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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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



For the fiscal quarter ended December 31, 2003



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.)



6290 Sequence Drive

San Diego, CA 92121

(Address of principal executive offices)



Registrants telephone number, including area code: (858) 450-9333



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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, as amended (the Exchange Act), during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days. Yes x No ̈



Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes x No ̈



As of February 6, 2004, 310,741,227 shares of the registrants common stock were issued and outstanding.



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##### Table of Contents

APPLIED MICRO CIRCUITS CORPORATION



INDEX



|               |  |                                                                                                                             |  |     
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------- |  | ----
|               |  |                                                                                                                             |  | Page
|Part I.        |  | FINANCIAL INFORMATION                                                                                                       |  |     
|               |  |                                                                                                                            
|Item 1.        |  | Condensed Consolidated Balance Sheets at December 31, 2003 (unaudited) and March 31, 2003.                                  |  | 3   
|               |  |                                                                                                                            
|               |  | Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended December 31, 2003 and 2002. |  | 4   
|               |  |                                                                                                                            
|               |  | Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended December 31, 2003 and 2002.           |  | 5   
|               |  |                                                                                                                            
|               |  | Notes to Condensed Consolidated Financial Statements (unaudited).                                                           |  | 6   
|               |  |                                                                                                                            
|Item 2.        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations.                                      |  | 17  
|               |  |                                                                                                                            
|Item 3.        |  | Quantitative and Qualitative Disclosures About Market Risk.                                                                 |  | 40  
|               |  |                                                                                                                            
|Item 4.        |  | Controls and Procedures.                                                                                                    |  | 40  
|               |  |                                                                                                                            
|Part II.       |  | OTHER INFORMATION                                                                                                           |  |     
|               |  |                                                                                                                            
|Item 1.        |  | Legal Proceedings.                                                                                                          |  | 41  
|               |  |                                                                                                                            
|Item 5.        |  | Other Information.                                                                                                          |  | 43  
|               |  |                                                                                                                            
|Item 6.        |  | Exhibits and Reports on Form 8-K.                                                                                           |  | 43  
|               | 
|Signatures     |  | 44                                                                                                                         
|               | 
|Certifications |  |                                                                                                                            



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------



APPLIED MICRO CIRCUITS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)



|                                                                                                      |  |                  |            |   |               |   |            |  
|----------------------------------------------------------------------------------------------------- |  | ---------------- | ---------- | - | ------------- | - | ---------- | -
|                                                                                                      |  | December 31,2003 |            |   | March 31,2003 |  
|                                                                                                      |  | (unaudited)      |            |   |               |  
|ASSETS                                                                                                |  |                  |            |   |               |   |            |  
|Current assets:                                                                                       |  |                  |            |   |               |   |            |  
|Cash and cash equivalents                                                                             |  | $                | 158,581    |   |               | $ | 150,556    |  
|Short-term investments-available-for-sale                                                             |  |                  | 687,113    |   |               |   | 885,584    |  
|Accounts receivable                                                                                   |  |                  | 19,526     |   |               |   | 5,634      |  
|Inventories                                                                                           |  |                  | 7,890      |   |               |   | 7,178      |  
|Other current assets                                                                                  |  |                  | 18,452     |   |               |   | 23,623     |  
|                                                                                                      |  |                  |            |   |               |   |            |  
|Total current assets                                                                                  |  |                  | 891,562    |   |               |   | 1,072,575  |  
|Property and equipment, net                                                                           |  |                  | 39,593     |   |               |   | 62,035     |  
|Goodwill and purchased intangibles, net                                                               |  |                  | 245,012    |   |               |   | 88,219     |  
|Other assets                                                                                          |  |                  | 2,206      |   |               |   | 759        |  
|                                                                                                      |  |                  |            |   |               |   |            |  
|Total assets                                                                                          |  | $                | 1,178,373  |   |               | $ | 1,223,588  |  
|                                                                                                      |  |                  |            |   |               |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                  |  |                  |            |   |               |   |            |  
|Current liabilities:                                                                                  |  |                  |            |   |               |   |            |  
|Accounts payable                                                                                      |  | $                | 17,239     |   |               | $ | 12,689     |  
|Accrued payroll and related expenses                                                                  |  |                  | 9,336      |   |               |   | 7,760      |  
|Other accrued liabilities                                                                             |  |                  | 47,630     |   |               |   | 26,012     |  
|Deferred revenue                                                                                      |  |                  | 3,564      |   |               |   | 3,674      |  
|Current portion of long-term debt and capital lease obligations                                       |  |                  | 265        |   |               |   | 1,265      |  
|                                                                                                      |  |                  |            |   |               |   |            |  
|Total current liabilities                                                                             |  |                  | 78,034     |   |               |   | 51,400     |  
|Long-term debt & capital lease obligations                                                            |  |                  | 103        |   |               |   |           |  
|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 December 31, 2003                                                      |  |                  |            |   |               |   |            |  
|Issued and outstanding shares - 307,457 at December 31, 2003 (unaudited)and 303,751 at March 31, 2003 |  |                  | 3,075      |   |               |   | 3,038      |  
|Additional paid-in capital                                                                            |  |                  | 5,921,887  |   |               |   | 5,908,063  |  
|Deferred compensation, net                                                                            |  |                  | (5,131     | ) |               |   | (30,406    | )
|Accumulated other comprehensive income or loss                                                        |  |                  | 452        |   |               |   | 8,800      |  
|Accumulated deficit                                                                                   |  |                  | (4,820,047 | ) |               |   | (4,717,307 | )
|                                                                                                      |  |                  |            |   |               |   |            |  
|Total stockholders equity                                                                            |  |                  | 1,100,236  |   |               |   | 1,172,188  |  
|                                                                                                      |  |                  |            |   |               |   |            |  
|Total liabilities and stockholders equity                                                            |  | $                | 1,178,373  |   |               | $ | 1,223,588  |  
|                                                                                                      |  |                  |            |   |               |   |            |  



See Accompanying
Notes to Financial Statements



3



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##### Table of Contents

APPLIED MICRO CIRCUITS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share data)



|                                                                    |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | -------- | - |  | - | -------- | -
|                                                                    |  | Three months ended December 31, |         |   | Nine months ended December 31, |  
|                                                                    |  | 2003                            |         |   | 2002                           |   |         | 2003 |  |   | 2002     |  
|Net revenues                                                        |  | $                               | 38,189  |   |                                | $ | 21,114  |      |  | $ | 83,823   |   |  | $ | 81,488   |  
|Cost of revenues(1)                                                 |  |                                 | 17,471  |   |                                |   | 14,327  |      |  |   | 36,739   |   |  |   | 48,469   |  
|                                                                    |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|Gross profit                                                        |  |                                 | 20,718  |   |                                |   | 6,787   |      |  |   | 47,084   |   |  |   | 33,019   |  
|Operating expenses:                                                 |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|Research and development                                            |  |                                 | 30,052  |   |                                |   | 32,040  |      |  |   | 85,280   |   |  |   | 100,978  |  
|Selling, general and administrative                                 |  |                                 | 13,493  |   |                                |   | 14,467  |      |  |   | 34,892   |   |  |   | 45,782   |  
|Stock-based compensation:                                           |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|Research and development                                            |  |                                 | 2,142   |   |                                |   | 10,467  |      |  |   | 14,846   |   |  |   | 62,557   |  
|Selling, general and administrative                                 |  |                                 | 375     |   |                                |   | 4,286   |      |  |   | 4,826    |   |  |   | 55,020   |  
|Acquired in-process research and development                        |  |                                 | 16,100  |   |                                |   |        |      |  |   | 21,800   |   |  |   |         |  
|Purchased intangible asset impairment charges                       |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   | 204,284  |  
|Amortization of purchased intangibles                               |  |                                 | 689     |   |                                |   |        |      |  |   | 689      |   |  |   |         |  
|Restructuring charges                                               |  |                                 | (200    | ) |                                |   |        |      |  |   | 23,298   |   |  |   | 5,500    |  
|                                                                    |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|Total operating expenses                                            |  |                                 | 62,651  |   |                                |   | 61,260  |      |  |   | 185,631  |   |  |   | 474,121  |  
|                                                                    |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|Operating loss                                                      |  |                                 | (41,933 | ) |                                |   | (54,473 | )    |  |   | (138,547 | ) |  |   | (441,102 | )
|Other income (expense), net                                         |  |                                 | 8,413   |   |                                |   | 3,657   |      |  |   | 8,403    |   |  |   | (9,263   | )
|Interest income, net                                                |  |                                 | 7,080   |   |                                |   | 11,757  |      |  |   | 27,404   |   |  |   | 36,195   |  
|                                                                    |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|Loss before income taxes and cumulative effect of accounting change |  |                                 | (26,440 | ) |                                |   | (39,059 | )    |  |   | (102,740 | ) |  |   | (414,170 | )
|Income tax expense (benefit)                                        |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|                                                                    |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|Loss before cumulative effect of accounting change                  |  |                                 | (26,440 | ) |                                |   | (39,059 | )    |  |   | (102,740 | ) |  |   | (414,170 | )
|Cumulative effect of accounting change                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   | (102,229 | )
|                                                                    |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|Net loss                                                            |  | $                               | (26,440 | ) |                                | $ | (39,059 | )    |  | $ | (102,740 | ) |  | $ | (516,399 | )
|                                                                    |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|Basic and diluted net loss per share:                               |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|Loss per share before cumulative effect of accounting change        |  | $                               | (0.09   | ) |                                | $ | (0.13   | )    |  | $ | (0.34    | ) |  | $ | (1.38    | )
|Cumulative effect of accounting change                              |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   | (0.34    | )
|                                                                    |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|Net loss per share                                                  |  | $                               | (0.09   | ) |                                | $ | (0.13   | )    |  | $ | (0.34    | ) |  | $ | (1.72    | )
|                                                                    |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|Shares used in calculating basic and diluted net loss per share     |  |                                 | 306,823 |   |                                |   | 301,622 |      |  |   | 305,273  |   |  |   | 300,711  |  
|                                                                    |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|(1)Cost
of revenues includes the following (in thousands):          |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|Stock-based compensation                                            |  | $                               | 153     |   |                                | $ | 400     |      |  | $ | 542      |   |  | $ | 2,256    |  
|Amortization of developed technology                                |  |                                 | 2,701   |   |                                |   | 1,572   |      |  |   | 5,844    |   |  |   | 4,715    |  
|Amortization of purchased inventory fair value adjustment           |  |                                 | 475     |   |                                |   |        |      |  |   | 475      |   |  |   |         |  
|                                                                    |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|                                                                    |  | $                               | 3,329   |   |                                | $ | 1,972   |      |  | $ | 6,861    |   |  | $ | 6,971    |  
|                                                                    |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  



See Accompanying
Notes to Financial Statements



4



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##### Table of Contents

APPLIED MICRO CIRCUITS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)



|                                                                            |  |                                |            |   |      |   |            |  
|--------------------------------------------------------------------------- |  | ------------------------------ | ---------- | - | ---- | - | ---------- | -
|                                                                            |  | Nine months ended December 31, |           
|                                                                            |  | 2003                           |            |   | 2002 |  
|Operating activities:                                                       |  |                                |            |   |      |   |            |  
|Net loss                                                                    |  | $                              | (102,740   | ) |      | $ | (516,399   | )
|Adjustments to reconcile net loss to net cash used for operating activities |  |                                |            |   |      |   |            |  
|Cumulative effect of accounting change                                      |  |                                |           |   |      |   | 102,229    |  
|Depreciation and amortization                                               |  |                                | 16,136     |   |      |   | 24,504     |  
|Amortization of purchased intangibles                                       |  |                                | 6,533      |   |      |   | 4,715      |  
|Acquired in-process research and development                                |  |                                | 21,800     |   |      |   |           |  
|Purchased intangible asset impairment charges                               |  |                                |           |   |      |   | 204,284    |  
|Stock-based compensation expense                                            |  |                                | 20,214     |   |      |   | 119,833    |  
|Non-cash restructuring charges                                              |  |                                | 6,610      |   |      |   | 45         |  
|Net loss on strategic equity investments                                    |  |                                | (862       | ) |      |   | 11,650     |  
|Gain on disposals of property                                               |  |                                | (7,541     | ) |      |   | (2,387     | )
|Changes in operating assets and liabilities:                                |  |                                |            |   |      |   |            |  
|Accounts receivables                                                        |  |                                | (11,161    | ) |      |   | 7,036      |  
|Inventories                                                                 |  |                                | 3,233      |   |      |   | 6,723      |  
|Other assets                                                                |  |                                | 7,755      |   |      |   | 1,569      |  
|Accounts payable                                                            |  |                                | (1,431     | ) |      |   | (3,974     | )
|Accrued payroll and other accrued liabilities                               |  |                                | 3,434      |   |      |   | 7,888      |  
|Deferred revenue                                                            |  |                                | (698       | ) |      |   | 833        |  
|                                                                            |  |                                |            |   |      |   |            |  
|Net cash used for operating activities                                      |  |                                | (38,718    | ) |      |   | (31,451    | )
|                                                                            |  |                                |            |   |      |   |            |  
|Investing activities:                                                       |  |                                |            |   |      |   |            |  
|Proceeds from sales and maturities of short-term investments                |  |                                | 4,403,581  |   |      |   | 2,994,234  |  
|Purchases of short-term investments                                         |  |                                | (4,213,579 | ) |      |   | (3,179,302 | )
|Repayments on notes receivable from employees                               |  |                                | 61         |   |      |   | (13        | )
|Purchase of property, equipment and other assets                            |  |                                | (11,222    | ) |      |   | (4,181     | )
|Proceeds from the sale of strategic equity investments                      |  |                                | 1,760      |   |      |   |           |  
|Proceeds from sale of real estate                                           |  |                                | 24,881     |   |      |   | 16,432     |  
|Net cash paid for acquisitions                                              |  |                                | (167,869   | ) |      |   |           |  
|                                                                            |  |                                |            |   |      |   |            |  
|Net cash provided by (used for) investing activities                        |  |                                | 37,613     |   |      |   | (172,830   | )
|                                                                            |  |                                |            |   |      |   |            |  
|Financing activities:                                                       |  |                                |            |   |      |   |            |  
|Proceeds from issuance of common stock                                      |  |                                | 10,314     |   |      |   | 4,747      |  
|Repayment of note receivable from stockholder                               |  |                                |           |   |      |   | 47         |  
|Payments on capital lease obligations                                       |  |                                | (763       | ) |      |   | (319       | )
|Payments on long-term debt                                                  |  |                                | (542       | ) |      |   | (531       | )
|Other                                                                       |  |                                | 121        |   |      |   | (68        | )
|                                                                            |  |                                |            |   |      |   |            |  
|Net cash provided by financing activities                                   |  |                                | 9,130      |   |      |   | 3,876      |  
|                                                                            |  |                                |            |   |      |   |            |  
|Net increase (decrease) in cash and cash equivalents                        |  |                                | 8,025      |   |      |   | (200,405   | )
|Cash and cash equivalents at beginning of period                            |  |                                | 150,556    |   |      |   | 335,592    |  
|                                                                            |  |                                |            |   |      |   |            |  
|Cash and cash equivalents at end of period                                  |  | $                              | 158,581    |   |      | $ | 135,187    |  
|                                                                            |  |                                |            |   |      |   |            |  
|Supplementary cash flow disclosure:                                         |  |                                |            |   |      |   |            |  
|Cash paid for:                                                              |  |                                |            |   |      |   |            |  
|Interest                                                                    |  | $                              | 45         |   |      | $ | 110        |  
|                                                                            |  |                                |            |   |      |   |            |  
|Income taxes                                                                |  | $                              | 144        |   |      | $ | 335        |  
|                                                                            |  |                                |            |   |      |   |            |  



See Accompanying
Notes to Financial Statements



5



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##### Table of Contents

APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Basis of Presentation



The accompanying unaudited interim condensed consolidated financial
statements of Applied Micro Circuits Corporation (AMCC or the Company) have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying financial statements reflect all adjustments (consisting of normal recurring accruals), which are, in the opinion
of management, considered necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The Company has experienced significant quarterly fluctuations
in net revenues and operating results, and expects that these fluctuations will continue.



The financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the audited financial statements for the preceding
fiscal year. Accordingly, these financial statements should be read in conjunction with the audited financial statements and the related notes thereto contained in the Companys Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the year ended March 31, 2003.



Use of
Estimates



The preparation of financial statements in
accordance with accounting principles generally accepted in the United States 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. These estimates include, among others, assessing the collectibility of accounts receivable, inventory valuation, costs of future product returns under warranty, the valuation of restructuring liabilities, the valuation of
deferred income taxes, and the fair value and useful lives of intangible assets. Actual results could differ from those estimates.



Reclassification



Certain prior period amounts have been reclassified to conform to the current period presentation.



Stock-Based Compensation



The Company has in effect several stock option plans under which
non-qualified and incentive stock options have been granted to employees and non-employee directors. The Company also has in effect an employee stock purchase plan. The Company accounts for stock-based awards to employees in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and the related Interpretation No. 44, Accounting for Certain Transactions Involving Stock CompensationAn
Interpretation of APB Opinion No. 25. The Company has adopted the disclosure-only alternative of Statement of Financial Accounting Standard (SFAS) No. 123, Accounting for Stock-Based Compensation (SFAS 123),
as amended by SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure (SFAS 148).



Pro forma information regarding net loss and net loss per share is required and has been determined as if the Company had accounted for its stock-based
awards under the fair value method, instead of the guidelines provided by APB 25. The fair value of the awards was estimated at the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model requires the
input of highly subjective assumptions, including the expected life and stock price volatility. Changes in the subjective input assumptions can materially affect the fair value estimate.



The Companys pro forma information under SFAS 123 and SFAS 148 is as follows (in thousands, except per share amounts):



|                                               |  |                                 |          |   |                                |   |          |      |  |   |          |   |  |   |          |  
|---------------------------------------------- |  | ------------------------------- | -------- | - | ------------------------------ | - | -------- | ---- |  | - | -------- | - |  | - | -------- | -
|                                               |  | Three Months Ended December 31, |          |   | Nine Months Ended December 31, |  
|                                               |  | 2003                            |          |   | 2002                           |   |          | 2003 |  |   | 2002     |  
|Net lossas reported                           |  | $                               | (26,440  | ) |                                | $ | (39,059  | )    |  | $ | (102,740 | ) |  | $ | (516,399 | )
|Plus: Reported stock-based compensation        |  |                                 | 2,670    |   |                                |   | 15,153   |      |  |   | 20,214   |   |  |   | 119,833  |  
|Less: Fair value stock-based compensation      |  |                                 | (76,328  | ) |                                |   | (115,029 | )    |  |   | (283,193 | ) |  |   | (323,541 | )
|                                               |  |                                 |          |   |                                |   |          |      |  |   |          |   |  |   |          |  
|Net losspro forma                             |  | $                               | (100,098 | ) |                                | $ | (138,935 | )    |  | $ | (365,719 | ) |  | $ | (720,107 | )
|                                               |  |                                 |          |   |                                |   |          |      |  |   |          |   |  |   |          |  
|Reported basic and diluted net loss per share  |  | $                               | (0.09    | ) |                                | $ | (0.13    | )    |  | $ | (0.34    | ) |  | $ | (1.72    | )
|                                               |  |                                 |          |   |                                |   |          |      |  |   |          |   |  |   |          |  
|Pro forma basic and diluted net loss per share |  | $                               | (0.33    | ) |                                | $ | (0.46    | )    |  | $ | (1.20    | ) |  | $ | (2.39    | )
|                                               |  |                                 |          |   |                                |   |          |      |  |   |          |   |  |   |          |  



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For purposes of the pro forma disclosures, the estimated fair value of the options is amortized to expense over the
options vesting periods. The per share fair value of options granted in connection with stock option plans and rights granted in connection with the employee stock purchase plan reported below has been estimated at the date of grant with the
following weighted average assumptions:



|                                      |  |                                 |      |   |                                |   |      |                                 |  |   |                                |   |  |      |      |   |      |   |      |      |  |   |      |   |  |   |      |   |  |   |      |  
|------------------------------------- |  | ------------------------------- | ---- | - | ------------------------------ | - | ---- | ------------------------------- |  | - | ------------------------------ | - |  | ---- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | - |  | - | ---- | - |  | - | ---- | -
|                                      |  | Employee Stock Options          |      |   | Employee Stock Purchase Plan   |  
|                                      |  | Three Months Ended December 31, |      |   | Nine Months Ended December 31, |   |      | Three Months Ended December 31, |  |   | Nine Months Ended December 31, |  
|                                      |  | 2003                            |      |   | 2002                           |   |      | 2003                            |  |   | 2002                           |   |  | 2003 |      |   | 2002 |   |      | 2003 |  |   | 2002 |  
|Expected life (years)                 |  |                                 | 4.0  |   |                                |   | 4.0  |                                 |  |   | 4.0                            |   |  |      | 3.93 |   |      |   | 1.46 |      |  |   | 0.5  |   |  |   | 1.24 |   |  |   | 0.5  |  
|Volatility                            |  |                                 | .98  |   |                                |   | 1.02 |                                 |  |   | 1.00                           |   |  |      | 1.03 |   |      |   | 1.03 |      |  |   | 1.03 |   |  |   | 1.03 |   |  |   | 1.04 |  
|Risk-free interest rate               |  |                                 | 2.5  | % |                                |   | 2.8  | %                               |  |   | 2.5                            | % |  |      | 2.8  | % |      |   | 1.5  | %    |  |   | 1.5  | % |  |   | 1.5  | % |  |   | 1.9  | %
|Dividend yield                        |  |                                 | 0    | % |                                |   | 0    | %                               |  |   | 0                              | % |  |      | 0    | % |      |   | 0    | %    |  |   | 0    | % |  |   | 0    | % |  |   | 0    | %
|Weighted average fair value per share |  | $                               | 3.92 |   |                                | $ | 2.72 |                                 |  | $ | 3.66                           |   |  | $    | 4.18 |   |      | $ | 2.37 |      |  | $ | 2.01 |   |  | $ | 2.19 |   |  | $ | 2.63 |  



2. ACQUISITIONS



The Company completed two acquisitions during the nine months ended December
31, 2003 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:



JNI Corporation  On October 28, 2003, the Company
completed the acquisition of JNI Corporation, a provider of Fibre Channel hardware and software products that form critical elements of storage area networks. AMCC acquired all outstanding shares of JNI Corporation for approximately $196.4 million
in cash and assumed options to purchase approximately 4.3 million shares of AMCCs common stock.



IBM Power PRS Switch Fabric product line  On September 30, 2003, the Company purchased assets and licensed intellectual property associated
with IBMs PowerPRS Switch Fabric product line (PRS business) for $47.8 million in cash.



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, or 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):



|                                          |  |     |         |              |   |        |  |   |        
|----------------------------------------- |  | --- | ------- | ------------ | - | ------ |  | - | -------
|                                          |  | JNI |         | PRS business |   | Total 
|Net tangible assets                       |  | $   | 74,672  |              | $ | 315    |  | $ | 74,987 
|In-process research and development       |  |     | 16,100  |              |   | 5,700  |  |   | 21,800 
|Developed technology                      |  |     | 25,600  |              |   | 5,500  |  |   | 31,100 
|Backlog/customer relationships            |  |     | 1,000   |              |   | 400    |  |   | 1,400  
|Patents/core technology rights/tradename  |  |     | 7,800   |              |   | 1,700  |  |   | 9,500  
|Purchased inventory fair value adjustment |  |     | 1,262   |              |   | 117    |  |   | 1,379  
|Goodwill                                  |  |     | 87,270  |              |   | 34,056 |  |   | 121,326
|                                          |  |     |         |              |   |        |  |   |        
|Total consideration                       |  | $   | 213,704 |              | $ | 47,788 |  | $ | 261,492
|                                          |  |     |         |              |   |        |  |   |        



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



|                          |  |     |         |              |   |        |  |   |        
|------------------------- |  | --- | ------- | ------------ | - | ------ |  | - | -------
|                          |  | JNI |         | PRS business |   | Total 
|Cash paid and merger fees |  | $   | 200,939 |              | $ | 47,788 |  | $ | 248,727
|Value of assumed options  |  |     | 12,765  |              |   |       |  |   | 12,765 
|                          |  |     |         |              |   |        |  |   |        
|Total consideration       |  | $   | 213,704 |              | $ | 47,788 |  | $ | 261,492
|                          |  |     |         |              |   |        |  |   |        



The related 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,



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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 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.



3. CERTAIN FINANCIAL STATEMENT
INFORMATION



Accounts receivable (in thousands):



|                              |  |                   |        |   |                |   |        |  
|----------------------------- |  | ----------------- | ------ | - | -------------- | - | ------ | -
|                              |  | December 31, 2003 |        |   | March 31, 2003 |  
|Accounts receivable           |  | $                 | 21,217 |   |                | $ | 6,964  |  
|Less: allowance for bad debts |  |                   | (1,691 | ) |                |   | (1,330 | )
|                              |  |                   |        |   |                |   |        |  
|                              |  | $                 | 19,526 |   |                | $ | 5,634  |  
|                              |  |                   |        |   |                |   |        |  



Inventories (in thousands):



|                                          |  |                   |       |                |   |      
|----------------------------------------- |  | ----------------- | ----- | -------------- | - | -----
|                                          |  | December 31, 2003 |       | March 31, 2003
|Finished goods                            |  | $                 | 3,733 |                | $ | 4,455
|Work in process                           |  |                   | 2,251 |                |   | 2,252
|Raw materials                             |  |                   | 1,002 |                |   | 471  
|                                          |  |                   |       |                |   |      
|                                          |  |                   | 6,986 |                |   | 7,178
|Purchased inventory fair value adjustment |  |                   | 904   |                |   |     
|                                          |  |                   |       |                |   |      
|                                          |  | $                 | 7,890 |                | $ | 7,178
|                                          |  |                   |       |                |   |      



Property and equipment (in
thousands):



|                                                |  |                   |          |   |                |   |         |  
|----------------------------------------------- |  | ----------------- | -------- | - | -------------- | - | ------- | -
|                                                |  | December 31, 2003 |          |   | March 31, 2003 |  
|Machinery and equipment                         |  | $                 | 44,075   |   |                | $ | 48,772  |  
|Leasehold improvements                          |  |                   | 8,636    |   |                |   | 8,981   |  
|Computers, office furniture and equipment       |  |                   | 95,486   |   |                |   | 72,533  |  
|Land                                            |  |                   |         |   |                |   | 17,280  |  
|                                                |  |                   |          |   |                |   |         |  
|                                                |  |                   | 148,197  |   |                |   | 147,566 |  
|Less: accumulated depreciation and amortization |  |                   | (108,604 | ) |                |   | (85,531 | )
|                                                |  |                   |          |   |                |   |         |  
|                                                |  | $                 | 39,593   |   |                | $ | 62,035  |  
|                                                |  |                   |          |   |                |   |         |  



Goodwill and purchased intangibles:



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



|                                 |  |                   |           |                                          |   |            |     |  |       |         |                                          |   |           |     |   |            |   |  |   |       
|-------------------------------- |  | ----------------- | --------- | ---------------------------------------- | - | ---------- | --- |  | ----- | ------- | ---------------------------------------- | - | --------- | --- | - | ---------- | - |  | - | ------
|                                 |  | December 31, 2003 |           | March 31, 2003                          
|                                 |  | Gross             |           | Accumulated Amortization and Impairments |   |            | Net |  | Gross |         | Accumulated Amortization and Impairments |   |           | Net
|Goodwill                         |  | $                 | 4,190,911 |                                          | $ | (3,997,086 | )   |  | $     | 193,825 |                                          | $ | 4,046,685 |     | $ | (3,974,186 | ) |  | $ | 72,499
|Developed technology and patents |  |                   | 333,900   |                                          |   | (284,716   | )   |  |       | 49,184  |                                          |   | 294,400   |     |   | (278,680   | ) |  |   | 15,720
|Customer relationships / backlog |  |                   | 1,400     |                                          |   | (436       | )   |  |       | 964     |                                          |   |          |     |   |           |   |  |   |      
|Tradename                        |  |                   | 1,100     |                                          |   | (61        | )   |  |       | 1,039   |                                          |   |          |     |   |           |   |  |   |      
|                                 |  |                   |           |                                          |   |            |     |  |       |         |                                          |   |           |     |   |            |   |  |   |       
|                                 |  | $                 | 4,527,311 |                                          | $ | (4,282,299 | )   |  | $     | 245,012 |                                          | $ | 4,341,085 |     | $ | (4,252,866 | ) |  | $ | 88,219
|                                 |  |                   |           |                                          |   |            |     |  |       |         |                                          |   |           |     |   |            |   |  |   |       



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The estimated future amortization expense of purchased intangible assets as of December 31, 2003 is as
follows (in thousands):



|                                   |  |   |       
|---------------------------------- |  | - | ------
|Three months ending March 31, 2004 |  | $ | 3,534 
|Fiscal year 2005                   |  |   | 14,095
|Fiscal year 2006                   |  |   | 10,893
|Fiscal year 2007                   |  |   | 7,597 
|Fiscal year 2008                   |  |   | 7,383 
|Thereafter                         |  |   | 7,685 
|                                   |  |   |       
|Total                              |  | $ | 51,187
|                                   |  |   |       



The changes in the
carrying amount of goodwill for the nine months ended December 31, 2003, are as follows (in thousands):



|                                          |  |   |        
|----------------------------------------- |  | - | -------
|Balance as of March 31, 2003              |  | $ | 72,499 
|Goodwill related to acquisitions (Note 2) |  |   | 121,326
|                                          |  |   |        
|Balance as of December 31, 2003           |  | $ | 193,825
|                                          |  |   |        



Upon the
implementation of SFAS No. 142, Goodwill and Other Intangible Assets, or SFAS 142, the Company completed the initial goodwill impairment review and recorded a non-cash charge of approximately $102.2 million to reduce the carrying
value of goodwill. This charge is reflected as the cumulative effect of an accounting change in the accompanying consolidated statement of operations for the nine months ended December 31, 2002. In performing this initial fair value analysis, it
became evident, as a result of lower revenue forecasts, that certain other purchased intangible assets were also impaired. As a result, the Company performed an analysis of these assets as required under SFAS 144 and recorded non-cash charges of
$187.9 million for the impairment of developed technology and $16.3 million as a result of the abandonment of the MMC Networks trademark. These charges are reflected as operating expenses in the consolidated statement of operations for the nine
months ended December 31, 2002. As a result of a decline in the Companys estimated long-range net revenue, and particularly, the long-range revenue associated with the acquired businesses, the Company determined that goodwill was further
impaired and recorded an additional $186.4 million impairment charge to reduce the carrying value of goodwill, which was reflected as a component of operating expenses and occurred in the fourth quarter of fiscal 2003.



Other accrued liabilities (in thousands):



|                                                 |  |                   |        |                |   |       
|------------------------------------------------ |  | ----------------- | ------ | -------------- | - | ------
|                                                 |  | December 31, 2003 |        | March 31, 2003
|Accrued warranty and excess purchase commitments |  | $                 | 6,599  |                | $ | 7,078 
|Current tax liabilities                          |  |                   | 7,195  |                |   | 6,304 
|Restructuring liabilities                        |  |                   | 9,061  |                |   | 3,563 
|Excess lease liability                           |  |                   | 11,393 |                |   |      
|Other                                            |  |                   | 13,382 |                |   | 9,067 
|                                                 |  |                   |        |                |   |       
|                                                 |  | $                 | 47,630 |                | $ | 26,012
|                                                 |  |                   |        |                |   |       



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



|                                                          |  |                                 |       |                                |   |       |  |      |       |  |   |         |  
|--------------------------------------------------------- |  | ------------------------------- | ----- | ------------------------------ | - | ----- |  | ---- | ----- |  | - | ------- | -
|                                                          |  | Three Months Ended December 31, |       | Nine Months Ended December 31, |  
|                                                          |  | 2003                            |       | 2002                           |   | 2003  |  | 2002 |      
|Gain on strategic equity investments                      |  | $                               | 862   |                                | $ |      |  | $    | 862   |  | $ |        |  
|Recognized impairments on strategic equity investments    |  |                                 |      |                                |   |      |  |      |      |  |   | (11,650 | )
|Net gains (losses) on disposals of property and equipment |  |                                 | 7,551 |                                |   | 3,657 |  |      | 7,541 |  |   | 2,387   |  
|                                                          |  |                                 |       |                                |   |       |  |      |       |  |   |         |  
|                                                          |  | $                               | 8,413 |                                | $ | 3,657 |  | $    | 8,403 |  | $ | (9,263  | )
|                                                          |  |                                 |       |                                |   |       |  |      |       |  |   |         |  



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Interest income, net (in thousands):



|                                                        |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                        |  | Three Months Ended December 31, |       |   | Nine Months Ended December 31, |  
|                                                        |  | 2003                            |       |   | 2002                           |   |        | 2003 |  |   | 2002   |  
|Interest income                                         |  | $                               | 6,601 |   |                                | $ | 10,131 |      |  | $ | 21,443 |   |  | $ | 30,032 |  
|Net realized gains (losses) from short-term investments |  |                                 | 499   |   |                                |   | 1,652  |      |  |   | 6,015  |   |  |   | 6,249  |  
|Interest expense                                        |  |                                 | (20   | ) |                                |   | (26    | )    |  |   | (54    | ) |  |   | (86    | )
|                                                        |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  
|                                                        |  | $                               | 7,080 |   |                                | $ | 11,757 |      |  | $ | 27,404 |   |  | $ | 36,195 |  
|                                                        |  |                                 |       |   |                                |   |        |      |  |   |        |   |  |   |        |  



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 loss per share consists of the following (in thousands, except per share data):



|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|---------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | -------- | - |  | - | -------- | -
|                                                                                   |  | Three Months Ended December 31, |         |   | Nine Months Ended December 31, |  
|                                                                                   |  | 2003                            |         |   | 2002                           |   |         | 2003 |  |   | 2002     |  
|Net loss (numerator):                                                              |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|Loss before cumulative effect of accounting change                                 |  | $                               | (26,440 | ) |                                | $ | (39,059 | )    |  | $ | (102,740 | ) |  | $ | (414,170 | )
|Cumulative effect of accounting change                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   | (102,229 | )
|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|Net loss                                                                           |  | $                               | (26,440 | ) |                                | $ | (39,059 | )    |  | $ | (102,740 | ) |  | $ | (516,399 | )
|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|Shares used in basic and diluted net loss per share computation (denominator):     |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|Weighted average common shares outstanding                                         |  |                                 | 306,843 |   |                                |   | 302,153 |      |  |   | 305,383  |   |  |   | 301,466  |  
|Less: Unvested common shares outstanding                                           |  |                                 | (20     | ) |                                |   | (531    | )    |  |   | (110     | ) |  |   | (755     | )
|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|Shares used in basic and diluted net loss per share computation                    |  |                                 | 306,823 |   |                                |   | 301,622 |      |  |   | 305,273  |   |  |   | 300,711  |  
|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|Basic and diluted net loss per share:                                              |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|Basic and diluted net loss per share before cumulative effect of accounting change |  | $                               | (0.09   | ) |                                | $ | (0.13   | )    |  | $ | (0.34    | ) |  | $ | (1.38    | )
|Cumulative effect of accounting change                                             |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   | (0.34    | )
|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|Basic and diluted net loss per share                                               |  | $                               | (0.09   | ) |                                | $ | (0.13   | )    |  | $ | (0.34    | ) |  | $ | (1.72    | )
|                                                                                   |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  



Because the Company
incurred losses for the three and nine months ended December 31, 2003 and 2002, the effect of dilutive securities totaling 4.9 million and 3.9 million equivalent shares for the three and nine months ended December 31, 2003, respectively, and 2.2
million and 3.1 million equivalent shares for the three and nine months ended December 31, 2002, respectively, have been excluded from the net loss per share computations as their impact would be antidilutive.



4. RESTRUCTURING CHARGES



In July 2001, the Company announced the first of its restructuring programs.
The July 2001 restructuring plan was in response to the sharp downturn in business at the end of the Companys fiscal 2001 and included reducing the Companys overall cost structure and aligning manufacturing capacity with the then current
demand. The July 2001 restructuring plan resulted in a total of $11.6 million of restructuring costs, which were recognized as operating expenses in the last three quarters of fiscal 2002. The July 2001 restructuring plan was comprised of the
following components:



| |  | Workforce reductionApproximately 50 employees, or 5% of the workforce was eliminated, which resulted in severance payments of approximately $900,000 in the fiscal year
ended March 31, 2002.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Consolidation of excess facilitiesAs a result of the Companys acquisitions and significant internal growth in fiscal 2001, the Company expanded its number of
locations throughout the world. In an effort to improve the efficiency of the workforce and reduce the cost structure, the Company implemented a plan to consolidate its workforce into certain designated facilities. As a result, the Company recorded
a charge of approximately $2.0 million, which was recognized in the second quarter of fiscal 2002, primarily relating to non-cancelable lease commitments for smaller facilities in the United States.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | Property and equipment impairmentsDuring fiscal 2000 and 2001, the Company aggressively expanded its manufacturing capacity in order to meet demand. As a result of the
sharp decrease in demand at the end of fiscal 2001, the Company recorded a charge of approximately $5.6 million in the second quarter of fiscal 2002, for the elimination of excess manufacturing equipment related to older process technologies. These
assets were removed from the production floor and disposed of. In addition, the Company recorded a charge of approximately $3.1 million relating to the abandonment of certain leasehold improvements and software licenses in connection with the
closure of certain U.S. facilities.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company
has completed the restructuring activities contemplated by the July 2001 restructuring plan, but has not yet disposed of the surplus leased facilities. As a result of the Companys July 2001 restructuring activities, the Company realized
approximately $4 million of annual savings relating to fixed cost of sales overhead and approximately $2 million of annual savings relating to operating expenses.



As a result of the prolonged downturn in the telecommunications industry and the uncertainty as to when the
telecommunication equipment market would recover, in July 2002 the Company announced its second workforce reduction and restructuring program. The July 2002 workforce reduction and restructuring program was comprised of the following:



| |  | Closure of the wafer manufacturing facilityIn June 2002, the Company completed its plan to discontinue manufacturing non-communication ICs and close its internal wafer
manufacturing facility in San Diego. As a result, the Company recorded a total charge of $4.0 million in fiscal 2003. The charge was comprised of severance packages for approximately 70 employees in the manufacturing workforce and estimated facility
restoration costs. This was the only wafer fabrication facility owned by the Company.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Companys wafer manufacturing facility was closed at the end of March 2003 and the facility was exited at the end of June 2003. During the third
quarter of fiscal 2004, the Company completed the activities contemplated by the plan. As a result, the Company recorded an adjustment to the restructuring liability for the excess accrued severance and facilities restoration costs, and recognized a
restructuring benefit of approximately $537,000. The Company does not expect any future charges or benefits related to the closure of the wafer manufacturing facility.



| |  | Global workforce reductionIn an effort to reduce the Companys expenses in July 2002, the Company implemented a workforce reduction plan, which eliminated
approximately 165 employees or 25% of the Companys workforce. The global workforce reduction included the closing of a United States design center and disposal of its related assets and resulted in a charge of $3.0 million. Payments for the
employee severance were made in fiscal 2003; amounts for the facility closure were paid through the end of the related lease term in fiscal 2004.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company has completed the activities contemplated by the global workforce reduction portion of the July 2002 plan, and no further payments or
expenses are anticipated under this program.



As a result of
the closure of the Companys internal wafer manufacturing facility, the Company expects to realize annual savings totaling approximately $14 million relating to fixed cost of sales overhead in fiscal 2004. As a result of the global workforce
reduction undertaken in July 2002, the Company expects to realize $16 million annual savings relating to operating expenses in fiscal 2004. To date the Company believes it is on track to achieve such savings.



As the downturn in the telecommunications industry continued, it became
evident that further cost reductions were necessary. In April 2003, the Company announced its third workforce reduction and restructuring program. The April 2003 restructuring program consisted of a workforce reduction, further consolidation of
excess facilities and additional fixed asset disposals. In June 2002, the FASB issued SFAS 146 requiring 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. Accordingly, restructuring costs of $23.5 million related to the restructuring plan were recognized in the first quarter of fiscal 2004 and approximately $281,000 was recognized in the fourth quarter of fiscal 2003 for severance
packages communicated to employees in March 2003. The April 2003 workforce reduction and restructuring program was comprised of the following:



| |  | Workforce reductionApproximately 185 employees have been eliminated, resulting in a severance charge of approximately $5.7 million, which was substantially paid during
the first two quarters of fiscal 2004.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Consolidation of excess facilities and other operating leasesAs a result of the lower head count resulting from the workforce reduction, the Company
was able to exit certain facilities, including a 58,000 square foot building in San Diego and a substantial portion of the Sunnyvale facility. The Company recorded a charge of $7.2 million representing the estimated discounted cash flow of the lease
payments, less the estimated sublease income. In addition, as a result of the lower head count resulting from the workforce reduction, the Company disposed of certain software licenses used by the
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | engineering workforce resulting in a charge in the first quarter of $3.4 million, which will be paid over the respective licenses term.
| | ---------------------------------------------------------------------------------------------------------------------------------------



| |  | Property and equipment impairmentsAs a result of lower head count and facility closure the Company accelerated depreciation and abandoned a substantial amount of
leasehold improvements as well as furniture, fixtures and employee workstations. This resulted in a charge of $7.5 million in the first quarter of fiscal 2004 for the abandoned assets.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As a result of the Companys April 2003 restructuring activities, the
Company anticipated it would realize approximately $4 million of annual savings relating to fixed cost of sales overhead and approximately $36 million of annual savings relating to operating expenses in fiscal 2004. However, in November 2003 the
Company elected to reoccupy a portion of the 58,000 square foot building in San Diego. This decision was based on the acquisition of JNI Corporation and the need to integrate the operations of the two companies in order to achieve the planned cost
savings. As a result of this decision to reoccupy the San Diego building, the Company reversed a portion of the prior accrual for the excess lease commitment and reinstated the book value of the leasehold improvements, which were previously
abandoned. The Company recorded a net restructuring benefit of approximately $2.9 million related to this activity. In addition, the Company recorded an adjustment to the amount of accrued severance of approximately $200,000 because it overestimated
the amount of severance that would be paid.



In November 2003, the Company
implemented a fourth workforce reduction and restructuring. The November 2003 workforce reduction was implemented as a means to achieve certain cost savings anticipated in connection with the fiscal 2004 acquisitions. The restructuring consisted of
the elimination of approximately 50 employees and the abandonment of certain leased property. As a result of the November restructuring, the Company recorded a charge of approximately $2.8 million, consisting of $1.2 million for employee severance
and $1.6 million for excess facilities costs. The amount for employee severance will be substantially paid by the end of fiscal 2004 and the amounts to be paid for the excess lease commitments will be paid over the remaining lease term ending in
October 2005. The Company estimates that it will achieve annual operating expense savings of approximately $7 million.



The following tables provide a detailed activity related to each of our restructuring activities during the nine months ended December 31, 2003 (in
thousands):



|                                    |  |                     |        |   |                                                          |   |        |                                    |  |   |        |   |  |   |        |  
|----------------------------------- |  | ------------------- | ------ | - | -------------------------------------------------------- | - | ------ | ---------------------------------- |  | - | ------ | - |  | - | ------ | -
|                                    |  | Workforce Reduction |        |   | Facilities Consolidation and Operating Lease Commitments |   |        | Property and Equipment Impairments |  |   | Total  |  
|July 2001 Restructuring Program     |  |                     |        |   |                                                          |   |        |                                    |  |   |        |   |  |   |        |  
|Liability, March 31, 2003           |  | $                   |       |   |                                                          | $ | 351    |                                    |  | $ |       |   |  | $ | 351    |  
|Cash payments                       |  |                     |       |   |                                                          |   | (203   | )                                  |  |   |       |   |  |   | (203   | )
|                                    |  |                     |        |   |                                                          |   |        |                                    |  |   |        |   |  |   |        |  
|Liability, December 31, 2003        |  | $                   |       |   |                                                          | $ | 148    |                                    |  | $ |       |   |  | $ | 148    |  
|                                    |  |                     |        |   |                                                          |   |        |                                    |  |   |        |   |  |   |        |  
|July 2002 Restructuring Program     |  |                     |        |   |                                                          |   |        |                                    |  |   |        |   |  |   |        |  
|Liability, March 31, 2003           |  | $                   | 1,898  |   |                                                          | $ | 1,033  |                                    |  | $ |       |   |  | $ | 2,931  |  
|Cash payments                       |  |                     | (1,570 | ) |                                                          |   | (824   | )                                  |  |   |       |   |  |   | (2,394 | )
|Adjustments                         |  |                     | (328   | ) |                                                          |   | (209   | )                                  |  |   |       |   |  |   | (537   | )
|                                    |  |                     |        |   |                                                          |   |        |                                    |  |   |        |   |  |   |        |  
|Liability, December 31, 2003        |  | $                   |       |   |                                                          | $ |       |                                    |  | $ |       |   |  | $ |       |  
|                                    |  |                     |        |   |                                                          |   |        |                                    |  |   |        |   |  |   |        |  
|April 2003 Restructuring Program    |  |                     |        |   |                                                          |   |        |                                    |  |   |        |   |  |   |        |  
|Liability, March 31, 2003           |  | $                   | 281    |   |                                                          | $ |       |                                    |  | $ |       |   |  | $ | 281    |  
|Charged to expense                  |  |                     | 5,389  |   |                                                          |   | 10,580 |                                    |  |   | 7,529  |   |  |   | 23,498 |  
|Noncash amounts                     |  |                     |       |   |                                                          |   |       |                                    |  |   | (6,610 | ) |  |   | (6,610 | )
|Cash payments                       |  |                     | (5,350 | ) |                                                          |   | (2,394 | )                                  |  |   |       |   |  |   | (7,744 | )
|Adjustments                         |  |                     | (200   | ) |                                                          |   | (1,298 | )                                  |  |   | (919   | ) |  |   | (2,417 | )
|                                    |  |                     |        |   |                                                          |   |        |                                    |  |   |        |   |  |   |        |  
|Liability, December 31, 2003        |  | $                   | 120    |   |                                                          | $ | 6,888  |                                    |  | $ |       |   |  | $ | 7,008  |  
|                                    |  |                     |        |   |                                                          |   |        |                                    |  |   |        |   |  |   |        |  
|November 2003 Restructuring Program |  |                     |        |   |                                                          |   |        |                                    |  |   |        |   |  |   |        |  
|Liability, March 31, 2003           |  | $                   |       |   |                                                          | $ |       |                                    |  | $ |       |   |  | $ |       |  
|Charged to expense                  |  |                     | 1,150  |   |                                                          |   | 1,604  |                                    |  |   |       |   |  |   | 2,754  |  
|Noncash amounts                     |  |                     |       |   |                                                          |   |       |                                    |  |   |       |   |  |   |       |  
|Cash payments                       |  |                     | (834   | ) |                                                          |   | (15    | )                                  |  |   |       |   |  |   | (849   | )
|                                    |  |                     |        |   |                                                          |   |        |                                    |  |   |        |   |  |   |        |  
|Liability, December 31, 2003        |  | $                   | 316    |   |                                                          | $ | 1,589  |                                    |  | $ |       |   |  | $ | 1,905  |  
|                                    |  |                     |        |   |                                                          |   |        |                                    |  |   |        |   |  |   |        |  



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A combined summary of the restructuring programs is as follows (in thousands):



|                             |  |                     |        |   |                                                          |   |        |                                    |  |   |        |   |  |   |         |  
|---------------------------- |  | ------------------- | ------ | - | -------------------------------------------------------- | - | ------ | ---------------------------------- |  | - | ------ | - |  | - | ------- | -
|                             |  | Workforce Reduction |        |   | Facilities Consolidation and Operating Lease Commitments |   |        | Property and Equipment Impairments |  |   | Total  |  
|Liability, March 31, 2003    |  | $                   | 2,179  |   |                                                          | $ | 1,384  |                                    |  | $ |       |   |  | $ | 3,563   |  
|Charged to expense           |  |                     | 6,539  |   |                                                          |   | 12,184 |                                    |  |   | 7,529  |   |  |   | 26,252  |  
|Non-cash amounts             |  |                     |       |   |                                                          |   |       |                                    |  |   | (6,610 | ) |  |   | (6,610  | )
|Cash payments                |  |                     | (7,754 | ) |                                                          |   | (3,436 | )                                  |  |   |       |   |  |   | (11,190 | )
|Adjustments                  |  |                     | (528   | ) |                                                          |   | (1,507 | )                                  |  |   | (919   | ) |  |   | (2,954  | )
|                             |  |                     |        |   |                                                          |   |        |                                    |  |   |        |   |  |   |         |  
|Liability, December 31, 2003 |  | $                   | 436    |   |                                                          | $ | 8,625  |                                    |  | $ |       |   |  | $ | 9,061   |  
|                             |  |                     |        |   |                                                          |   |        |                                    |  |   |        |   |  |   |         |  



5. COMPREHENSIVE INCOME OR LOSS



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



|                                                        |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | -------- | - |  | - | -------- | -
|                                                        |  | Three Months Ended December 31, |         |   | Nine Months Ended December 31, |  
|                                                        |  | 2003                            |         |   | 2002                           |   |         | 2003 |  |   | 2002     |  
|Net loss                                                |  | $                               | (26,440 | ) |                                | $ | (39,059 | )    |  | $ | (102,740 | ) |  | $ | (516,399 | )
|Change in net unrealized gain on short-term investments |  |                                 | (1,363  | ) |                                |   | 210     |      |  |   | (8,469   | ) |  |   | 3,689    |  
|Foreign currency translation adjustment                 |  |                                 | 82      |   |                                |   | (174    | )    |  |   | 121      |   |  |   | (71      | )
|                                                        |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  
|Comprehensive loss                                      |  | $                               | (27,721 | ) |                                | $ | (39,023 | )    |  | $ | (111,088 | ) |  | $ | (512,781 | )
|                                                        |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |          |  



6. CONTINGENCIES



In April 2001, a series of similar federal complaints were filed against the
Company and certain of its executive officers and directors. The complaints have been consolidated into a single proceeding in the U.S. District Court for the Southern District of California. In re Applied Micro Circuits Corp. Securities
Litigation, lead case number 01-CV-0649-K(AB). In January 2002, the court appointed lead plaintiff filed a consolidated federal complaint. The consolidated federal complaint alleges violations of the Exchange Act and is brought as a shareholder
class action under Sections 10(b), 20(a), 20A and Rule 10b-5 under the Securities Exchange Act of 1934. Plaintiff seeks monetary damages on behalf of the shareholder class. Discovery in this lawsuit is continuing. Trial is currently scheduled for
calendar year 2005.



In May 2001, a series of similar state
derivative actions were filed against the Companys directors and certain executive officers. The state complaints have been coordinated and assigned to the Superior Court of California in the County of San Diego. Applied Micro Circuits
Shareholders Cases, Case No. JCCP No. 4193. In December 2001, the court appointed plaintiffs filed a consolidated state complaint that alleges overstatement of the Companys financial prospects, mismanagement, inflation of stock value and
sale of stock at inflated prices for personal gain during the period from November 2000 through February 2001. The plaintiffs seek treble damages from the defendants alleged to have illegally sold stock and damages from all defendants for the other
alleged violations of corporate law set forth in the complaint. In February 2002, the board of directors formed a special litigation committee to evaluate the claims in the consolidated state complaint. The special litigation committee retained
independent legal counsel and submitted a report to the court in July 2002. Defendants filed a motion seeking dismissal of the consolidated action. In June 2003, the court denied defendants motion to dismiss. In November 2003, counsel for the
special litigation committee filed a motion to bifurcate trial of this matter, seeking an order that trial regarding whether the matter should be dismissed due to the special litigation committees recommendations take place prior to trial
regarding the underlying claims. The motion was granted in January 2004. Discovery in this lawsuit is continuing.



The Company believes that the allegations in these lawsuits are without merit and intends to defend against the lawsuits vigorously. The Company cannot
predict the likely outcome of these lawsuits, and an adverse result in either lawsuit could have a material adverse effect on the Company. The Company has notified its insurance carriers of these lawsuits and submitted expenses incurred in defending
the lawsuits as claims under the relevant insurance policies.



Since 1993, the Company has been named as a potentially responsible party, or 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. The Company is a member of a large group of PRPs that has agreed to fund certain remediation efforts at the Omega Chemical site, for which the Company has accrued approximately $100,000. In September 2000, the Company entered into a
consent decree with the Environmental Protection Agency, pursuant to which the Company agreed to fund its proportionate share of the initial remediation efforts at the Omega Chemical site.



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In May 2003, the Companys wholly owned subsidiary, AMCC Sales Corporation, filed a complaint
against Mintera Corporation, a privately held telecommunications equipment supplier, in the Superior Court of California in the County of San Diego. AMCC Sales Corporation v. Mintera Corporation, Case No. GIC810669. The Company is seeking
recovery of amounts owed by Mintera for products supplied to Mintera and seeking a declaration that it has fulfilled its contractual obligations to Mintera pursuant to a development partner agreement. In July 2003, Mintera filed a cross-complaint in
which Mintera claims that the Company made misrepresentations in order to induce Mintera to rely on the Companys promises to release these products to production. The cross-complaint also claims that the Company breached its obligations to
Mintera under the development partner agreement. Mintera also alleges in the cross-complaint that as a result of the Companys alleged misrepresentations and alleged failure to deliver conforming product, Mintera has suffered substantial
damages. Mintera has asked for unspecified damages and punitive damages in its cross-complaint. The Company and its subsidiary have filed answers to the cross-complaint denying Minteras allegations and claims. In November 2003, Mintera filed
an amended cross-complaint, adding claims for unfair competition and a preliminary injunction compelling the Company to sell certain products to Mintera. Mintera also filed a motion for a preliminary injunction seeking an order mandating the sale of
certain products to Mintera. Minteras motion for a preliminary injunction was denied in January 2004. Discovery in this lawsuit has commenced. The lawsuit has been tendered to the Companys insurance carriers. Trial in this lawsuit is
currently scheduled for May 2004.



In September 2003, Silvaco
Data Systems (Silvaco) 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 claims that the Company misappropriated trade secrets and has engaged in unfair business practices by using software licensed to the Company by Circuit Symantics, Inc. The Company has filed an answer denying Silvacos
allegations and has filed a motion seeking a stay of the lawsuit against the Company pending arbitration of terms of a settlement agreement between Circuit Symantics and Silvaco. The motion has been granted and the arbitration is expected to take
place in the first quarter of fiscal 2005.



Several litigation
matters are currently pending involving JNI Corporation (JNI), which became a wholly-owned subsidiary of the Company in October 2003.



In April 2001, a series of similar federal complaints were filed against 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 alleged that between July 13, 2000 and March 28, 2001 JNI and
the individual defendants made false statements about its business and operating results in violation of the Securities Exchange Act, and also included allegations that defendants made false statements in its secondary public offering of common
stock in October 2000. In April 2002, JNI filed a motion to dismiss and a motion to strike the first consolidated and amended complaint. In March 2003, the Court granted with leave to amend JNIs motion to dismiss. In May 2003, plaintiffs filed
a second amended consolidated complaint. In June 2003, JNI filed a motion to dismiss and a motion to strike the second amended consolidated complaint. The Court granted that motion to dismiss on August 25, 2003, and indicated it would only allow the
plaintiffs one more opportunity to attempt to plead a valid complaint. Plaintiffs filed a third amended and consolidated complaint in October 2003. JNI filed a motion to dismiss that complaint in December 2003. Plaintiffs filed an opposition in
January 2004. JNIs reply brief is due on February 13, 2004. The Court will then take the matter under submission and rule on it in due course.



In October 2001, a stockholder derivative suit was filed against JNI and certain of its former officers and directors in the San Diego County Superior Court, 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 has sustained JNIs demurrers to each of the plaintiffs complaints and dismissed the plaintiff in June 2002. However, in May 2002, another
plaintiff, Sik-Lin Huang, filed a motion to intervene in the case. In June 2002, the Court granted Huangs motion to intervene. Huang filed a complaint in intervention in July 2002. In September 2002, the board of directors of JNI 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 is not in the best interests of JNI to pursue the litigation. In February
2003, counsel for the special litigation committee filed a motion to dismiss the action. In November 2003, the court dismissed the matter with prejudice. In January 2004, plaintiffs filed a notice of appeal.



In May 2002, following JNIs announcement that it would restate its financial
statements, a stockholder derivative suit was filed against JNI and certain of its officers and directors in the San Diego County Superior Court, Case No. GIC 789481. The complaint repeated the allegations of the derivative lawsuit filed by Grosset,
and added allegations that the defendants caused or allowed JNI to falsely report its results for the fourth quarter of fiscal 2001. The special litigation committee, appointed in September 2002, investigated the allegations in this case as well. In
February 2003, the special litigation committee issued a report of its investigation which concluded that it was not in the best interests of JNI to pursue this action. In February 2003, counsel for the special litigation



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committee filed a motion to dismiss this action. In November 2003, the court dismissed the matter with prejudice. No notice of appeal has been filed to date.
The securities and derivative lawsuits have all been tendered to JNIs insurance carriers.



In September 2003, the plaintiff in the May 2002 derivative lawsuit filed a purported class action suit against the JNIs directors in the San Diego County Superior Court, Case No. GIC 817299. The complaint
alleges that the defendants breached their fiduciary duties to JNI stockholders when they approved the merger with AMCC and also repeated the allegations made in the May 2002 derivative lawsuit. The complaint sought, among other things, injunctive
relief preventing consummation of the merger. A settlement was reached on October 23, 2003, which did not result in a material cash payment by JNI. The case has not yet been dismissed, but the Court has set a hearing for April 2004 regarding why the
case should not be dismissed.



In November 2001, a class action lawsuit was
filed against JNI and the underwriters of its initial and secondary public offerings of common stock in the U.S District Court for the Southern District of New York, Case No. 01 Civ 10740 (SAS). The complaint alleges that defendants violated the
Securities Exchange Act in connection with JNIs public offerings. This lawsuit is among over 300 class action lawsuits pending in this 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 securities issuers 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 court and by the securities issuers, would be funded by insurers of the issuers, and would not result in any payment by JNI or the Company.



In December 2002, JNI filed a complaint against Cenata Networks, Inc. and Charles McKnett in
Superior Court of the State of California for the County of San Diego, North County Division, JNI Corporation v. Cenata Networks, Inc. and Charles McKnett, Case No. GIN026304, alleging misappropriation of proprietary information in violation
of contractual, statutory and other legal duties. In December 2003, Cenata and McKnett filed a cross complaint alleging that JNIs complaint was filed in violation of a prior settlement agreement and that JNI had misappropriated certain trade
secrets belonging to McKnett. Both sides have filed motions seeking summary adjudication of each others claims. These motions are scheduled to be heard in March and April 2004. Trial in this matter is scheduled for the first fiscal quarter of
2005.



The Company is also party to various claims and legal
actions arising in the normal course of business, including employee disputes and notification of possible infringement on the intellectual property rights of third parties.



Although the ultimate outcome of the pending matters is not presently determinable, the Company believes that the resolution
of all such matters, net of amounts accrued, will not have a material adverse effect on its financial position or liquidity; however, there can be no assurance that the ultimate resolution of these matters will not have a material impact on its
results of operations in any period.



7. RELATED PARTY TRANSACTIONS



From time to time the Company charters an aircraft for
business travel from an aircraft charter company, which manages an aircraft owned by a company that AMCCs chief executive officer controls. The Company expensed a total of $600,000 for such charters during each of the nine months ended
December 31, 2003 and the nine months ended December 31, 2002. These amounts were within the limits on such expenses approved by the board of directors.



8. RECENT ACCOUNTING PRONOUNCEMENTS



In May 2003, the FASB issued SFAS No.150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity. The statement improves the accounting for three types of financial instruments that were previously accounted for as equity  mandatorily redeemable shares, instruments that may require the issuer to buy back shares and
certain obligations that can be settled with shares. The statement requires that those instruments be accounted for as liabilities in the statement of financial position. The statement is effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement has not had a material impact on the Companys operating results or financial
position.



In April 2003, FASB issued SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.This statement is effective for contracts entered into or modified and for hedging relationships designated
after June 30, 2003. The Company does not currently hold any derivative instruments. The adoption of this statement has not had a material impact on the Companys operating results or financial position.



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In November 2002 the Emerging Issues Task Force (EITF) reached a consensus on Issue No.
00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21).EITF 00-21 provides guidance on how to account for certain arrangements that involve the delivery or performance of multiple products, services and/or
rights to use assets. The provisions of EITF 00-21 apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF 00-21 has not had a material impact on the Companys operating results or
financial position.



FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46) in January 2003. This interpretation of Accounting Research Bulletin No. 51 requires the consolidation of certain variable interest entities by the primary
beneficiary. FIN 46 is effective immediately for all variable interest entities created after January 31, 2003, and applies in the first interim or annual period occurring subsequent to June 15, 2003 for variable interest entities created prior to
February 1, 2003. The adoption of FIN 46 has not had a material effect on its operating results or financial position.



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|ITEM 2. | 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 and nine months ended December 31, 2003 and 2002. 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.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Risk factors.This section provides a description of risk factors that could adversely affect our business, results of operations, or financial condition.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------



CAUTION CONCERNING FORWARD-LOOKING STATEMENTS



This section should be read in conjunction with the consolidated
financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended March 31, 2003. This report, and in particular the MD&A, 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 of MD&A. 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 design, develop, and market silicon networking solutions for global wide
area networks, or WANs, and storage area networks, or SANs. We utilize a combination of design expertise coupled with system-level knowledge and multiple silicon process technologies to offer integrated circuit, or IC, products that enable the
transport of voice, video and data over WANs and Fibre Channel hardware and software products that address host bus adapter, storage array, switching and SAN extension requirements for high-growth networked storage. We generate revenues in the WAN
market primarily through sales of our IC products to communications equipment manufacturers, such as Alcatel, Ciena, Cisco, Fujitsu, Hitachi, Huawei, JDS Uniphase, Juniper, Lucent, Marconi, NEC, Nortel, Siemens, and Tellabs. In the SAN market, we
generate revenues primarily through sales of our host bus adapters to original equipment manufactures, or OEMs, such as EMC, Hitachi Data Systems, Network Appliance, Storagetek and Sun Microsystems.



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Since the end of our fiscal 2001, our primary markets and the communications industry have been in an
extended economic downturn. Due to this downturn, we experienced a significant drop in sales and orders of our products. Over the last three fiscal years, we have focused on reducing our expenses, maintaining our strong position in the
communications IC market by strategically investing in new products and more recently diversifying our business into other markets. A key element of our business strategy involves the acquisition of businesses, products or technologies that allow us
to reduce the time required to develop new technologies and products and bring them to market, complement our existing product offerings, expand our market coverage, or enhance our technological capabilities.



In September 2003, we purchased assets and licensed property associated with
IBMs PowerPRS Switch Fabric product line for approximately $47.8 million in cash to complement our existing switch fabric product portfolio. In October 2003, we completed the acquisition of all outstanding shares of JNI Corporation, a provider
of Fibre Channel hardware and software products that are critical SAN elements, for approximately $196.4 million in cash and assumed options to purchase approximately 4.3 million shares of our common stock. We plan to continue evaluating strategic
opportunities as they arise, including business combinations, strategic relationships, capital infusions and the purchase and sale of assets.



CRITICAL ACCOUNTING POLICIES



The SEC Financial Reporting Release No. 60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, or FRR 60,
encourages companies to provide additional disclosure and commentary on their most critical accounting policies. In FRR 60, the SEC defined the most critical accounting policies as the ones that are most important to the portrayal of a
companys financial condition and operating results, and require management to make its most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Based on this definition, our most critical accounting policies include: inventory valuation, which affects our cost of sales and gross margin; the valuation of purchased intangibles and goodwill, which affects our amortization and write-offs 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 revenue recognition, including the deferral of a portion of revenues on sales to distributors, and allowance for bad debt. 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.



Inventory Valuation



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



Goodwill and Intangible Asset Valuation



The determination of the fair value of certain
acquired assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions. Determining the fair values and useful lives of intangible assets especially requires 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. This method requires 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.



During 2001, the FASB issued SFAS 142, which requires that, effective April
1, 2002, goodwill and certain other intangible assets deemed to have an indefinite useful life, cease amortizing. SFAS 142 requires that goodwill and certain intangible assets be assessed for impairment using fair value measurement techniques. If
the carrying amount of a reporting unit exceeds its fair value, then a goodwill impairment test is performed to measure the amount of the impairment loss, if any. The goodwill impairment test compares the implied fair value of the reporting
units goodwill with the carrying amount of that goodwill. 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



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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 rate reflecting the risk inherent in future cash flows, perpetual growth rate, determination of appropriate market
comparables, and determination of whether a premium or discount should be applied to comparables. It is reasonably 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.



Restructuring Charges



Over the last three 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 writedowns, lease cancellations, facilities consolidation costs, and other restructuring costs. Given the significance
of, 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. Prior to 2003, the liability for certain exit costs was recognized on
the date that management committed to a plan. In 2003, new accounting guidance was issued requiring us to recognize costs associated with our exit and disposal activities at fair value when a liability is incurred. In calculating the charges for our
excess facilities, we have to estimate the timing of exiting certain facilities and then estimate the future lease and operating costs to be paid until the lease is terminated and the amount of any sublease income. To form our estimates for these
costs, we performed an assessment of the affected facilities and considered the current market conditions for each site. Our assumptions for the operating costs until termination or the offsetting sublease revenues may turn out to be incorrect, and
our actual costs may be materially different from our estimates, which could result in the need to record additional costs or to reverse previously recorded liabilities. Our policies require us to periodically evaluate the adequacy of the remaining
liabilities under our restructuring initiatives.



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 in
our financial statements.



Revenue Recognition



We recognize revenue in accordance with SEC Staff Accounting Bulletin No.
101 Revenue Recognition in Financial Statements, or SAB 101. SAB 101 requires 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. 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 with rights of return is deferred until all return or cancellation privileges lapse. In addition, we record reductions to revenue for estimated allowances such
as returns and competitive pricing programs. These estimates are based on our experience with product returns and the contractual terms of the competitive pricing programs. Shipping terms are FOB shipping point. If actual returns or pricing
adjustments exceed our estimates, additional reductions to revenue would result.



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



Net Revenues. Net revenues for the three and nine months ended December 31, 2003 were approximately $38.2 million and $83.8 million, respectively,
representing an increase of 81% and 3% from net revenues of approximately $21.1 million and $81.5 million for the three and nine months ended December 31, 2002, respectively. The increase in total net revenues was attributable to an increase in
communications revenue, including revenues generated by the acquisition of the PRS business, of 88% and 31% for the three and nine months ended December 31, 2003, respectively, and the additional revenue generated from the acquisition of JNI
Corporation from October 28, 2003 (the date of acquisition) through December 31, 2003 offset by decreases in the non-communications revenue of 55% and 66% for the three and nine months ended December 31, 2003 due to higher shipments of last time buy
products in the prior year. See the following table (in thousands):



|                                          |  |                                 |        |                                |   |        |  |      |        |  |   |       
|----------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                                          |  | Three Months Ended December 31, |        | Nine Months Ended December 31,
|                                          |  | 2003                            |        | 2002                           |   | 2003   |  | 2002
|AMCC:                                     |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Communications including the PRS business |  | $                               | 31,125 |                                | $ | 16,519 |  | $    | 69,015 |  | $ | 52,865
|Non-Communications                        |  |                                 | 2,050  |                                |   | 4,595  |  |      | 9,794  |  |   | 28,623
|                                          |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Sub-Total                                 |  |                                 | 33,175 |                                |   | 21,114 |  |      | 78,809 |  |   | 81,488
|JNI Corporation:                          |  |                                 | 5,014  |                                |   |       |  |      | 5,014  |  |   |      
|                                          |  |                                 |        |                                |   |        |  |      |        |  |   |       
|                                          |  | $                               | 38,189 |                                | $ | 21,114 |  | $    | 83,823 |  | $ | 81,488
|                                          |  |                                 |        |                                |   |        |  |      |        |  |   |       



We believe this
increase in revenues from communications products was due to an increase in the demand for communications equipment and our customers replenishing inventories of our products after having worked through overstocked inventories of such products that
existed throughout much of the past two years.



Based on direct
shipments, net revenues to customers that exceeded 10% of total net revenues in the three and nine months ended December 31, 2003 and 2002 were as follows:



|                          |  |                                 |   |  |                                |   |  |      |   |  |      |  
|------------------------- |  | ------------------------------- | - |  | ------------------------------ | - |  | ---- | - |  | ---- | -
|                          |  | Three Months Ended December 31, |   |  | Nine Months Ended December 31, |  
|                          |  | 2003                            |   |  | 2002                           |   |  | 2003 |   |  | 2002 |  
|Memec                     |  | 6                               | % |  | 10                             | % |  | 9    | % |  | 8    | %
|Mitsui Comtek Corporation |  | 10                              | % |  | 13                             | % |  | 10   | % |  | 7    | %
|Sanmina-SCI               |  | 13                              | % |  | 15                             | % |  | 12   | % |  | 10   | %
|Harris Corporation        |  |                                |   |  |                               |   |  |     |   |  | 20   | %
|Insight Electronics       |  | 16                              | % |  | 8                              | % |  | 12   | % |  | 7    | %



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 the three and nine months ended December 31, 2003 and 2002 were as follows:



|                            |  |                                 |   |  |                                |   |  |      |   |  |      |  
|--------------------------- |  | ------------------------------- | - |  | ------------------------------ | - |  | ---- | - |  | ---- | -
|                            |  | Three Months Ended December 31, |   |  | Nine Months Ended December 31, |  
|                            |  | 2003                            |   |  | 2002                           |   |  | 2003 |   |  | 2002 |  
|Nortel Networks Corporation |  | 18                              | % |  | 17                             | % |  | 17   | % |  | 15   | %
|Fujitsu                     |  | 11                              | % |  | 13                             | % |  | 11   | % |  | 8    | %
|Harris Corporation          |  |                                |   |  |                               |   |  |     |   |  | 20   | %
|Huawei                      |  | 12                              | % |  | 4                              | % |  | 10   | % |  | 4    | %



The decline in
revenues attributable to Harris Corporation was due to the fulfillment of certain last time buy orders of non-communications products in fiscal 2003.



Revenues based on direct shipments outside the United States of America accounted for 45% and 47% of net revenues for the three and nine months ended
December 31, 2003, compared to 56% and 41% for the three and nine months ended December 31, 2002.



Gross Margin. Gross margin was 54.3% and 56.2% for the three and nine months ended December 31, 2003, as compared to 32.1% and 41.0% for the three
and nine months ended December 31, 2002. The increase was primarily attributable to the reduced fixed cost of manufacturing overhead of approximately $3.5 million quarterly as a result of the permanent closure of our internal wafer fabrication
facility in March 2003 and the effects of the workforce reductions as well as decreased stock-based compensation



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charges included in cost of revenues of $390,000 and $1.9 million for the three and nine months ended December 31, 2003, respectively. In addition, during
the nine months ended December 31, 2003, we sold approximately $1.1 million of inventory which had been previously reserved. Partially offsetting the increases in gross margin were increases in the amortization of purchased intangible assets
included in costs of revenues.



The amortization of purchased
intangible assets included in cost of revenues during the three and nine months ended December 31, 2003 was $3.2 million and $6.3 million, respectively, compared to $1.6 million and $4.7 million for the three and nine months ended December 31, 2002,
respectively. The increase came as a result of the acquisition of JNI Corporation on October 28, 2003 and our acquisition of the PRS business on September 30, 2003. We expect amortization expense for purchased intangibles charged to cost of revenues
to be $13.7 million, $12.5 million and $9.3 million for the fiscal years ending March 31, 2004, 2005 and 2006, respectively. Future acquisitions of businesses may result in substantial additional charges which would impact the gross margin in future
periods.



Research and Development. Research and
development, or R&D, expenses consist primarily of salaries and related costs of employees engaged in research, design and development activities, costs related to engineering design tools, subcontracting costs and facilities expenses. R&D
expenses decreased 6% to approximately $30.1 million and decreased 16% to approximately $85.3 million for the three and nine months ended December 31, 2003, respectively, from approximately $32.0 million and $101.0 million for the three and nine
months ended December 31, 2002, respectively. The decrease in R&D for the nine months ended December 31, 2003 was primarily due to lower payroll and related benefits expense of approximately $7.8 million, resulting from our workforce reductions
and lower software and equipment depreciation costs of approximately $6.0 million, resulting from our restructuring initiatives. These decreases were partially offset by increases in payroll and related benefits resulting from the acquisition of JNI
Corporation on October 28, 2003 and our acquisition of the PRS business on September 30, 2003. We believe that a continued commitment to R&D is vital to our goal of maintaining a leadership position with innovative communications products.
Currently, R&D expenses are focused on the development of products for the communications and storage equipment markets, and we expect to continue this focus. Future acquisitions of businesses may result in substantial additional on-going costs.



Since the start of fiscal 2002, we have invested a total of
approximately $230 million in the development of new products, including higher-speed, lower-power and lower-cost products, products that combine the functions of multiple existing products into single highly integrated products, and other products
to complete our portfolio of communications products. For most products developed by us, due to their complexity and the complexity of our OEM customers equipment, it often takes several years to complete development and qualification. We have
not yet generated significant revenues from many of these new products for two additional reasons. First, the dramatic and extended downturn in the telecommunications market has severely impacted our customers and has resulted in significantly less
demand for the quantity of these products than expected when development commenced. Second, we have discontinued development of several new products and slowed down development of other new products as we realized that demand for these products
would not materialize as originally anticipated.



Selling,
General and Administrative. Selling, general and administrative, or SG&A, expenses consist primarily of personnel-related expenses, professional and legal fees, corporate branding and facilities expenses. SG&A expenses were approximately
$13.5 million and $34.9 million for the three and nine months ended December 31, 2003, respectively, as compared to approximately $14.5 million and $45.8 million for the three and nine months ended December 31, 2002, respectively, representing
decreases of 7% and 24%, respectively. The decrease in SG&A expenses for the three and nine months ended December 31, 2003 was primarily due to the effect of lower payroll and related benefits expense of approximately $1.4 million and $5.5
million, respectively, following workforce reductions as well as lower legal and professional fees of approximately $445,000 and $2.5 million, respectively, offset by increases in payroll and facilities costs for the three months ended December 31,
2003 related to the fiscal 2004 acquisitions. We expect SG&A expenses in absolute dollars to decrease modestly in the fourth quarter of fiscal 2004 as we recognize the planned cost savings following our recent acquisitions. Future acquisitions
of businesses may result in substantial additional on-going costs.



Stock-Based Compensation. Stock-based compensation expense represents 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. In the third quarter of fiscal 2004, we recorded approximately $4.2 million of deferred compensation in connection with stock options assumed in our
purchase acquisition of JNI Corporation. Stock-based compensation charges, including amounts charged to cost of revenues, were $2.7 million and $20.2 million for the three and nine months ended December 31, 2003, respectively, compared to $15.2
million and $119.8 million for the three and nine months ended December 31, 2002, respectively. We currently expect to record amortization of deferred compensation with respect to these assumed options of approximately $861,000 for the fourth
quarter of fiscal 2004 and $2.4 million, $1.6 million and $305,000 for fiscal years 2005, 2006 and 2007, respectively. These charges could be further reduced as a result of employee turnover. Future acquisitions of businesses may result in
substantial additional on-going costs. Such charges may cause fluctuations in our interim or annual operating results.



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Acquired In-process Research and Development. For the three and nine months ended December 31,
2003, we recorded $16.1 million and $21.8 million, respectively, of acquired in-process research and development resulting from the acquisition of JNI Corporation and the PRS 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 PRS acquisition was made up of five projects which were between 38% and 68% complete at the date of
acquisition. The estimated aggregate cost to complete these projects was $5.3 million. The discount rate applied to calculate the IPR&D charge ranged from 20% to 30%. The IPR&D charge related to the JNI Corporation acquisition was made up of
six projects, which were between 33% and 88% complete at the date of acquisition. The estimated aggregate cost to complete these projects was $2.3 million. The discount rate applied to calculate the IPR&D charge ranged from 22% to 35%. There can
be no assurance that acquisitions of businesses, products or technologies by us in the future will not result in substantial charges for acquired in-process research and development that may cause fluctuations in our interim or annual operating
results.



Goodwill and Purchased Intangible Asset Impairment
Charges. Upon adoption of SFAS 142 during the first quarter of fiscal 2003, we completed our initial goodwill impairment review. As a result, in the three months ended June 30, 2002 we recorded a $102.2 million non-cash charge for the impairment
of goodwill, which is reflected as the cumulative effect of an accounting change. In performing the fair value analysis as required under SFAS 142, it became evident, as a result of lower revenue forecasts, that certain other purchased intangible
assets were also impaired. As a result, we performed an analysis of these assets as required under SFAS 144 and recorded non-cash charges in the three months ended June 30, 2002 of $187.9 million for the impairment of developed technology and $16.3
million as a result of the abandonment of the MMC Networks trademark. These amounts are reflected as components of operating expenses. Throughout fiscal 2003, the estimates of carrier capital equipment spending continued to decline and for much of
the year our book value exceeded our market capitalization. To coincide with our annual long-range planning process, we assess goodwill for impairment annually in the fourth quarter. As a result of a decline in our estimated long-range net revenue,
and particularly, the long-range revenue associated with our acquired businesses, we determined that goodwill was further impaired and recorded an additional $186.4 million impairment charge to reduce the carrying value of goodwill, which was
reflected as a component of operating expenses and occurred in the fourth quarter of fiscal 2003.



Restructuring Charges.In July 2001, we announced the first of our restructuring programs. The July 2001 plan was in response to the sharp
downturn in business at the end of our fiscal 2001 and included reducing our overall cost structure and aligning manufacturing capacity with the then current demand. The July 2001 restructuring plan resulted in a total of $11.6 million of
restructuring costs, which were recognized as operating expenses in the last three quarters of fiscal 2002. The July 2001 restructuring plan was comprised of the following components:



| |  | Workforce reductionApproximately 50 employees, or 5% of the workforce was eliminated, which resulted in severance payments of approximately $900,000 in the fiscal year
ended March 31, 2002.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Consolidation of excess facilitiesAs a result of our acquisitions and significant internal growth in fiscal 2001, we expanded our number of locations throughout the
world. In an effort to improve the efficiency of our workforce and reduce our cost structure, we implemented a plan to consolidate our workforce into certain designated facilities. As a result, we recorded a charge of approximately $2.0 million,
which was recognized in the second quarter of fiscal 2002, primarily relating to non-cancelable lease commitments for smaller facilities in the United States.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Property and equipment impairmentsDuring fiscal 2000 and 2001, we aggressively expanded our manufacturing capacity in order to meet demand. As a result of the sharp
decrease in demand at the end of fiscal 2001, we recorded a charge of approximately $5.6 million in the second quarter of fiscal 2002, for the elimination of excess manufacturing equipment related to older process technologies. These assets were
removed from the production floor and disposed of. In addition, we recorded a charge of approximately $3.1 million relating to the abandonment of certain leasehold improvements and software licenses in connection with the closure of certain U.S.
facilities.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We have completed the restructuring
activities contemplated by the July 2001 plan, but have not yet disposed of the surplus leased facilities. As a result of the July 2001 restructuring activities, we realized approximately $4 million of annual savings relating to fixed cost of sales
overhead and approximately $2 million of annual savings relating to operating expenses.



As a result of the prolonged downturn in the telecommunications industry and the uncertainty as to when the telecommunication equipment market would recover, in July 2002 we announced our second workforce reduction
and restructuring program. The July 2002 workforce reduction and restructuring program was comprised of the following:



| |  | Closure of the wafer manufacturing facilityIn June 2002, we completed our plan to discontinue manufacturing non-communication ICs and close our
internal wafer manufacturing facility in San Diego. As a result, we recorded a total charge of $4.0 million in fiscal 2003. The charge was comprised of severance packages for approximately 70 employees in the manufacturing workforce and estimated
facility restoration costs. This was the only wafer fabrication facility we owned.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | Our wafer manufacturing facility was closed at the end of March 2003 and the facility was exited at the end of June 2003. During the third quarter of fiscal
2004, we completed the activities contemplated by the plan. As a result, we recorded an adjustment to the restructuring liability for the excess accrued severance and facilities restoration costs, and recognized a restructuring benefit of
approximately $537,000. We do not expect any future charges related to the closure of the wafer manufacturing facility.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Global workforce reductionIn an effort to reduce our expenses in July 2002, we implemented a workforce reduction plan, which eliminated approximately 165 employees or
25% of our workforce. The global workforce reduction included the closing of a United States design center and disposal of its related assets and resulted in a charge of $3.0 million. Payments for the employee severance were made in fiscal 2003;
amounts for the facility closure were paid through the end of the related lease term in fiscal 2004.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We have completed the activities contemplated by the global workforce reduction portion of the July 2002 plan, no further payments or expenses are
anticipated under this program.



As a result of the closure of
our internal wafer manufacturing facility, we expect to realize annual savings totaling approximately $14 million relating to fixed cost of sales overhead in fiscal 2004. As a result of the global workforce reduction undertaken in July 2002, we
expect to realize $16 million annual savings relating to operating expenses in fiscal 2004. To date we believe we are on track to achieve such savings.



As the downturn in the telecommunications industry continued it became evident that further cost reductions were necessary. In April of 2003, we announced
our third workforce reduction and restructuring program. The April 2003 restructuring program consisted of a workforce reduction, further consolidation of excess facilities and additional fixed asset disposals. In June 2002, the FASB issued SFAS 146
requiring 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. Accordingly, restructuring costs of $23.5 million related to the restructuring
plan were recognized in the first quarter of fiscal 2004 and approximately $281,000 was recognized in the fourth quarter of fiscal 2003 for severance packages communicated to employees in March 2003. The April 2003 workforce reduction and
restructuring program was comprised of the following:



| |  | Workforce reductionApproximately 185 employees have been eliminated which resulted in a severance charge of approximately $5.7 million, which was substantially paid
during the first two quarters of fiscal 2004.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Consolidation of excess facilities and other operating leasesAs a result of the lower head count resulting from the workforce reduction, we were able to exit certain
facilities, including a 58,000 square foot building in San Diego and a substantial portion our Sunnyvale facility. We recorded a charge of $7.2 million representing the estimated discounted cash flow of the lease payments, less the estimated
sublease income. In addition, as a result of the lower head count resulting from the workforce reduction, we disposed of certain software licenses used by the engineering workforce resulting in a charge in the first quarter of $3.4 million, which
will be paid over the respective licenses term.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Property and equipment impairmentsAs a result of lower head count and facility closure we accelerated depreciation and abandoned a substantial amount of leasehold
improvements as well as furniture, fixtures and employee workstations. This resulted in a charge of $7.5 million in the first quarter of fiscal 2004 for the abandon assets.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As a result of our April 2003 restructuring activities, we anticipated we would realize approximately $4 million of annual
savings relating to fixed cost of sales overhead and approximately $36 million of annual savings relating to operating expenses in fiscal 2004. However, in November 2003 we elected to reoccupy a portion of the 58,000 square foot building in San
Diego. This decision was based on the acquisition of JNI Corporation and the need to integrate our operations to achieve the planned cost savings. As a result of this decision to reoccupy the San Diego building, we reversed a portion of the prior
accrual for the excess lease commitment and reinstated the book value of the leasehold improvements, which were previously abandoned. We recorded a net restructuring benefit of approximately $2.9 million related to this activity. In addition, we
recorded an adjustment to the amount of accrued severance of approximately $200,000 because we overestimated the amount of severance that would be paid.



In November 2003, we implemented a fourth workforce reduction and restructuring. The November 2003 workforce reduction was implemented as a means to achieve certain cost
savings anticipated in connection with the fiscal 2004 acquisitions. The restructuring consisted of the elimination of approximately 50 employees and the abandonment of certain leased property. As a result of the November restructuring, we recorded
a charge of approximately $2.8 million, consisting of $1.2 million for employee severance and $1.6 million for excess facilities costs. The amount for employee severance will be substantially paid by the end of fiscal 2004 and



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the amounts to be paid for the excess lease commitments will be paid over the remaining lease term ending in October 2005. We estimate that we will achieve
annual operating expense savings of approximately $7 million.



Net Other Income (Expense). Net other income (expense) primarily includes recorded gains on strategic equity investments as well as gains from dispositions of real estate, property and equipment. Other income (expense) for the three
and nine months ended December 31, 2003 primarily consist of a gain on the sale of a parcel of real estate located in Poway, California of approximately $7.6 million and a gain on the sale of a strategic equity investment of approximately $862,000.
Other income (expense) for the three and nine months ended December 31, 2002 primarily consisted of a recognized impairment charge of $11.7 million for certain strategic equity investments offset by $3.7 million gain from the sale of a building.



Net Interest Income.Net interest income 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 and capital lease obligations. Net interest income
decreased to $7.1 million and $27.4 million for the three and nine months ended December 31, 2003, respectively, from $11.8 million and $36.2 million for the three and nine months ended December 31, 2002. This decrease is primarily due to lower
interest income as a result of lower yields and cash balances.



Income Taxes.We recorded no income taxes for the three and nine months ended December 31, 2003 and 2002. The difference between our effective tax rate and the federal statutory rate for those periods resulted from the establishment
of valuation allowances for the deferred tax assets generated, as it is more likely than not that they will expire unused.



Cumulative Effect of Accounting Change. As a result of our initial goodwill impairment review performed as of April 1, 2002 as required by the
adoption of SFAS 142, we recorded a non-cash charge of $102.2 million in the three months ended June 30, 2002.



Financial Condition and Liquidity



As of December 31, 2003, our principal source of liquidity consisted of $845.7 million in cash, cash equivalents and short-term investments. Working
capital as of December 31, 2003 was $813.5 million. At the end of December 31, 2003, we had contractual obligations not included on our balance sheet totaling $69.6 million, primarily related to facilities leases and engineering design software
tools.



For the nine months ended December 31, 2003, we used
$38.7 million of cash to fund our operations compared to using $31.5 million for our operations in the nine months ended December 31, 2002. Although we had a net loss of $102.7 million for the nine months ended December 31, 2003, $71.3 million
consisted of non-cash charges such as depreciation, amortization of purchased intangible assets, amortization of stock based compensation, in process R&D charges and restructuring charges. Excluding non-cash charges, operating cash flows for the
nine months ended December 31, 2003 primarily reflected increases in accounts receivables resulting from higher revenues and accrued liabilities primarily from our restructuring accruals and decreases in other assets and inventories. Operating cash
flows for the nine months ended December 31, 2002 consisted of non-cash items related to amortization or impairments of amounts recorded in connection with our purchase acquisitions of $431.1 million. The remaining change reflected decreases in
receivables and inventories, and increases in accrued payroll and other liabilities offset in part by decreases in accounts payable.



We generated $37.6 million of cash from investing activities during the nine months ended December 31, 2003, compared to using $172.8 million during the
nine months ended December 31, 2002. The inflow of cash for the nine months ended December 31, 2003 primarily represented the proceeds from the sale of real estate, the sale of investments in order to liquidate cash needed for our acquisitions,
offset by net cash paid for the acquisitions.



Capital
expenditures totaled $11.2 million and $4.2 million for the nine months ended December 31, 2003 and 2002, respectively. These capital expenditures primarily consisted of purchases of engineering hardware and design software.



We generated $9.1 million of cash for the nine months ended December 31, 2003
from financing activities compared to generating $3.9 million for the nine months ended December 31, 2002. The major financing source of cash was from the sale of our common stock through the exercise of employee stock options. The major use of cash
from financing activities was for the repayment of debt and capital lease obligations.



In October 2002, our board of directors approved a stock repurchase program whereby we are authorized to expend up to $200.0 million to purchase our common stock. Depending on market conditions and other factors,
purchases may be made from time to time in the open market and in negotiated transactions, including block transactions, at times and prices considered appropriate by us. Such program may be discontinued at any time. As of December 31, 2003, we had
not made any purchases under the program.



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In connection with the acquisition of the PRS business, we were required to pay $3.0 million for certain
assets, including an assembled workforce located in France, after certain local legal requirements were met. These requirements were met on January 1, 2004.



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.



The following table summarizes our
contractual obligations not included on the balance sheet as of December 31, 2003 (in thousands):



|                                   |  |                  |        |                            |   |        |  |   |       
|---------------------------------- |  | ---------------- | ------ | -------------------------- | - | ------ |  | - | ------
|                                   |  | Operating Leases |        | Other Purchase Commitments |   | Total 
|Three months ending March 31, 2004 |  | $                | 5,946  |                            | $ | 11,050 |  | $ | 16,996
|Fiscal year 2005                   |  |                  | 16,995 |                            |   | 3,650  |  |   | 20,645
|Fiscal year 2006                   |  |                  | 7,912  |                            |   |       |  |   | 7,912 
|Fiscal year 2007                   |  |                  | 5,304  |                            |   |       |  |   | 5,304 
|Fiscal year 2008                   |  |                  | 4,844  |                            |   |       |  |   | 4,844 
|Thereafter                         |  |                  | 13,875 |                            |   |       |  |   | 13,875
|                                   |  |                  |        |                            |   |        |  |   |       
|Total                              |  | $                | 54,876 |                            | $ | 14,700 |  | $ | 69,576
|                                   |  |                  |        |                            |   |        |  |   |       



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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 in which we report
our financial condition and results for the quarter and fiscal year-to-date. 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 equipment, 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, whether as a result of slowing demand for our products or our customers products, over-ordering of our
products or otherwise;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | fluctuations in manufacturing output, yields or other potential problems or delays in the fabrication, assembly, testing or delivery of our products;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the effects of the closure of our internal wafer fabrication facility;
| | - | ----------------------------------------------------------------------



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



| |  | problems or delays that we 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;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | changes in the mix of products that our customers buy;
| | - | ------------------------------------------------------



| |  | the potential negative effects and ability to reduce costs as planned through our on-going restructuring and cost reduction efforts;
| | - | ------------------------------------------------------------------------------------------------------------------------------------



| |  | the gain or loss of a key customer 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;
| | - | ----------------------------------------



| |  | market acceptance of our products and our customers products;
| | - | --------------------------------------------------------------



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



| |  | costs associated with acquisitions and the integration of acquired companies;
| | - | -----------------------------------------------------------------------------



| |  | our ability to successfully integrate acquired companies;
| | - | ---------------------------------------------------------



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



| |  | costs associated with compliance with applicable environmental and other governmental regulations;
| | - | --------------------------------------------------------------------------------------------------



| |  | the effects of changes in accounting standards, including rules regarding the recognition of expense related to employee stock options;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------



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



| |  | costs associated with litigation, including without limitation, litigation judgments or settlements relating to the use or ownership of intellectual property, the pending litigation
against us and certain of our executive officers and directors alleging violations of federal securities laws and various state claims or other claims arising out of our operations;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the ability of our customers to obtain components from their other suppliers;
| | - | -----------------------------------------------------------------------------



| |  | 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:



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



| |  | the failure of our products to be qualified in our customers systems or certified by our customers;
| | - | ----------------------------------------------------------------------------------------------------



| |  | a stockpiling of our products by our customers resulting in a reduction in their order patterns as they work through the excess inventory of our products;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | fabrication, test or assembly constraints for our devices, which adversely affect our ability to meet our production obligations;
| | - | ---------------------------------------------------------------------------------------------------------------------------------



| |  | the reduction, rescheduling or cancellation of customer orders;
| | - | ---------------------------------------------------------------



| |  | declines in the average selling prices of our products; and
| | - | -----------------------------------------------------------



| |  | shortages of raw materials or production capacity constraints that lead our suppliers to allocate available supplies or capacity to customers with resources greater than us and, in
turn, interrupt our ability to meet our production obligations.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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
noncancellable backlog, we typically plan our production and inventory levels based on internal forecasts of customer demand, which are 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. Accordingly, our financial condition and operating
results could be materially harmed.



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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.



If the downturns in the communications equipment industry and in information technology spending continue, our revenues and profitability will continue to be adversely affected.



We derive a majority of our revenues from sales of IC products and
subsystems to communications equipment manufacturers. The communications equipment industry has experienced a significant extended downturn and as a result, the financial condition of many telecommunications companies has significantly declined.
This downturn has severely affected carrier capital equipment expenditures, which in turn has affected the demand for our IC products and our revenues and profitability. We cannot predict how long this downturn will last, but as long as it does, our
revenues and profitability will continue to be impacted. Our need to continue investment in research and development during this downturn and to maintain extensive ongoing customer service and support constrains our ability to reduce expenses.



In addition to the downturn in the communications equipment
industry, since late 2000 large enterprises throughout the global economy have significantly reduced their spending on information technology products such as our SAN products. We cannot predict the depth or duration of this downturn in spending,
and if it grows more severe or continues for a long period of time, our ability to derive or maintain revenues from our SAN business may be impaired. Because we intend to continue to make significant investments in research and development in our
SAN business and to maintain its customer service and support capabilities, any resulting decline in its revenues will have a significant adverse impact on our operating results.



We expect revenues that are currently derived from non-communications ICs will decline in future periods.



We derived significant revenues from product sales to customers in the ATE,
high-speed computing and military markets in the past. The majority of these products were manufactured at our internal wafer fabrication facility, which closed in March 2003. Throughout fiscal 2003, we were fulfilling last-time-buy orders for parts
manufactured in this facility. As a result of the last-time-buy program, our revenues from sales of our non-communications IC products decreased to 5% and 12% of net revenues for the three and nine months ended December 31, 2003, respectively, from
22% and 35% of net revenues for the three and nine months ended December 31, 2002, respectively. We expect that revenues from our non-communications IC products will continue to decline materially as we fulfill the last-time-buy orders throughout
most of fiscal 2004. We will continue to sell products for these markets for the foreseeable future, but the volumes and revenues are expected to be modest.



Our business substantially depends upon the continued growth of the Internet.



A substantial portion of our business and revenue depends on the continued growth of the Internet. We sell our 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 SAN products are similarly dependent on continued Internet growth and
information technology spending. As a result of the economic slowdown, the significant decline in the financial condition of many telecommunications companies and the reduction in capital spending, spending on Internet infrastructure has declined.
To the extent that the economic slowdown and reduction in capital spending continues to adversely affect spending on Internet infrastructure, our business, operating results, and financial condition will continue to be materially harmed.



Our customers are concentrated. 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 any of our key customers. Many of our key customers have announced dramatic declines in demand for their products into which our products are
incorporated. As a result, new orders from these customers have been deferred, and customers may have overstocked our products. 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;
| | - | ------------------------------------------------------------------------------------------------------------------------------------



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| |  | 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 a customers new products may be late or less successful in the market than planned;
| | - | --------------------------------------------------------------------------------------------------------



| |  | a customers product line using our products may rapidly decline or 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 relationship 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 SAN 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 SAN products.



Any significant order cancellations or order deferrals could adversely affect our
operating results.



We typically sell products pursuant to
purchase orders that customers can generally cancel or defer on short notice without incurring a significant penalty. Any significant cancellations or deferrals in the future could materially and adversely affect our business, financial condition
and results of operations. Cancellations or deferrals could cause us to hold excess inventory, which could reduce our profit margins, increase product obsolescence and restrict our ability to fund our operations. 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.



An important part of our strategy is to
continue our focus on the markets for wireline communications and SAN infrastructure. If we are unable to further expand our share of these markets, our revenues may not grow and could further 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
be likely to lose business from an existing or potential customer and would 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.



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



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



Because a significant portion of our SAN products are designed to
work with servers from Sun Microsystems, our SAN business will be adversely affected if demand for Suns servers does not expand, or by our failure to develop, market and sell host bus adapters that interoperate with operating systems other
than the Sun Solaris operating system.



A substantial
majority of the historical revenues from our SAN business are derived from sales of host bus adapters that include software designed to work with the Sun Microsystems Solaris operating system. These host bus adapters have achieved their greatest
market acceptance in computing environments built with high-end servers from Sun Microsystems due to our products interoperability with the Solaris operating system. To increase our revenues and grow our SAN business, we must increase our
position in Solaris environments and build market share with our newer products that interoperate with other operating systems. These products have not obtained market penetration comparable to what we have achieved in the Solaris environment, and
our ability to increase market share is subject to the risks inherent in the commercialization of new products. In particular, competition in the market for non-Solaris Fibre Channel host bus adapters or HBA is fierce, and it will be challenging to
displace incumbent suppliers such as Emulex and QLogic to expand our market share. To achieve increased market share, it may be necessary for us to reduce our product prices in these new markets. This strategy may not be successful in increasing our
market share, and it could affect pricing in our existing markets. We may not be successful in marketing and selling the new products we develop, and we cannot assure you that our intended customers will purchase our products instead of competing
products. Our failure to obtain a significant share of the market for HBAs compatible with operating systems other than the Solaris operating system would impair our growth and harm our operating results. Also, in light of our dependence on
interoperability with the Solaris operating system, our revenues and operating results also may suffer if the demand for Suns servers, and particularly its high-end servers, does not expand.



Because a significant portion of our host bus adapters is integrated with storage devices
manufactured by a limited number of storage companies, the future revenue growth of our SAN business depends on our ability to obtain OEM certifications for the new and existing products of these manufacturers and on the increased demand for such
products.



We believe that the majority of our SAN
products are used to form connections to storage arrays manufactured by companies such as EMC, Hitachi Data Systems, Network Appliance, Storagetek or Sun Microsystems. To a material extent, the future revenue growth of our SAN business depends upon
the continued acceptance of and increased demand for the storage products offered by these vendors and other like vendors. To maintain and expand our position with these vendors, we must continue to provide high quality, early-to-market, high
performance HBAs at competitive prices. Even if we are able to meet the demands of these vendors, it is possible that they will develop or acquire products or technologies that make our SAN products uncompetitive. These vendors may form alliances
with other industry participants or competitive suppliers of HBAs that could adversely impact the demand for our SAN products. If we are unable to timely obtain OEM certifications for new storage products offered by these vendors, they could make
arrangements with competing HBA manufacturers that would make our products less competitive for both existing and new storage arrays. If we are unable to maintain or expand our relationships with vendors such as EMC, Hitachi Data Systems, Network
Appliance, Storagetek or Sun Microsystems, our revenues may suffer.



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. As a result, an
increasing portion of our revenues may be subject to certain risks, including:



| |  | foreign currency exchange fluctuations;
| | - | ---------------------------------------



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| |  | 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 subsidiary operations;
| | - | --------------------------------------------------------------------



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



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



| |  | 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. Some of our customer purchase orders and agreements are governed by foreign laws, which may differ
significantly from United States laws. We may be limited in our ability to enforce our rights under such agreements.



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 the 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, credit ratings of the issuers and foreign currency exchange rates, as well as the risk of default by the issuer. 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. We currently do not use derivative financial instruments to manage any of these risks. Increases in interest
rates, decreases in the credit worthiness of one or more of the issuers in the portfolio or adverse changes in foreign currency exchange rates could have a material adverse impact on our financial condition or results of operations.



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



As a
result of the continuing significant economic slowdown and the related uncertainties in our industry, we implemented a new restructuring plan in the first quarter of fiscal 2004. The plan focused on cost reductions and operating efficiencies, and
included workforce reductions. Additionally, in the third quarter of fiscal 2004 we had a workforce reduction in connection with synergistic plans associated with the acquisition of the PRS business and JNI Corporation. Employees directly affected
by the reductions 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. Our 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 our
restructuring efforts will be successful, that future operations will improve or that the completion of restructuring will not disrupt our operations. If we continue to reduce our workforce, it may adversely impact our ability to respond rapidly to
any renewed growth opportunities.



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



| |  | short product life cycles;
| | - | --------------------------



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



| |  | emerging competition;
| | - | ---------------------



| |  | frequent new product introductions and enhancements;
| | - | ----------------------------------------------------



| |  | increased integration with other functions; and
| | - | -----------------------------------------------



| |  | rapid product obsolescence.
| | - | ---------------------------



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



Products for communications applications 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, we could miss opportunities to achieve crucial design wins. If we fail to do so, we may not achieve design wins with key customers or may subsequently lose such design wins, and our business will
significantly suffer because once a customer has designed a suppliers product into its system, the customer typically is extremely reluctant to change its supply source due to significant costs associated with qualifying a new supplier.



The markets in which we compete are highly competitive and subject to rapid
technological change, price erosion and heightened competition.



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:



| |  | success in designing and subcontracting the manufacture of new products that implement new technologies;
| | - | --------------------------------------------------------------------------------------------------------



| |  | product quality, reliability, performance and certification;
| | - | ------------------------------------------------------------



| |  | customer support;
| | - | -----------------



| |  | time-to-market;
| | - | ---------------



| |  | price;
| | - | ------



| |  | production efficiency;
| | - | ----------------------



| |  | design wins;
| | - | ------------



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| |  | 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 such enhancements or new products by our
competitors could render our existing and future products obsolete or unmarketable. Once a customer has designed a suppliers product into its system, the customer is unlikely to change its supply source due to the significant costs associated
with qualifying a new supplier. 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 Agere, Broadcom, Intel, Mindspeed, PMC-Sierra, and Vitesse. Certain of
our customers or potential customers have internal IC design or manufacturing capability with which we compete. Any failure by us to compete successfully in these target markets, particularly in the communications markets, would have a material
adverse effect on our business, financial condition and results of operations.



In the Fibre Channel market, we compete against companies such as Emulex, QLogic, Agilent Technologies, Hewlett-Packard and LSI Logic. These companies all have substantially greater financial, marketing and
distribution resources than we have. Emulex and QLogic have entered the Sun Solaris segment of the Fibre Channel market, which is the primary market for our Fibre Channel products. We may also face competition from new entrants to the Fibre Channel
market, including larger technology companies that may develop or acquire differentiating technology and then apply their resources to our detriment. The Fibre Channel 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.



Our Fibre Channel products may also compete at the end-user level with other current or future technology alternatives. Businesses that implement SANs may
select fully-integrated SAN systems that are offered by large product solution companies. Because these systems typically do not interoperate with our products, customers that invest in these systems will be less likely to purchase our products.
Unless we are able to develop products based on other emerging connectivity technologies, our SAN business could suffer if the market for Fibre Channel products grows more slowly than we anticipate as a result of competition from these technologies.
To the extent that we develop products based on other standards, such as our InfiniBand products, we will face competition in the markets for these products that may come from larger technology companies such as Emulex, IBM, QLogic and Sun. We may
not succeed, for competitive or other reasons, in achieving market penetration with our InfiniBand or other potential products directed at new markets.



The closing of our internal wafer fabrication facility could result in unanticipated liability and reduced revenues.



A significant portion of our fiscal 2003 revenues was derived from products
manufactured in our internal wafer fabrication facility. As of March 31, 2003, the facility closed and we do not have the ability to manufacture products in the facility, which subjects us to substantial risks, including:



| |  | we may be unable to repair or replace defective products;
| | - | ---------------------------------------------------------



| |  | we may be unable to fulfill customer orders for products which are not in our inventory;
| | - | ----------------------------------------------------------------------------------------



| |  | if we have not built or effectively stored products which we have committed to customers, we may incur liability to these customers; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------



| |  | if we are unable to successfully design and sell products manufactured in external foundries, our revenues will decline.
| | - | ------------------------------------------------------------------------------------------------------------------------



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A disruption in the manufacturing capabilities of our outside foundries would negatively impact the production of
certain of our products.



In the past, we relied on
outside foundries for the manufacture of the majority of our IC products. Now that we have closed our internal foundry, all of our IC products will be manufactured by outside foundries. These outside foundries generally manufacture our products on a
purchase order basis, and we generally do not have long-term supply arrangements with these suppliers. 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. The transition to the next generation of manufacturing technologies at one or more of our
outside foundries could be unsuccessful or delayed.



Our IC
products are generally only qualified for production at a single foundry. These suppliers can allocate, and in the past have allocated, capacity to the production of other companies products while reducing deliveries to us on a short notice.
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.



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.



The risks associated with our dependence upon third parties which manufacture, assemble or package certain of our products, include:



| |  | reduced control over delivery schedules and quality;
| | - | ----------------------------------------------------



| |  | risks of inadequate manufacturing yields and excessive costs;
| | - | -------------------------------------------------------------



| |  | difficulties selecting and integrating new subcontractors;
| | - | ----------------------------------------------------------



| |  | the potential lack of adequate capacity during periods of excess demand;
| | - | ------------------------------------------------------------------------



| |  | limited warranties on products supplied to us;
| | - | ----------------------------------------------



| |  | potential increases in prices; and
| | - | ----------------------------------



| |  | potential misappropriation of our intellectual property.
| | - | --------------------------------------------------------



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.



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 be certain 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.



Our operating results depend on manufacturing output and yields of our ICs, 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



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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 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.



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.



We expect to transition our IC products to increasingly smaller line width geometries. This transition will require us to
migrate to new manufacturing processes for our products and redesign certain products. 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.
As smaller geometry processes become more prevalent, we expect to continue to integrate greater levels of functionality into our IC products. We may not be able to achieve higher levels of design integration or deliver new integrated products on a
timely basis.



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 when they are first introduced, 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. This, in
turn, 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. There can be no assurance that problems will not be found in new products after commencement of commercial production, despite testing by us, our suppliers or our customers.
This 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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Our future success depends in part on the continued service of our key design engineering, sales, marketing,
manufacturing, and executive personnel and our ability to identify, hire and retain additional, qualified personnel.



There is intense competition for qualified personnel in the semiconductor industry, in particular design, product and test engineers, and we may not be
able to continue to attract and retain engineers or other qualified personnel necessary for the development of our business, or to replace engineers or other qualified personnel who may leave our employment in the future. 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.



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 past and future potential acquisitions will require significant additional management,
technical and administrative resources. We cannot be certain 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.



Our test and assembly facilities are located in San
Diego, California and our external manufacturing operations are mainly concentrated in Taiwan. 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 terrorist attacks on September 11, 2001 disrupted commerce throughout the world and
intensified the uncertainty of the U.S. economy and other economies around the world. 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 these economies and create further uncertainties. To the extent that such disruptions or uncertainties result in delays or cancellations of customer orders, or the manufacture or shipment of our products, our business, operating
results and financial condition could be materially and adversely affected.



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



We are subject to a variety of federal, state and local governmental regulations related to the use, storage, discharge and disposal of toxic, volatile or
otherwise hazardous chemicals 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. These regulations
could require us to acquire costly equipment or incur other significant expenses to comply with environmental regulations or clean up prior discharges. Since 1993, we have been named as a PRP, along with 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.



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We have in the past and may be involved in merger and acquisition activities that will involve numerous risks. We may
not be able to address these risks successfully without substantial expense, delay or other operational or financial problems.



The risks involved with mergers and acquisitions include:



| |  | potential dilution to our stockholders, or use of a significant portion of our cash reserves;
| | - | ---------------------------------------------------------------------------------------------



| |  | diversion of managements attention;
| | - | ------------------------------------



| |  | failure to retain 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;
| | - | -------------------------------------------------------------------



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



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



| |  | assumption of unknown liabilities, or other unanticipated 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 various significant impairment charges against these assets as noted in our financial statements. At December 31, 2003, we have $245.0 million of goodwill and purchased intangible assets.
There can be no assurance 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.



We have been named as a defendant in securities class action litigation that could result
in substantial costs and divert managements attention and resources.



Our chief executive officer, current and former chief financial officer and certain of our other executive officers and directors, have been sued for alleged violations of federal securities laws related to alleged
misrepresentations regarding our financial prospects for the fourth quarter of fiscal 2001. In addition, JNI Corporation, which we acquired in October 2003, also has a number of pending lawsuits. We believe that the claims being brought against us,
including JNI Corporation and our officers and directors are without merit, and we intend to engage 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.



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, 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. 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 be certain that others will not independently develop substantially equivalent



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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 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 be certain that infringement claims by third parties or claims for indemnification by customers or end users resulting from infringement claims will not be asserted in the future, or that such assertions will not
harm our business.



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



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



| |  | 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, and that have often been unrelated or disproportionate to the operating performance of those companies. These fluctuations may harm the market price of our common stock.



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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 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 then current stockholders.



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|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------



We maintain an investment portfolio of various holdings, types and maturities. These securities are classified as available-for-sale and, consequently,
are recorded in the consolidated balance sheets at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income. We invest our excess cash in debt instruments of the U.S. Treasury, corporate
bonds, mortgage-backed securities and closed-end bond funds with investment grade credit ratings as specified in our investment policy. We have also 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 have not used derivative financial instruments.



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 do not currently hold any derivative instruments. We are exposed to market risks related to changes in interest rates and foreign currency exchange rates.



We are also exposed to market risk as it relates to changes in the market
value of our investments. At December 31, 2003, our investment portfolio included fixed-income securities classified as available-for-sale investments with a fair market value of $687.1 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 December 31, 2003 (in thousands):



|                               |  |                                                                           |         |                                    |   |                                                                           |  |   |         |  |         |         |         |   |         |  |   |         |  |   |        
|------------------------------ |  | ------------------------------------------------------------------------- | ------- | ---------------------------------- | - | ------------------------------------------------------------------------- |  | - | ------- |  | ------- | ------- | ------- | - | ------- |  | - | ------- |  | - | -------
|                               |  | Valuation of Securities Given an Interest Rate Decrease of X Basis Points |         | Fair Value as of December 31, 2003 |   | Valuation of Securities Given an Interest Rate Increase of X Basis Points
|                               |  | (150 BPS)                                                                 |         | (100 BPS)                          |   | (50 BPS)                                                                  |  |   | 50 BPS  |  | 100 BPS |         | 150 BPS
|Available-for-sale investments |  | $                                                                         | 735,366 |                                    | $ | 718,802                                                                   |  | $ | 702,465 |  | $       | 687,113 |         | $ | 672,505 |  | $ | 658,762 |  | $ | 646,238
|                               |  |                                                                           |         |                                    |   |                                                                           |  |   |         |  |         |         |         |   |         |  |   |         |  |   |        



These instruments are
not leveraged. 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. 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 4. | CONTROLS AND PROCEDURES
|------- | -----------------------



Our chief executive officer and chief financial officer performed an evaluation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our chief executive officer and chief
financial officer concluded that our disclosure controls and procedures were effective.



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PART II. OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------



In April 2001, a series of similar federal complaints were filed against us and certain of our executive officers and directors. The complaints have been consolidated into a single proceeding in the U.S. District Court for the Southern
District of California. In re Applied Micro Circuits Corp. Securities Litigation, lead case number 01-CV-0649-K(AB). In January 2002, the court appointed lead plaintiff filed a consolidated federal complaint. The consolidated federal
complaint alleges violations of the Exchange Act and is brought as a shareholder class action under Sections 10(b), 20(a), 20A and Rule 10b-5 under the Securities Exchange Act of 1934. Plaintiff seeks monetary damages on behalf of the shareholder
class. Discovery in this lawsuit is continuing. Trial is currently scheduled for calendar year 2005.



In May 2001, a series of similar state derivative actions were filed against our directors and certain executive officers. The state complaints have been
coordinated and assigned to the Superior Court of California in the County of San Diego. Applied Micro Circuits Shareholders Cases, Case No. JCCP No. 4193. In December 2001, the court appointed plaintiffs filed a consolidated state complaint
that alleges overstatement of our financial prospects, mismanagement, inflation of stock value and sale of stock at inflated prices for personal gain during the period from November 2000 through February 2001. The plaintiffs seek treble damages from
the defendants alleged to have illegally sold stock and damages from all defendants for the other alleged violations of corporate law set forth in the complaint. In February 2002, our board of directors formed a special litigation committee to
evaluate the claims in the consolidated state complaint. The special litigation committee retained independent legal counsel and submitted a report to the court in July 2002. Defendants filed a motion seeking dismissal of the consolidated action. In
June 2003, the court denied defendants motion to dismiss. In November 2003, counsel for the special litigation committee filed a motion to bifurcate trial of this matter, seeking an order that trial regarding whether the matter should be
dismissed due to the special litigation committees recommendations take place prior to trial regarding the underlying claims. The motion was granted in January 2004. Discovery in this lawsuit is continuing.



We believe that the allegations in these lawsuits are without merit and
intend to defend against the lawsuits vigorously. We cannot predict the likely outcome of these lawsuits, and an adverse result in either lawsuit could have a material adverse effect on us. We have notified its insurance carriers of these lawsuits
and submitted expenses incurred in defending the lawsuits as claims under the relevant insurance policies.



Since 1993, we have been named as a potentially responsible party, or 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, for which we have accrued
approximately $100,000. In September 2000, we entered into a consent decree with the Environmental Protection Agency, pursuant to which we agreed to fund our proportionate share of the initial remediation efforts at the Omega Chemical site.



In May 2003, our wholly owned subsidiary, AMCC Sales
Corporation, filed a complaint against Mintera Corporation, a privately held telecommunications equipment supplier, in the Superior Court of California in the County of San Diego. AMCC Sales Corporation v. Mintera Corporation, Case No.
GIC810669. We are seeking recovery of amounts owed by Mintera for products supplied to Mintera and seeking a declaration that we have fulfilled our contractual obligations to Mintera pursuant to a development partner agreement. In July 2003, Mintera
filed a cross-complaint in which Mintera claims that we made misrepresentations in order to induce Mintera to rely on our promises to release these products to production. The cross-complaint also claims that we breached our obligations to Mintera
under the development partner agreement. Mintera also alleges in the cross-complaint that as a result of our alleged misrepresentations and alleged failure to deliver conforming product, Mintera has suffered substantial damages. Mintera has asked
for unspecified damages and punitive damages in its cross-complaint. We and our subsidiary have filed answers to the cross-complaint denying Minteras allegations and claims. In November 2003, Mintera filed an amended cross-complaint, adding
claims for unfair competition and a preliminary injunction compelling us to sell certain products to Mintera. Mintera also filed a motion for a preliminary injunction seeking an order mandating the sale of certain products to Mintera. Minteras
motion for a preliminary injunction was denied in January 2004. Discovery in this lawsuit has commenced. The lawsuit has been tendered to our insurance carriers. Trial in this lawsuit is currently scheduled for May 2004.



In September 2003, Silvaco Data Systems (Silvaco) filed a
complaint against us 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 claims that we misappropriated
trade secrets and have engaged in unfair business practices by using software licensed to us by Circuit Symantics, Inc. We have filed an answer denying Silvacos allegations and have filed a motion seeking a stay of the lawsuit against us
pending arbitration of terms of a settlement agreement between Circuit Symantics and Silvaco. The motion has been granted and the arbitration is expected to take place in the first quarter of fiscal 2005.



Several litigation matters are currently pending involving JNI Corporation
(JNI), which became a wholly-owned subsidiary of the Company in October 2003.



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In April 2001, a series of similar federal complaints were filed against 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 alleged that between July 13, 2000 and March 28, 2001 JNI and the individual defendants made false statements about its business and operating results in violation of the Securities Exchange Act, and also included allegations that
defendants made false statements in its secondary public offering of common stock in October 2000. In April 2002, JNI filed a motion to dismiss and a motion to strike the first consolidated and amended complaint. In March 2003, the Court granted
with leave to amend JNIs motion to dismiss. In May 2003, plaintiffs filed a second amended consolidated complaint. In June 2003, JNI filed a motion to dismiss and a motion to strike the second amended consolidated complaint. The Court granted
that motion to dismiss on August 25, 2003, and indicated it would only allow the plaintiffs one more opportunity to attempt to plead a valid complaint. Plaintiffs filed a third amended and consolidated complaint in October 2003. JNI filed a motion
to dismiss that complaint in December 2003. Plaintiffs filed an opposition in January 2004. JNIs reply brief is due on February 13, 2004. The Court will then take the matter under submission and rule on it in due course.



In October 2001, a stockholder derivative suit was filed against JNI and
certain of its former officers and directors in the San Diego County Superior Court, 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 has sustained JNIs demurrers to each of the plaintiffs
complaints and dismissed the plaintiff in June 2002. However, in May 2002, another plaintiff, Sik-Lin Huang, filed a motion to intervene in the case. In June 2002, the Court granted Huangs motion to intervene. Huang filed a complaint in
intervention in July 2002. In September 2002, the board of directors of JNI 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 is not in the best interests of JNI to pursue the litigation. In February 2003, counsel for the special litigation committee filed a motion to dismiss the action. In November 2003, the court dismissed the matter with prejudice. In
January 2004, plaintiffs filed a notice of appeal.



In May
2002, following JNIs announcement that it would restate its financial statements, a stockholder derivative suit was filed against JNI and certain of its officers and directors in the San Diego County Superior Court, Case No. GIC
789481. The complaint repeated the allegations of the derivative lawsuit filed by Grosset, and added allegations that the defendants caused or allowed JNI to falsely report its results for the fourth quarter of fiscal 2001. The special
litigation committee, appointed in September 2002, investigated the allegations in this case as well. In February 2003, the special litigation committee issued a report of its investigation which concluded that it was not in the best interests of
JNI to pursue this action. In February 2003, counsel for the special litigation committee filed a motion to dismiss this action. In November 2003, the court dismissed the matter with prejudice. No notice of appeal has been filed to date. The
securities and derivative lawsuits have all been tendered to JNIs insurance carriers.



In September 2003, the plaintiff in the May 2002 derivative lawsuit filed a purported class action suit against the JNIs directors in the San Diego County Superior Court, Case No. GIC 817299. The
complaint alleges that the defendants breached their fiduciary duties to JNI stockholders when they approved the merger with AMCC and also repeated the allegations made in the May 2002 derivative lawsuit. The complaint sought, among other things,
injunctive relief preventing consummation of the merger. A settlement was reached on October 23, 2003, which did not result in a material cash payment by JNI. The case has not yet been dismissed, but the Court has set a hearing for April 2004
regarding why the case should not be dismissed.



In November
2001, a class action lawsuit was filed against JNI and the underwriters of its initial and secondary public offerings of common stock in the U.S District Court for the Southern District of New York, Case No. 01 Civ 10740 (SAS). The
complaint alleges that defendants violated the Securities Exchange Act in connection with JNIs public offerings. This lawsuit is among over 300 class action lawsuits pending in this 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 securities issuers 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 court and by the securities issuers, would be funded by insurers of the issuers, and would not result in any payment by JNI or the company.



In December 2002, JNI filed a complaint against Cenata Networks, Inc. and
Charles McKnett in Superior Court of the State of California for the County of San Diego, North County Division, JNI Corporation v. Cenata Networks, Inc. and Charles McKnett, Case No. GIN026304, alleging misappropriation of proprietary
information in violation of contractual, statutory and other legal duties. In December 2003, Cenata and McKnett filed a cross complaint alleging that JNIs complaint was filed in violation of a prior settlement agreement and that JNI had
misappropriated certain trade secrets belonging to McKnett. Both sides have filed motions seeking summary adjudication of each others claims. These motions are scheduled to be heard in March and April 2004. Trial in this matter is scheduled
for the first fiscal quarter of 2005.



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We are also party to various claims and legal actions arising in the normal course of business, including
employee disputes and notification of possible infringement on the intellectual property rights of third parties.



Although the ultimate outcome of the pending matters is not presently determinable, we believe that the resolution of all such matters, net of amounts accrued, will not
have a material adverse effect on our financial position or liquidity; however, there can be no assurance that the ultimate resolution of these matters will not have a material impact on its results of operations in any period.



|ITEM 5. | OTHER INFORMATION
|------- | -----------------



Effective January 20, 2004, Douglas C. Spreng resigned from the Companys Board of Directors.



|ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K
|------- | --------------------------------



(a) EXHIBITS



|     |  |                                                                                                                       
|---- |  | ----------------------------------------------------------------------------------------------------------------------
|     | 
|31.1 |  | Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Exchange Act.
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Exchange Act.
|     | 
|32.1 |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                   
|     | 
|32.2 |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                   



(b) REPORTS ON FORM 8-K



We filed the following current reports on Form 8-K with
the SEC during the three months ended December 31, 2003:



| | 1) | On October 23, 2003, we furnished the press release of our financial results for the quarter ended September 30, 2003.
| | -- | ----------------------------------------------------------------------------------------------------------------------



| | 2) | On October 28, 2003, we announced that we had completed the acquisition of JNI Corporation.
| | -- | -------------------------------------------------------------------------------------------



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SIGNATURES



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



Date: February 10, 2004



APPLIED MICRO CIRCUITS CORPORATIONBy:

/s/    STEPHEN M. SMITHStephen M. SmithSenior Vice President and Chief Financial Officer (Duly Authorized Signatory and Principal Financial and Accounting Officer)




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