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UNITED STATES

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 June 30, 2005



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 jurisdictionof incorporation or organization) |  | (I.R.S. EmployerIdentification No.)
|                                                              | 
|                                                              |  |                                    
|6290 Sequence Drive San Diego, CA                             |  | 92121                              
|(Address of principal executive offices)                      |  | (zip code)                         



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



---



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 July 18, 2005,
305,471,292 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 June 30, 2005 (unaudited) and March 31, 2005.                         |  | 3   
|               |  |                                                                                                               
|               |  | Condensed Consolidated Statements of Operations (unaudited) for the three months ended June 30, 2005 and 2004. |  | 4   
|               |  |                                                                                                               
|               |  | Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended June 30, 2005 and 2004. |  | 5   
|               |  |                                                                                                               
|               |  | Notes to Condensed Consolidated Financial Statements (unaudited).                                              |  | 6   
|               |  |                                                                                                               
|Item 2.        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations.                         |  | 15  
|               |  |                                                                                                               
|Item 3.        |  | Quantitative and Qualitative Disclosures About Market Risk.                                                    |  | 40  
|               |  |                                                                                                               
|Item 4.        |  | Controls and Procedures.                                                                                       |  | 41  
|               |  |                                                                                                               
|Part II.       |  | OTHER INFORMATION                                                                                              |  |     
|               |  |                                                                                                               
|Item 1.        |  | Legal Proceedings.                                                                                             |  | 42  
|               |  |                                                                                                               
|Item 2.        |  | Unregistered Sales of Equity Securities and Use of Proceeds.                                                   |  | 42  
|               |  |                                                                                                               
|Item 6.        |  | Exhibits.                                                                                                      |  | 42  
|               | 
|Signatures     |  | 43                                                                                                            
|               | 
|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)



|                                                                                       |  |               |            |   |               |   |            |  
|-------------------------------------------------------------------------------------- |  | ------------- | ---------- | - | ------------- | - | ---------- | -
|                                                                                       |  | June 30, 2005 |            |   | March 31,2005 |  
|                                                                                       |  | (unaudited)   |            |   |               |  
|ASSETS                                                                                 |  |               |            |   |               |   |            |  
|Current assets:                                                                        |  |               |            |   |               |   |            |  
|Cash and cash equivalents                                                              |  | $             | 33,046     |   |               | $ | 75,396     |  
|Short-term investments-available-for-sale                                              |  |               | 346,325    |   |               |   | 347,996    |  
|Accounts receivable, net                                                               |  |               | 23,694     |   |               |   | 28,601     |  
|Inventories                                                                            |  |               | 16,399     |   |               |   | 18,014     |  
|Other current assets                                                                   |  |               | 15,585     |   |               |   | 51,448     |  
|                                                                                       |  |               |            |   |               |   |            |  
|Total current assets                                                                   |  |               | 435,049    |   |               |   | 521,455    |  
|Property and equipment, net                                                            |  |               | 44,668     |   |               |   | 44,461     |  
|Goodwill and purchased intangibles, net                                                |  |               | 528,051    |   |               |   | 534,514    |  
|Other assets                                                                           |  |               | 2,071      |   |               |   | 1,965      |  
|                                                                                       |  |               |            |   |               |   |            |  
|Total assets                                                                           |  | $             | 1,009,839  |   |               | $ | 1,102,395  |  
|                                                                                       |  |               |            |   |               |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                   |  |               |            |   |               |   |            |  
|Current liabilities:                                                                   |  |               |            |   |               |   |            |  
|Accounts payable                                                                       |  | $             | 19,747     |   |               | $ | 24,016     |  
|Accrued payroll and related expenses                                                   |  |               | 9,944      |   |               |   | 10,101     |  
|Other accrued liabilities                                                              |  |               | 20,466     |   |               |   | 87,107     |  
|Deferred revenue                                                                       |  |               | 3,281      |   |               |   | 3,939      |  
|Current portion of long-term debt and capital lease obligations                        |  |               | 7          |   |               |   | 34         |  
|                                                                                       |  |               |            |   |               |   |            |  
|Total current liabilities                                                              |  |               | 53,445     |   |               |   | 125,197    |  
|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 June 30, 2005                                           |  |               |            |   |               |   |            |  
|Issued and outstanding shares - 305,402 at June 30, 2005 and 308,328 at March 31, 2005 |  |               | 3,054      |   |               |   | 3,083      |  
|Additional paid-in capital                                                             |  |               | 5,918,110  |   |               |   | 5,939,640  |  
|Deferred compensation, net                                                             |  |               | (7,507     | ) |               |   | (9,101     | )
|Accumulated other comprehensive income or loss                                         |  |               | (3,502     | ) |               |   | (6,867     | )
|Accumulated deficit                                                                    |  |               | (4,953,761 | ) |               |   | (4,949,557 | )
|                                                                                       |  |               |            |   |               |   |            |  
|Total stockholders equity                                                             |  |               | 956,394    |   |               |   | 977,198    |  
|                                                                                       |  |               |            |   |               |   |            |  
|Total liabilities and stockholders equity                                             |  | $             | 1,009,839  |   |               | $ | 1,102,395  |  
|                                                                                       |  |               |            |   |               |   |            |  



See Accompanying
Notes to Condensed Consolidated 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 EndedJune 30, |        
|                                                                |  | 2005                       |         |   | 2004 |  
|Net revenues                                                    |  | $                          | 64,673  |   |      | $ | 67,402  |  
|Cost of revenues (1)                                            |  |                            | 30,833  |   |      |   | 31,492  |  
|                                                                |  |                            |         |   |      |   |         |  
|Gross profit                                                    |  |                            | 33,840  |   |      |   | 35,910  |  
|Operating expenses:                                             |  |                            |         |   |      |   |         |  
|Research and development                                        |  |                            | 22,974  |   |      |   | 30,990  |  
|Selling, general and administrative                             |  |                            | 15,550  |   |      |   | 14,378  |  
|Stock-based compensation:                                       |  |                            |         |   |      |   |         |  
|Research and development                                        |  |                            | 696     |   |      |   | 1,032   |  
|Selling, general and administrative                             |  |                            | 785     |   |      |   | 1,323   |  
|Acquired in-process research and development                    |  |                            |        |   |      |   | 13,400  |  
|Amortization of purchased intangibles                           |  |                            | 1,267   |   |      |   | 1,557   |  
|                                                                |  |                            |         |   |      |   |         |  
|Total operating expenses                                        |  |                            | 41,272  |   |      |   | 62,680  |  
|                                                                |  |                            |         |   |      |   |         |  
|Operating loss                                                  |  |                            | (7,432  | ) |      |   | (26,770 | )
|Interest income, net                                            |  |                            | 3,589   |   |      |   | 5,281   |  
|Other income (expense), net                                     |  |                            | (185    | ) |      |   |        |  
|                                                                |  |                            |         |   |      |   |         |  
|Loss before income taxes                                        |  |                            | (4,028  | ) |      |   | (21,489 | )
|Income tax expense                                              |  |                            | 176     |   |      |   | 335     |  
|                                                                |  |                            |         |   |      |   |         |  
|Net loss                                                        |  | $                          | (4,204  | ) |      | $ | (21,824 | )
|                                                                |  |                            |         |   |      |   |         |  
|                                                                |  |                           
|Basic and diluted net loss per share:                           |  |                            |         |   |      |   |         |  
|                                                                |  |                           
|Net loss per share                                              |  | $                          | (0.01   | ) |      | $ | (0.07   | )
|                                                                |  |                            |         |   |      |   |         |  
|Shares used in calculating basic and diluted net loss per share |  |                            | 306,327 |   |      |   | 311,519 |  
|                                                                |  |                            |         |   |      |   |         |  
|                                                                |  |                           
|(1) Cost of revenues includes the following (in thousands):     |  |                            |         |   |      |   |         |  
|Stock-based compensation                                        |  | $                          | 26      |   |      | $ | 155     |  
|Amortization of developed technology                            |  |                            | 5,196   |   |      |   | 5,601   |  
|Amortization of purchased inventory fair value adjustment       |  |                            |        |   |      |   | 1,101   |  
|                                                                |  |                            |         |   |      |   |         |  
|                                                                |  | $                          | 5,222   |   |      | $ | 6,857   |  
|                                                                |  |                            |         |   |      |   |         |  



See Accompanying
Notes to Condensed Consolidated Financial Statements



4



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APPLIED MICRO CIRCUITS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)



|                                                                                          |  |                             |          |   |      |   |            |  
|----------------------------------------------------------------------------------------- |  | --------------------------- | -------- | - | ---- | - | ---------- | -
|                                                                                          |  | Three Months Ended June 30, |         
|                                                                                          |  | 2005                        |          |   | 2004 |  
|Operating activities:                                                                     |  |                             |          |   |      |   |            |  
|Net loss                                                                                  |  | $                           | (4,204   | ) |      | $ | (21,824    | )
|Adjustments to reconcile net loss to net cash provided by (used for) operating activities |  |                             |          |   |      |   |            |  
|Depreciation and amortization                                                             |  |                             | 3,672    |   |      |   | 4,829      |  
|Amortization of purchased intangibles                                                     |  |                             | 6,463    |   |      |   | 7,158      |  
|Acquired in-process research and development                                              |  |                             |         |   |      |   | 13,400     |  
|Stock-based compensation expense                                                          |  |                             | 1,507    |   |      |   | 2,510      |  
|Net gains on disposals of property and equipment                                          |  |                             | (4       | ) |      |   |           |  
|Changes in operating assets and liabilities:                                              |  |                             |          |   |      |   |            |  
|Accounts receivables                                                                      |  |                             | 4,907    |   |      |   | (9,866     | )
|Inventories                                                                               |  |                             | 1,615    |   |      |   | (635       | )
|Other assets                                                                              |  |                             | 35,757   |   |      |   | 1,533      |  
|Accounts payable                                                                          |  |                             | (4,269   | ) |      |   | 4,742      |  
|Accrued payroll and other accrued liabilities                                             |  |                             | (66,798  | ) |      |   | 1,261      |  
|Deferred revenue                                                                          |  |                             | (658     | ) |      |   | (750       | )
|                                                                                          |  |                             |          |   |      |   |            |  
|Net cash provided by (used for) operating activities                                      |  |                             | (22,012  | ) |      |   | 2,358      |  
|                                                                                          |  |                             |          |   |      |   |            |  
|Investing activities:                                                                     |  |                             |          |   |      |   |            |  
|Proceeds from sales and maturities of short-term investments                              |  |                             | 438,359  |   |      |   | 1,523,317  |  
|Purchases of short-term investments                                                       |  |                             | (433,116 | ) |      |   | (1,412,328 | )
|Purchase of property, equipment and other assets                                          |  |                             | (3,936   | ) |      |   | (7,563     | )
|Proceeds from sale of property                                                            |  |                             | 61       |   |      |   |           |  
|Net cash paid for acquisitions                                                            |  |                             |         |   |      |   | (366,895   | )
|                                                                                          |  |                             |          |   |      |   |            |  
|Net cash provided by (used for) investing activities                                      |  |                             | 1,368    |   |      |   | (263,469   | )
|                                                                                          |  |                             |          |   |      |   |            |  
|Financing activities:                                                                     |  |                             |          |   |      |   |            |  
|Proceeds from issuance of common stock                                                    |  |                             | 28       |   |      |   | 965        |  
|Structured stock repurchases, net                                                         |  |                             | (21,500  | ) |      |   |           |  
|Payments on capital lease obligations                                                     |  |                             | (27      | ) |      |   | (70        | )
|Other                                                                                     |  |                             | (207     | ) |      |   | (62        | )
|                                                                                          |  |                             |          |   |      |   |            |  
|Net cash provided by (used for) financing activities                                      |  |                             | (21,706  | ) |      |   | 833        |  
|                                                                                          |  |                             |          |   |      |   |            |  
|Net decrease in cash and cash equivalents                                                 |  |                             | (42,350  | ) |      |   | (260,278   | )
|Cash and cash equivalents at beginning of period                                          |  |                             | 75,396   |   |      |   | 329,162    |  
|                                                                                          |  |                             |          |   |      |   |            |  
|Cash and cash equivalents at end of period                                                |  | $                           | 33,046   |   |      | $ | 68,884     |  
|                                                                                          |  |                             |          |   |      |   |            |  
|Supplementary cash flow disclosure:                                                       |  |                             |          |   |      |   |            |  
|Cash paid for:                                                                            |  |                             |          |   |      |   |            |  
|Interest                                                                                  |  | $                           | 19       |   |      | $ | 22         |  
|                                                                                          |  |                             |          |   |      |   |            |  
|Income taxes                                                                              |  | $                           | 149      |   |      | $ | 209        |  
|                                                                                          |  |                             |          |   |      |   |            |  



See Accompanying
Notes to Condensed Consolidated Financial Statements



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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 these fluctuations could
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 fiscal year ended March 31, 2005.



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 reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and
expenses in the reporting period. The Company regularly evaluates estimates and assumptions related to inventory valuation and warranty liabilities, which affects our cost of sales and gross margin; the valuation of purchased intangibles and
goodwill, which affects our amortization and impairments of goodwill and other intangibles; the valuation of restructuring liabilities, which affects the amount and timing of restructuring charges; and the valuation of deferred income taxes, which
affects our income tax expense and benefit. The Company bases its estimates and assumptions on historical experience and on various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from managements estimates. To the extent
there are material differences between the estimates and the actual results, future results of operations will be affected.



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 SFAS 123, Accounting for Stock-Based Compensation (SFAS 123), as amended by SFAS 148, Accounting for Stock-Based CompensationTransition and Disclosure (SFAS
148).



In accordance with the requirements of the
disclosure-only alternative of SFAS 123, set forth below are the assumptions used and a pro forma illustration of the effect on net loss and net loss per share if the Company had valued stock-based awards to employees using the Black-Scholes option
pricing model instead of applying the guidelines provided by APB 25. In arriving at an option valuation, the Black-Scholes model considers, among other factors, the expected life of the option and the expected volatility of the Companys stock
price.



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##### Table of Contents

The per share fair value of options granted in connection with stock option plans and rights granted in
connection with the employee stock purchase plans 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 June 30, |      |   | Three Months Ended June 30,  |  
|                                      |  | 2005                        |      |   | 2004                         |   |      | 2005 |  |   | 2004 |  
|Expected life (years)                 |  |                             | 4.0  |   |                              |   | 4.0  |      |  |   | 1.4  |   |  |   | 1.7  |  
|Volatility                            |  |                             | 0.56 |   |                              |   | 0.96 |      |  |   | 0.72 |   |  |   | 1.03 |  
|Risk-free interest rate               |  |                             | 3.8  | % |                              |   | 3.8  | %    |  |   | 2.5  | % |  |   | 1.6  | %
|Dividend yield                        |  |                             | 0    | % |                              |   | 0    | %    |  |   | 0    | % |  |   | 0    | %
|Weighted average fair value per share |  | $                           | 1.36 |   |                              | $ | 3.52 |      |  | $ | 1.68 |   |  | $ | 2.57 |  



For purposes of pro
forma disclosures, the estimated fair value of the options is amortized to expense over the options vesting periods. The Companys pro forma information under SFAS 123 and SFAS 148 was as follows:



|                                               |  |                             |         |   |      |   |         |  
|---------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                               |  | Three Months Ended June 30, |        
|                                               |  | 2005                        |         |   | 2004 |  
|Net lossas reported                           |  | $                           | (4,204  | ) |      | $ | (21,824 | )
|Plus: Reported stock-based compensation        |  |                             | 1,507   |   |      |   | 2,510   |  
|Less: Fair value stock-based compensation      |  |                             | (11,184 | ) |      | $ | (32,812 | )
|                                               |  |                             |         |   |      |   |         |  
|Net losspro forma                             |  | $                           | (13,881 | ) |      | $ | (52,126 | )
|                                               |  |                             |         |   |      |   |         |  
|Reported basic and diluted net loss per share  |  | $                           | (0.01   | ) |      | $ | (0.07   | )
|                                               |  |                             |         |   |      |   |         |  
|Pro forma basic and diluted net loss per share |  | $                           | (0.05   | ) |      | $ | (0.17   | )
|                                               |  |                             |         |   |      |   |         |  



The Company evaluates
the assumptions used to value stock awards under SFAS 123 on a quarterly basis. Based on guidance provided in SFAS No. 123 (revised 2004), Share-Based Payment(SFAS 123R), and SAB No. 107, Share-Based Payment, in the three
months ended June 30, 2005 the Company refined its volatility assumption from 0.60% to 0.56% based on historical data over the estimated life of the options. The Company believes that its current assumptions generate a more representative estimate
of fair value.



In December 2004, the Financial Accounting
Standards Board (FASB) issued SFAS 123R, which is a revision of SFAS 123. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their
fair values and does not allow the previously permitted pro forma disclosure as an alternative to financial statement recognition. SFAS 123R supersedes APB 25 and related interpretations and amends SFAS No. 95, Statement of Cash Flows.The
Company will be required to adopt SFAS 123R in the first quarter of fiscal 2007. SFAS 123R allows for either prospective recognition of compensation expense or retroactive recognition, which may date back to the original issuance of SFAS 123
or only to interim periods in the year of adoption. The Company is currently evaluating these transition methods.



The adoption of the SFAS 123R fair value method will have a significant impact on the Companys reported results of operations, although it will have
no impact on the Companys overall financial position. The impact of adoption of SFAS 123R cannot be predicted at this time because that will depend on the fair value and number of share-based payments granted in the future. However, had the
Company adopted SFAS 123R in prior periods, the magnitude of the impact of that standard would have approximated the impact of SFAS 123 assuming the application of the Black-Scholes model as illustrated in the table above.



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Derivative Financial Instruments



The Company uses foreign exchange forward contracts to hedge expense commitments that are denominated in currencies other
than the US dollar. The purpose of the Companys foreign currency hedging activities is to fix the dollar value of specific commitments and payments to foreign vendors. At June 30, 2005, the Company had foreign exchange contracts with a
notional value of $4.3 million outstanding. The Company accounts for derivatives pursuant to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. This standard requires that all derivative instruments be
recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. The classification of gains and losses resulting from changes in the fair values of derivatives is dependent on the intended use
of the derivative and its resulting designation. The change in fair value of the ineffective portion of a hedge, and changes in fair values of derivatives that are not considered highly effective hedges are immediately recognized in earnings. If the
derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income and are subsequently recognized in earnings when the hedged item affects earnings.
Ineffectiveness between the change in fair value of the derivatives and the change in fair value of hedged items was immaterial for the three months ended June 30, 2005. At June 30, 2005 net unrealized losses of $349,000 were recorded in accumulated
other comprehensive income associated with cash flow hedging transactions.



2. CERTAIN FINANCIAL STATEMENT INFORMATION



Accounts
receivable (in thousands):



|                              |  |              |        |   |               |   |        |  
|----------------------------- |  | ------------ | ------ | - | ------------- | - | ------ | -
|                              |  | June 30,2005 |        |   | March 31,2005 |  
|Accounts receivable           |  | $            | 25,478 |   |               | $ | 30,385 |  
|Less: allowance for bad debts |  |              | (1,784 | ) |               |   | (1,784 | )
|                              |  |              |        |   |               |   |        |  
|                              |  | $            | 23,694 |   |               | $ | 28,601 |  
|                              |  |              |        |   |               |   |        |  



Inventories (in thousands):



|                |  |              |        |               |   |       
|--------------- |  | ------------ | ------ | ------------- | - | ------
|                |  | June 30,2005 |        | March 31,2005
|Finished goods  |  | $            | 9,192  |               | $ | 9,754 
|Work in process |  |              | 5,863  |               |   | 7,095 
|Raw materials   |  |              | 1,344  |               |   | 1,165 
|                |  |              |        |               |   |       
|                |  | $            | 16,399 |               | $ | 18,014
|                |  |              |        |               |   |       



Other current assets (in
thousands):



|                                |  |              |        |               |   |       
|------------------------------- |  | ------------ | ------ | ------------- | - | ------
|                                |  | June 30,2005 |        | March 31,2005
|Litigation insurance receivable |  | $            |       |               | $ | 32,947
|Deposits                        |  |              | 1,760  |               |   | 2,366 
|Prepaid expenses                |  |              | 11,493 |               |   | 13,689
|Other                           |  |              | 2,332  |               |   | 2,446 
|                                |  |              |        |               |   |       
|                                |  | $            | 15,585 |               | $ | 51,448
|                                |  |              |        |               |   |       



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##### Table of Contents

Property and equipment (in thousands):



|                                               |  |            |  |              |          |   |               |   |          |  
|---------------------------------------------- |  | ---------- |  | ------------ | -------- | - | ------------- | - | -------- | -
|                                               |  | UsefulLife |  | June 30,2005 |          |   | March 31,2005 |  
|                                               |  | (in years) |  |              |         
|Machinery and equipment                        |  | 5-7        |  | $            | 41,067   |   |               | $ | 42,906   |  
|Leasehold improvements                         |  | 1-10       |  |              | 14,982   |   |               |   | 11,676   |  
|Computers, office furniture and equipment      |  | 3-7        |  |              | 80,287   |   |               |   | 80,353   |  
|Buildings                                      |  | 31.5       |  |              | 5,953    |   |               |   | 5,860    |  
|Land                                           |  | N/A        |  |              | 12,202   |   |               |   | 12,202   |  
|                                               |  |            |  |              |          |   |               |   |          |  
|                                               |  |            |  |              | 154,491  |   |               |   | 152,997  |  
|Less accumulated depreciation and amortization |  |            |  |              | (109,823 | ) |               |   | (108,536 | )
|                                               |  |            |  |              |          |   |               |   |          |  
|                                               |  |            |  | $            | 44,668   |   |               | $ | 44,461   |  
|                                               |  |            |  |              |          |   |               |   |          |  



Goodwill and purchased intangibles:



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



|                                         |  |               |           |                                        |   |            |     |  |       |         |                                        |   |           |     |   |            |   |  |   |        
|---------------------------------------- |  | ------------- | --------- | -------------------------------------- | - | ---------- | --- |  | ----- | ------- | -------------------------------------- | - | --------- | --- | - | ---------- | - |  | - | -------
|                                         |  | June 30, 2005 |           | March 31, 2005                        
|                                         |  | Gross         |           | AccumulatedAmortizationand Impairments |   |            | Net |  | Gross |         | AccumulatedAmortizationand Impairments |   |           | Net
|Goodwill                                 |  | $             | 4,401,662 |                                        | $ | (3,974,186 | )   |  | $     | 427,476 |                                        | $ | 4,401,662 |     | $ | (3,974,186 | ) |  | $ | 427,476
|Developed technology                     |  |               | 413,500   |                                        |   | (336,227   | )   |  |       | 77,273  |                                        |   | 413,500   |     |   | (331,031   | ) |  |   | 82,469 
|Backlog/customer relationships           |  |               | 3,600     |                                        |   | (3,450     | )   |  |       | 150     |                                        |   | 3,600     |     |   | (3,282     | ) |  |   | 318    
|Patents/core technology rights/tradename |  |               | 59,200    |                                        |   | (36,048    | )   |  |       | 23,152  |                                        |   | 59,200    |     |   | (34,949    | ) |  |   | 24,251 
|                                         |  |               |           |                                        |   |            |     |  |       |         |                                        |   |           |     |   |            |   |  |   |        
|                                         |  | $             | 4,877,962 |                                        | $ | (4,349,911 | )   |  | $     | 528,051 |                                        | $ | 4,877,962 |     | $ | (4,343,448 | ) |  | $ | 534,514
|                                         |  |               |           |                                        |   |            |     |  |       |         |                                        |   |           |     |   |            |   |  |   |        



As of June 30, 2005,
the estimated future amortization expense of purchased intangible assets to be charged to cost of sales and operating expenses was as follows (in thousands):



|                 |  |              |        |                   |   |        |  |   |        
|---------------- |  | ------------ | ------ | ----------------- | - | ------ |  | - | -------
|                 |  | Cost ofSales |        | OperatingExpenses |   | Total 
|Fiscal year 2006 |  | $            | 12,448 |                   | $ | 3,321  |  | $ | 15,769 
|Fiscal year 2007 |  |              | 14,500 |                   |   | 4,430  |  |   | 18,930 
|Fiscal year 2008 |  |              | 14,500 |                   |   | 4,430  |  |   | 18,930 
|Fiscal year 2009 |  |              | 13,950 |                   |   | 4,429  |  |   | 18,379 
|Fiscal year 2010 |  |              | 10,500 |                   |   | 3,169  |  |   | 13,669 
|Thereafter       |  |              | 11,375 |                   |   | 3,523  |  |   | 14,898 
|                 |  |              |        |                   |   |        |  |   |        
|Total            |  | $            | 77,273 |                   | $ | 23,302 |  | $ | 100,575
|                 |  |              |        |                   |   |        |  |   |        



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Other accrued liabilities (in thousands):



|                                                 |  |              |        |               |   |       
|------------------------------------------------ |  | ------------ | ------ | ------------- | - | ------
|                                                 |  | June 30,2005 |        | March 31,2005
|Accrued warranty and excess purchase commitments |  | $            | 6,253  |               | $ | 6,828 
|Current tax liabilities                          |  |              | 2,724  |               |   | 2,697 
|Restructuring liabilities                        |  |              | 2,104  |               |   | 2,699 
|Excess lease liability                           |  |              | 63     |               |   | 4,769 
|Litigation settlement liability                  |  |              |       |               |   | 60,000
|Other                                            |  |              | 9,322  |               |   | 10,114
|                                                 |  |              |        |               |   |       
|                                                 |  | $            | 20,466 |               | $ | 87,107
|                                                 |  |              |        |               |   |       



Interest income, net (in
thousands):



|                                                        |  |                            |       |   |      |   |       |  
|------------------------------------------------------- |  | -------------------------- | ----- | - | ---- | - | ----- | -
|                                                        |  | Three Months EndedJune 30, |      
|                                                        |  | 2005                       |       |   | 2004 |  
|Interest income                                         |  | $                          | 3,962 |   |      | $ | 4,189 |  
|Net realized gains (losses) from short-term investments |  |                            | (354  | ) |      |   | 1,114 |  
|Interest expense                                        |  |                            | (19   | ) |      |   | (22   | )
|                                                        |  |                            |       |   |      |   |       |  
|                                                        |  | $                          | 3,589 |   |      | $ | 5,281 |  
|                                                        |  |                            |       |   |      |   |       |  



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



|                                                 |  |                            |      |   |      |   |  
|------------------------------------------------ |  | -------------------------- | ---- | - | ---- | - | -
|                                                 |  | Three Months EndedJune 30,
|                                                 |  | 2005                       |      |   | 2004
|Net gains on disposals of property and equipment |  | $                          | 4    |   |      | $ | 
|Foreign currency loss                            |  |                            | (189 | ) |      |   | 
|                                                 |  |                            |      |   |      |   |  
|                                                 |  | $                          | (185 | ) |      | $ | 
|                                                 |  |                            |      |   |      |   |  



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 EndedJune 30, |        
|                                                                               |  | 2005                       |         |   | 2004 |  
|Net loss                                                                       |  | $                          | (4,204  | ) |      | $ | (21,824 | )
|                                                                               |  |                            |         |   |      |   |         |  
|Shares used in basic and diluted net loss per share computation (denominator): |  |                            |         |   |      |   |         |  
|Weighted average common shares outstanding                                     |  |                            | 306,327 |   |      |   | 311,519 |  
|Less: Unvested common shares outstanding                                       |  |                            |        |   |      |   |        |  
|                                                                               |  |                            |         |   |      |   |         |  
|Shares used in basic and diluted net loss per share computation                |  |                            | 306,327 |   |      |   | 311,519 |  
|                                                                               |  |                            |         |   |      |   |         |  
|Basic and diluted net loss per share                                           |  | $                          | (0.01   | ) |      | $ | (0.07   | )
|                                                                               |  |                            |         |   |      |   |         |  



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Because the Company incurred losses for the three months ended June 30, 2005 and 2004, the effect of
dilutive securities totaling 1.0 million and 6.8 million equivalent shares for the three months ended June 30, 2005 and 2004, respectively, have been excluded from the net loss per share computations as their impact would be antidilutive.



3. RESTRUCTURING CHARGES



Over the last several years, the Company has undertaken significant
restructuring activities in an effort to reduce operating costs. The Company had initiated several restructuring plans. A combined summary of the restructuring programs is as follows (in thousands):



|                          |  |                    |      |   |                                                       |   |       |       |  |   |       |  
|------------------------- |  | ------------------ | ---- | - | ----------------------------------------------------- | - | ----- | ----- |  | - | ----- | -
|                          |  | WorkforceReduction |      |   | FacilitiesConsolidation andOperating LeaseCommitments |   |       | Total | 
|Liability, March 31, 2005 |  | $                  | 697  |   |                                                       | $ | 2,002 |       |  | $ | 2,699 |  
|Cash payments             |  |                    | (299 | ) |                                                       |   | (296  | )     |  |   | (595  | )
|                          |  |                    |      |   |                                                       |   |       |       |  |   |       |  
|Liability, June 30, 2005  |  | $                  | 398  |   |                                                       | $ | 1,706 |       |  | $ | 2,104 |  
|                          |  |                    |      |   |                                                       |   |       |       |  |   |       |  



The following tables
provide detailed activity related to the two most recent restructuring plan activities during the three months ended June 30, 2005 (in thousands):



|                                    |  |                    |      |   |                                                        |   |       |       |  |   |       |  
|----------------------------------- |  | ------------------ | ---- | - | ------------------------------------------------------ | - | ----- | ----- |  | - | ----- | -
|                                    |  | WorkforceReduction |      |   | Facilities Consolidation andOperating LeaseCommitments |   |       | Total | 
|April 2003 Restructuring Program    |  |                    |      |   |                                                        |   |       |       |  |   |       |  
|Liability, March 31, 2005           |  | $                  |     |   |                                                        | $ | 1,801 |       |  | $ | 1,801 |  
|Cash payments                       |  |                    |     |   |                                                        |   | (293  | )     |  |   | (293  | )
|                                    |  |                    |      |   |                                                        |   |       |       |  |   |       |  
|Liability, June 30, 2005            |  | $                  |     |   |                                                        | $ | 1,508 |       |  | $ | 1,508 |  
|                                    |  |                    |      |   |                                                        |   |       |       |  |   |       |  
|November 2004 Restructuring Program |  |                    |      |   |                                                        |   |       |       |  |   |       |  
|Liability, March 31, 2005           |  | $                  | 697  |   |                                                        | $ | 201   |       |  | $ | 898   |  
|Cash payments                       |  |                    | (299 | ) |                                                        |   | (3    | )     |  |   | (302  | )
|                                    |  |                    |      |   |                                                        |   |       |       |  |   |       |  
|Liability, June 30, 2005            |  | $                  | 398  |   |                                                        | $ | 198   |       |  | $ | 596   |  
|                                    |  |                    |      |   |                                                        |   |       |       |  |   |       |  



In April 2003, the
Company announced a restructuring program. The April 2003 restructuring program consisted of a workforce reduction of 185 employees, consolidation of excess facilities and fixed asset disposals. In June 2002, the FASB issued SFAS 146,
Accounting for Costs Associated with Exit or Disposal Activities, 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, approximately $281,000 was charged for severance packages communicated to employees in March 2003. The remaining restructuring costs of $23.5 million were recognized in the first quarter of fiscal 2004 and consisted of
approximately $5.4 million for employee severances, $7.2 million representing the discounted cash flow of lease payments on exited facilities, $3.4 million for the disposal of certain software licenses, and $7.5 million for the write off of
leasehold improvements and property and equipment. This restructuring charge was offset by a $2.6 million restructuring benefit, in November 2003, related to the reoccupation of a portion of the 58,000 square foot building in San Diego and an
adjustment for overestimated severance to be paid.



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In November 2004, the Company implemented another workforce reduction and realignment. The November 2004
workforce reduction was implemented as a means to reduce ongoing operating expenses by restructuring its operations, consolidating its facilities and reducing its workforce. The restructuring consisted of the elimination of approximately 150
employees, or 20 percent of the workforce, the closure of the Israel facility and consolidating other locations. As a result of the November 2004 restructuring, the Company recorded a charge of approximately $9.1 million, consisting of $4.4 million
for employee severances, $4.2 million for property and equipment write-offs, and $500,000 for the closure of the Israel facility and abandonment of certain leased property.



4. COMPREHENSIVE INCOME OR LOSS



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



|                                                               |  |                            |        |   |      |   |         |  
|-------------------------------------------------------------- |  | -------------------------- | ------ | - | ---- | - | ------- | -
|                                                               |  | Three Months EndedJune 30, |       
|                                                               |  | 2005                       |        |   | 2004 |  
|Net loss                                                       |  | $                          | (4,204 | ) |      | $ | (21,824 | )
|Change in net unrealized gain (loss) on short-term investments |  |                            | 3,572  |   |      |   | (14,522 | )
|Foreign currency translation adjustment                        |  |                            | (207   | ) |      |   | (62     | )
|                                                               |  |                            |        |   |      |   |         |  
|Comprehensive loss                                             |  | $                          | (839   | ) |      | $ | (36,408 | )
|                                                               |  |                            |        |   |      |   |         |  



5. STOCKHOLDERS EQUITY



On August 12, 2004, the Companys board of directors
authorized a stock repurchase program for the repurchase of up to $200.0 million of its common stock. Under the program, the Company is authorized to make purchases in the open market or enter into structured agreements. The Company has utilized
structured stock repurchase agreements to buy back shares. These structured agreements are settled in cash or stock depending on the closing market price of the Companys common stock on the expiration date of the agreements. Upon expiration of
each agreement, if the closing market price of the Companys common stock was at or above the pre-determined price, the Company will have its investment returned with a premium. If the closing market price was below the pre-determined price,
the Company will receive a predetermined number of its shares. Any cash received, including the premium, is treated as an increase to additional paid in capital on the balance sheet in accordance with the guidance issued in EITF 00-19,
Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock.



During fiscal 2005, the Company repurchased 7.9 million shares of its common stock for approximately $24.4 million on the open market or through
structured stock repurchase agreements. These shares were retired upon delivery to the company. At March 31, 2005, the Company had four open structured stock repurchase agreements which were settled during the three months ended June 30, 2005. Under
these agreements, the Company received approximately 3.0 million shares of its common stock at an effective purchase price of $3.22 per share. In addition, during the three months ended June 30, 2005, the Company entered into five structured stock
repurchase agreements totaling $21.5 million that have varying maturities through September 2005. Under these agreements, the Company will receive up to $23.3 million of cash, or the delivery of up to 8.0 million shares of its common stock, or a
combination of cash and shares.



6. CONTINGENCIES



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 April 2001, a series of similar federal complaints were filed against the Company and certain of its
executive officers and directors. The complaints were 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). The consolidated federal complaint alleged violations of the Securities Exchange Act of 1934 and was brought as a shareholder class action. In January 2005, the parties entered into a Memorandum of Understanding pursuant to which
the Company agreed to pay $60 million to settle the litigation. In April 2005, the Company and its insurers funded the settlement fund following the courts preliminary approval of the settlement. Of the total amount, the Companys
insurers paid approximately $31 million. The settlement received final court approval in June 2005, and the litigation has been dismissed with prejudice.



In September 2003, Silvaco Data Systems filed a complaint against the Company in the Superior Court of the State of California in the County of Santa
Clara. Silvaco Data Systems v. Applied Micro Circuits Corporation, case no. 103cv005696. In its complaint, Silvaco claims that the Company misappropriated trade secrets and engaged in unfair business practices by using software licensed to
the Company by Circuit Symantics, Inc. The Company filed an answer denying Silvacos allegations. The court has not set a trial date. The Company believes that the allegations in this lawsuit are without merit and intends to defend against the
lawsuit vigorously.



In April 2005, Cicada Semiconductor
Corporation, a Delaware corporation and now a wholly owned subsidiary of Vitesse Semiconductor Corporation, filed a complaint against the Company and other unknown defendants in the Superior Court of the State of California in the County of San
Diego. Cicada Semiconductor Corporation v. Applied Micro Circuits Corporation, case no. GIC 845887. In its complaint, Cicada alleges that the Company breached a contract to purchase assets from Cicada by failing to make installment payments
due under the contract. Cicadas complaint seeks $2 million in damages plus interest and its attorneys fees and costs. In June 2005, the Company filed a cross-complaint against both Cicada and Vitesse. The cross-complaint states claims
for breach of contract, breach of the implied covenant of good faith and fair dealing and rescission against Cicada, based on allegations that Cicada failed to perform its obligations under the contract and further breached the contract by assigning
its rights and obligations under the contract to Vitesse. The cross-complaint states claims for intentional interference with contract and breach of contract against Vitesse based on allegations that Vitesse interfered with the Companys
contract with Cicada and, separately, failed to pay for certain products ordered from and delivered by the Company. Preliminary settlement negotiations were unsuccessful. No trial date has been set.



Several litigation matters are discussed below involving JNI Corporation,
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 contained allegations that between July 13, 2000 and March 28, 2001 JNI and the individual defendants made false statements about
JNIs business and operating results in violation of the Securities Exchange Act of 1934, and also included allegations that defendants made false statements in JNIs public offering of common stock in October 2000. In March 2003, the
court dismissed the action with prejudice. In April 2004, plaintiffs filed a notice of appeal. The appeal has been fully briefed. The date for oral argument has yet to be set by the Court of Appeals.



In October 2001, a shareholder derivative lawsuit was filed against JNI and
certain of its former officers and directors in the Superior Court of the State of California in the County of San Diego, case no. GIC 775153. The complaint alleged that between October 16, 2000 and January 24, 2001, the defendants breached their
fiduciary duty by failing to adequately oversee the activities of management and that JNI allegedly made false statements about its business and results causing its stock to trade at artificially inflated levels. The court sustained JNIs
demurrers to each of the plaintiffs complaints and dismissed the complaint in June 2002. In June 2002, the court



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##### Table of Contents

granted Sik-Lin Huangs motion to intervene. Huang filed a complaint in intervention in July 2002. In September 2002, JNIs board of directors
appointed a special litigation committee to investigate the allegations. In February 2003, the special litigation committee issued a report of its investigation, which concluded that it was not in JNIs best interests to pursue the litigation.
In November 2003, the court dismissed the complaint with prejudice. In January 2004, plaintiffs filed a notice of appeal. A motion to dismiss the appeal has been filed by the defendants on the grounds that the plaintiffs have lost standing because
they no longer own JNI shares. The court has stated that it will rule on the motion to dismiss the appeal when it rules on the merits of the appeal. Plaintiffs opening brief on the merits was filed in January 2005. The respondents brief
was filed in March 2005. Plaintiffs reply merits briefs were filed in April 2005. The court has not set a date to hear oral arguments on the appeal.



In November 2001, a class action lawsuit was filed against JNI and the underwriters of its initial and secondary public offerings of common stock in the
U.S. District Court for the Southern District of New York, case no. 01 Civ 10740 (SAS). The complaint alleges that defendants violated the Securities Exchange Act of 1934 in connection with JNIs public offerings. This lawsuit is among more
than 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 issuer defendants and the plaintiffs that would guarantee at least $1 billion to investors who are class members from the insurers of the issuers. The proposed settlement, if approved by the court and by the issuers, would be funded by insurers
of the issuers, and would not result in any payment by JNI or the Company. The Court has granted its preliminary approval of settlement subject to defendants agreement to modify certain provisions of the settlement agreements regarding
contractual indemnification. JNI has accepted the Courts proposed modifications. The court has set a hearing for final approval of the settlement for January 2006.



The Company cannot predict the likely outcome of these lawsuits, and an adverse result in any of these lawsuits could have a
material adverse effect on the Company.



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.



7. RELATED PARTY TRANSACTIONS



From time to time the Company chartered an aircraft for business travel from
an aircraft charter company, which managed an aircraft owned by a company that AMCCs former chief executive officer controlled. The Company expensed a total of $0 and $200,000 for such charters during the three months ended June 30, 2005 and
June 30, 2004, respectively. These amounts were within the limits on such expenses approved by the board of directors. The board of directors has discontinued this practice.



8. SUBSEQUENT EVENT



On July 27, 2005,
AMCC announced plans to restructure and reorganize its operations. The plan includes reducing approximately 5% of the current headcount by eliminating job redundancies. The Company expects to incur a charge of approximately $2 million to $3 million
in the second quarter of fiscal 2006 and anticipates that the restructuring plan will reduce ongoing operating expenses by approximately $1 million per quarter commencing in the third quarter of fiscal 2006.



14



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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 months ended June 30, 2005 and 2004. 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, 2005. This discussion contains forward-looking statements. These forward-looking statements are made as of the date of this report. Any
statement that refers to an expectation, projection or other characterization of future events or circumstances, including the underlying assumptions, is a forward-looking statement. We use certain words and their derivatives such as
anticipate, believe, plan, expect, estimate, predict, intend, may, will, should, could, future,
potential, and similar expressions in many of the forward-looking statements. The forward-looking statements are based on our current expectations, estimates and projections about our industry, managements beliefs, and other
assumptions made by us. These statements and the expectations, estimates, projections, beliefs and other assumptions on which they are based are subject to many risks and uncertainties and are inherently subject to change. We describe many of the
risks and uncertainties that we face in the Risk Factors section 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



AMCC provides semiconductor and board level products that are the essential building blocks for the processing, moving and
storing of information worldwide. The company blends systems and software expertise with high-performance, high-bandwidth silicon integration to deliver silicon, hardware and software solutions for global wide area networks (WAN), embedded
applications such as PowerPC and programmable system on a chip architectures, storage area networks (SAN), and high-growth storage markets such as Serial ATA (SATA) RAID. AMCCs corporate headquarters are located in San Diego, California. Sales
and engineering offices are located throughout the world.



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Over the last several years, we have undertaken significant restructuring activities in an effort to
reduce operating costs. In addition, in an effort to diversify our customer base and markets that we serve, we have also made several acquisitions. In September 2003 and January 2004, we purchased assets and licensed intellectual property associated
with IBMs PowerPRS Switch Fabric product line, or the PRS Business, for approximately $51 million in cash to complement our existing communications products 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 elements of storage networks, for approximately $196.4 million in cash. In April 2004, we completed the acquisition of 3ware, Inc., a provider of
high-performance, high-capacity SATA storage solutions, for a purchase price of approximately $145 million in cash. In May 2004 and December 2004, we acquired intellectual property and a portfolio of assets associated with IBMs 400 series of
embedded PowerPC® standard products, or the
Embedded Products Business, for approximately $232 million in cash. The PowerPC 400 series product line targets Internet, communication, data storage, consumer and imaging applications.



CRITICAL ACCOUNTING POLICIES



The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses in the reporting period. We regularly evaluate our estimates and assumptions related
to inventory valuation and warranty liabilities, which affects our cost of sales and gross margin; the valuation of purchased intangibles and goodwill, which affects our amortization and impairments of goodwill and other intangibles; the valuation
of restructuring liabilities, which affects the amount and timing of restructuring charges; and the valuation of deferred income taxes, which affects our income tax expense and benefit. We also have other key accounting policies, such as our
policies for revenue recognition, including the deferral of a portion of revenues on sales to distributors, and allowance for bad debts. The methods, estimates and judgments we use in applying these most critical accounting policies have a
significant impact on the results we report in our financial statements. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. To the extent there are material differences between our estimates and the actual results, our future results of
operations will be affected.



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



Inventory Valuation and Warranty Liabilities



Our policy is to value inventories at the lower of cost or market on a part-by-part basis. This policy requires us to make estimates regarding the market
value of our inventories, including an assessment of excess or obsolete inventories. We determine excess and obsolete inventories based on an estimate of the future demand for our products within a specified time horizon, generally 12 months. The
estimates we use for future demand are also used for near-term capacity planning and inventory purchasing and are consistent with our revenue forecasts. If our demand forecast is greater than our actual demand we may be required to take additional
excess inventory charges, which would decrease gross margin and net operating results in the future. Our products typically carry a one to three year warranty. We establish reserves for estimated product warranty costs at the time revenue is
recognized. Although we engage in extensive product quality programs and processes, our warranty obligation is affected by product failure rates, use of materials and service delivery costs incurred in correcting any product failure. Should actual
product failure rates, use of materials or service delivery costs differ from our estimates, additional warranty reserves could be required, which could reduce our gross margins.



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Goodwill and Intangible Asset Valuation



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



We are required to assess goodwill impairment annually using the methodology prescribed by Statement of Financial Accounting Standards, or SFAS, No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that
goodwill be tested for impairment at the reporting unit level on an annual basis or more frequently if we believe indicators of impairment exist. Application of the goodwill impairment test requires judgment, including the identification of
reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units and determining the fair value of each reporting unit. The goodwill impairment test compares the implied fair value of the reporting unit
with the carrying value of the reporting unit. The implied fair value of goodwill is determined in the same manner as in a business combination. Determining the fair value of the implied goodwill is judgmental in nature and often involves the use of
significant estimates and assumptions. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the magnitude of any such charge. Estimates of fair value are primarily determined
using discounted cash flows and market comparisons. These approaches use significant estimates and assumptions, including projection and timing of future cash flows, discount rates reflecting the risk inherent in future cash flows, perpetual growth
rates, determination of appropriate market comparables, and determination of whether a premium or discount should be applied to comparables. It is 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 four years we have undertaken significant restructuring
initiatives, which have required us to develop formalized plans for exiting certain business activities and reducing spending levels. We have had to record estimated expenses for employee severance, long-term asset write downs, lease cancellations,
facilities consolidation costs, and other restructuring costs. Given the significance, and the timing of the execution, of such activities, this process is complex and involves periodic reassessments of estimates made at the time the original
decisions were made. 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, at least semiannually, the adequacy of the remaining liabilities under our restructuring initiatives.



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Valuation of Deferred Income Taxes



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



Revenue
Recognition



We recognize revenue in accordance with
SEC Staff Accounting Bulletin No. 101 Revenue Recognition in Financial Statements, or SAB 101 as well as SAB 104, Revenue Recognition. These pronouncements require that four basic criteria be met before revenue
can be recognized: 1) there is evidence that an arrangement exists; 2) delivery has occurred; 3) the fee is fixed or determinable; and 4) collectibility is reasonably assured. We recognize revenue upon determination that all criteria for revenue
recognition have been met. In addition, we do not recognize revenue until all customers acceptance criteria have been met. The criteria are usually met at the time of product shipment, except for shipments to distributors with rights of
return. Revenue from shipments to distributors subject to rights of return is deferred until all return or cancellation privileges lapse. Revenue from shipments to distributors without return rights is recognized upon shipment. In addition, we
record reductions to revenue for estimated allowances such as returns, competitive pricing programs and rebates. These estimates are based on our experience with product returns and the contractual terms of the competitive pricing and rebate
programs. Shipping terms are generally FCA shipping point. If actual returns or pricing adjustments exceed our estimates, 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.



RESULTS OF OPERATIONS



Net Revenues. Net revenues for the three months ended June 30, 2005 were approximately $64.7 million, representing a decrease of 4.0% from the net
revenues of approximately $67.4 million for the three months ended June 30, 2004. The decrease in total net revenues was primarily attributable to decreases in our communications products and other revenues, offset by increases in our storage and
embedded products revenues. See the following table (dollars in thousands):



|                  |  |                             |        |                 |       |   |        |   |                 |  |       |                    |  |   |        |   |  |       |   
|----------------- |  | --------------------------- | ------ | --------------- | ----- | - | ------ | - | --------------- |  | ----- | ------------------ |  | - | ------ | - |  | ----- | --
|                  |  | Three Months Ended June 30, |        |                 |       |   |        |   |                
|                  |  | 2005                        |        |                 | 2004  |   |        |   |                 |  |       |                   
|                  |  | Amount                      |        | % of NetRevenue |       |   | Amount |   | % of NetRevenue |  |       | Increase(Decrease) |  |   | Change |  
|Communications    |  | $                           | 34,053 |                 | 52.7  | % |        | $ | 36,377          |  | 54.0  | %                  |  | $ | (2,324 | ) |  | (6.4  | )%
|Storage           |  |                             | 13,383 |                 | 20.7  | % |        |   | 13,222          |  | 19.6  | %                  |  |   | 161    |   |  | 1.2   | % 
|Embedded Products |  |                             | 15,213 |                 | 23.5  | % |        |   | 13,893          |  | 20.6  | %                  |  |   | 1,320  |   |  | 9.5   | % 
|Other             |  |                             | 2,024  |                 | 3.1   | % |        |   | 3,910           |  | 5.8   | %                  |  |   | (1,886 | ) |  | (48.2 | )%
|                  |  |                             |        |                 |       |   |        |   |                 |  |       |                    |  |   |        |   |  |       |   
|                  |  | $                           | 64,673 |                 | 100.0 | % |        | $ | 67,402          |  | 100.0 | %                  |  | $ | (2,729 | ) |  | (4.0  | )%
|                  |  |                             |        |                 |       |   |        |   |                 |  |       |                    |  |   |        |   |  |       |   



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Based on direct shipments, net revenues to customers that exceeded 10% of total net revenues in the three
months ended June 30, 2005 and 2004 were as follows:



|                    |  |                            |   |  |      |  
|------------------- |  | -------------------------- | - |  | ---- | -
|                    |  | Three Months EndedJune 30, |  
|                    |  | 2005                       |   |  | 2004 |  
|Insight Electronics |  | 13                         | % |  | 18   | %



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 months ended June 30, 2005 and 2004 were as follows:



|                            |  |                            |   |  |      |  
|--------------------------- |  | -------------------------- | - |  | ---- | -
|                            |  | Three Months EndedJune 30, |  
|                            |  | 2005                       |   |  | 2004 |  
|Nortel Networks Corporation |  | 12                         | % |  | 10   | %



Revenues based on
direct shipments outside the United States of America accounted for 52% of net revenues for the three months ended June 30, 2005, compared to 50% for the three months ended June 30, 2004.



Gross Profit. The following table presents net revenues, cost of revenues and gross profit for the three months ended
June 30, 2005 and June 30, 2004 (dollars in thousands):



|                 |  |                             |        |                 |       |   |        |   |                 |  |       |          |  |   |        |   |  |      |   
|---------------- |  | --------------------------- | ------ | --------------- | ----- | - | ------ | - | --------------- |  | ----- | -------- |  | - | ------ | - |  | ---- | --
|                 |  | Three Months Ended June 30, |        |                 |       |   |        |   |                
|                 |  | 2005                        |        |                 | 2004  |   |        |   |                 |  |       |         
|                 |  | Amount                      |        | % of NetRevenue |       |   | Amount |   | % of NetRevenue |  |       | Decrease |  |   | Change |  
|Net revenues     |  | $                           | 64,673 |                 | 100.0 | % |        | $ | 67,402          |  | 100.0 | %        |  | $ | (2,729 | ) |  | (4.0 | )%
|Cost of revenues |  |                             | 30,833 |                 | 47.7  | % |        |   | 31,492          |  | 46.7  | %        |  |   | (659   | ) |  | (2.1 | )%
|                 |  |                             |        |                 |       |   |        |   |                 |  |       |          |  |   |        |   |  |      |   
|Gross profit     |  | $                           | 33,840 |                 | 52.3  | % |        | $ | 35,910          |  | 53.3  | %        |  | $ | (2,070 | ) |  | (5.8 | )%
|                 |  |                             |        |                 |       |   |        |   |                 |  |       |          |  |   |        |   |  |      |   



The decrease in gross
profit for the three months ended June 20, 2005 was primarily attributable to the decrease in net revenues as well as an unfavorable change in the mix of our products sold, offset by a decrease of $1.5 million of amortization in purchased
intangibles included in our cost of revenues.



The amortization
of purchased intangible assets included in cost of revenues during the three months ended June 30, 2005 was $5.2 million, compared to $6.7 million for the three months ended June 30, 2004. Based on the amount of capitalized purchased intangible
assets on the balance sheet as of June 30, 2005, we expect amortization expense for purchased intangibles charged to cost of revenues to be $12.4 million in fiscal 2006, $14.5 million in fiscal 2007, and $50.4 million for fiscal periods thereafter.
Future acquisitions of businesses may result in substantial additional charges which would impact the gross margin in future periods.



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Research and Development and Selling, General and Administrative Expenses. The following table
presents research and development and selling, general and administrative expenses for the three months ended June 30, 2005 and June 30, 2004 (dollars in thousands):



|                                    |  |                             |        |                 |                    |   |        |        |                 |  |      |   |  |   |        |   |  |       |   
|----------------------------------- |  | --------------------------- | ------ | --------------- | ------------------ | - | ------ | ------ | --------------- |  | ---- | - |  | - | ------ | - |  | ----- | --
|                                    |  | Three Months Ended June 30, |        |                 | Increase(Decrease) |   |        | Change |                
|                                    |  | 2005                        |        |                 | 2004               |   |        |       
|                                    |  | Amount                      |        | % of NetRevenue |                    |   | Amount |        | % of NetRevenue |  |      |  
|Research and development            |  | $                           | 22,974 |                 | 35.5               | % |        | $      | 30,990          |  | 46.0 | % |  | $ | (8,016 | ) |  | (25.9 | )%
|Selling, general and administrative |  | $                           | 15,550 |                 | 24.0               | % |        | $      | 14,378          |  | 21.3 | % |  | $ | 1,172  |   |  | 8.2   | % 



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. The decrease in R&D expenses of 25.9% for the three months ended June 30, 2005 compared to the three months ended June 30, 2004, was primarily due to lower payroll and related benefits expense of $4.7 million resulting from
our workforce reductions and lower design costs, software and equipment depreciation costs, and subcontracting costs of approximately $3.3 million, resulting from our restructuring initiatives. We believe that a continued commitment to R&D is
vital to our goal of maintaining a leadership position with innovative communications, storage and embedded products. Currently, R&D expenses are focused on the development of communications, storage, and embedded products and we expect to
continue this focus. Future acquisitions of businesses may result in substantial additional on-going costs.



Since the start of fiscal 2003, we have invested a total of approximately $386.1 million in the research and development of new products, including
higher-speed, lower-power and lower-cost products, products that combine the functions of multiple existing products into single highly integrated products, and other products to complete our portfolio of communications, storage and embedded
products. For most products developed by us, due to their complexity and the complexity of our 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 downturn in the telecommunications market severely impacted our customers and resulted in significantly less demand for the quantity of these products than expected when some of the
developments commenced. Second, as a result of restructuring activities, 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. The increase in SG&A expenses of 8.2% for
the three months ended June 30, 2005 compared to the three months ended June 30, 2004, was primarily due to higher personnel-related expense of approximately $1.3 million. Future acquisitions of businesses may result in substantial additional
on-going costs.



Stock-Based Compensation. The following
table presents stock-based compensation expense for employees engaged in research and development and selling, general and administrative activities for the three months ended June 30, 2005 and June 30, 2004, all of which were excludedfrom
those operating expenses (dollars in thousands):



|                                    |  |                             |       |                 |          |   |        |        |                 |  |     |   |  |   |      |   |  |       |   
|----------------------------------- |  | --------------------------- | ----- | --------------- | -------- | - | ------ | ------ | --------------- |  | --- | - |  | - | ---- | - |  | ----- | --
|                                    |  | Three Months Ended June 30, |       |                 | Decrease |   |        | Change |                
|                                    |  | 2005                        |       |                 | 2004     |   |        |       
|                                    |  | Amount                      |       | % of NetRevenue |          |   | Amount |        | % of NetRevenue |  |     |  
|Research and development            |  | $                           | 696   |                 | 1.1      | % |        | $      | 1,032           |  | 1.5 | % |  | $ | (336 | ) |  | (32.6 | )%
|Selling, general and administrative |  |                             | 785   |                 | 1.2      | % |        |        | 1,323           |  | 2.0 | % |  |   | (538 | ) |  | (40.7 | )%
|                                    |  |                             |       |                 |          |   |        |        |                 |  |     |   |  |   |      |   |  |       |   
|                                    |  | $                           | 1,481 |                 | 2.3      | % |        | $      | 2,355           |  | 3.5 | % |  | $ | (874 | ) |  | (37.1 | )%
|                                    |  |                             |       |                 |          |   |        |        |                 |  |     |   |  |   |      |   |  |       |   



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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. Stock-based compensation charges,
including amounts charged to cost of revenues, were $1.5 million for the three months ended June 30, 2005, compared to $2.5 million for the three months ended June 30, 2004. We currently expect to record amortization of deferred compensation with
respect to these assumed options of approximately $6.0 million in fiscal 2006, $2.9 million in fiscal 2007, and $200,000 in fiscal 2008. These charges could be reduced as a result of employee turnover. Acquisitions of businesses may result in
substantial additional on-going costs. Such charges may cause fluctuations in our interim or annual operating results.



Acquired In-process Research and Development. For the three months ended June 30, 2004, we recorded $13.4 million of IPR&D resulting from the
acquisition of 3ware and the Embedded Products Business. These amounts were expensed on the acquisition dates because the acquired technology had not yet reached technological feasibility and had no future alternative uses. The IPR&D charge
related to the 3ware acquisition was made up of two projects that were 42% and 25% complete at the date of acquisition. The estimated aggregate cost to complete these projects was $3.0 million, and the discount rate applied to calculate the
IPR&D charge was 30% and 35%, respectively. The IPR&D charge related to the Embedded Products Business acquisition was made up of three projects, which were between 42% and 69% complete at the date of acquisition. The estimated aggregate
cost to complete these projects was $9.1 million. The discount rate applied to calculate the IPR&D charge ranged from 25% to 30%. 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 IPR&D that may cause fluctuations in our interim or annual operating results.



Interest and Other Income (Expense), net. The following table presents interest and other income (expense), net for the three months ended June 30,
2005 and June 30, 2004 (dollars in thousands):



|                            |  |                             |       |   |                    |      |    |        |   |                 |  |     |   |  |   |        |   |  |       |   
|--------------------------- |  | --------------------------- | ----- | - | ------------------ | ---- | -- | ------ | - | --------------- |  | --- | - |  | - | ------ | - |  | ----- | --
|                            |  | Three Months Ended June 30, |       |   | Increase(Decrease) |      |    | Change |  
|                            |  | 2005                        |       |   | 2004               |      |    |       
|                            |  | Amount                      |       |   | % of NetRevenue    |      |    | Amount |   | % of NetRevenue |  |     |  
|Interest income, net        |  | $                           | 3,589 |   |                    | 5.5  | %  |        | $ | 5,281           |  | 7.8 | % |  | $ | (1,692 | ) |  | (32.0 | )%
|Other income (expense), net |  | $                           | (185  | ) |                    | (0.3 | )% |        | $ |                |  | 0.0 | % |  | $ | 185    |   |  |      |   



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. The decrease for the three months ended June 30, 2005 is primarily due to lower coupon interest from lower cash and short-term investment balances as well as increased net realized losses on the sales of short-term investments.



Other Income (Expense), net. Other income (expense) for
the three months ended June 30, 2005 includes realized losses on foreign currency hedges and net gains on disposals of property and equipment.



Income Taxes. The following table presents our income tax expense for the three months ended June 30, 2005 and June 30, 2004 (dollars in
thousands):



|                   |  |                             |     |                 |          |   |        |        |                 |  |     |   |  |      |   |  |       |   
|------------------ |  | --------------------------- | --- | --------------- | -------- | - | ------ | ------ | --------------- |  | --- | - |  | ---- | - |  | ----- | --
|                   |  | Three Months Ended June 30, |     |                 | Decrease |   |        | Change |                
|                   |  | 2005                        |     |                 | 2004     |   |        |       
|                   |  | Amount                      |     | % of NetRevenue |          |   | Amount |        | % of NetRevenue |  |     |  
|Income tax expense |  | $                           | 176 |                 | 0.3      | % |        | $      | 335             |  | 0.5 | % |  | (159 | ) |  | (47.5 | )%



The federal statutory
income tax rate was 35% for the three months ended June 30, 2005 and June 30, 2004. Our income tax expense in 2005 and 2004 primarily reflects estimated foreign taxes and alternative minimum taxes.



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FINANCIAL CONDITION AND LIQUIDITY



As of June 30, 2005, our principal source of liquidity consisted of $379.4 million in cash, cash equivalents and short-term
investments. Working capital as of June 30, 2005 was $381.6 million. Total cash, cash equivalents, and short-term investments decreased by $44.0 million during the three months ended June 30, 2005 primarily as a result of the use of $21.5 million to
fund our structured stock repurchase program, $4.0 million to purchase property, equipment and other assets, and $22.0 million to fund our operating activities. At June 30, 2005, we had contractual obligations not included on our balance sheet
totaling $42.7 million, primarily related to facilities leases, engineering design software tool licenses and inventory purchase commitments.



For the three months ended June 30, 2005, we used $22.0 million of cash for our operations compared to generating $2.4 million from our operations in the
three months ended June 30, 2004. Our net loss of $4.2 million for the three months ended June 30, 2005 included $11.6 million of non-cash charges such as $3.7 million of depreciation, $6.4 million of amortization of purchased intangibles, and $1.5
million of stock-based compensation charges. Included in the operating cash flows for the three months ended June 30, 2005 was the payment of $29.3 million for the settlement of the shareholder litigation in April 2005. The remaining change in
operating cash flows for the three months ended June 30, 2005 primarily reflected decreases in our accounts receivable, inventory, and other assets, which were offset by decreases in accounts payable, accrued payroll and other accrued liabilities,
and deferred revenue. Net cash provided by operations for the three months ended June 30, 2004 primarily reflected our operating results before non-cash charges, as well as an increase in accounts receivable, as a result of higher net revenues,
offset by an increase in accounts payable as a result of higher overall spending and inventory purchases.



We generated $1.4 million of cash from investing activities during the three months ended June 30, 2005, compared to using $263.5 million during the three
months ended June 30, 2004. The inflow of cash for the three months ended June 30, 2005 primarily reflected proceeds from sales and maturities of short-term investments, offset by purchases of property, equipment and other assets. The use of cash
for the three months ended June 30, 2004 primarily reflected the net cash paid for acquisitions and the purchase of land and a building in Andover, Massachusetts, offset by proceeds from the sale of short-term investments.



We used $21.7 million of cash for the three months ended June 30, 2005 for
financing activities compared to generating $833,000 for the three months ended June 30, 2004. The major financing use of cash was in funding our structured stock repurchase agreements. The major financing source of cash for the three months ended
June 30, 2004 was related to sales of common stock through the exercise of employee stock options.



At March 31, 2005, we had four open structured stock repurchase agreements which matured during the three months ended June 30, 2005. Upon maturity of
these agreements, we received approximately 3.0 million shares of our common stock at an effective purchase price of $3.22.



In addition, during the three months ended June 30, 2005, we entered into five structured stock repurchase agreements totaling $21.5 million that have
varying maturities through September 2005. Under these agreements, we will receive up to $23.3 million of cash, or the delivery of up to 8.0 million shares of our common stock or a combination of cash and shares.



On July 27, 2005, AMCC announced plans to restructure and reorganize its
operations. The plan includes reducing approximately 5% of the current headcount by eliminating job redundancies. The Company expects to incur a charge of approximately $2 million to $3 million in the second quarter of fiscal 2006 and anticipates
that the restructuring plan will reduce ongoing operating expenses by approximately $1 million per quarter commencing in the third quarter of fiscal 2006.



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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 June 30, 2005 (in thousands):



|                                  |  |                 |        |                          |   |        |  |   |       
|--------------------------------- |  | --------------- | ------ | ------------------------ | - | ------ |  | - | ------
|                                  |  | OperatingLeases |        | OtherPurchaseCommitments |   | Total 
|Nine months ending March 31, 2006 |  | $               | 6,285  |                          | $ | 25,485 |  | $ | 31,770
|Fiscal year 2007                  |  |                 | 3,159  |                          |   |       |  |   | 3,159 
|Fiscal year 2008                  |  |                 | 2,339  |                          |   |       |  |   | 2,339 
|Fiscal year 2009                  |  |                 | 1,972  |                          |   |       |  |   | 1,972 
|Fiscal year 2010                  |  |                 | 1,895  |                          |   |       |  |   | 1,895 
|Thereafter                        |  |                 | 1,553  |                          |   |       |  |   | 1,553 
|                                  |  |                 |        |                          |   |        |  |   |       
|Total                             |  | $               | 17,203 |                          | $ | 25,485 |  | $ | 42,688
|                                  |  |                 |        |                          |   |        |  |   |       



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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. 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 our customers products or otherwise;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | increases in the costs of products or discontinuance of products by suppliers;
| | - |  | ------------------------------------------------------------------------------



| |  |  | the availability of external foundry capacity, contract manufacturing services, purchased parts and raw materials;
| | - |  | ------------------------------------------------------------------------------------------------------------------



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



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



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



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



| |  |  | the announcement or introduction of products and technologies by our competitors;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | competitive pressures on selling prices;
| | - |  | ----------------------------------------



| |  |  | 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, products and technologies;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | our ability to successfully integrate acquired companies, products and technologies;
| | - |  | ------------------------------------------------------------------------------------



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



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



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



| |  |  | the effects of changes in accounting standards, including the recently announced rule requiring 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, attorney fees, litigation judgments or settlements, relating to the use or ownership of intellectual property or
other claims arising out of our operations;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | our ability to identify, hire and retain senior management and other key personnel, including a permanent Chief Financial Officer;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 or our customers products;
| | - |  | ----------------------------------------------------------------------



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



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



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



| |  |  | the financial failure of one of our subcontract manufacturers;
| | - |  | --------------------------------------------------------------



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



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



| |  |  | our failure to successfully integrate acquired companies, products and technologies; and
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | shortages of raw materials or production capacity constraints that lead our suppliers to allocate available supplies or capacity to 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 is highly unpredictable and can fluctuate substantially. Customer orders for our products typically have non-standard
lead times, which makes it difficult for us to predict revenues and plan



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inventory levels and production schedules. If we are unable to plan inventory levels and production schedules effectively, our business, financial condition
and operating results could be materially harmed.



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



Our expense levels are relatively fixed and are based on our expectations of future revenues. We have limited ability to reduce expenses quickly in
response to any revenue shortfalls.



If the recovery of the technology
sector does not continue, our revenues and profitability will be adversely affected.



We derive a majority of our revenues from sales of IC products and subsystems to technology equipment manufacturers. The technology equipment industry is cyclical and has experienced a significant extended downturn
from which it has only recently begun recovery. We cannot predict how long this recovery will last, but if it ends, our revenues and profitability will continue to be impacted.



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 communications IC products primarily to communications equipment manufacturers that in turn sell their equipment to customers that depend on the growth of the Internet. OEMs and other customers that buy our
storage products are similarly dependent on continued Internet growth and information technology spending. 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.



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 most of our key customers. One or more of our key customers may discontinue operations as a result of consolidation, liquidation or
otherwise. Continued reductions, delays and cancellation of orders from our key customers or the loss of one or more key customers could significantly further reduce our revenues and profits. We cannot assure that our current customers will continue
to place orders with us, that orders by existing customers will continue at current or historical levels or that we will be able to obtain orders from new customers.



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



| |  |  | customers may stop incorporating our products into their own products with limited notice to us and may suffer little or no penalty;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



| |  |  | some of our OEM customers may develop products internally that would replace our products;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | we may not be able to successfully develop relationships with additional network equipment vendors;
| | - |  | ---------------------------------------------------------------------------------------------------



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



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.



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



After we have developed and delivered a product to a customer, the customer will usually test and evaluate our product prior to designing its own
equipment to incorporate our product. Our customers may need three to more than six months to test, evaluate and adopt our product and an additional three to more than nine months to begin volume production of equipment that incorporates our
product. Due to this lengthy design cycle, we may experience significant delays from the time we increase our operating expenses and make investments in inventory until the time that we generate revenue from these products. It is possible that we
may never generate any revenue from these products after incurring such expenditures. Even if a customer selects our product to incorporate into its equipment, we have no assurances that the customer will ultimately market and sell its equipment or
that such efforts by our customer will be successful. The delays inherent in our lengthy design cycle increase the risk that a customer will decide to cancel or change its product plans. Such a cancellation or change in plans by a customer could
cause us to lose sales that we had anticipated. In addition, anticipated sales could be materially and adversely affected if a significant customer curtails, reduces or delays orders during our sales cycle or chooses not to release equipment that
contains our products.



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While our design cycles are typically long, some of our product life cycles tend to be short as a result
of the rapidly changing technology environment in which we operate. As a result, the resources devoted to product sales and marketing may not generate material revenue for us, and from time to time, we may need to write off excess and obsolete
inventory. If we incur significant marketing expenses and investments in inventory in the future that we are not able to recover, and we are not able to compensate for those expenses, our operating results could be adversely affected. In addition,
if we sell our products at reduced prices in anticipation of cost reductions but still hold higher cost products in inventory, our operating results would be harmed.



An important part of our strategy is to continue our focus on the markets for communications and storage equipment. If we are unable to
further expand our share of these markets, our revenues may not grow and could 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 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.



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.



The discontinuance of some of our
FibreChannel HBA products will result in a decline in revenue that we realize from sales of these products and we may incur significant costs due to customer obligations relating to these products.



We recently announced the discontinuance of our FibreChannel HBA products
designed to operate on Suns Solaris servers. These HBA products accounted for a significant portion of our revenue from sales of storage products during fiscal 2004 and fiscal 2005. Though we will continue to ship these products in the near
term, we expect the revenue from sales of these products to decline rapidly. We also have obligations to customers that relate to these products, including obligations for warranty support, maintenance and repairs. Our ability to fulfill these
obligations has been limited by the reduction in force we implemented in the third quarter of fiscal 2005. Both fulfilling these obligations and any failure to fulfill these obligations could result in significant liability, costs, and expenses.



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



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



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



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



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



| |  |  | changes in regulatory requirements;
| | - |  | -----------------------------------



| |  |  | tariffs and other barriers;
| | - |  | ---------------------------



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



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



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



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



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



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



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



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



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



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



We are subject to risks associated with the imposition of legislation and regulations relating to the import or export of high technology products. We
cannot predict whether quotas, duties, taxes or other charges or restrictions upon the importation or exportation of our products will be implemented by the United States or other countries. Because sales of our products have been denominated to
date primarily in United States dollars, increases in the value of the United States dollar could increase the price of our products so that they become relatively more expensive to customers in the local currency of a particular country, leading to
a reduction in sales and profitability in that country. Future international activity may result in increased foreign currency denominated sales. Gains and losses on the conversion to United States dollars of accounts receivable, accounts payable
and other monetary assets and liabilities arising from international operations may contribute to fluctuations in our results of operations. 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 our consolidated balance sheets at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss), net of tax. Our investment
portfolio is



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exposed to market risks related to changes in interest rates and credit ratings of the issuers, as well as to 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 issuers credit ratings is reduced. Increases in interest rates or decreases in the
credit worthiness of one or more of the issuers in our investment portfolio could have a material adverse impact on our financial condition or results of operations.



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



Employees directly affected by our previous restructuring plans may seek
future employment with our customers or competitors. Although all employees are required to sign a confidentiality agreement with us at the time of hire, we cannot assure you that the confidential nature of our proprietary information will be
maintained in the course of such future employment. Any additional restructuring efforts could divert the attention of our management away from our operations, harm our reputation and increase our expenses. We cannot assure you that we will not
undertake additional restructuring activities or that any future restructuring efforts will be successful. In addition, if we continue to reduce our workforce, it may adversely impact our ability to respond rapidly to any renewed growth
opportunities.



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



The markets for our products are characterized by:



| |  |  | rapidly changing technologies;
| | - |  | ------------------------------



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



| |  |  | long sales cycles;
| | - |  | ------------------



| |  |  | 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 storage or other technology markets, we must develop, gain access to and use leading technologies in a
cost-effective and timely manner and continue to develop technical and design expertise. We must have our products designed into our customers future products and maintain close working relationships with key customers in order to develop new
products that meet customers changing needs. We must respond to changing industry standards, trends towards increased integration and other 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.



Many of our products are based on industry standards that are continually
evolving. Our ability to compete in the future will depend on our ability to identify and ensure compliance with these evolving industry standards. The emergence of new industry standards could render our products incompatible with products
developed by major systems manufacturers. As a result, we could be required to invest significant time and effort and to incur significant expense to redesign our products to ensure compliance with relevant standards. If our products are not in
compliance with prevailing industry standards or requirements, we could miss opportunities to achieve crucial design wins. If we fail to do so, we may not achieve design wins with key customers or may subsequently lose



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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 we expect competition to increase in these markets in the future.



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



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



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



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



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



| |  |  | price;
| | - |  | ------



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



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



| |  |  | expansion of production of our products for particular systems manufacturers;
| | - |  | -----------------------------------------------------------------------------



| |  |  | end-user acceptance of the systems manufacturers products;
| | - |  | -----------------------------------------------------------



| |  |  | market acceptance of competitors products; and
| | - |  | -----------------------------------------------



| |  |  | general economic conditions.
| | - |  | ----------------------------



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



In the communications IC markets, we compete primarily against companies such
as Agere, Broadcom, Intel, Mindspeed, PMC-Sierra, and Vitesse. Certain of our customers or potential customers have internal IC design or manufacturing capabilities 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 storage market, we primarily compete against companies such as Emulex, QLogic, Agilent Technologies, Adaptec and LSI Logic. Our embedded processor
products compete against products from Freescale Semiconductor and IBM. Our RAID products compete against products from Adaptec and LSI Logic. Many of these companies have substantially greater financial, marketing and distribution resources than we
have. We may also face competition from new entrants to the storage market, including larger technology companies that may develop or acquire differentiating technology and then apply their resources to our detriment. The storage market continues to
mature and become commoditized. To the extent that commoditization leads to



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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.



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



In the past we have derived a significant portion of our revenues from
products manufactured in our internal wafer fabrication facility. This facility was closed during fiscal 2003 and we no longer 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



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



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



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



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



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



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



Difficulties associated with adapting our technology
and product design to the proprietary process technology and design rules of outside foundries can lead to reduced yields of our IC products. The process technology of an outside foundry is typically proprietary to the manufacturer. Since low yields
may result from



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



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



Our requirements typically represent a very small portion of the total production of the third-party foundries. As a result, we are subject to the risk
that a producer will cease production of an older or lower-volume process that it uses to produce our parts. We cannot 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.



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



Our operating results depend on manufacturing output and yields of our ICs and PCBAs,
which may not meet expectations.



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



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



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 redesign certain products and will require us and our foundries to migrate to new manufacturing processes for our 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



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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, 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.



A recently announced change in the accounting treatment of stock options will adversely
affect our results of operations.



In December 2004, the
Financial Accounting Standards Board issued revised SFAS No. 123, Share-Based Payment, or SFAS 123(R), which requires companies to expense employee stock options for financial reporting purposes. As a result, beginning in April 2006, we will
be required to value our employee stock option grants pursuant to an option valuation model, and then amortize that value against our reported earnings over the vesting period in effect for those options. We currently account for stock-based awards
to employees in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and



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have adopted the disclosure-only alternative of SFAS 123 and FAS 128, each of which has been superseded by FAS 123(R). The change in accounting treatment
resulting from FAS 123(R) will materially and adversely affect our reported results of operations as following its implementation, the stock-based compensation expense will be charged directly against our reported earnings. For an illustration of
the effect of such a change on our recent results of operations, see Note 1 of our Notes to Consolidated Financial Statements.



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



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



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



Our management has concluded, and our independent registered public
accounting firm has attested, that our internal control over financial reporting was effective as of March 31, 2005, as required by Section 404. However, we cannot assure you that we or our independent registered public accounting firm will not
identify a material weakness in our internal controls in the future. A material weakness in our internal controls over financial reporting would require management and our independent registered public accounting firm to evaluate our internal
controls as ineffective. If our internal controls over financial reporting are not considered effective, we may experience a loss of public confidence, which could have an adverse effect on our business and on the market price of our common stock.



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



We are currently conducting a search for a permanent chief financial officer. However, we cannot assure you that we will be
able to attract, hire and retain a qualified candidate, and there may be significant costs associated with his or her recruiting, hiring and retention. Our future success depends to a significant extent upon the continued service of our senior
management personnel. The loss of key senior executives could have a material adverse effect on us. 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.



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In December 2004, we concluded the French portion of the acquisition of certain intellectual property and
assets associated with IBMs embedded PowerPC 400 series products, which enabled the integration of the associated French IBM development employees into AMCC. Subsequently, certain legal challenges have been brought against IBM regarding the
transfer of these employees. IBM is taking affirmative legal steps to combat these challenges, and has agreed to provide development transitional services from these same employees in the event of a negative ruling from the legal challenges. There
is a risk that some or all of the employees transferred in the transaction may have to return to IBM. Loss of the services of these employees could be significantly detrimental to our product development efforts.



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



The effects of war, acts of terrorism or
global threats, including, but not limited to, the outbreak of epidemic disease, could have a material adverse effect on our business, operating results and financial condition. The continued threat of terrorism and heightened security and military
action in response to this threat, or any future acts of terrorism, may cause further disruptions to 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.



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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.



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



Acquiring products, technologies or businesses from third parties is part of our business strategy. The risks involved with
merger and acquisition activities include:



| |  |  | potential dilution to our stockholders, 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, products or technologies;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | 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 June 30, 2005, we have $528.1 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.



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



JNI Corporation, which we acquired in October 2003, has a number of pending lawsuits relating to alleged securities law violations and alleged breaches of fiduciary duty. We believe that the claims pending against JNI
Corporation 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



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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. Though insurers have paid defense costs to date, there can be no assurance that they
will continue to pay such costs, judgments or other expenses associated with the lawsuit.



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



We rely in part on patents to protect our intellectual property. We cannot assure you that our pending patent applications or any future applications will
be approved, or that any issued patents will adequately protect the intellectual property in our products, 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 intellectual property or otherwise gain access to our trade secrets or intellectual property, or disclose such intellectual property or trade secrets, or that we can meaningfully protect our intellectual property. A
failure by us to meaningfully protect our intellectual property could have a material adverse effect on our business, financial condition and operating results.



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



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



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



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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.



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



Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange rates, interest rates and a
decline in the stock market. We are exposed to market risks related to changes in interest rates and foreign currency exchange rates.



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



We are exposed to market risk as it relates to changes in the market value of our investments. At June 30, 2005, our investment portfolio included fixed-income securities classified as available-for-sale investments
with a fair market value of $346.3 million and a cost basis of $350.1 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 June 30, 2005 (in thousands):



|                               |  |                                                                          |         |                              |   |                                                                          |  |   |          |  |           |         |           |   |         |  |   |         |  |   |        
|------------------------------ |  | ------------------------------------------------------------------------ | ------- | ---------------------------- | - | ------------------------------------------------------------------------ |  | - | -------- |  | --------- | ------- | --------- | - | ------- |  | - | ------- |  | - | -------
|                               |  | Valuation of Securities Given anInterest Rate Decrease of X Basis Points |         | Fair Value asof June 30,2005 |   | Valuation of Securities Given anInterest Rate Increase of X Basis Points
|                               |  | (150 BPS)                                                                |         | (100 BPS)                    |   | (50 BPS)                                                                 |  |   | (50 BPS) |  | (100 BPS) |         | (150 BPS)
|Available-for-sale investments |  | $                                                                        | 371,690 |                              | $ | 362,772                                                                  |  | $ | 354,262  |  | $         | 346,325 |           | $ | 339,179 |  | $ | 332,398 |  | $ | 325,952
|                               |  |                                                                          |         |                              |   |                                                                          |  |   |          |  |           |         |           |   |         |  |   |         |  |   |        



The modeling technique
used measures the change in fair market value arising from selected potential changes in interest rates. Market changes reflect immediate hypothetical parallel shifts in the yield curve of plus or minus 50 basis points, 100 basis points, and 150
basis points.



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



We generally conduct business, including sales to
foreign customers, in U.S. dollars, and as a result, we have limited foreign currency exchange rate risk. However, we have entered into forward currency exchange contracts to hedge our overseas monthly operating expenses when deemed appropriate.
Gains and losses on foreign currency forward contracts that are designated and effective as hedges of anticipated transactions are deferred and included in the basis of the transaction in the same period that the underlying transaction is settled.
Gains and losses on any instruments not meeting the above criteria are recognized in income or expenses in the consolidated statement of operations in the current period. The effect of an immediate 10 percent change in foreign exchange rates would
not have a material impact on our financial condition or results of operations.



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|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------



Our chief executive officer and chief financial officer performed an evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of
the Securities Exchange Act of 1934) as of June 30, 2005 (the Evaluation Date). Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective and
sufficient to ensure that the information required to be disclosed in the reports that we file under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SECs rules and
forms.



There was no change in our internal control over
financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION



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



The information set forth under Note 6 of Notes to Consolidated Financial Statements, included in Part I, Item 1 of this Report, is incorporated herein by
reference.



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



Below is a summary of stock repurchases for the quarter ended June 30, 2005 (in thousands, except average price per share).



|                         |  |                                 |     |  |                             |      |                                                                              |       |                                                                  |   |        
|------------------------ |  | ------------------------------- | --- |  | --------------------------- | ---- | ---------------------------------------------------------------------------- | ----- | ---------------------------------------------------------------- | - | -------
|Period                   |  | Total Number ofShares Purchased |     |  | Average PricePaid per Share |      | Total Number ofShares Purchased asPart of PubliclyAnnounced Plans orPrograms |       | Maximum Amountthat May Yet BePurchased Underthe Plans orPrograms
|April 1  April 30, 2005 |  | 1,860                           |     |  | $                           | 3.23 |                                                                              | 1,860 |                                                                  | $ | 169,621
|May 1  May 31, 2005     |  | 1,100                           |     |  |                             | 3.20 |                                                                              | 1,100 |                                                                  | $ | 166,104
|June 1  June 30, 2005   |  |                                |     |  |                             |     |                                                                              |      |                                                                  |   |       
|Total Shares Repurchased |  | 2,960                           | (1) |  | $                           | 3.22 |                                                                              | 2,960 |                                                                  | $ | 166,104

---

|(1) | At March 31, 2005, the Company had four open structured stock repurchase agreements totaling $9.5 million that had varying maturities through May 31, 2005. Under these agreements,
the Company received approximately 3.0 million shares of its common stock at an effective purchase price of $3.22 per share.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



During the three months ended June 30, 2005, the Company entered into an additional five structured stock repurchase agreements totaling $21.5 million
that have varying maturities through September 2005. Under these remaining agreements, the Company could receive up to $23.3 million of cash, or the delivery of up to 8.0 million shares of its common stock or a combination of cash and shares.



|ITEM 6. | EXHIBITS
|------- | --------



|     |  |                                                                                                                                           
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.        
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.        
|     | 
|32.1 |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|     | 
|32.2 |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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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: August 3, 2005



APPLIED MICRO CIRCUITS CORPORATIONBy:

/s/    JEFFERY A.
BLAZEVICHJeffery A. BlazevichChief Financial Officer (Duly Authorized Signatory and Principal Financial and Accounting Officer)




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