e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2008


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

For the transition period from to .

Commission File Number: 000-23193

APPLIED MICRO CIRCUITS CORPORATION

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		94-2586591 (I.R.S. Employer Identification No.)

215 Moffett Park Drive, Sunnyvale, CA (Address of principal executive offices)		94089 (Zip code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, 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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

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

As of September 30, 2008, 65,270,230 shares of the registrant’s common stock, $0.01 par value per share were issued and outstanding.

APPLIED MICRO CIRCUITS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(unaudited)


	September 30,			March 31,
	2008			2008
ASSETS
Current assets:
Cash and cash equivalents	$	63,809		$	42,689
Short-term investments-available-for-sale		131,839			100,200
Accounts receivable, net		31,899			28,800
Inventories		34,481			37,966
Other current assets		9,400			11,340

Total current assets		271,428			220,995
Marketable securities		5,436			51,919
Property and equipment, net		27,456			25,995
Goodwill		264,130			264,130
Purchased intangibles, net		44,221			56,025
Other assets		14,673			13,783

Total assets	$	627,344		$	632,847

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		23,459			25,518
Accrued payroll and related expenses		8,573			6,087
Other accrued liabilities		11,925			14,655
Deferred revenue		2,028			1,917

Total current liabilities		45,985			48,177
Deferred tax liability		4,397			3,958
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value:
Authorized shares-2,000, none issued and outstanding
Common stock, $0.01 par value:
Authorized shares-375,000 at September 30, 2008 and March 31, 2008
Issued and outstanding shares-65,270 at September 30, 2008 and 64,779 at March 31, 2008		653			648
Additional paid-in capital		5,904,366			5,896,616
Accumulated other comprehensive loss		(8,995	)		(4,976	)
Accumulated deficit		(5,319,062	)		(5,311,576	)

Total stockholders’ equity		576,962			580,712

Total liabilities and stockholders’ equity		627,344			632,847

See Accompanying Notes to Condensed Consolidated Financial Statements

APPLIED MICRO CIRCUITS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)


	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Net revenues	$	76,931		$	58,210		$	150,991		$	108,345
Cost of revenues		35,981			30,328			71,831			56,826

Gross profit		40,950			27,882			79,160			51,519
Operating expenses:
Research and development		24,461			24,480			47,942			49,962
Selling, general and administrative		16,334			15,850			32,947			31,913
Amortization of purchased intangible assets		1,320			1,336			2,640			2,681
Restructuring charges (reversal)		140			1,376			(118	)		1,344
Litigation settlement		130			—			130			—
Option investigation, net		(184	)		209			163			501

Total operating expenses		42,201			43,251			83,704			86,401

Operating loss		(1,251	)		(15,369	)		(4,544	)		(34,882	)
Interest income (expense), net		(814	)		2,128			(2,216	)		5,176
Other income, net		264			4,778			339			4,806

Loss before income taxes		(1,801	)		(8,463	)		(6,421	)		(24,900	)
Income tax expense (benefit)		512			(410	)		1,066			(427	)

Net loss	$	(2,313	)	$	(8,053	)	$	(7,487	)	$	(24,473	)

Basic and diluted net loss per share:
Net loss per share	$	(0.04	)	$	(0.12	)	$	(0.12	)	$	(0.35	)

Shares used in calculating basic and diluted net loss per share		65,150			68,783			65,007			69,599

See Accompanying Notes to Condensed Consolidated Financial Statements

APPLIED MICRO CIRCUITS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Six Months Ended
	September 30,
	2008			2007
Operating activities:
Net loss		(7,487	)	$	(24,473	)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities
Depreciation		3,449			3,227
Amortization of purchased intangibles		11,804			11,956
Investment impairment charge		6,837			—
Stock-based compensation expense
Stock options		3,703			5,268
Restricted stock units		2,502			649
Net gain on sale of strategic equity investments		—			(4,649	)
Net loss (gain) on disposal of property and equipment		29			(64	)
Changes in operating assets and liabilities:
Accounts receivable		(3,099	)		9,340
Inventories		3,485			(9,195	)
Other assets		1,050			1,653
Accounts payable		(2,059	)		(12,582	)
Accrued payroll and other accrued liabilities		(244	)		(4,506	)
Deferred taxes		439			—
Deferred revenue		111			6

Net cash provided by (used for) operating activities		20,520			(23,370	)

Investing activities:
Proceeds from sales and maturities of short-term investments and marketable securities		339,602			345,009
Purchases of short-term investments and marketable securities		(335,619	)		(286,191	)
Purchase of strategic investments		—			(5,000	)
Net proceeds from the sale of strategic equity investments		—			5,249
Purchase of property, equipment and other assets		(4,935	)		(3,314	)
Proceeds from sale of property and equipment		—			1,646

Net cash provided by (used for) investing activities		(952	)		57,399

Financing activities:
Proceeds from issuance of common stock		1,615			3,286
Repurchase of company stock		—			(29,268	)
Funding of structured stock repurchase agreements		—			(23,830	)
Funds received from structured stock repurchase agreement including gains		—			13,237
Other		(63	)		(231	)

Net cash provided by (used for) financing activities		1,552			(36,806	)

Net increase (decrease) in cash and cash equivalents		21,120			(2,777	)
Cash and cash equivalents at the beginning of the period		42,689			51,595

Cash and cash equivalents at the end of the period		63,809		$	48,818

Supplementary cash flow disclosure:
Cash paid for:
Interest	$	3		$	9

Income taxes	$	555		$	338

See Accompanying Notes to Condensed Consolidated Financial Statements

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 and Article 10 of Regulation S-X 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 adjustments), 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 (“SEC”) for the fiscal year ended March 31, 2008.

Use of Estimates

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

1-for-4 Reverse Stock Split

On November 14, 2007, the Company’s board of directors (the “Board”) approved a 1-for-4 reverse stock split of the Company’s common stock in accordance with a previous approval by the Company’s stockholders on March 9, 2007. This reverse stock split was implemented on December 10, 2007. At the same time, the authorized shares of common stock were changed from 630.0 million (pre-split, or 157.5 million post-split) to 375.0 million (post-split). All reserved, issued and outstanding common stock and per share amounts contained in the financial statements have been retroactively adjusted to reflect the reverse stock split.

Recent Accounting Pronouncements

Effective April 1, 2008, the Company adopted EITF 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities. EITF 07-3 requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities be deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed. The adoption of EITF 07-3 did not have a material impact on the Company’s consolidated results of operations or financial condition.

In October 2008, the FASB issued FASB Staff Position (“FSP”) 157-3 (“FSP 157-3”), Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. FSP 157-3 provides guidance for the valuation of financial assets in an inactive market, the use of

internal assumptions when relevant observable data does not exist, the use of observable market information when the market is not active, and the use of market quotes when assessing the relevance of observable and unobservable data. FSP 157-3 is effective for all periods presented in accordance with SFAS No. 157. The adoption of FSP 157-3 did not have a significant impact on the Company’s consolidated financial statements or the fair values of its financial assets.

Effective April 1, 2008, the Company adopted SFAS No. 159 (“SFAS 159”), The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for specified financial assets and liabilities on a contract-by-contract basis. The Company did not elect to adopt the fair value option under this statement.

2. CERTAIN FINANCIAL STATEMENT INFORMATION

Accounts receivable (in thousands):


	September30,			March 31,
	2008			2008
Accounts receivable	$	33,427		$	30,113
Less: allowance for doubtful accounts		(1,528	)		(1,313	)

	$	31,899		$	28,800

Inventories (in thousands):


	September 30,		March 31,
	2008		2008
Finished goods	$	22,026	$	28,753
Work in process		8,908		5,338
Raw materials		3,547		3,875

	$	34,481	$	37,966

Other current assets (in thousands):


	September 30,		March 31,
	2008		2008
Prepaid expenses	$	7,843	$	9,819
Deposits		424		469
Interest receivable		332		410
Other		801		642

	$	9,400	$	11,340

Property and equipment (in thousands):


	Useful	September 30,			March 31,
	Life	2008			2008
	(in years)
Machinery and equipment	5—7	$	35,652		$	35,142
Leasehold improvements	1—15		9,191			8,364
Computers, office furniture and equipment	3—7		54,320			64,386
Buildings	31.5		2,756			2,756
Land	N/A		9,800			9,800

			111,719			120,448
Less: accumulated depreciation and amortization			(84,263	)		(94,453	)

		$	27,456		$	25,995

Purchased intangibles (in thousands):


	September 30, 2008							March 31, 2008
			Accumulated							Accumulated
			Amortization							Amortization
	Gross		and Impairments			Net		Gross		and Impairments			Net
Developed technology	$	425,000	$	(392,911	)	$	32,089	$	425,000	$	(383,745	)	$	41,255
Backlog/customer relationships		6,330		(4,831	)		1,499		6,330		(4,687	)		1,643
Patents/core technology rights/tradenames		62,305		(51,672	)		10,633		62,305		(49,178	)		13,127

	$	493,635	$	(449,414	)	$	44,221	$	493,635	$	(437,610	)	$	56,025

As of September 30, 2008, the estimated future amortization expense of purchased intangible assets to be charged to cost of sales and operating expenses was as follows (in thousands):


	Cost of		Operating
	Revenue		Expenses		Total
Fiscal year 2009 (remaining)	$	8,617	$	2,639	$	11,256
Fiscal year 2010		12,097		4,018		16,115
Fiscal year 2011		10,500		4,018		14,518
Fiscal year 2012		875		852		1,727
Fiscal year 2013		—		250		250
Thereafter		—		355		355

Total	$	32,089	$	12,132	$	44,221

Other assets (in thousands):


	September 30,		March 31,
	2008		2008
Non-current portion of prepaid expenses	$	4,238	$	4,251
Strategic investments		7,000		7,000
Other		3,435		2,532

	$	14,673	$	13,783

Short-term investments and marketable securities:

The following is a summary of available-for-sale investments, at fair value (in thousands):


	September 30,		March 31,
	2008		2008
U.S. Treasury securities and agency bonds	$	10,453	$	8,838
Corporate bonds		11,004		13,431
Mortgage-backed and asset-backed securities*		46,818		52,837
Closed-end bond funds		50,228		55,621
Preferred stock and options		18,772		21,392

	$	137,275	$	152,119


*		At September 30, 2008 and March 31, 2008, approximately $38.4 million and $43.1 million of the amounts presented were mortgage-backed securities, respectively.


	September 30,		March 31,
	2008		2008
Reported as:
Short-term investments available-for-sale	$	131,839	$	100,200
Marketable securities		5,436		51,919

	$	137,275	$	152,119

The following is a summary of gross unrealized losses as of September 30, 2008 (in thousands):


	Less than 12 months of					12 months or more of
	unrealized losses					unrealized losses					Total
	Estimated		Gross			Estimated		Gross			Estimated		Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
U.S. Treasury securities and agency bonds	$	6,781	$	(37	)	$	—	$	—		$	6,781	$	(37	)
Corporate bonds		11,139		(633	)		—		—			11,139		(633	)
Mortgage-backed and asset-backed securities		26,904		(949	)		243		(4	)		27,147		(953	)
Closed-end bond funds		36,456		(5,645	)		5,193		(1,153	)		41,649		(6,798	)
Preferred stock and options		4,297		(502	)		—		—			4,297		(502	)

	$	85,577	$	(7,766	)	$	5,436	$	(1,157	)	$	91,013	$	(8,923	)

As of September 30, 2008, the Company determined that approximately $5.4 million of its available-for-sale securities constitute long-term marketable securities because the Company has the ability and the intent to hold these securities until a recovery of the amortized cost is achieved, which recovery may be at maturity. The fair value of each of these securities had been less than its amortized cost for 12 or more consecutive months. The unrealized losses of these securities at September 30, 2008 are $1.2 million.

Based on an evaluation of securities that have been in a continuous loss position at September 30, 2008, the Company determined the decline in the fair value of certain securities to be an other-than-temporary impairment and accordingly has written down such securities by approximately $3.4 million and $6.8 million for the three and six months ended September 30, 2008, respectively.

Short-term investments and marketable securities, measured at fair value:

The following table summarizes the type of instruments measured at fair value on a recurring basis as of September 30, 2008:


	Fair Value Measurement as of September 30,
	(In thousands)
	Level 1		Level 2		Level 3		Total
Description
US Treasury securities and agency bonds	$	10,453	$	—	$	—	$	10,453
Corporate bonds		—		11,004		—		11,004
Mortgage backed and asset backed securities		—		46,818		—		46,818
Closed-end bond funds		50,228		—		—		50,228
Preferred stock and options		—		18,772		—		18,772

	$	60,681	$	76,594	$	—	$	137,275

The following table summarizes the financial assets presented on our consolidated condensed balance sheets as of September 30, 2008 as follows:


	Fair Value Measurement as of September 30,
	(In thousands)
	Level 1		Level 2		Level 3		Total
Assets
Short-term investments available-for-sale	$	55,245	$	76,594	$	—	$	131,839
Marketable securities		5,436		—		—		5,436

	$	60,681	$	76,594	$	—	$	137,275

Other accrued liabilities (in thousands):


	September 30,		March 31,
	2008		2008
Executive deferred compensation	$	3,435	$	3,558
Employee related liabilities		2,239		2,475
Warranty		1,320		1,475
Professional fees		1,046		785
Restructuring liabilities		644		1,578
Current income taxes		394		322
Other taxes		93		317
Other		2,754		4,145

	$	11,925	$	14,655

Warranty reserves:

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

The following table summarizes the activity related to the warranty reserves (in thousands):


	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Beginning accrual balance	$	1,507		$	2,507		$	1,475		$	2,692
Charged to (reduction in) costs and expenses		(66	)		(548	)		46			(309	)
Charges incurred		(121	)		(77	)		(161	)		(161	)
Adjustments to estimated liability		—			—			(40	)		(340	)

Ending accrual balance	$	1,320		$	1,882		$	1,320		$	1,882

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


	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Interest income	$	2,639		$	3,081		$	5,093		$	6,243
Net realized loss on short-term investments and other-than-temporary impairment on investment securities		(3,452	)		(947	)		(7,306	)		(1,058	)
Interest expense		(1	)		(6	)		(3	)		(9	)

	$	(814	)	$	2,128		$	(2,216	)	$	5,176

During the three and six months ended September 30, 2008, the company recorded an impairment charge of approximately $3.4 and $6.8 million for certain securities which it determined to be an other-than-temporary impairment, respectively.

Other income, net (in thousands):


	Three Months Ended					Six Months Ended
	September 30,					September 30,
	2008		2007			2008			2007
Net (loss) gain on disposals of property and equipment	$	—	$	58		$	(29	)	$	64
Foreign currency loss		—		(13	)		(1	)		(51	)
Gain on strategic investment*		—		4,649			—			4,649
Other		264		84			369			144

	$	264	$	4,778		$	339		$	4,806


*		The gain on strategic investment is from the sale of the Company’s equity investment in Mellanox Technologies, Ltd., an Israeli company listed on the Nasdaq Stock Market.

Net loss per share:

Basic net loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period. The reconciliation of shares used to calculate basic and diluted net loss per share consists of the following (in thousands, except per share data):


	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Net loss	$	(2,313	)	$	(8,053	)	$	(7,487	)	$	(24,473	)
Shares used in basic and diluted net loss per share computation (denominator):
Weighted average common shares outstanding		65,150			68,783			65,007			69,599
Dilutive effect of stock options and restricted stock units		—			—			—			—

Shares used in basic and diluted net loss per share computation		65,150			68,783			65,007			69,599

Basic and diluted net loss per share	$	(0.04	)	$	(0.12	)	$	(0.12	)	$	(0.35	)

Because the Company incurred losses for the three and six months ended September 30, 2008 and 2007, the effect of dilutive securities totaling 219,000, 230,000, 267,000 and 254,000 equivalent shares for the three and six months ended September 30, 2008 and 2007, respectively, have been excluded from the net loss per share computations as their impact would be anti-dilutive.

3. RESTRUCTURING CHARGES

Over the last several years, the Company has undertaken significant restructuring activities under several plans in an effort to reduce operating costs. A combined summary of the restructuring activities as of September 30, 2008, is as follows (in thousands):


				Facilities			Property
				Consolidation and			and
	Workforce			Operating Lease			Equipment
	Reduction			Commitments			Impairments			Total
Liability, March 31, 2007	$	350		$	—		$	—		$	350
Charged to expense		1,993			853			316			3,162
Cash payments		(1,441	)		—			—			(1,441	)
Noncash charges		—			—			(316	)		(316	)
Reductions to estimated liability		(177	)		—			—			(177	)

Liability, March 31, 2008		725			853			—			1,578
Charged to expense		140			—			—			140
Cash payments		(588	)		(228	)		—			(816	)
Noncash charges		—			—			—			—
Reductions to estimated liability		(258	)		—			—			(258	)

Liability, September 30, 2008	$	19		$	625		$	—		$	644

The following table provides detailed activity related to the restructuring programs as of September 30, 2008 (in thousands):


				Facilities			Property
				Consolidation and			and
	Workforce			Operating Lease			Equipment
	Reduction			Commitments			Impairments			Total
March 2006 Restructuring Program
Liability, March 31, 2007	$	300		$	—		$	—		$	300
Cash payments		(155	)		—			—			(155	)
Reductions to estimated liability		(145	)		—			—			(145	)

Liability, March 31, 2008	$	—		$	—		$	—		$	—


June 2006 Restructuring Program
Liability, March 31, 2007	$	50		$	—		$	—		$	50
Cash payments		(18	)		—			—			(18	)
Reductions to estimated liability		(32	)		—			—			(32	)

Liability, June 30, 2007	$	—		$	—		$	—		$	—


July 2007 Restructuring Program
Charged to expense	$	733		$	—		$	—		$	733
Cash payments		(709	)		—			—			(709	)

Liability, March 31, 2008	$	24		$	—		$	—		$	24

Reductions to estimated liability		(24	)		—			—			(24	)

Liability, June 30, 2008	$	—		$	—		$	—		$	—


September 2007 Restructuring Program
Charged to expense	$	812		$	—		$	—		$	812
Cash payments		(459	)		—			—			(459	)

Liability, March 31, 2008	$	353		$	—		$	—		$	353

Cash payments		(157	)		—			—			(157	)
Reductions to estimated liability		(196	)		—			—			(196	)

Liability, September 30, 2008	$	—		$	—		$	—		$	—


March 2008 Restructuring Program
Charged to expense	$	448		$	853		$	316		$	1,617
Cash payments		(100	)		—			—			(100	)
Noncash charge		—			—			(316	)		(316	)

Liability, March 31, 2008	$	348		$	853		$	—		$	1,201

Cash payments		(291	)		(228	)		—			(519	)
Reductions to estimated liability		(38	)		—			—			(38	)

Liability, September 30, 2008	$	19		$	625		$	—		$	644


September 2008 Restructuring Program
Charged to expense	$	140		$	—		$	—		$	140
Cash payments		(140	)		—			—			(140	)

Liability, September 30, 2008	$	—		$	—		$	—		$	—

In March 2006, the Company communicated and began implementation of a plan to exit its operations in France and India and reorganize part of its manufacturing operations. The restructuring program included the elimination of 68 positions. The Company recorded a charge of $7.6 million, consisting of $6.0 million for employee severances, $1.0 million for operating lease write-offs and $0.6 million for asset impairments. During fiscal 2007, the Company recorded additional net charges of $2.5 million, consisting of $0.2 million for excess lease liability, $0.1 million for operating lease commitments and $2.8 million for asset impairments, offset by $0.6 million in workforce reduction liability adjustments. During fiscal 2008, the Company paid all its remaining liabilities related to this restructuring program and recorded a reversal of the remaining liabilities through restructuring expense.

In June 2006, the Company implemented another restructuring program. The June 2006 restructuring program was implemented to reduce job redundancies. This restructuring program consisted of the elimination of 20 positions. As a result of the June 2006

restructuring program, the Company recorded a net charge of $0.5 million, consisting of employee severances. During the three months ended June 30, 2007, the Company paid all remaining liabilities related to this restructuring program and recorded a reversal of the remaining liabilities through restructuring expense.

In July 2007, the Company implemented another restructuring program. The July 2007 restructuring program was implemented to reduce job redundancies. This restructuring program consisted of the elimination of 29 positions. As a result of the July 2007 restructuring program, the Company recorded a net charge of $0.7 million, consisting of employee severances. During fiscal 2008, the Company paid down part of its remaining liabilities related to this restructuring program. During the three months ended June 30, 2008, the Company recorded a reversal of the remaining liabilities through restructuring expense.

In September 2007, the Company implemented another restructuring program. The September 2007 restructuring program was implemented to reduce job redundancies. This restructuring program consisted of the elimination of 28 positions. As a result of the September 2007 restructuring program, the Company recorded a net charge of $0.7 million, consisting of employee severances. During fiscal 2008, the Company recorded an additional $0.1 million for employee severances and paid down part of its remaining liability. During the three months ended June 30, 2008, the Company reduced its estimated liability related to this restructuring program by $0.2 million through restructuring expense. During the three months ended September 30, 2008, the Company paid all remaining liabilities related to this restructuring program.

In March 2008, the Company implemented another restructuring program. The March 2008 restructuring program was implemented to reduce job redundancies. The restructuring program consisted of the elimination of 20 positions. As a result of the March 2008 restructuring program, the Company recorded a net charge of $1.6 million, consisting of $0.4 million for employee severances, $0.9 million for operating lease impairment and $0.3 million for an asset impairment. During the six months ended September 30, 2008, the Company paid down part of its remaining liabilities related to this restructuring program. In addition, the Company also recorded a reversal for part of its liabilities which was no longer required through restructuring expense.

In September 2008, the Company implemented another restructuring program which was put into effect during the months of September and October 2008. The September 2008 restructuring program was implemented to realign and focus the Company’s resources on its core competencies. The restructuring program consisted of the elimination of 30 positions. As a result of the September 2008 restructuring program, the Company recorded a payment of $0.1 million during the three months ended September 30, 2008 and expects to record an additional charge of $0.9 to $1.1 million during the three months ended December 31, 2008 for employee severances. The Company anticipates that the restructuring plan will reduce its ongoing operating expenses by approximately $5.0 million to $5.5 million annually.

4. COMPREHENSIVE LOSS

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


	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Net loss	$	(2,313	)	$	(8,053	)	$	(7,487	)	$	(24,473	)
Change in net unrealized gain (loss) on short-term investments and marketable securities		(4,657	)		(4,102	)		(4,025	)		(4,221	)
Foreign currency translation adjustment loss		7			(226	)		6			(422	)

Comprehensive loss	$	(6,963	)	$	(12,381	)	$	(11,507	)	$	(29,116	)

5. STOCKHOLDERS’ EQUITY

Preferred Stock

The Company’s Amended and Restated Certificate of Incorporation, as amended, allows for the issuance of up to 2.0 million shares of preferred stock in one or more series and permits the Company’s Board to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences, and the number of shares constituting any series so designated by the Board without further vote or action by the stockholders.

Common Stock

At September 30, 2008 the Company had 375.0 million shares authorized for issuance and approximately 65.3 million shares issued and outstanding. At March 31, 2008 there were approximately 64.8 million shares issued and outstanding.

Employee Stock Purchase Plan

The Company has in effect an employee stock purchase plan under which 4.8 million shares of common stock have been reserved for issuance. Under the terms of this plan, purchases are made semiannually and the purchase price of the common stock is equal to 85% of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. Approximately 0.3 million shares were issued during the six months ended September 30, 2008. During the fiscal year ended March 31, 2008, approximately 0.6 million shares were issued under this plan. At September 30, 2008, approximately 3.4 million shares had been issued under this plan and approximately 1.4 million shares were available for future issuance.

Stock Repurchase Program

In August 2004, the Board authorized a stock repurchase program for the repurchase of up to $200.0 million of the Company’s common stock. Under the program, the Company is authorized to make purchases in the open market or enter into structured repurchase agreements. During the six months ended September 30, 2008, no shares were repurchased on the open market. During the six months ended September 30, 2007, 2.5 million common shares were repurchased on the open market at a weighted average price of $11.81 per share. From the time the program was implemented, a total of 8.9 million shares have been repurchased on the open market at a weighted average price of $11.74 per share. All repurchased shares have been retired upon delivery.

The Company has also utilized structured stock repurchase agreements to buy back shares which are prepaid written put options on the Company’s common stock. The Company pays a fixed sum of cash upon execution of each agreement in exchange for the right to receive either a pre-determined amount of cash or stock depending on the closing market price of the Company’s common stock on the expiration date of the agreement. Upon expiration of each agreement, if the closing market price of the Company’s common stock is above the pre-determined price, the Company will have its investment returned with a premium. If the closing market price is at or below the pre-determined price, the Company will receive the number of shares specified at the agreement inception. Any cash received, including the premium, is treated as an increase to additional paid in capital on the balance sheet in accordance with the guidance issued in EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.

There was no structured stock repurchase agreement activity during the six months ended September 30, 2008. At September 30, 2008, the Company had no outstanding structured stock repurchase agreements. During the six months ended September 30, 2007, the Company entered into structured stock repurchase agreements totaling $23.8 million. For those agreements that had been settled by September 30, 2007, the Company received 0.4 million shares of its common stock at an effective purchase price of $11.38 per share and $13.2 million in cash. The outstanding structured stock repurchase agreements settled in October 2007 for $7.9 million in cash. From the inception of the Company’s stock repurchase program in August 2004, the Company has entered into structured stock repurchase agreements totaling $215.7 million. Upon settlement of these agreements, the Company received $136.6 million in cash and 7.8 million shares of its common stock at an effective purchase price of $10.16 per share.

The table below is a plan-to-date summary of the Company’s repurchase program activity as of September 30, 2008 (in thousands, except per share data):


	Aggregate		Repurchased		Average Price
	Price		Shares		Per Share
Stock repurchase program
Authorized amount	$	200,000		—	$	—
Open market repurchases		103,966		8,856		11.74
Structured stock repurchase agreements*		90,517		7,797		11.61

Total repurchases	$	194,483		16,653	$	11.68

Available for repurchase	$	5,517


*		The amounts above do not include gains of $11.3 million from structured stock repurchase agreements which settled in cash. The average price per share for structured stock repurchase agreements adjusted for gains from settlements in cash would have been $10.16 share and for total repurchases would have been $11.00 per share.

Stock Options

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

In March 2007, the Company’s stockholders approved a stock option exchange program to permit eligible employees to exchange outstanding stock options with exercise prices equal to or greater than $19.60 per share for a reduced number of restricted stock units to be granted under the 2000 Equity Incentive Plan. In May 2007, options for approximately 2.0 million shares of common stock with a weighted average exercise price of $33.99 were exchanged for approximately 0.4 million restricted stock units which vest semi-annually over a two year period. The exchange was considered a modification under the revised Statement of Financial Accounting Standards No. 123, Share-Based Payment, (“SFAS123(R)”), and the incremental expense associated with the modification, which was immaterial, was included in stock-based compensation expense for the three months ended June 30, 2007.

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

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

In connection with its annual review of officer compensation in April 2007, the Compensation Committee granted to each of the Company’s executive officers performance options that vest based on pre-determined Company goals. There were two types of performance options. The first type vests in 48 equal monthly installments beginning one month after the grant date; provided, however, if the Company achieved specific goals under its fiscal 2008 operating plan, the vesting of the option would have accelerated such that the option would have been fully exercisable at the end of two years instead of four years. The second type of performance options would have been exercisable only if the Company achieved certain rankings within a group of peer companies with respect to certain measures of performance by the end of fiscal 2008 as determined by the Compensation Committee. As a result of our performance during fiscal 2008, the Compensation Committee determined the performance criteria for both types of performance options have not been achieved.

In connection with its annual review of officer compensation in May 2008, the Compensation Committee granted to each of the Company’s executive officers performance options that vest based on pre-determined Company goals. The performance options becomes exercisable only if the Company achieves certain rankings within a group of peer companies with respect to certain measures of performance by the end of fiscal 2009 as determined by the Compensation Committee.

At September 30, 2008, there were no shares of common stock subject to repurchase. Options are granted at prices at least equal to fair value of the Company’s common stock on the date of grant.

Option activity under the Company’s stock incentive plans in the six months ended September 30, 2008 is set forth below:


				Weighted Average
	Number of Shares			Exercise Price Per
	(in thousands)			Share
Outstanding at the beginning of the period		9,214		$	17.57
Granted		930			7.80
Exercised		(33	)		2.62
Cancelled		(2,762	)		21.26

Outstanding at the end of the period		7,349		$	15.02

Vested at the end of the period		4,955		$	17.29

At September 30, 2008, the weighted average remaining contractual term for options outstanding is 5.44 years and for options vested is 4.77 years.

The aggregate pretax intrinsic value of options exercised during the six months ended September 30, 2008 was $0.2 million. This intrinsic value represents the excess of the fair market value of the Company’s common stock on the date of exercise over the exercise price of such options.

The weighted average remaining contractual life and weighted average per share exercise price of options outstanding and of options exercisable as of September 30, 2008 were as follows (in thousands, except exercise prices and years):


	Options Outstanding						Options Exercisable
					Weighted
					Average
					Remaining
Range of			Weighted		Contractual				Weighted
Exercise	Number of		Average		Term		Number of		Average
Prices	Shares		Exercise Price		(in years)		Shares		Exercise Price
$ 0.19 — $8.31		1,616,505		$ 7.18		7.37		334,159		$ 4.77
8.88 — 12.16		1,761,671		11.57		4.45		1,341,939		11.50
12.20 — 14.12		1,568,212		13.12		6.26		1,265,820		13.15
14.13 — 19.80		1,523,324		15.27		5.24		1,134,484		15.40
20.36 — 300.13		879,087		39.29		2.76		879,087		39.29

$ 0.19 — $300.13		7,348,799		$ 15.02		5.44		4,955,489		$ 17.29

As of September 30, 2008, the aggregate pre-tax intrinsic value of options outstanding and exercisable was $0.8 million and options outstanding was $0.8 million. The aggregate pretax intrinsic values were calculated based on the closing price of the Company’s common stock of $5.98 on September 30, 2008.

Restricted Stock Units

The Company has granted restricted stock units pursuant to its 2000 Equity Incentive Plan as part of its regular annual employee equity compensation review program as well as to new hires. In addition, in May 2007, the Company granted approximately 0.4 million restricted stock units in exchange for approximately 2.0 million options for shares of common stock in connection with the stock option exchange program approved by its stockholders in March 2007. Restricted stock units are share awards that upon vesting, will deliver to the holder, shares of the Company’s common stock. Generally, restricted stock units vest ratably on a quarterly basis over four years from the date of grant. For employees hired after May 15, 2006, restricted stock units will vest on a quarterly basis over four years from the date of hire provided that no shares will vest during the first year, at the end of which the shares that would have vested during that year will vest and the remaining shares will vest over the remaining 12 quarters.

Restricted stock unit activity for the six months ended September 30, 2008 is set forth below:


	Restricted Stock Units
	Outstanding
	Number of Shares
	(in thousands)
Balance at beginning of period		1,200
Awarded during the period		952
Vested during the period		(220	)
Cancelled during the period		(142	)

Balance at end of period		1,790

The weighted average grant-date fair value per share for the restricted stock units was $8.95 for the six months ended September 30, 2008, and the weighted average remaining contractual term for the restricted stock units outstanding as of September 30, 2008 was 1.3 years.

Based on the closing price of the Company’s common stock of $5.98 on September 30, 2008, the total pretax intrinsic value of all outstanding restricted stock units on that date was $10.7 million.

6. STOCK-BASED COMPENSATION

SFAS 123(R) requires companies to estimate the fair value of stock-based compensation on the date of grant using an option-pricing model. The Company uses the Black-Scholes model to value stock-based compensation. The Black-Scholes model determines the fair value of share-based payment awards based on the stock price on the date of grant and is affected by assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Although the fair value of stock options granted by the Company is determined in accordance with SFAS 123(R) and Staff Accounting Bulletin No. 107 (“SAB 107”), Share-Based Payment, using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

The following table summarizes stock-based compensation expense related to stock options and restricted stock units under SFAS 123(R) for the three and six months ended September 30, 2008 and 2007, which is allocated as follows (in thousands):


	Three Months Ended					Six Months Ended
	September 30,					September 30,
	2008			2007		2008			2007
Stock-based compensation expense by type of awards
Stock options	$	1,593		$	2,929	$	3,703		$	5,268
Restricted stock units		1,404			368		2,502			649

Total stock-based compensation expense		2,997			3,297		6,205			5,917
Stock-based compensation capitalized to (expensed from) inventory		(64	)		48		(64	)		192

Total stock-based compensation	$	2,933		$	3,345	$	6,141		$	6,109

The fair value of the options granted during the three and six months ended September 30, 2008 and 2007 is estimated as of the grant date using the Black-Scholes option-pricing model assuming the weighted-average assumptions listed in the following table:


	Three Months Ended September 30,
							Employee Stock
	Employee Stock Options						Purchase Plans
	2008			2007			2008			2007
Expected life (years)		3.9			3.9			0.5			0.5
Risk-free interest rate		3.0	%		4.6	%		1.9	%		5.0	%
Volatility		43	%		49	%		43	%		55	%
Dividend yield		—	%		—	%		—	%		—	%
Weighted average fair value per share	$	2.79		$	5.08		$	2.13		$	3.44

The weighted average fair value per share of the restricted stock units awarded was $8.57, $8.95, $11.88 and $11.84 in the three and six months ended September 30, 2008 and 2007, respectively. The weighted average fair value per share was calculated based on the fair market value of the Company’s common stock on the respective grant dates.

Effective April 1, 2008, the Company revised its estimated forfeiture rate used in determining the amount of stock-based compensation from 6.1% to 5.2% as a result of a decreasing rate of forfeitures in recent periods, which the Company believes is indicative of the rate it will experience during the remaining vesting period of currently outstanding unvested options.

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


	Three Months Ended					Six Months Ended
	September 30,					September 30,
	2008			2007		2008			2007
Stock-based compensation included in expenses:
Cost of revenues	$	182		$	240	$	396		$	312
Research and development		1,098			1,216		2,435			2,271
Selling, general and administrative		1,717			1,841		3,374			3,334

Total stock-based compensation expense	$	2,997		$	3,297	$	6,205		$	5,917
Stock-based compensation capitalized to (expensed from) inventory		(64	)		48		(64	)		192

Total stock-based compensation	$	2,933		$	3,345	$	6,141		$	6,109

The amount of unearned stock-based compensation currently estimated to be expensed from now through fiscal 2013 related to unvested share-based payment awards at September 30, 2008 is $23.8 million. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is approximately 2.8 years. If there are any modifications or cancellations of the underlying unvested securities, the Company may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that the Company grants additional equity awards or assumes unvested equity awards in connection with acquisitions.

7. CONTINGENCIES

Legal Proceedings

The Company acquired JNI in October 2003. In November 2001, a class action lawsuit was filed against JNI and the underwriters of its initial and secondary public offerings of common stock in the U.S. District Court for the Southern District of New York, case no. 01 Civ 10740 (SAS). The complaint alleges that defendants violated the Exchange Act in connection with JNI’s public offerings. This lawsuit is among more than 300 class action lawsuits pending in this District Court that have come to be known as the “IPO laddering cases.” In June 2003, a proposed partial global settlement, subsequently approved by JNI’s board of directors, was announced between the issuer defendants and the plaintiffs that would guarantee at least $1 billion to investors who are class members from the insurers of the issuers. The proposed settlement, if approved by the District Court and by the issuers, would be funded by insurers of the issuers, and would not result in any payment by JNI or the Company. The District Court granted its preliminary approval of settlement subject to defendants’ agreement to modify certain provisions of the settlement agreements regarding contractual indemnification. JNI accepted the District Court’s proposed modifications. The District Court held a hearing for final approval of the settlement in April 2006. In December 2006, the U.S. Court of Appeals for the Second Circuit vacated the District Court’s decision certifying as class actions the six lawsuits designated as “focus cases.” On April 6, 2007, the Second Circuit Court of Appeals denied plaintiffs’ petition for a rehearing, but clarified that the plaintiffs may seek to certify a more limited class in the District Court. Accordingly, the parties withdrew the prior settlement, and plaintiffs filed amended complaints in six focus or test cases in an attempt to comply with the Second Circuit’s ruling. On March 26, 2008, the Court issued an order granting in part and denying in part motions to dismiss the amended complaints in the focus cases. In particular, the Court denied the motions to dismiss as to the Section 10(b) claims. It also denied the motions to dismiss as to the Section 11 claims except for those claims raised by two different classes of plaintiffs: (1) plaintiffs who had no conceivable damages because they sold their securities above the offering price; and (2) plaintiffs whose claims were time barred because they purchased their securities outside the previously certified class period. If a settlement is not renegotiated and then approved by the Court, the Company intends to defend the lawsuit vigorously. Prior to the Court’s decision, the settlement amount, if any, cannot be reasonably estimated at this time.

The Company acquired Quake Technologies, Inc. (“Quake”) in August 2006. On or about November 20, 2002, Spirent Communications of Ottawa Limited (“Spirent”) filed suit in the Ontario (Canada) Superior Court of Justice against Quake. Spirent’s claim, as submitted at trial, was for approximately $1,100,000, representing rent allegedly owed by Quake pursuant to an offer to sublease. Quake defended that lawsuit and asserted a Counterclaim by way of a Statement of Defence and Counterclaim that was filed on or about December 20, 2002. The trial took place in 2005 and 2006. Quake was successful at trial, obtaining a dismissal of Spirent’s claim against it, judgment against Spirent on its Counterclaim, and an award of legal costs. Spirent filed a Notice of Appeal on July 27, 2006, appealing the trial Decision to the Court of Appeal for Ontario. Spirent’s appeal was heard by the Court of Appeal on November 21, 2007, and the Decision of the Court of Appeal was received on February 12, 2008, allowing Spirent’s appeal. In the result, Spirent was granted judgment against Quake in the amount of $1,096,793, plus legal costs. In April 2008, Quake filed an Application for Leave to Appeal with the Supreme Court of Canada, pursuant to Quake’s effort to appeal the Decision of the Court of Appeal for Ontario to the Supreme Court of Canada. The Application for Leave to Appeal was dismissed by the Supreme Court of Canada on July 17, 2008. No further rights of appeal are available to Quake. Accordingly, in July and October 2008, Quake made payments to Spirent in the total amount of $1,488,420 on account of all amounts owing by Quake to Spirent On October 14, 2008, a deposit that was paid by Quake to a real estate broker in trust in or about October 2000, pursuant to the offer to sublease, was returned to Quake, with interest, in the amount of $152,752. All amounts identified above in this paragraph are in Canadian Dollars.

On June 5, 2007, two former officers of the Company were named as defendants in another derivative action filed in the United States District Court for the Northern District of California, captioned Segen v. Rickey, et al ., No. C 07 2917 (“Section 16b Action”). The plaintiff in the Section 16b Action alleged that these two former officers violated Section 16b of the Securities Exchange Act of 1934, as amended, and Rule 16b-3 promulgated thereunder through the receipt of option grants and stock sales from 1999 through 2001 which plaintiff alleged constituted short-swing trading transactions. The Section 16b Action sought disgorgement of profits and benefits from these individual defendants, and attorneys’ fees and costs. The Company was named as a nominal defendant in the Section 16b Action, and thus no recovery against the Company was sought. The Company and the individual defendants moved to dismiss the complaint. On February 29, 2008, the Court granted the motions to dismiss without leave to amend and entered judgment in favor of the defendants. Plaintiff appealed the judgment but before the parties had begun briefing, Plaintiff agreed to dismiss the appeal. On August 29, 2008, the Court of Appeals dismissed the appeal with prejudice pursuant to a stipulation of the parties.

8. INCOME TAXES

The Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, on April 1, 2007. The adoption of FIN 48 was not material to the financial statements due to a full valuation allowance against deferred tax assets. The total amount of unrecognized tax benefits as of April 1, 2008, was $36.9 million, including interest and penalties. During the quarter ended September 30, 2008, additional unrecognized tax benefits of $31,000 were recorded. The Company does not foresee significant changes to its unrecognized tax liabilities within the next twelve months.

The Company’s income tax expense consists of federal alternative minimum taxes, state taxes, and foreign taxes. The federal statutory income tax rate was 35% for the three and six months ended September 30, 2008 and 2007. The Company’s income tax expense for the three months ended September 30, 2008 was $0.5 million as compared to an income tax benefit of $0.4 million during the three months ended September 30, 2007. The increase in the income tax expense recorded for the three and six months ended September 30, 2008 compared to September 30, 2007, was primarily due to a charge for deferred tax liabilities related to the amortization of tax-deductible goodwill in connection with the acquisition of assets and licensed intellectual property related to IBM’s Power PRS Switch Fabric line which we acquired in September 2003 and alternative minimum taxes. Comparatively, the tax benefit for the three and six months ended September 30, 2007 was primarily due to the completion and settlement of a foreign tax audit that resulted from the liquidation of one of its foreign subsidiaries.

At April 1, 2008, the Company had net deferred tax assets of $398.4 million. These deferred tax assets are primarily composed of federal and state tax net operating loss (“NOL”) carryforwards and federal and state research and development (“R&D”) credit carryforwards. Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these assets, a full valuation allowance has been established to offset these net deferred tax assets. Federal and state laws impose restrictions on the utilization of net operating loss and tax credit carryforwards in the event of an “ownership change” for tax purposes as defined by Section 382 of the Internal Revenue Code. The Company has completed a Section 382 analysis regarding the limitation of net operating loss and research and development tax credit carryforwards. There were no ownership changes identified. However, no Section 382 analysis was done with respect to the Company’s acquired net operating losses and research and development tax credit carryforwards. As a result, utilization of the portion of the Company’s net operating loss and tax credit carryforwards attributable to acquired entities

may be restricted. The Company has removed these acquired deferred tax assets for net operating losses and research and development credits from its deferred tax asset schedule. The Company has not recognized any accrued interest or penalties related to unrecognized tax benefits through the quarter ended September 30, 2008.

The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. The Company currently has no years under examination by the Internal Revenue Service or any state jurisdiction. Effectively, all of the Company’s historical tax years are subject to examination by the Internal Revenue Service and various state jurisdictions due to the generation of net operating loss and credit carryforwards. With few exceptions, the Company is no longer subject to foreign examinations by tax authorities for years before 2005.

9. PATENT PURCHASE AGREEMENT

On July 11, 2008, the Company entered into a patent purchase agreement (the “Patent Purchase Agreement”) with QUALCOMM Incorporated (“Qualcomm”). Pursuant to the agreement, the Company has agreed to sell a series of its patents, patent applications and associated rights related to certain technologies (collectively, the “Assigned Patent Rights”) in consideration for an aggregate purchase price of $33.0 million. The purchase price will be paid over the next three years in equal quarterly payments of $3.0 million each and due to the nature of the payment terms, revenue will be recorded as the payments are received. The first quarterly payment and related revenue of $3.0 million was recognized during the three months ended September 30, 2008. The Company generally recognizes revenue from the sale of patents and associated rights when cash is received and contractual terms have been met.

Under the Patent Purchase Agreement, the Company and its affiliates have retained a worldwide and non-exclusive right to manufacture and sell existing AMCC products that utilize technology covered by the patents.

The Patent Purchase Agreement includes customary representations, warranties and covenants by AMCC. Prior to the due date of the final payment, Qualcomm is permitted to withhold a portion of the total purchase price from its payment in the event of a breach by AMCC of the representations or warranties that have been made by AMCC under the Patent Purchase Agreement.

10. SUBSEQUENT EVENT

On October 29, 2008, the Board approved a $100.0 million stock repurchase program. The specific terms of the program are still to be determined.

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

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

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

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

	•		Results of operations. This section provides an analysis of our results of operations for the three and six months ended September 30, 2008 and 2007. A brief description is provided of transactions and events that impact the comparability of the results being analyzed.

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

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

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

OVERVIEW

We are a leader in semiconductors and printed circuit board assemblies (“PCBAs”) for the communications and storage markets. We design, develop, market and support high-performance ICs and storage components, which are essential for the processing, transporting and storing of information worldwide. In the communications market, we utilize a combination of design expertise coupled with system-level knowledge and multiple technologies to offer IC products and PCBAs, for wireline and wireless communications equipment such as wireless base stations, edge switches, routers, gateways, metro transport platforms and core switches and routers. In the storage market, we blend systems and software expertise with high-performance, high-bandwidth silicon integration to deliver high-performance, high capacity serial advanced technology attachment (“SATA”) redundant array of integrated disks (“RAID”) controllers for emerging storage applications such as disk-to-disk backup, near-line storage, network-attached storage, video, and high-performance computing. Our corporate headquarters are located in Sunnyvale, California. We have sales and engineering offices throughout the world.

We maintain a website at www.amcc.com to which we regularly post copies of our press releases as well as additional information about us. Our filings with the SEC are available free of charge through our website as soon as reasonably practicable after being electronically filed with or furnished to the SEC. Interested persons can subscribe on our website to email or RSS feed alerts that are sent automatically when we issue press releases, file our reports with the SEC or post certain other information to our website. Information contained in our website does not constitute a part of this report.

The following tables present a summary of our results of operations for the three and six months ended September 30, 2008 and 2007 (dollars in thousands):


	Three Months Ended September 30,
	2008						2007
				% of Net						% of Net			Increase
	Amount			Revenue			Amount			Revenue			(Decrease)			% Change
Net revenues	$	76,931			100.0	%	$	58,210			100.0	%	$	18,721			32.2	%
Cost of revenues		35,981			46.8			30,328			52.1			5,653			18.6

Gross profit		40,950			53.2			27,882			47.9			13,068			46.9
Total operating expenses		42,201			54.9			43,251			74.3			(1,050	)		(2.4	)

Operating loss		(1,251	)		(1.7	)		(15,369	)		(26.4	)		14,118			91.9
Interest and other income (expense), net		(550	)		(0.7	)		6,906			11.9			(7,456	)		(108.0	)

Loss before income taxes		(1,801	)		(2.4	)		(8,463	)		(14.5	)		6,662			78.7
Income tax expense (benefit)		512			0.7			(410	)		(0.7	)		922			224.9

Net loss	$	(2,313	)		(3.1	)%	$	(8,053	)		(13.8	)%	$	5,740			71.3	%


	Six Months Ended September 30,
	2008						2007
				% of Net						% of Net			Increase
	Amount			Revenue			Amount			Revenue			(Decrease)			% Change
Net revenues	$	150,991			100	%	$	108,345			100.0	%	$	42,646			39.4	%
Cost of revenues		71,831			47.6			56,826			52.4			15,005			26.4

Gross profit		79,160			52.4			51,519			47.6			27,641			53.7
Total operating expenses		83,704			55.4			86,401			79.8			(2,697	)		(3.1	)

Operating loss		(4,544	)		(3.0	)		(34,882	)		(32.2	)		30,338			87.0
Interest and other income (expense), net		(1,877	)		(1.2	)		9,982			9.2			(11,859	)		(118.8	)

Loss before income taxes		(6,421	)		(4.2	)		(24,900	)		(23.0	)		18,479			74.2
Income tax expense (benefit)		1,066			0.7			(427	)		(0.4	)		1,493			349.6

Net loss	$	(7,487	)		(4.9	)%	$	(24,473	)		(22.6	)%	$	16,986			69.4	%

Net Revenues. We generate revenues primarily through sales of our IC products, embedded processors and PCBAs to original equipment manufacturers (“OEMs”), such as Alcatel-Lucent, Ciena, Cisco, Brocade, Fujitsu, Hitachi, Huawei, Juniper, Ericsson, NEC, Nortel, Nokia Siemens Networks, and Tellabs, who in turn supply their equipment principally to communications service providers. In the storage market we generate revenues primarily through sales of our SATA RAID controllers to our distribution channel partners who in turn sell to enterprises, small and mid-size businesses, value added resellers (“VARs”), systems integrators and retail consumers.

In calendar 2006, our strategic direction changed in such a way that certain valuable patents were no longer core to our strategic direction. We reported our non-focus revenues separately and began to analyze our patent portfolio in detail. These patents relate to non-core products, foundry and other items that are not relevant to our long-term strategic product road maps. As a result, we embarked on a program to monetize this intellectual property. In July, 2008, we entered into a Patent Purchase Agreement (“the Agreement”) with QUALCOMM Incorporated (“Qualcomm”). Pursuant to the Agreement, we agreed to sell a series of our patents, patent applications and associated rights related to certain technologies in consideration for an aggregate purchase price of $33.0 million. The purchase price will be paid over the next three years in equal quarterly payments of $3.0 million each and due to the nature of the payment terms, revenue will be recorded as the payments are received beginning in the quarter ended September 30, 2008. Under the Agreement, we and our affiliates have retained a worldwide and non-exclusive right to manufacture and sell existing AMCC products that utilize technology covered by the patents. The Agreement includes customary representations, warranties and covenants by us. Prior to the due date of the final payment, Qualcomm is permitted to withhold a portion of the total purchase price in the event we breach the representations, warranties or covenants that we made under the Agreement. We hope to achieve a sustainable long-term revenue stream from our program to monetize our non-core intellectual property in the next three-to-five years.

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

•

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

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

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

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

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

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

For these and other reasons, our net revenue and results of operations for the three and six months ended September 30, 2008 and prior periods may not necessarily be indicative of future net revenue and results of operations.

Based on direct shipments, net revenues to customers that exceeded 10% of total net revenues in the three and six months ended September 30, 2008 and 2007 were as follows:


	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Avnet Inc.		25	%		23	%		23	%		23	%

We expect that Avnet will continue to account for a substantial portion of our net revenues for the foreseeable future.

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


	Three Months Ended September 30,
	2008					2007
			% of Net					% of Net
	Amount		Revenue			Amount		Revenue
United States of America	$	26,041		33.8	%	$	20,378		35.0	%
Other North America		7,417		9.6			4,454		7.7
Europe		13,530		17.6			12,459		21.4
Asia		29,673		38.6			20,680		35.5
Other		270		0.4			239		0.4

	$	76,931		100	%	$	58,210		100.0	%


	Six Months Ended September 30,
	2008					2007
			% of Net					% of Net
	Amount		Revenue			Amount		Revenue
United States of America	$	50,972		33.8	%	$	38,941		35.9	%
Other North America		12,786		8.5			8,593		7.9
Europe		27,480		18.2			22,696		20.9
Asia		59,264		39.2			37,654		34.8
Other		489		0.3			461		0.5

	$	150,991		100	%	$	108,345		100.0	%

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

Net Loss. Our net loss has been affected in the past, and may continue to be affected in the future, by various factors, including, but not limited to, the following:

	•		stock-based compensation expense;

	•		amortization of purchased intangibles;

	•		acquired in-process research and development (“IPR&D”);

	•		litigation settlement costs;

	•		restructuring charges;

	•		goodwill impairment charges;

	•		combinations of companies within our customer base;

	•		purchased intangible asset impairment charges;

	•		other-than-temporary impairment of short-term investments and marketable securities; and

	•		income tax expense (benefit).

Since the start of fiscal 2007, we have invested a total of $241.9 million in the research and development of new products, including higher-speed, lower-power and lower-cost products, products that combine the functions of multiple existing products into single highly integrated products, and other products to complete our portfolio of communications and storage products. These products, and our customers’ products for which they are intended, are highly complex. Due to this complexity, it often takes several years to complete the development and qualification of these products before they enter into volume production. Accordingly, we have not yet generated significant revenues from some of the products developed during this time period. In addition, downturns in the telecommunications market can severely impact our customers’ business and usually result in significantly less demand for our products than was expected when the development work commenced. As a result of restructuring activities associated with these downturns, we have discontinued development of several products that were in process and slowed down development of others as we realized that demand for these products would not materialize as originally anticipated.

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 affect our cost of sales and gross margin; the valuation of purchased intangibles and goodwill, which has in the past, and could in the future affect our impairment charges to write down the carrying value of goodwill and other intangibles and the amount of related periodic amortization expense recorded for definite-lived intangibles; the valuation of restructuring liabilities, which affects the amount and timing of restructuring charges; an evaluation of other than temporary impairment of our investments, which affects the amount and timing of write-down charges; and the valuation of deferred income taxes, which affects our income tax expense (benefit). We also have other key accounting policies, such as our policies for stock-based compensation and revenue recognition, including the deferral of a portion of revenues on sales to distributors. The methods, estimates and judgments we use in applying these critical accounting policies have a significant impact on the results we report in our financial statements. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from management’s estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected.

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

Inventory Valuation and Warranty Liabilities

Our policy is to value inventories at the lower of cost or market on a part-by-part basis. This policy requires us to make estimates regarding the market value of our inventories, including an assessment of excess or obsolete inventories. We determine excess and obsolete inventories based on an estimate of the future demand for our products within a specified time horizon, generally 12 months. The estimates we use for future demand are also used for near-term capacity planning and inventory purchasing and are consistent with our revenue forecasts. If our demand forecast is greater than our actual demand we may be required to take additional excess inventory charges, which would decrease gross margin and net operating results. For example, as of September 30, 2008, reducing our future demand estimate to six months could decrease our current inventory valuation by approximately $11.9 million or increasing our future demand forecast to 18 months could increase our current inventory valuation by approximately $0.5 million.

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 margin. Additional changes to negotiated master purchase agreements could result in increased warranty reserves and unfavorably impact future gross margins.

Goodwill and Intangible Asset Valuation

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

We are required to assess goodwill impairment annually using the methodology prescribed by Statement of Financial Accounting Standards No. 142 (“SFAS 142”), Goodwill and Other Intangible Assets. SFAS 142 requires that goodwill be tested for impairment at the reporting unit level on at least an annual basis and between annual tests in certain circumstances. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units and determining the fair value of each reporting unit. For fiscal 2008, in accordance with SFAS 142, we determined that there were three reporting units to be tested. The goodwill impairment test compares the implied fair value of the reporting unit with the carrying value of the reporting unit. The implied fair value of goodwill is determined in the same manner as in a business combination. Determining the fair value of the implied goodwill is judgmental in nature and often involves the use of significant estimates and assumptions. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the magnitude of any such charge. Estimates of fair value are primarily determined using discounted cash flows and market comparisons. These approaches use significant estimates and assumptions, including projection and timing of future cash flows, discount rates reflecting the risk inherent in future cash flows, perpetual growth rates, determination of appropriate market comparables, and determination of whether a premium or discount should be applied to comparables. It is possible that the plans and estimates used to value these assets may differ from actual outcomes. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges.

For the fiscal 2008 annual impairment test, the projected discounted cash flows for each reporting unit were based on discrete ten-year financial forecasts developed by management for planning purposes. Cash flows beyond the discrete forecasts were estimated using terminal value calculations. The sales compound annual growth rates ranged from 10% to 15% for the reporting units during the discrete forecast period and the future cash flows were discounted to present value using a discount rate of 16% to 17% and terminal growth rates of 4%. Upon completion of the annual impairment test for fiscal 2008, we determined that there was an indicator of impairment because the estimated carrying value of one of the three reporting units exceeded its fair value. As a result, we performed

additional impairment analyses as required by SFAS 142. The second step of the goodwill impairment test compared the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeded the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. Any variance in the assumptions used to value the unrecognized intangible assets could have had a significant impact on the estimated fair value of the unrecognized intangible assets and consequently the amount of identified goodwill impairment. As a result of the additional analyses performed, we recorded an impairment charge of $71.5 million for our storage unit in the fourth quarter of fiscal 2008, which primarily related to the deterioration of the projected future revenues associated with the products in our storage unit. As a result of general market conditions, our planned product introductions in our storage unit were not expected to ramp as quickly as previously expected in fiscal 2007 or during fiscal 2008, causing our near-term and longer-term forecasts to be lower. These forecasts represented the best estimate that our management had at the time and believed at that time to be reasonable. However, actual results could differ from these forecasts, which may have resulted in a further impairment of goodwill. For example, if our projected future revenues in these forecasts were decreased by 10%, then our impairment charge would have increased by $4.7 million.

Investments

We hold a variety of interest bearing securities that have varied underlying investments. We review our investment portfolio periodically to assess for other-than-temporary impairment. We assess the existence of impairment of our investments in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, and related guidance issued by the FASB in order to determine the classification of the impairment as “temporary” or “other-than-temporary”. A temporary impairment results in an unrealized loss being recorded in the other comprehensive income (loss) component of stockholders’ equity. Such an unrealized loss does not affect net income (loss) for the applicable accounting period. An other-than-temporary impairment is recorded in the consolidated statement of operations and reduces net income (increases net loss) for the applicable accounting period. The factors used to determine whether an impairment is temporary or other-than-temporary involve considerable judgment. The current rapidly changing economic climate and volatile financial markets have created an environment in which it is difficult to make accurate estimates and assumptions on which we base our judgments. The factors we consider in determining whether any individual impairment is temporary or other-than-temporary are primarily the length of the time and the extent to which the market value has been less than amortized cost, the nature of underlying assets (including the degree of collateralization), the financial condition, credit rating, market liquidity conditions and near-term prospects of the issuer. In the future, should we determine we no longer have the ability or intent to hold securities in a loss position to their maturity or a recovery in value, we may be required to recognize additional losses in our earnings for unrealized loss positions that we currently consider to be temporary in nature. If securities in a continuous loss position that are considered temporarily impaired remain in a continuous loss position in the future, then these securities could be considered other-than-temporarily impaired in future periods. As of September 30, 2008, we classified $5.4 million as long term investments. In the six months ended September 30, 2008 we recorded other-than-temporary impairment charges of $6.8 million to current earnings. This change was primarily driven by an overall deterioration of the financial markets during the six months ended September 30, 2008. For the year ended March 31, 2008 we recorded other-than-temporary impairment charges of $1.7 million to current earnings. For the six months ended September 30, 2008, we did not record a write-down in connection with other securities in a continuous loss position (fair value less than carrying value) with unrealized losses of $8.9 million as we believed that such losses were temporary. In addition, if we had determined that the impairment of securities in a continuous loss position greater than 12 months was other-than-temporary, an additional charge of $1.2 million would have been recorded.

Fair Value of Financial Instruments

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157 (“SFAS 157”), Fair Value Measurements, which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements and is effective for fiscal years beginning after November 15, 2007.

Beginning April 1, 2008, short term investments and long term marketable securities are recorded at fair value in our condensed consolidated balance sheet and are categorized based upon the level of judgment associated with inputs used to measure their fair value. SFAS 157 defines a three-level valuation hierarchy for disclosure of fair value measurements as follows:

Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2 – Inputs (other than quoted market prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level 3 – Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

We classify inputs to derive fair values for short term investments and long-term marketable investments as Level 1 and 2. Instruments classified as Level 1 include highly liquid government and agency securities, money market funds and publicly traded equity securities in active markets. Instruments classified as Level 2 include corporate notes, asset-backed securities and commercial paper.

We have no Level 3 inputs.

In October 2008, the FASB issued FASB Staff Position (“FSP”) 157-3 (“FSP 157-3”), Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. FSP 157-3 provides guidance for the valuation of financial assets in an inactive market, the use of internal assumptions when relevant observable data does not exist, the use of observable market information when the market is not active, and the use of market quotes when assessing the relevance of observable and unobservable data. FSP 157-3 is effective for all periods presented in accordance with SFAS 157. The adoption of FSP 157-3 did not have a significant impact on our consolidated financial statements or the fair values of our financial assets.

Restructuring Charges

Over the last several years we have undertaken significant restructuring initiatives, which have required us to develop formalized plans for exiting certain business activities and reducing spending levels. We have had to record estimated expenses for employee severance, long-term asset write downs, lease cancellations, facilities consolidation costs, and other restructuring costs. Given the significance, and the timing of the execution, of such activities, this process is complex and involves periodic reassessments of estimates made at the time the original decisions were made. In calculating the charges for our excess facilities, we have to estimate the timing of exiting certain facilities. Our assumptions for exiting and/or reoccupying certain facilities may differ from actual outcomes, which could result in the need to record additional costs or reduce estimated amounts previously charged to restructuring expense. For example, in fiscal 2007, when we decided to reoccupy a previously restructured facility, we eliminated the related liability which reduced our restructuring expense. Our policies require us to periodically evaluate the adequacy of the remaining liabilities under our restructuring initiatives. In fiscal 2008, we recorded restructuring charges of approximately $3.0 million associated with our restructuring actions. For the six months ended September 30, 2008, we recorded a net reversal of $0.1 million in restructuring charge. For a full description of our restructuring activities, refer to our discussion of restructuring charges in Note 3 to the condensed consolidated financial statements.

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. In determining taxable income for financial statement reporting purposes, we must make certain estimates and judgments. These estimates and judgments are applied in the calculation of certain tax liabilities and in the determination of the recoverability of deferred tax assets, which arise from temporary differences between the recognition of assets and liabilities for tax and financial statement reporting purposes. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax rules and the potential for future adjustment of our uncertain tax positions by the Internal Revenue Service or other taxing jurisdiction. If our estimates of these taxes are greater or less than actual results, an additional tax benefit or charge will result.

Stock-Based Compensation Expense

Effective April 1, 2006 we adopted SFAS 123(R), which requires all share-based payments, including grants of stock options, restricted stock units and employee stock purchase rights, to be recognized in our financial statements based on their respective grant date fair values. Under this standard, the fair value of each employee stock option and employee stock purchase right is estimated on the date of grant using an option pricing model that meets certain requirements. We currently use the Black-Scholes option pricing model to estimate the fair value of our share-based payments. The Black-Scholes model meets the requirements of SFAS 123(R) but the fair values generated by the model may not be indicative of the actual fair values of our stock-based awards as it does not consider certain factors important to stock-based awards, such as continued employment, periodic vesting requirements and limited transferability. The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by our stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. We estimate the expected volatility of our stock options at grant date by equally weighting the historical volatility and the implied volatility of our stock over specific periods of time as the expected volatility assumption required in the Black-Scholes model. The expected life of the stock options is based on historical and other data including life of the option and vesting period. The risk-free interest rate assumption is the implied yield currently available on zero-coupon government issues with a remaining term equal to the expected term. The dividend yield assumption is based on our history and expectation of dividend payouts. The fair value of our restricted stock units is based on the fair market value of our common stock on the date of grant. Stock-based compensation expense recognized in our financial statements in fiscal 2007 and thereafter was based on awards that are ultimately expected to vest. The amount of stock-based compensation expense in fiscal 2007 and thereafter was reduced for estimated forfeitures based on historical experience. Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ significantly from those estimated. We evaluate the assumptions used to value stock-based awards on a quarterly basis. If factors change and we employ different assumptions, stock-based compensation expense may differ significantly from what we have recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. We currently estimate when and if performance-based options will be earned. If the awards are not considered probable of achievement, no amount of stock-based compensation is recognized. If we considered the award to be probable, expense is recorded over the estimated service period. To the extent that our assumptions are incorrect, the amount of stock-based compensation recorded will be increased or decreased. To the extent that we grant additional equity securities to employees or we assume unvested securities in connection with any acquisitions, our stock-based compensation expense will be increased by the additional unearned compensation resulting from those additional grants or acquisitions.

Revenue Recognition

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

From time to time we generate revenue from the sale of our internally developed intellectual property (“IP”). We generally recognize revenue from the sale of IP when cash is received and all other basic criteria outlined above are met.

Allowance for Bad Debts

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

Comparison of the Three and Six Months Ended September 30, 2008 to the Three and Six Months Ended September 30, 2007

Net Revenues. Net revenues for the three and six months ended September 30, 2008 were $76.9 million and $151.0 million respectively, representing an increase of 30.7% and 38.6% from net revenues of $58.2 million and $108.3 million for the three and six months ended September 30, 2007. We classify our revenues into three categories based on the markets that the underlying products serve. The categories are Process, Transport and Store. We use this information to analyze our performance and success in these markets. See the following tables (dollars in thousands):


	Three Months Ended September 30,
	2008					2007
			% of Net					% of Net
	Amount		Revenue			Amount		Revenue			Increase		% Change
Process	$	33,297		43.3	%	$	28,924		49.7	%	$	4,373		15.1	%
Transport		30,993		40.3			17,057		29.3			13,936		81.7
Store		12,641		16.4			12,229		21.0			412		3.4

	$	76,931		100.0	%	$	58,210		100.0	%	$	18,721		32.2	%


	Six Months Ended September 30,
	2008					2007
			% of Net					% of Net
	Amount		Revenue			Amount		Revenue			Increase		% Change
Process	$	67,194		44.5	%	$	48,225		44.5	%	$	18,969		39.3	%
Transport		58,295		38.6			34,648		32.0			23,647		68.2
Store		25,502		16.9			25,472		23.5			30		0.1

	$	150,991		100.0	%	$	108,345		100.0	%	$	42,646		39.4	%

The primary driver to the overall growth in our net revenues for the three and six months ended September 30, 2008 compared to the three and six months ended September 30, 2007 was the increase in net revenues from our process and transport product lines. The increase in these product lines is significant as the related revenues for the comparable periods in 2007 were lower due to downward inventory corrections at our customers, product transitions and overall softness in demand. The decline was primarily in net revenues of our process and transport products. We expect our overall revenues to decline by about 10% next quarter. The primary driver for the projected decline is overall depressed market conditions.

Gross Profit. The following table presents net revenues, cost of revenues and gross profit for the three and six months ended September 30, 2008 and 2007 (dollars in thousands):


	Three Months Ended September 30,
	2008					2007
			% of Net					% of Net
	Amount		Revenue			Amount		Revenue			Increase		% Change
Net revenues	$	76,931		100.0	%	$	58,210		100.0	%	$	18,721		32.2	%
Cost of revenues		35,981		46.8			30,328		52.1			5,653		18.6

Gross profit	$	40,950		53.2	%	$	27,882		47.9	%	$	13,068		46.9	%


	Six Months Ended September 30,
	2008					2007
			% of Net					% of Net
	Amount		Revenue			Amount		Revenue			Increase		% Change
Net revenues	$	150,991		100.0	%	$	108,345		100.0	%	$	42,646		39.4	%
Cost of revenues		71,831		47.6			56,826		52.4			15,005		26.4

Gross profit	$	79,160		52.4	%	$	51,519		47.6	%	$	27,641		53.7	%

The gross profit percentage for the three and six months ended September 30, 2008 increased to 53.2% and 52.4%, compared to 47.9% and 47.6% for the three and six months ended September 30, 2007. The increase in our gross profit percentage for the three and six months ended September 30, 2008 compared to the prior year period was primarily due to an overall increase in net revenues, favorable product mix, favorable cost improvements and $3.0 million in revenue from the sale of our non-core patents and associated rights to Qualcomm.

The amortization of purchased intangible assets included in cost of revenues during the three and six months ended September 30, 2008 was $4.6 million and $9.2 million compared to $4.6 million and $9.3 million for the three and six months ended September 30, 2007. Based on the amount of capitalized purchased intangibles on the balance sheet as of September 30, 2008, we expect amortization expense for purchased intangibles charged to cost of revenues to be $8.6 million in the remainder of fiscal 2009, $12.1 million in fiscal 2010 and $11.4 million for fiscal periods thereafter. Future acquisitions of businesses may result in substantial additional charges, which would impact our gross margin in future periods.

Research and Development and Selling, General and Administrative Expenses. The following table presents research and development and selling, general and administrative expenses for the three and six months ended September 30, 2008 and 2007 (dollars in thousands):


	Three Months Ended September 30,
	2008					2007
			% of Net					% of Net			Increase
	Amount		Revenue			Amount		Revenue			(Decrease)			% Change
Research and development	$	24,461		31.8	%	$	24,480		42.1	%	$	(19	)		(0.1	)%
Selling, general and administrative	$	16,334		21.2	%	$	15,850		27.2	%	$	484			3.1	%


	Six Months Ended September 30,
	2008					2007
			% of Net					% of Net			Increase
	Amount		Revenue			Amount		Revenue			(Decrease)			% Change
Research and development	$	47,942		31.8	%	$	49,962		46.1	%	$	(2,020	)		(4.0	)%
Selling, general and administrative	$	32,947		21.8	%	$	31,913		29.5	%	$	1,034			3.2	%

Research and Development. Research and development (“R&D”) expenses consist primarily of salaries and related costs (including stock-based compensation) of employees engaged in research, design and development activities, costs related to engineering design tools, subcontracting costs and facilities expenses. R&D expenses for the three months ended September 30, 2008, were consistent with the three months ended September 30, 2007. The decrease in R&D expenses of 4.0% for the six months ended September 30, 2008, compared to the six months ended September 30, 2007, was due to a decrease of $2.6 million in foundry costs, and $1.0 million in core development costs, offset by an increase of $1.8 million in personnel expenses. We believe that a continued commitment to R&D is vital to our goal of maintaining a leadership position with innovative products. In addition to our internal R&D programs, our business strategy includes acquiring products, technologies or businesses from third parties. Future acquisitions of products, technologies or businesses may result in substantial additional on-going R&D costs.

Selling, General and Administrative. Selling, general and administrative (“SG&A”) expenses consist primarily of personnel-related expenses, professional and legal fees, corporate branding and facilities expenses. The increase in SG&A expenses of 3.1% for the three months ended September 30, 2008 compared to the three months ended September 30, 2007, was primarily due to an increase of $0.4 million in personnel expenses, $0.3 million in external commissions and $0.2 million in bad debts, offset by a decrease of $0.4 million in product interface software costs for demonstration products to specific requirements of potential customers. The increase in SG&A expenses of 3.2% for the six months ended September 30, 2008 compared to the six months ended September 30, 2007, was primarily due to an increase of, $0.5 million in professional fees, $0.5 million in marketing communication expenses and $0.5 million in bad debts, offset by a decrease of $0.4 million in personnel expense. Future acquisitions of products, technologies or businesses may result in substantial additional on-going SG&A costs.

Stock-Based Compensation. The following table presents stock-based compensation expense for the three and six months ended September 30, 2008 and 2007, which was included in the tables above (dollars in thousands):


	Three Months Ended September 30,
	2008					2007
			% of Net					% of Net
	Amount		Revenue			Amount		Revenue			Decrease			% Change
Costs of revenues	$	182		0.2	%	$	240		0.4	%	$	(58	)		(24.2	)%
Research and development		1,098		1.4			1,216		2.1			(118	)		(9.7	)
Selling, general and administrative		1,717		2.3			1,841		3.2			(124	)		(6.7	)

	$	2,997		3.9	%	$	3,297		5.7	%	$	(300	)		(9.1	)%


	Six Months Ended September 30,
	2008					2007
			% of Net					% of Net
	Amount		Revenue			Amount		Revenue			Increase		% Change
Costs of revenues	$	396		0.3	%	$	312		0.3	%	$	84		26.9	%
Research and development		2,435		1.6			2,271		2.1			164		7.2
Selling, general and administrative		3,374		2.2			3,334		3.1			40		1.2

	$	6,205		4.1	%	$	5,917		5.5	%	$	288		4.9	%

The decrease in stock-based compensation expense for the three months ended September 30, 2008 compared to the three months ended September 30, 2007 was primarily due to a decrease in performance option and employee stock purchase plan expense, offset by expenses from additional option and RSU grants for the three months ended September 30, 2008. The increase in stock-based compensation expense for the six ended September 30, 2008 compared to the six months ended September 30, 2007 is primarily due to option and RSU grants during the six months ended September 30, 2008. The amount of unearned stock-based compensation currently estimated to be expensed from now through fiscal 2013 related to unvested share-based payment awards at September 30, 2008 is $23.8 million. This expense relates to equity instruments already issued and will not be affected by our future stock price. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is approximately 2.8 years. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Future stock-based compensation expense will increase to the extent that we grant additional equity awards. We anticipate we will continue to grant additional employee stock options and RSUs in fiscal 2009 and thereafter. The value of these grants cannot be predicted at this time because it will depend on the number of share-based payments granted and the then current fair values.

Restructuring Charges. The following table presents restructuring charges for the three and six months ended September 30, 2008 and 2007 (dollars in thousands):


	Three Months Ended September 30,
	2008					2007
			% of Net					% of Net
	Amount		Revenue			Amount		Revenue			Decrease			% Change
Restructuring charges	$	140		0.2	%	$	1,376		2.4	%	$	(1,236	)		(89.8	)%


	Six Months Ended September 30,
	2008						2007
				% of Net					% of Net
	Amount			Revenue			Amount		Revenue			Decrease			% Change
Restructuring charges (reversal)	$	(118	)		(0.1	)%	$	1,344		1.2	%	$	(1,462	)		(108.8	)%

The charge incurred during the three months ended September 30, 2008 was for employee severance. The reversal of restructuring charges recorded for the six months ended September 30, 2008 was related to accruals made for prior restructuring actions for which the liability is no longer required.

Option investigation and related expenses. The following table presents option investigation and related expenses for the three and six months ended September 30, 2008 and 2007 (dollars in thousands):


	Three Months Ended September 30.
	2008						2007
				% of Net					% of Net
	Amount			Revenue			Amount		Revenue			Decrease			% Change
Option investigation, net	$	(184	)		0.2	%	$	209		0.4	%	$	(393	)		(188.0	)%


	Six Months Ended September 30.
	2008					2007
			% of Net					% of Net
	Amount		Revenue			Amount		Revenue			Decrease			% Change
Option investigation, net	$	163		0.1	%	$	501		0.5	%	$	(338	)		(67.5	)%

During the three months ended June 30, 2006, we initiated a review of our historical stock option granting policies. We incurred professional and legal fees as a result of our self-initiated review. Although we concluded our investigation during the three months ended March 31, 2007, we continue to incur expenses for the related ongoing legal and regulatory proceedings as a result of the option investigation, offset by our insurance proceeds.

Interest and Other Income (Expense), net. The following table presents interest and other income, net for the three and six months ended September 30, 2008 and 2007 (dollars in thousands):


	Three Months Ended September 30,
	2008						2007
				% of Net					% of Net
	Amount			Revenue			Amount		Revenue			Decrease			% Change
Interest income (expense), net	$	(814	)		1.1	%	$	2,128		3.7	%	$	(2,942	)		(138.3	)%
Other income, net	$	264			0.3	%	$	4,778		8.2	%	$	(4,514	)		(94.5	)%


	Six Months Ended September 30,
	2008						2007
				% of Net					% of Net
	Amount			Revenue			Amount		Revenue			Decrease			% Change
Interest income (expense), net	$	(2,216	)		(1.5	)%	$	5,176		4.8	%	$	(7,392	)		(142.8	)%
Other income, net	$	339			0.2	%	$	4,806		4.4	%	$	(4,467	)		(92.9	)%

Interest and Other Income (Expense), net. Interest income (expense), net of management fees, reflects interest earned on cash and cash equivalents, short-term investments and marketable securities as well as realized gains and losses from the sale of short-term investments and impairment charges on investments, less interest expense. The decrease in interest income for the three and six months ended September 30, 2008, compared to the same period in fiscal 2007 was mainly due to the effect of impairment charges of $3.4 million and $6.8 million, respectively, on investments and lower cash and investments balances, as well as the effect of declining interest rates. The decrease in other income was due to a $4.6 million gain from the sale of our strategic equity investment in Mellanox Technologies, Ltd., an Israeli company listed on the Nasdaq Stock Market, recorded in fiscal 2007.

Income Taxes. The following table presents our income tax expense (benefit) for the three and six months ended September 30, 2008 and 2007 (dollars in thousands):


	Three Months Ended September 30,
	2008					2007
			% of Net						% of Net
	Amount		Revenue			Amount			Revenue			Increase		% Change
Income tax expense (benefit)	$	512		0.7	%	$	(410	)		(0.7	)%	$	922		224.9	%


	Six Months Ended September 30,
	2008					2007
			% of Net						% of Net
	Amount		Revenue			Amount			Revenue			Increase		% Change
Income tax expense (benefit)	$	1,066		0.7	%	$	(427	)		(0.4	)%	$	1,493		349.6	%

The federal statutory income tax rate was 35% for the three months ended September 30, 2008 and 2007. The increase in the income tax expense recorded for the three and six months ended September 30, 2008 compared to September 30, 2007, was primarily due to a charge for deferred tax liabilities related to the amortization of tax-deductible goodwill in connection with the acquisition of assets and licensed intellectual property related to IBM’s Power PRS Switch Fabric line which we acquired in September 2003 and alternative minimum taxes.

FINANCIAL CONDITION AND LIQUIDITY

As of September 30, 2008, our principal source of liquidity consisted of $195.6 million in cash, cash equivalents and short-term investments. Working capital as of September 30, 2008 was $225.4 million. Total cash, cash equivalents and short-term investments increased by $52.8 million during the six months ended September 30, 2008 compared to March 31, 2008, primarily due to the reclassification of $46.5 million in marketable securities to short-term investments. At September 30, 2008, we had contractual obligations not included on our balance sheet totaling $44.6 million, primarily related to facility leases, engineering design software tool licenses and non-cancelable inventory purchase commitments.

During the six months ended September 30, 2008, we generated $20.5 million of cash in our operations compared to using $23.4 million during the six months ended September 30, 2007. Our net loss of $7.5 million for the six months ended September 30, 2008 included $28.2 million of non-cash charges consisting of $3.4 million of depreciation, $11.8 million of amortization of purchased intangibles, $6.2 million of stock-based compensation and $6.8 million for marketable securities impairment. Our net loss of $24.5 million for the six months ended September 30, 2007, included $21.1 million of non-cash charges consisting of $3.2 million of depreciation, $12.0 million of amortization of purchased intangibles, $5.9 million of stock-based compensation charges recorded in accordance with SFAS 123(R), and $4.6 million gain on the sale of strategic equity investments. The remaining change in operating cash flows for the six months ended September 30, 2008 primarily reflected increases in our accounts receivable, deferred tax liability, accrued payroll and other accrued liabilities and deferred revenue and decreases in inventory, other assets, and other accrued liabilities. Our overall days sale outstanding was consistent at 37 days for both the six months ended September 30, 2008 and the fiscal year ended March 31, 2008.

We used $1.0 million in cash for our investing activities during the six months ended September 30, 2008, compared to generating $57.4 million during the six months ended September 30, 2007. During the six months ended September 30, 2008, we used $4.9 million of cash for the purchase of property, equipment and other assets, offset by net proceeds of $3.9 million from short-term investment activities. During the six months ended September 30, 2007, we generated cash primarily from the sales and maturities of short-term investments.

We received net cash of $1.6 million from financing activities during the six months ended September 30, 2008 compared to using $36.8 million during the six months ended September 30, 2007. The financing receipt of cash for the six months ended September 30, 2008 was from the sales of common stock through employee stock options and purchases. The financing use of cash for the six month ended September 30, 2007 was for our stock repurchase program.

In August 2004, the Board authorized a stock repurchase program for the repurchase of up to $200.0 million of our common stock. Under the program, we are authorized to make purchases in the open market or enter into structured repurchase agreements. During the

six months ended September 30, 2008, no shares were repurchased on the open market. During the six months ended September 30, 2007, we repurchased 2.5 million shares on the open market at a weighted average price of $11.81 per share. From the time the program was implemented in August 2004, a total of 8.9 million shares were repurchased on the open market at a weighted average price of $11.74 per share. All repurchased shares were retired upon delivery.

We have also utilized structured stock repurchase agreements to buy back shares which are prepaid written put options on our common stock. We pay a fixed sum of cash upon execution of each agreement in exchange for the right to receive either a pre-determined amount of cash or stock depending on the closing market price of our common stock on the expiration date of the agreement. Upon expiration of each agreement, if the closing market price of our common stock is above the pre-determined price, we will have our investment returned with a premium. If the closing market price is at or below the pre-determined price, we will receive the number of shares specified at the agreement inception. Any cash received, including the premium, is treated as an increase to additional paid in capital on the balance sheet in accordance with the guidance issued in EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.

During the six months ended September 30, 2008, we did not enter into any structured stock repurchase agreements. At September 30, 2008, we had no outstanding structured stock repurchase agreements. During the six months ended September 30, 2007, we entered into structured stock repurchase agreements totaling $23.8 million. For those agreements that had been settled by September 30, 2007, we received 0.4 million shares of our common stock at an effective purchase price of $11.38 per share and $13.2 million in cash. The outstanding structured stock repurchase agreements settled in October 2007 for $7.9 million in cash. From the inception of our most recent stock repurchase program, we entered into structured stock repurchase agreements totaling $215.7 million. Upon settlement of these agreements, we received $136.6 million in cash and 7.8 million shares of our common stock at an effective purchase price of $10.16 per share.

The table below is a plan-to-date summary of the Company’s repurchases program activity as of September 30, 2008 (in thousands, except per share data):


	Aggregate		Repurchased		Average Price
	Price		Shares		Per Share
Stock repurchase program
Authorized amount	$	200,000		—	$	—
Open market repurchases		103,966		8,856		11.74
Structured stock repurchase agreements*		90,517		7,797		11.61

Total repurchases	$	194,483		16,653	$	11.68

Available for repurchase	$	5,517


*		The amounts above do not include gains of $11.3 million from structured stock repurchase agreements which settled in cash. The average price per share for structured stock repurchase agreements adjusted for gains from settlements in cash would have been $10.16 per share and for total repurchases would have been $11.00 per share.

The following table summarizes our contractual operating leases and other purchase commitments as of September 30, 2008 (in thousands):


			Other
	Operating		Purchase
	Leases		Commitments		Total
Fiscal Years Ending March 31,
2009 (remaining)	$	11,947	$	24,722	$	36,669
2010		5,978		—		5,978
2011		1,716		—		1,716
2012		227		—		227
2013		—		—		—

Total minimum payments	$	19,868	$	24,722	$	44,590

We did not have any off-balance sheet arrangements as of September 30, 2008 or March 31, 2008.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

We maintain an investment portfolio of various holdings, types and maturities. These securities are classified as available-for-sale and, consequently, are recorded on our consolidated balance sheets at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income or loss. We have established guidelines relative to diversification and maturities that attempt to maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of interest rate trends. We invest our excess cash in debt instruments of the U.S. Treasury, corporate bonds, mortgage-backed and asset backed securities and closed-end bond funds, with credit ratings as specified in our investment policy. We also have invested in preferred stocks, which pay quarterly fixed rate dividends. We generally do not utilize derivatives to hedge against increases in interest rates which decrease market values, except for investments managed by one investment manager who utilizes U.S. Treasury bond futures options 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 September 30, 2008, our investment portfolio included fixed-income securities classified as available-for-sale investments and marketable securities with an aggregate fair market value of $137.3 million and a cost basis of $150.0 million. These securities are subject to interest rate risk, as well as credit risk and liquidity risk, and will decline in value if interest rates increase or an issuer’s credit rating or financial condition is decreased. Based on an evaluation of securities that have been in a continuous loss position at September 30, 2008, we have determined the decline in the fair value of certain securities to be other-than-temporary and we have accordingly written down such securities by approximately $6.8 million during the six months ended September 30, 2008. As of September 30, 2008, we have not recorded a write-down adjustment in connection with our other securities in a loss position with unrealized losses of $8.9 million, as we believe that such loss is not other-than-temporary.

The following table presents the hypothetical changes in fair value of our short-term investments and marketable securities held at September 30, 2008 (in thousands):


							Fair
	Valuation of Securities Given an						Value as		Valuation of Securities Given an
	Interest Rate Decrease of						of		Interest Rate Increase of
	X Basis Points (“BPS”)						September 30, 2008		X Basis Points (“BPS”)
	(150 BPS)		(100 BPS)		(50 BPS)				50 BPS		100 BPS		150 BPS
Available-for-sale investments	$	152,796	$	147,494	$	142,303	$	137,274	$	132,486	$	127,875	$	123,143

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

We generally conduct business, including sales to foreign customers, in U.S. dollars, and as a result, we have limited foreign currency exchange rate risk. However, we have entered into forward currency exchange contracts to hedge our overseas monthly operating expenses when deemed appropriate. Gains and losses on foreign currency forward contracts that are designated and effective as hedges of anticipated transactions, for which a firm commitment has been attained, are deferred and included in the basis of the

transaction in the same period that the underlying transaction is settled. Gains and losses on any instruments not meeting the above criteria are recognized in income or expenses in the consolidated statement of operations in the current period. The effect of an immediate 10 percent change in foreign exchange rates would not have a material impact on our financial condition or results of operations.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports we file or submit with the SEC pursuant to the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

As required by SEC Rule 13a-15(b), we conducted an evaluation, under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2008. Based on the foregoing, our CEO and CFO concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information set forth under Note 7 of Notes to Consolidated Financial Statements, included in Part I, Item 1 of this report, is incorporated herein by reference.

ITEM 1A. RISK FACTORS

Before deciding to invest in us or to maintain or increase your investment, you should carefully consider the risks described below, in addition to the other information contained in this report and in our other filings with the SEC. We update our descriptions of the risks and uncertainties facing us in our periodic reports filed with the SEC. The risks and uncertainties described below and in our other filings are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs, our business, financial condition and results of operations could be seriously harmed. In that event, the market price for our common stock could decline and you may lose your investment. The risks and uncertainties set forth below with an asterisk (“*”) next to the title contain changes to the description of the risks and uncertainties associated with our business as previously disclosed in Item 1A to our Annual Report on Form 10-K for the fiscal year ended March 31, 2008.

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

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

	•		potential dilution to our stockholders;

	•		use of a significant portion of our cash reserves;

	•		diversion of management’s attention;

	•		failure to retain or integrate key personnel;

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

	•		amortization of acquired intangible assets and deferred compensation;

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

	•		costs associated with acquisitions or mergers;

	•		difficulties associated with the integration of acquired companies, products or technologies;

	•		difficulties competing in markets that are unfamiliar to us;

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

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

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

As with past acquisitions, future acquisitions could adversely affect operating results. In particular, acquisitions may materially and adversely affect our results of operations because they may require large one-time charges or could result in increased debt or contingent liabilities, adverse tax consequences, substantial additional depreciation or deferred compensation charges. Our past purchase

acquisitions required us to capitalize significant amounts of goodwill and purchased intangible assets. As a result of the slowdown in our industry and reduction of our market capitalization, we have been required to record significant impairment charges against these assets as noted in our financial statements. In the fiscal year ended March 31, 2008, we recorded a goodwill impairment charge of $71.5 million related to our storage unit. In the fiscal year ended March 31, 2006, we recorded a goodwill impairment charge of $131.2 million related to our storage and embedded units. There can be no assurances that market conditions will not deteriorate further or that our market capitalization will not decline further. At September 30, 2008, we had $308.4 million of goodwill and purchased intangible assets. We cannot assure you that we will not be required to take additional significant charges as a result of impairment to the carrying value of these assets, due to further adverse changes in market conditions.

*The uncertainty of the current economic and political conditions could harm our investment portfolio, revenues and operating results.

Current conditions in the domestic and global economies are uncertain. A general weakening of, or declining corporate confidence in, the global economy, or a curtailment in government or corporate spending could delay or decrease customer purchases.

The recent turmoil in the economic environment in many parts of the world may continue to put pressure on global economic conditions. Our revenues and operating results may also be affected by uncertain or changing economic conditions. If global economic and market conditions, or economic conditions in the United States or other key markets, remain uncertain or persist, spread, or deteriorate further, we may experience material impacts on our business, operating results, and financial condition.

We maintain an investment portfolio of various holdings, types, and maturities. These securities are generally classified as available-for-sale and, consequently, are recorded on our consolidated balance sheets at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income. Our portfolio includes fixed income securities and equity investments in publicly traded companies, the values of which are subject to market price volatility. If the market prices continue to decline or securities continue to be in a loss position over time, we may recognize additional impairments in fair value of our investments below the cost basis when the decline is judged to be other-than-temporary.

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

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

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

	•		communications, information technology and semiconductor industry conditions;

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

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

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

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

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

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

	•		competitive pressures on selling prices;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

	•		the effects of changes in accounting standards;

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

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

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

	•		general economic and industry conditions.

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

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

	•		the reduction, rescheduling or cancellation of customer orders;

	•		declines in the average selling prices of our products;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The technology equipment industry is cyclical and has experienced significant and extended downturns in the past. A substantial portion of our business and revenue depends on the continued growth of the technology sector and the Internet. We sell our communications IC products primarily to communications equipment manufacturers that in turn sell their equipment to customers that depend on the growth of the Internet. OEMs and other customers that buy our storage products are similarly dependent on

continued Internet growth and information technology spending. If there is an economic slowdown or reduction in capital spending, our business, operating results, and financial condition may be materially harmed.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

After we have developed and delivered a product to a customer, the customer will usually test and evaluate our product prior to designing its own equipment to incorporate our product. Our customers may need more than six months to test, evaluate and adopt our product and an additional nine months or more to begin volume production of equipment that incorporates our product. Due to this lengthy design cycle, we may experience significant delays from the time we increase our operating expenses and make investments in inventory until the time that we generate revenue from these products. It is possible that we may never generate any revenue from these products after incurring such expenditures. Even if a customer selects our product to incorporate into its equipment, we cannot guarantee that the customer will ultimately market and sell its equipment or that such efforts by our customer will be successful. The delays inherent in this lengthy design cycle increases the risk that a customer will decide to cancel or change its product plans. Such a cancellation or change in plans by a customer could cause us to lose sales that we had anticipated. While our customers’ design cycles are typically long, some of our product life cycles tend to be short as a result of the rapidly changing technology environment in which we operate. As a result, the resources devoted to product sales and marketing may not generate material revenue for us, and from time to time, we may need to write off excess and obsolete inventory. If we incur significant marketing expenses and investments in inventory in the future that we are not able to recover, and we are not able to mitigate those expenses, our operating results could be adversely affected. In addition, if we sell our products at reduced prices in anticipation of cost reductions but still hold higher cost products in inventory, our operating results would be harmed.

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

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

product to market, or if our customers fail to achieve market acceptance of their products, our revenues could be significantly reduced for a substantial period.

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

If we change our strategy, the change could have a significant impact on our business, financial condition and results of operations while we are implementing our new strategy. Furthermore, there is no assurance that our new strategy will not fail.

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

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

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

Our 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;

	•		burdens 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 payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in our results of operations.

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

*Our cash and cash equivalents and portfolio of short-term investments and long-term marketable securities are exposed to certain market risks.

We maintain an investment portfolio of various holdings, types of instruments and maturities. These securities are recorded on our consolidated balance sheets at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss), net of tax. Our investment portfolio is exposed to market risks related to changes in interest rates and credit ratings of the issuers, as well as to the risks of default by the issuers and lack of overall market liquidity. Substantially all of these securities are subject to interest rate and credit rating risk and will decline in value if interest rates increase or one of the issuers’ credit ratings is reduced. Increases in interest rates or decreases in the credit worthiness of one or more of the issuers in our investment portfolio could have a material adverse impact on our financial condition or results of operations. As of September 30, 2008, $5.4 million of our available-for-sale securities were classified as long-term assets on our consolidated balance sheet. These securities have fair values that have been less than their amortized cost for 12 or more consecutive months. During the six months ended September 30, 2008, we recorded $6.8 million in write-downs in the carrying value of certain securities as we determined the decline in the fair value of these securities to be other than temporary. If the fair value of any of these securities does not recover to at least the amortized cost of such security or we are unable to hold these securities until they recover, we may be required to record a further decline in the carrying value of these securities resulting in further charges. At September 30, 2008, the continuous unrealized losses on these securities over the preceding 12 months were approximately $1.2 million.

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

Over the past several years, we have initiated several restructuring activities in an effort to reduce operating costs, including new restructuring initiatives announced in July and September 2007 and March 2008. Employees whose positions were eliminated in connection with these restructuring plans may seek future employment with our customers or competitors. Although each of our employees is required to sign a confidentiality agreement with us at the time of hire, we cannot guarantee that the confidential nature of our proprietary information will be maintained in the course of such future employment. Any additional restructuring efforts could divert the attention of our management away from our operations, harm our reputation and increase our expenses. We cannot guarantee that we will not undertake additional restructuring activities, that any of our restructuring efforts will be successful, or that we will be able to realize the cost savings and other anticipated benefits from our previous or future restructuring plans. In addition, if we continue to reduce our workforce, it may adversely impact our ability to respond rapidly to new growth opportunities.

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

The markets for our products are characterized by:

	•		rapidly changing technologies;

	•		evolving and competing industry standards;

	•		changing customer needs;

	•		frequent introductions of new products and enhancements;

	•		increased integration with other functions;

	•		long design and sales cycles;

	•		short product life cycles; and

	•		intense competition.

To develop new products for the communications, 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 adopting such advances, we may be unable to timely bring to market new products and our revenues will suffer.

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

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

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

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

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

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

	•		customer support;

	•		time-to-market;

	•		price;

	•		production efficiency;

	•		design wins;

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

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

	•		market acceptance of competitors’ products; and

	•		general economic conditions.

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

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

The storage market continues to mature and become commoditized. To the extent that commoditization leads to significant pricing declines, whether initiated by us or by a competitor, we will be required to increase our product volumes and reduce our costs of goods sold to avoid resulting pressure on our profit margin for these products, and we cannot assure you that we will be successful in responding to these competitive pricing pressures. In addition, the storage market is a continuously evolving market and if we fail to align ourselves with the correct emerging trend or market leaders, we could quickly fall out of favor with our customers and prospective customers and may not be able to regain ground on the next emerging trend. Such trends typically last for approximately 18 to 24 months.

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

	•		reduced control over delivery schedules and quality;

	•		inadequate manufacturing yields and excessive costs;

	•		difficulties selecting and integrating new subcontractors;

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

	•		limited warranties on products supplied to us;

	•		potential increases in prices;

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

	•		potential misappropriation of our intellectual property.

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

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

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

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

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

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

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

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

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

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

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

We may not be able to achieve higher levels of design integration or deliver new integrated products on a timely basis. We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies to reduce our costs and increase performance, and we have designed IC products to be manufactured at as little as .09 micron geometry processes. We have experienced some difficulties in shifting to smaller geometry process technologies and new manufacturing processes. These difficulties resulted in reduced manufacturing yields, delays in product deliveries and increased expenses. We may face similar difficulties, delays and expenses as we continue to transition our IC products to smaller geometry processes. We are dependent on our relationships with our foundries to transition to smaller geometry processes successfully. We cannot assure you that our foundries will be able to effectively manage the transition or that we will be able to maintain our relationships with our foundries. If we or our foundries experience significant delays in this transition or fail to implement this transition, our business, financial condition and results of operations could be materially and adversely affected.

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

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

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

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

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

	•		additional development costs;

	•		loss of, or delays in, market acceptance;

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

	•		claims by our customers or others against us; and

	•		loss of credibility with our current and prospective customers.

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

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

Our management, including our chief executive officer and chief financial officer, does not expect that our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of control must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal control can provide absolute assurance that all control issues and instances of fraud involving a company have been, or will be, detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions. Over time, internal control 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, 2008. In connection with the investigation of our historical stock option grant practices, we did identify material weaknesses in our internal control over financial reporting that existed in fiscal years prior to fiscal 2005. We cannot assure you that we or our independent registered public accounting firm will not identify a material weakness in our internal control in the future. A material weakness in our internal control over financial reporting would require management and our independent registered public accounting firm to assess our internal control as ineffective. If our internal control over financial reporting is not considered effective, we may experience another restatement and/or a loss of public confidence, which could have an adverse effect on our business and on the market price of our common stock.

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

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

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

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

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

Several of our facilities, including our principal executive offices, are located in California. In 2001, California experienced prolonged energy alerts and blackouts caused by disruption in energy supplies. As a consequence, businesses and other energy consumers in California continue to experience substantially increased costs of electricity and natural gas. We are unsure whether

energy alerts and blackouts will reoccur or how severe they may become in the future. Many of our customers and suppliers are also headquartered or have substantial operations in California. If we or any of our major customers or suppliers located in California experience a sustained disruption in energy supplies, our results of operations could be materially and adversely affected.

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

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

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

We are subject to a variety of federal, state and local governmental regulations related to the use, storage, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing process. Any failure to comply with present or future regulations could result in the imposition of fines, the suspension of production or a cessation of operations. These regulations could require us to acquire costly equipment or incur other significant expenses to comply with environmental regulations or clean up prior discharges. Since 1993, we have been named as a potentially responsible party (“PRP”) along with a large number of other companies that used Omega Chemical Corporation in Whittier, California to handle and dispose of certain hazardous waste material. We are a member of a large group of PRPs that has agreed to fund certain on-going remediation efforts at the Omega Chemical site. To date, our payment obligations with respect to these funding efforts have not been material, and we believe that our future obligations to fund these efforts will not have a material adverse effect on our business, financial condition or operating results. In 2003, we closed our wafer fabrication facility in San Diego and the property was returned to the landlord. In operating the facility at this site, we stored and used hazardous materials. Although we believe that we have been and currently are in material compliance with applicable environmental laws and regulations, we cannot guarantee that we are or will be in material compliance with these laws or regulations or that our future obligations to fund any remediation efforts, including those at the Omega Chemical site, will not have a material adverse effect on our business.

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

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

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

We may make additional investments in or acquire other companies, products or technologies. These acquisitions may involve numerous risks, including:

•

problems combining or integrating the purchased operations, technologies or products;

	•		unanticipated costs;

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

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

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

	•		potential loss of key employees, particularly those of the acquired organizations.

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

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

	•		incur debt;

	•		assume liabilities;

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

	•		incur large and immediate write-offs.

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

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

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

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

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

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

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

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

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

Our stock price is volatile.

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

	•		our anticipated or actual operating results;

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

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

	•		technological innovations or setbacks by us or our competitors;

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

	•		the commencement or outcome of litigation or governmental investigations;

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

	•		announcements of merger or acquisition transactions;

	•		management changes;

	•		our inclusion in certain stock indices; and

	•		other events or factors.

The stock market in recent years has experienced extreme price and volume fluctuations that have affected the market prices of many high technology companies, particularly semiconductor companies. In some instances, these fluctuations appear to have been unrelated or disproportionate to the operating performance of the affected companies. Any such fluctuation could harm the market price of our common stock.

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

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

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

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

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

We held our annual meeting of stockholders on August 19, 2008. Of the 64.9 million shares of our common stock that could be voted at the annual meeting, 59.6 million shares, or 92% were represented at the meeting in person or by proxy, which constituted a quorum. Voting results were as follows:

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


	For		Withheld
Cesar Cesaratto		58,578,623		1,049,757
Donald Colvin		58,814,381		813,999
Kambiz Hooshmand		58,797,478		830,902
Niel Ransom		58,816,254		812,126
Fred Shlapak		58,811,439		816,941
Arthur B. Stabenow		58,265,274		1,363,106
Julie H. Sullivan		58,808,722		819,658

Ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the period ending March 31, 2009:


For	Against		Abstain
58,941,548		585,696		101,136

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS


3.1(1)		Amended and Restated Certificate of Incorporation of the Company, as amended.

3.2(2)		Amended and Restated Bylaws of the Company.

4.1(3)		Specimen Stock Certificate.

10.60(4)		Qualcomm Patent Purchase Agreement dated July 11, 2008.

10.61(4)		Qualcomm Patent Purchase Amendment dated July 11, 2008.

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.


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

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

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

(4)		The Company has requested confidential treatment for certain portions of these agreements and certain terms and conditions have been redacted from the exhibits.

Exhibit Index


3.1(1)		Amended and Restated Certificate of Incorporation of the Company, as amended.

3.2(2)		Amended and Restated Bylaws of the Company.

4.1(3)		Specimen Stock Certificate.

10.60(4)		Qualcomm Patent Purchase Agreement dated July 11, 2008.

10.61(4)		Qualcomm Patent Purchase Amendment dated July 11, 2008.

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.


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

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

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

(4)		The Company has requested confidential treatment for certain portions of these agreements and certain terms and conditions have been redacted from the exhibits.


	Page
Part I. FINANCIAL INFORMATION (unaudited)
Item 1. Condensed Consolidated Balance Sheets at September 30, 2008 and March 31, 2008		3
Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2008 and 2007		4
Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2008 and 2007		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3. Quantitative and Qualitative Disclosures About Market Risk		35
Item 4. Controls and Procedures		36
Part II. OTHER INFORMATION
Item 1. Legal Proceedings		37
Item 1A. Risk Factors		37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		53
Item 3. Defaults Upon Senior Securities		53
Item 4. Submission of Matters to a Vote of Security Holders		53
Item 5. Other Information		54
Item 6. Exhibits		54
Signatures		55
EX-10.60
EX-10.61
EX-31.1
EX-31.2
EX-32.1
EX-32.2


	Applied Micro Circuits Corporation
	By:	/s/ Robert G. Gargus
		Robert G. Gargus
		Senior Vice President and Chief Financial Officer (Duly Authorized Signatory and Principal Financial and Accounting Officer)