10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the fiscal quarter ended September 30, 2003

OR

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

For the transition period from              to             .

Commission File Number: 000-23193

APPLIED MICRO CIRCUITS CORPORATION

(Exact name of registrant as specified in its charter)

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

6290 Sequence Drive

San Diego, CA 92121

(Address of principal executive offices)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes x    No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes x    No ¨

As of October 31, 2003, 306,991,154 shares of the registrant’s common stock were issued and outstanding.

APPLIED MICRO CIRCUITS CORPORATION

INDEX

		Page
Part I.	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Balance Sheets at September 30, 2003 (unaudited) and March 31, 2003.	3
	Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended September 30, 2003 and 2002.	4
	Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended September 30, 2003 and 2002.	5
	Notes to Condensed Consolidated Financial Statements (unaudited).	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	35
Item 4.	Controls and Procedures.	35
Part II.	OTHER INFORMATION
Item 1.	Legal Proceedings.	36
Item 4.	Submission of Matters to a Vote of Security Holders	37
Item 6.	Exhibits and Reports on Form 8-K.	37
Signatures		38
Certification

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

APPLIED MICRO CIRCUITS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

	September 30, 2003			March 31, 2003
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	232,722		$	150,556
Short-term investments-available-for-sale		723,167			885,584
Accounts receivable		11,286			5,634
Inventories		5,475			7,178
Other current assets		15,442			23,623
Total current assets		988,092			1,072,575
Property and equipment, net		52,927			62,035
Goodwill and purchased intangibles, net		126,731			88,219
Other assets		1,153			759
Total assets	$	1,168,903		$	1,223,588
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	12,007		$	12,689
Accrued payroll and related expenses		7,208			7,760
Other accrued liabilities		32,189			26,012
Deferred revenue		5,202			3,674
Current portion of long-term debt and capital lease obligations		159			1,265
Total current liabilities		56,765			51,400
Stockholders’ equity:
Preferred stock, $0.01 par value:
Authorized shares—2,000, none issued and outstanding		—			—
Common stock, $0.01 par value:
Authorized Shares—630,000 at September 30, 2003
Issued and outstanding shares—305,724 at September 30, 2003 (unaudited) and 303,751 at March 31, 2003		3,057			3,038
Additional paid-in capital		5,905,219			5,908,063
Deferred compensation, net		(4,264	)		(30,406	)
Accumulated other comprehensive income or loss		1,733			8,800
Accumulated deficit		(4,793,607	)		(4,717,307	)
Total stockholders’ equity		1,112,138			1,172,188
Total liabilities and stockholders’ equity	$	1,168,903		$	1,223,588

See Accompanying Notes to Financial Statements

3

APPLIED MICRO CIRCUITS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share data)

	Three months ended September 30,						Six months ended September 30,
	2003			2002			2003			2002
Net revenues	$	25,119		$	30,219		$	45,634		$	60,374
Cost of revenues (1)		9,485			16,503			19,268			34,142
Gross profit		15,634			13,716			26,366			26,232
Operating expenses:
Research and development		26,102			33,441			55,228			68,938
Selling, general and administrative		11,037			14,989			21,399			31,315
Stock-based compensation:
Research and development		3,579			11,413			12,704			52,090
Selling, general and administrative		1,043			24,104			4,451			50,734
Acquired in-process research and development		5,700			—			5,700			—
Purchased intangible asset impairment charges		—			—			—			204,284
Restructuring charges		—			3,000			23,498			5,500
Total operating expenses		47,461			86,947			122,980			412,861
Operating loss		(31,827	)		(73,231	)		(96,614	)		(386,629	)
Other income (expense), net		(10	)		(12,811	)		(10	)		(12,941	)
Interest income, net		8,929			13,606			20,324			24,459
Loss before income taxes and cumulative effect of accounting change		(22,908	)		(72,436	)		(76,300	)		(375,111	)
Income tax expense (benefit)		—			—			—			—
Loss before cumulative effect of accounting change		(22,908	)		(72,436	)		(76,300	)		(375,111	)
Cumulative effect of accounting change		—			—			—			(102,229	)
Net loss	$	(22,908	)	$	(72,436	)	$	(76,300	)	$	(477,340	)
Basic and diluted net loss per share:
Loss per share before cumulative effect of accounting change	$	(0.08	)	$	(0.24	)	$	(0.25	)	$	(1.25	)
Cumulative effect of accounting change		—			—			—			(0.34	)
Net loss per share	$	(0.08	)	$	(0.24	)	$	(0.25	)	$	(1.59	)
Shares used in calculating basic and diluted net loss per share		305,195			300,701			304,498			300,256
(1) Cost of revenues includes the following (in thousands):
Stock-based compensation	$	171		$	419		$	389		$	1,856
Amortization of developed technology		1,572			1,571			3,143			3,143
	$	1,743		$	1,990		$	3,532		$	4,999

See Accompanying Notes to Financial Statements

4

APPLIED MICRO CIRCUITS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

	Six months ended September 30,
	2003			2002
Operating activities:
Net loss	$	(76,300	)	$	(477,340	)
Adjustments to reconcile net loss to net cash used for operating activities
Cumulative effect of accounting change		—			102,229
Depreciation and amortization		10,623			16,424
Amortization of purchased intangibles		3,143			3,143
Acquired in-process research and development		5,700			—
Purchased intangible asset impairment charges		—			204,284
Stock-based compensation expense		17,544			104,682
Non-cash restructuring charges		7,529			45
Net loss on strategic equity investments		—			11,650
Loss on disposals of property		10			1,270
Changes in operating assets and liabilities:
Accounts receivables		(5,652	)		3,258
Inventories		2,136			4,185
Other assets		7,736			5,951
Accounts payable		(682	)		(3,507	)
Accrued payroll and other accrued liabilities		5,625			6,156
Deferred revenue		1,528			(431	)
Net cash used for operating activities		(21,060	)		(18,001	)
Investing activities:
Proceeds from sales and maturities of short-term investments		2,939,209			1,553,988
Purchases of short-term investments		(2,783,898	)		(1,742,544	)
Repayments on notes receivable from employees		51			(19	)
Purchase of property, equipment and other assets		(9,054	)		(3,651	)
Cash paid for acquisitions		(47,788	)		—
Net cash provided by (used for) investing activities		98,520			(192,226	)
Financing activities:
Proceeds from issuance of common stock		5,773			4,135
Repayment of note receivable from stockholder		—			47
Payments on capital lease obligations		(763	)		(228	)
Payments on long-term debt		(343	)		(351	)
Other		39			104
Net cash provided by financing activities		4,706			3,707
Net increase (decrease) in cash and cash equivalents		82,166			(206,520	)
Cash and cash equivalents at beginning of period		150,556			335,592
Cash and cash equivalents at end of period	$	232,722		$	129,072
Supplementary cash flow disclosure:
Cash paid for:
Interest	$	34		$	84
Income taxes	$	133		$	223

See Accompanying Notes to Financial Statements

5

APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

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

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. These estimates include among others, assessing the collectibility of accounts receivable, inventory valuation, costs of future product returns under warranty, the valuation of deferred income taxes, and the fair value and useful lives of intangible assets. Actual results could differ from those estimates.

Reclassification

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

Stock-Based Compensation

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

Pro forma information regarding net loss and net loss per share is required and has been determined as if the Company had accounted for its stock-based awards under the fair value method, instead of the guidelines provided by APB 25. The fair value of the awards was estimated at the date of grant using the Black Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions, including the expected life and stock price volatility. Because the Company’s options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of its options.

The per share fair value of options granted in connection with stock option plans and rights granted in connection with the employee stock purchase plan reported below has been estimated at the date of grant with the following weighted average assumptions:

	Employee Stock Options								Employee Stock Purchase Plans
	Three Months Ended September 30,				Six Months Ended September 30,				Three Months Ended September 30				Six Months Ended September 30
	2003		2002		2003		2002		2003		2002		2003		2002
Expected life (years)	4.0		4.0		4.0		3.92		1.3		0.5		1.3		0.5
Volatility	1.00		1.03		1.01		1.03		1.03		1.04		1.03		1.04
Risk-free interest rate	2.5	%	2.8	%	2.5	%	2.8	%	1.5	%	1.9	%	1.5	%	1.9	%
Dividend yield	0	%	0	%	0	%	0	%	0	%	0	%	0	%	0	%
Weighted average fair value per share	$4.12		$2.80		$3.55		$4.34		$2.09		$2.63		$2.09		$2.63

6

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting periods. The Company’s pro forma information under SFAS 123 and SFAS 148 is as follows (in thousands, except per share amounts):

	Three Months Ended September 30,						Six Months Ended September 30,
	2003			2002			2003			2002
Net loss—as reported	$	(22,908	)	$	(72,436	)	$	(76,300	)	$	(477,340	)
Plus: Reported stock-based compensation		4,793			35,936			17,544			104,680
Less: Fair value stock-based compensation		(78,265	)		(138,731	)		(206,865	)		(208,512	)
Net loss—adjusted	$	(96,380	)	$	(175,231	)	$	(265,621	)	$	(581,172	)
Reported basic and diluted net loss per share	$	(0.08	)	$	(0.24	)	$	(0.25	)	$	(1.59	)
Adjusted basic and diluted net loss per share	$	(0.32	)	$	(0.58	)	$	(0.87	)	$	(1.94	)

2. ACQUISITIONS

The Company completed the purchase of assets and license of property associated with IBM’s PowerPRS Switch Fabric product line on September 30, 2003 for $47.8 million in cash.

In connection with this transaction, the Company conducted valuations of the intangible assets acquired in order to allocate the purchase price in accordance with SFAS No. 141, “Business Combinations”, or SFAS 141. The Company has allocated the excess purchase price over the fair value of net tangible assets acquired to the following identified intangible assets: existing technology rights, patents/core technology rights, in-process research and development (“IPR&D”) and backlog. The total purchase price was allocated as follows (in thousands):

Net tangible assets	$	315
In-process research and development		5,700
Developed technology		5,500
Backlog		400
Patents/core technology rights		1,700
Purchased inventory fair value adjustment		117
Goodwill		34,056
Total consideration	$	47,788

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

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

3. CERTAIN FINANCIAL STATEMENT INFORMATION

Accounts receivable (in thousands):

	September 30, 2003			March 31, 2003
Accounts receivable	$	12,585		$	6,964
Less: allowance for bad debts		(1,299	)		(1,330	)
	$	11,286		$	5,634

7

Inventories (in thousands):

	September 30, 2003		March 31, 2003
Finished goods	$	3,338	$	4,455
Work in process		1,790		2,252
Raw materials		230		471
		5,358		7,178
Purchased inventory fair value adjustment		117		—
	$	5,475	$	7,178

Property and equipment (in thousands):

	September 30, 2003			March 31, 2003
Machinery and equipment	$	37,939		$	48,772
Leasehold improvements		7,351			8,981
Computers, office furniture and equipment		73,556			72,533
Land		17,280			17,280
		136,126			147,566
Less: accumulated depreciation and amortization		(83,199	)		(85,531	)
	$	52,927		$	62,035

Goodwill and other purchased intangibles:

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

	September 30, 2003							March 31, 2003
	Gross		Accumulated Amortization and Impairments			Net		Gross		Accumulated Amortization and Impairments			Net
Goodwill	$	4,080,741	$	(3,974,186	)	$	106,555	$	4,046,685	$	(3,974,186	)	$	72,499
Developed technology and patents		301,600		(281,824	)		19,776		294,400		(278,680	)		15,720
Backlog		400		—			400		—		—			—
	$	4,382,741	$	(4,256,010	)	$	126,731	$	4,341,085	$	(4,252,866	)	$	88,219

Upon the implementation of SFAS No. 142, “Goodwill and Other Intangible Assets”, or SFAS 142, the Company completed the initial goodwill impairment review and recorded a non-cash charge of approximately $102.2 million to reduce the carrying value of goodwill. This charge is reflected as the cumulative effect of an accounting change in the accompanying consolidated statement of operations for the six months ended September 30, 2002. In performing this initial fair value analysis, it became evident, as a result of lower revenue forecasts, that certain other purchased intangible assets were also impaired. As a result, the Company performed an analysis of these assets as required under SFAS 144 and recorded non-cash charges of $187.9 million for the impairment of developed technology and $16.3 million as a result of the abandonment of the MMC Networks trademark. These charges are reflected as operating expenses in the consolidated statement of operations for the six months ended September 30, 2002.

The changes in the carrying amount of goodwill for the six months ended September 30, 2003, are as follows (in thousands):

Balance as of March 31,2003	$	72,499
Goodwill related to acquisitions (Note 2)		34,056
Balance as of September 30, 2003	$	106,555

8

Other accrued liabilities (in thousands):

	September 30, 2003		March 31, 2003
Accrued warranty and excess purchase commitments	$	7,078	$	7,078
Current tax liabilities		6,369		6,304
Restructuring liabilities		10,582		3,563
Other		8,160		9,067
	$	32,189	$	26,012

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

	Three Months Ended September 30,						Six Months Ended September 30,
	2003			2002			2003			2002
Recognized impairments on strategic equity investments	$	—		$	(11,650	)	$	—		$	(11,650	)
Gains (losses) on disposals of property and equipment, net		(10	)		(1,144	)		(10	)		(1,270	)
Other		—			(17	)		—			(21	)
	$	(10	)	$	(12,811	)	$	(10	)	$	(12,941	)

Interest income, net (in thousands):

	Three Months Ended September 30,						Six Months Ended September 30,
	2003			2002			2003			2002
Interest income	$	6,865		$	10,405		$	14,842		$	19,945
Net realized gains (losses) from short-term investments		2,069			3,241			5,516			4,598
Interest expense		(5	)		(40	)		(34	)		(84	)
	$	8,929		$	13,606		$	20,324		$	24,459

Net loss per share:

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

	Three Months Ended September 30,						Six Months Ended September 30,
	2003			2002			2003			2002
Net loss (numerator):
Loss before cumulative effect of accounting change	$	(22,908	)	$	(72,436	)	$	(76,300	)	$	(375,111	)
Cumulative effect of accounting change		—			—			—			(102,229	)
Net loss	$	(22,908	)	$	(72,436	)	$	(76,300	)	$	(477,340	)
Shares used in basic and diluted net loss per share computation (denominator):
Weighted average common shares outstanding		305,284			301,528			304,654			301,124
Less: Unvested common shares outstanding		(89	)		(827	)		(156	)		(868	)
Shares used in basic and diluted net loss per share computation		305,195			300,701			304,498			300,256
Basic and diluted net loss per share:
Basic and diluted net loss per share before cumulative effect of accounting change	$	(0.08	)	$	(0.24	)	$	(0.25	)	$	(1.25	)
Cumulative effect of accounting change		—			—			—			(0.34	)
Basic and diluted net loss per share	$	(0.08	)	$	(0.24	)	$	(0.25	)	$	(1.59	)

Because the Company incurred losses for the three and six months ended September 30, 2003 and 2002, the effect of dilutive securities totaling 3.8 million and 3.4 million equivalent shares for the three and six months ended September 30, 2003, respectively, and 2.9 million and 3.6 million equivalent shares for the three and six months ended September 30, 2002, respectively, have been excluded from the net loss per share computations as their impact would be antidilutive.

9

4. RESTRUCTURING CHARGES

The Company has announced a total of three restructuring programs between July 2001 and April 2003. A summary of each of the separate programs is as follows:

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

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

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

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

The Company has completed the restructuring activities contemplated by the July 2001 plan, but has not yet disposed of the surplus leased facilities. As a result of the Company’s July 2001 restructuring activities, the Company realized approximately $4 million of annual savings relating to fixed cost of sales overhead and approximately $2 million of annual savings relating to operating expenses in fiscal 2003.

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

• Closure of the wafer manufacturing facility—In June 2002, the Company completed its plan to discontinue manufacturing non-communication ICs and close its internal wafer manufacturing facility in San Diego. As a result, the Company recorded a charge of $2.5 million in the first quarter of fiscal 2003. The charge was comprised of severance packages for approximately 70 employees in the manufacturing workforce, which had been notified of the reduction prior to June 30, 2002, and estimated facility restoration costs. This was the only wafer fabrication facility owned by the Company. In the fourth quarter of fiscal 2003, the Company recorded an addition $1.5 million for the closure of the facility due to higher than anticipated restoration and severance costs, and lower values for the semiconductor equipment sold then was originally anticipated.

The Company’s wafer fabrication facility was closed at the end of March 2003 and the facility was exited at the end of June 2003. The Company has largely completed the wafer fabrication facility portion on the July 2002 plan and expects only nominal amounts of additional severance and facility restoration costs to be incurred.

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

The Company has completed the activities contemplated by the global workforce reduction portion of the July 2002 plan, but has not yet disposed of the surplus lease commitments.

As a result of the closure of the Company’s internal wafer manufacturing facility, which was completed at the end of fiscal 2003, the Company expects to realize annual savings totaling approximately $14 million relating to fixed cost of sales overhead in fiscal 2004. As a result of the global workforce reduction undertaken in July 2002, the Company expects to

10

realize $16 million annual savings relating to operating expenses in fiscal 2004.

As the downturn in the telecommunications continued it became evident that further cost reductions were necessary. As a result, the Company announced its third workforce reduction and restructuring program in April of 2003. The April 2003 restructuring program consisted of a workforce reduction, further consolidation of excess facilities and additional fixed asset disposals. In June 2002, the FASB issued SFAS 146 requiring that costs associated with exit or disposal activities be recognized when they are incurred rather than at the date of a commitment to an exit or disposal plan. Accordingly, restructuring costs of $23.5 million related to the restructuring plan were recognized in the first quarter of fiscal 2004 and approximately $281,000 was recognized in the fourth quarter of fiscal 2003 for severance packages communicated to employees in March 2003.

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

• Consolidation of excess facilities and other operating leases—As a result of the lower head count resulting from the workforce reduction, the Company was able to exit certain facilities, including its 58,000 square foot building in San Diego and a substantial portion of the Sunnyvale facility. As a result, the Company recorded a charge of $7.2 million representing the estimated discounted cash flow of the lease payments, less the estimated sublease income. These facilities are being actively marketed for a sublease tenant. In addition, as a result of the lower head count resulting from the workforce reduction, the Company disposed of certain software licenses used by the engineering workforce resulting in a charge in the first quarter of $3.4 million, which will be paid over the respective licenses term.

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

As a result of the Company’s April 2003 restructuring activities, the Company expects to realize approximately $4 million of annual savings relating to fixed cost of sales overhead and approximately $36 million of annual savings relating to operating expenses in fiscal 2004.

The following tables provide a detailed activity related to each of our restructuring activities during the six months ended September 30, 2003 (in thousands):

July 2001 Restructuring Program	Workforce Reduction			Facilities Consolidation and Operating Lease Commitments			Property and Equipment Impairments			Total
Liability, March 31, 2003	$	—		$	351		$	—		$	351
Cash payments		—			(126	)		—			(126	)
Liability, September 30, 2003	$	—		$	225		$	—		$	225
July 2002 Restructuring Program
Liability, March 31, 2003	$	1,898		$	1,033		$	—		$	2,931
Cash payments		(1,570	)		(817	)		—			(2,387	)
Liability, September 30, 2003	$	328		$	216		$	—		$	544
April 2003 Restructuring Program
Liability, March 31, 2003	$	281		$	—		$	—		$	281
Charged to expense		5,389			10,580			7,529			23,498
Noncash amounts		—			—			(7,529	)		(7,529	)
Cash payments		(5,307	)		(1,130	)		—			(6,437	)
Liability, September 30, 2003	$	363		$	9,450		$	—		$	9,813

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

	Workforce Reduction			Facilities Consolidation and Operating Lease Commitments			Property and Equipment Impairments			Total
Liability, March 31, 2003	$	2,179		$	1,384		$	—		$	3,563
Charged to expense		5,389			10,580			7,529			23,498
Non-cash amounts		—			—			(7,529	)		(7,529	)
Cash payments		(6,877	)		(2,073	)		—			(8,950	)
Liability, September 30, 2003	$	691		$	9,891		$	—		$	10,582

5. COMPREHENSIVE INCOME OR LOSS

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

	Three Months Ended September 30,						Six Months Ended September 30,
	2003			2002			2003			2002
Net loss	$	(22,908	)	$	(72,436	)	$	(76,300	)	$	(477,340	)
Change in net unrealized gain on short-term investments		(9,234	)		1,290			(7,106	)		3,479
Foreign currency translation adjustment		6			7			39			103
Comprehensive loss	$	(32,136	)	$	(71,139	)	$	(83,367	)	$	(473,758	)

6. CONTINGENCIES

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

In May 2001, a series of similar state derivative actions were filed against the Company’s directors and certain executive officers. The state complaints have been coordinated and assigned to the Superior Court of California in the County of San Diego. Applied Micro Circuits Shareholders Cases, No. JCCP No. 4193. In November 2001, the court appointed liaison plaintiffs’ counsel in the coordinated proceeding, and plaintiffs filed a consolidated state complaint in December 2001. The consolidated state complaint alleges overstatement of the Company’s financial prospects, mismanagement, inflation of stock value and sale of stock at inflated prices for personal gain during the period from November 2000 through February 2001. The plaintiffs seek treble damages from the defendants alleged to have illegally sold stock and damages from all defendants for the other alleged violations of corporate law set forth in the complaint. In February 2002, the board of directors formed a special litigation committee to evaluate the claims in the consolidated state complaint. The special litigation committee retained independent legal counsel and submitted a report to the court in July 2002. Defendants filed a motion seeking dismissal of the consolidated action. In June 2003, the court denied defendants’ motion to dismiss. In July 2003, defendants filed a writ petition to the appellate court seeking reversal of the denial of the motion to dismiss, or in the alternative for summary judgment. In October 2003, the appellate court denied the defendants’ writ petition. Discovery in this lawsuit is continuing.

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

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

        Since 1993, the Company has been named as a potentially responsible party, or PRP, along with a large number of other companies that used Omega Chemical Corporation in Whittier, California to handle and dispose of certain hazardous waste material. The Company is a member of a large group of PRPs that has agreed to fund certain remediation efforts at the Omega Chemical site for which the Company has accrued approximately $100,000. In September 2000, the Company entered into a consent decree with the Environmental Protection Agency, pursuant to which the Company agreed to fund its proportionate share of the initial remediation efforts at the Omega Chemical site.

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

In September, 2003, Silvaco Data Systems (“Silvaco”) filed a complaint against the Company in the Superior Court of the State of California in the County of Santa Clara. Silvaco Data Systems v. Applied Micro Circuits Corporation case no. 103cv005696. In its complaint, Silvaco claims that the Company misappropriated trade secrets and has engaged in unfair business practices by using software licensed to the Company by Circuit Symantics, Inc. The Company has filed an answer denying Silvaco’s allegations and has filed a motion seeking a stay of the lawsuit against the Company pending arbitration of terms of a settlement agreement between Circuit Symantics and Silvaco.

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

7. RELATED PARTY TRANSACTIONS

From time to time the Company charters an aircraft for business travel from an aircraft charter company, which manages an aircraft owned by a company that AMCC’s chief executive officer controls. In the six months ended September 30, 2003 and 2002, the Company expensed a total of $200,000 and $400,000, respectively, for such charters. These amounts were within the limits on such expenses approved by the board of directors.

8. RECENT ACCOUNTING PRONOUNCEMENTS

In May 2003, the FASB, issued SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. The statement improves the accounting for three types of financial instruments that were previously accounted for as equity – mandatorily redeemable shares, instruments that may require the issuer to buy back shares and certain obligations that can be settled with shares. The statement requires that those instruments be accounted for as liabilities in the statement of financial position. The statement is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement has not had a material impact on its operating results or financial position.

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

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

9. SUBSEQUENT EVENTS

On October 28, 2003, the Company completed the acquisition of JNI Corporation, a provider of Fibre Channel hardware and software products that form critical elements of storage area networks. Under the terms of the agreement, AMCC acquired all outstanding shares of JNI Corporation for approximately $196.4 million and assumed options to purchase approximately 4.3 million shares of AMCC’s common stock. In connection with this acquisition, on November 12, 2003, the Company eliminated approximately 10% of the combined companies workforce to achieve some of the cost savings anticipated at the time the merger was announced.

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

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

• Caution concerning forward-looking statements. This section discusses how certain forward-looking statements made by us throughout 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 a general description of our business.

• 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, 2003 and 2002. A brief description is provided of transactions and events that impact the comparability of the results being analyzed.

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

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

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

This section should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended March 31, 2003. This report, and in particular the MD&A, contains forward-looking statements. These forward-looking statements are made as of the date of this report. Any statement that refers to an expectation, projection or other characterization of future events or circumstances, including the underlying assumptions, is a forward-looking statement. We use certain words and their derivatives such as “anticipate”, “believe”, “plan”, “expect”, “estimate”, “predict”, “intend”, “may”, “will”, “should”, “could”, “future”, “potential”, and similar expressions in many of the forward-looking statements. The forward-looking statements are based on our current expectations, estimates and projections about our industry, management’s beliefs, and other assumptions made by us. These statements and the expectations, estimates, projections, beliefs and other assumptions on which they are based are subject to many risks and uncertainties and are inherently subject to change. We describe many of the risks and uncertainties that we face in the “Risk Factors” section of MD&A. We update our descriptions of the risks and uncertainties facing us in our periodic reports filed with the SEC in which we report our financial condition and results for the quarter and fiscal year-to-date. Our actual results and actual events could differ materially from those anticipated in any forward-looking statement. Readers should not place undue reliance on any forward-looking statement.

OVERVIEW

We design, develop, manufacture, and market high-performance, high-bandwidth silicon integrated circuits, or ICs, empowering wide area networks. We utilize a combination of digital, mixed-signal and high-frequency analog design expertise coupled with system-level knowledge and multiple silicon process technologies to offer IC products that enable the transport of voice and data over fiber optic networks, as well as chips that send T1 and T3 signals over coaxial cable networks. Our system solution portfolio includes switch fabric, traffic management, network processor, framer/mapper, and physical layer devices that address the high-performance needs of the evolving intelligent optical network. We also supply silicon ICs for the automated test equipment, or ATE, high-speed computing and military markets. In addition, on October 28, 2003, we completed the acquisition of JNI Corporation, a provider of Fibre Channel hardware and software products that form critical elements of storage area networks.

CRITICAL ACCOUNTING POLICIES

The SEC Financial Reporting Release No. 60, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies”, or FRR 60, encourages companies to provide additional disclosure and commentary on their most critical accounting policies. In FRR 60, the SEC defined the most critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and operating results, and require management to make its most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Based on this definition, our most critical accounting policies include: inventory valuation, which affects our cost of sales and gross margin; the valuation of purchased intangibles and goodwill, which affects our amortization and write-offs of goodwill and other intangibles; the valuation of restructuring liabilities, which affects the amount and timing of restructuring charges; and the valuation of deferred income taxes,

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which affects our income tax expense and benefit. We also have other key accounting policies, such as our policies for revenue recognition, including the deferral of a portion of revenues on sales to distributors, and allowance for bad debt. The methods, estimates and judgments we use in applying these most critical accounting policies have a significant impact on the results we report in our financial statements.

Inventory Valuation

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

Goodwill and Intangible Asset Valuation

The determination of the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions. Determining the fair values and useful lives of intangible assets especially requires the exercise of judgment. While there are a number of different generally accepted valuation methods to estimate the value of intangible assets acquired, we primarily use the discounted cash flow method. This method requires significant management judgment to forecast the future operating results used in the analysis. In addition, other significant estimates are required such as residual growth rates and discount factors. The estimates we use to value and amortize intangible assets are consistent with the plans and estimates that we use to manage our business and are based on available historical information and industry estimates and averages. These judgments can significantly affect our net operating results.

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

Determining the fair value of the implied goodwill is judgmental in nature and often involves the use of significant estimates and assumptions. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the magnitude of any such charge. Estimates of fair value are primarily determined using discounted cash flows and market comparisons. These approaches use significant estimates and assumptions, including projection and timing of future cash flows, discount rate reflecting the risk inherent in future cash flows, perpetual growth rate, determination of appropriate market comparables, and determination of whether a premium or discount should be applied to comparables. It is reasonably possible that the plans and estimates used to value these assets may be incorrect. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges.

Restructuring Charges

Over the last two years we have undertaken significant restructuring initiatives, which have required us to develop formalized plans for exiting certain business activities and reducing spending levels. We have had to record estimated expenses for employee severance, long-term asset writedowns, lease cancellations, facilities consolidation costs, and other restructuring costs. Given the significance of, and the timing of the execution of such activities, this process is complex and involves periodic reassessments of estimates made at the time the original decisions were made. Prior to 2003, the liability for certain exit costs was recognized on the date that management committed to a plan. In 2003, new accounting guidance was issued requiring us to recognize costs associated with our exit and disposal activities at fair value when a liability is incurred. In calculating the charges for our excess facilities, we have to estimate the timing of exiting certain facilities and then estimate the future lease and operating costs to be paid until the lease is terminated and the amount of any sublease income. To form our estimates for these costs, we performed an assessment of the affected facilities and considered the current market conditions for each site. Our assumptions for the operating costs until termination or the offsetting sublease revenues may turn out to be incorrect, and our actual costs may be materially different from our estimates, which could result in the need to record additional costs or to reverse previously recorded liabilities. Our policies require us to periodically evaluate the adequacy of the remaining liabilities under our restructuring initiatives.

Valuation of Deferred Income Taxes

We record valuation allowances to reduce our deferred tax assets to an amount that we believe is more likely than not to be realized. We consider estimated future taxable income and ongoing prudent and feasible tax planning strategies, including reversals of deferred tax liabilities, in assessing the need for a valuation allowance. If we were to determine that we will not realize all or part of

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our deferred tax assets in the future, we would make an adjustment to the carrying value of the deferred tax asset, which would be reflected as income tax expense. Conversely, if we were to determine that we will realize a deferred tax asset, which currently has a valuation allowance, we would reverse the valuation allowance which would be reflected as an income tax benefit in our financial statements.

Revenue Recognition

We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101 “Revenue Recognition in Financial Statements”, or SAB 101. SAB 101 requires that four basic criteria be met before revenue can be recognized: 1) there is evidence that an arrangement exists; 2) delivery has occurred; 3) the fee is fixed or determinable; and 4) collectibility is reasonably assured. We recognize revenue upon determination that all criteria for revenue recognition have been met. The criteria are usually met at the time of product shipment, except for shipments to distributors with rights of return. Revenue from shipments to distributors with rights of return is deferred until all return or cancellation privileges lapse. In addition, we record reductions to revenue for estimated allowances such as returns and competitive pricing programs. These estimates are based on our experience with product returns and the contractual terms of the competitive pricing programs. Shipping terms are FOB shipping point. If actual returns or pricing adjustments exceed our estimates, additional reductions to revenue would result.

Allowance for Bad Debt

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

RESULTS OF OPERATIONS

Net Revenues. Net revenues for the three and six months ended September 30, 2003 were approximately $25.1 million and $45.6 million, respectively, representing a decrease of 17% and 24% from net revenues of approximately $30.2 million and $60.4 million for the three and six months ended September 30, 2002, respectively. The decline in total net revenues was primarily due to a decrease in non-communications revenues related to the closure of the wafer fabrication facility in March 2003. Non-communications revenues decreased to $3.3 million and $7.8 million for the three and six months ended September 30, 2003, respectively, from $12.0 million and $24.0 million for the three and six months ended September 30, 2002, as a result of greater shipments of last-time-buy orders in fiscal 2003. Revenues from sales of communications products partially offset the decrease in revenues from non-communications products and increased 20% to $21.8 million from $18.2 million for the three months ended September 30, 2003 and 2002, respectively, and increased 5% to $37.9 million from $36.3 million for the six months ended September 30, 2003 and 2002, respectively. We believe this increase in revenues from communications products was due to our customers replenishing inventories of our products after having worked through overstocked inventories of such products that existed throughout much of the past two years.

Based on direct shipments, net revenues to customers that exceeded 10% of total net revenues in the three or six months ended September 30, 2003 or 2002 were as follows:

	Three Months Ended September 30,				Six Months Ended September 30,
	2003		2002		2003		2002
Memec	10	%	7	%	12	%	7	%
Mitsui Comtek Corporation	10	%	6	%	10	%	6	%
Sanmina-SCI	13	%	8	%	11	%	8	%
Harris Corporation	—		27	%	—		27	%

Looking through product shipments to distributors and subcontractors to the end customers, net revenues to end customers that exceeded 10% of total net revenues in the three or six months ended September 30, 2003 or 2002 were as follows:

	Three Months Ended September 30,				Six Months Ended September 30,
	2003		2002		2003		2002
Nortel Networks Corporation	16	%	18	%	16	%	14	%
Fujitsu	10	%	6	%	11	%	6	%
Harris Corporation	—		27	%	—		27	%

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

Revenues based on direct shipments outside the United States of America accounted for 50% and 49% of net revenues for the three and six months ended September 30, 2003, compared to 33% and 36% for the three and six months ended September 30, 2002.

Gross Margin. Gross margin was 62.2% and 57.8% for the three and six months ended September 30, 2003, as compared to 45.4% and 43.4% for the three and six months ended September 30, 2002. The increase was primarily attributable to the reduced fixed cost of manufacturing overhead of approximately $3.5 million quarterly as a result of the permanent closure of our internal wafer fabrication facility in March 2003 and the effects of the workforce reductions taken as a result of our restructuring activities, as well as decreased stock-based compensation charges included in cost of revenues of $0.2 million and $1.4 million for the three and six months ended September 30, 2003, respectively. In addition, during the three months ended September 30, 2003, we sold approximately $1.1 million of inventory which had been previously reserved.

The amortization of purchased intangible assets included in cost of revenues was $1.6 million for each of the three months ended September 30, 2003 and 2002 and $3.1 million for each of the six months ended September 30, 2003 and 2002. We expect amortization expense for purchased intangibles charged to cost of revenues to be $6.8 million, $7.4 million and $4.2 million for the fiscal years ending March 31, 2004, 2005 and 2006, respectively. Future acquisitions of businesses including the acquisition of JNI Corporation may result in substantial additional charges which will impact the gross margin in future periods.

Research and Development. Research and development, or R&D, expenses consist primarily of salaries and related costs of employees engaged in research, design and development activities, costs related to engineering design tools, subcontracting costs and facilities expenses. R&D expenses decreased 22% to approximately $26.1 million and 20% to approximately $55.2 million for the three and six months ended September 30, 2003, respectively, from approximately $33.4 million and $68.9 million for the three and six months ended September 30, 2002, respectively. The decrease in R&D for the three and six months ended September 30, 2003 was primarily due to lower payroll and related benefits expense of $3.2 million and $6.0 million, respectively, resulting from our workforce reductions and lower software and equipment depreciation costs of $2.7 million and $3.6 million, respectively, resulting from our restructuring initiatives. We believe that a continued commitment to R&D is vital to our goal of maintaining a leadership position with innovative communications products. Currently, R&D expenses are focused on the development of products for the communications markets, and we expect to continue this focus. We expect R&D expenses in absolute dollars to increase in the third quarter of fiscal 2004 as a result of the acquisition of JNI Corporation on October 28, 2003 and our acquisition of certain assets and licenses from IBM Corporation on September 30, 2003. Future acquisitions of businesses may result in substantial additional on-going costs.

Since the start of fiscal 2002, we invested a total of $197.8 million in the development of new products, including higher-speed, lower-power and lower-cost products, products that combine the functions of multiple existing products into single, integrated products, and products to complete our portfolio of communications products. For most products developed by us, due to their complexity and the complexity of our OEM customers’ equipment, it often takes several years to complete development. We have not yet generated significant revenues from many of these new products for two additional reasons. First, the dramatic and extended downturn in the telecommunications market has severely impacted our customers and has resulted in significantly less demand for these products than expected when development commenced. Second, we have discontinued development of several new products and slowed down development of other new products as we realized that demand for these products would not materialize as originally anticipated.

Selling, General and Administrative. Selling, general and administrative, or SG&A, expenses consist primarily of personnel-related expenses, professional and legal fees, corporate branding and facilities expenses. SG&A expenses were approximately $11.0 million and $21.4 million for the three and six months ended September 30, 2003, respectively, as compared to approximately $15.0 million and $31.3 million for the three and six months ended September 30, 2002, respectively, representing decreases of 26% and 32%. The decrease in SG&A expenses for the three and six months ended September 30, 2003 was primarily due to the effect of lower payroll and related benefits expense of $2.5 million and $4.8 million, respectively, following workforce reductions as well as lower marketing expenses of $0.3 million and $0.8 million, respectively, and lower legal and professional fees of $1.0 million and $2.1 million, respectively. We expect SG&A expenses in absolute dollars to increase in the third quarter of fiscal 2004 as a result of our acquisition of JNI Corporation on October 28, 2003 and our acquisition of certain assets and licenses from IBM Corporation on September 30, 2003. Future acquisitions of businesses may result in substantial additional on-going costs.

Stock-Based Compensation. Stock-based compensation expense represents the amortization of deferred compensation related to acquisitions. Deferred compensation is the difference between the fair value of our common stock at the date of each acquisition and the exercise price of the unvested stock options assumed in the acquisition. In fiscal 2001, we recorded approximately $438.8 million of deferred compensation in connection with stock options assumed in our purchase acquisitions. Stock-based compensation charges, including amounts charged to cost of revenues, were $4.8 million and $17.5 million for the three and six months ended September 30, 2003, respectively, compared to $35.9 million and $104.7 million for the three and six months ended September 30, 2002, respectively. We currently expect to record amortization of deferred compensation with respect to these assumed options of

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approximately $22.8 million in fiscal 2004 and $387,000 in fiscal 2005. These charges could be further reduced as a result of employee turnover. Acquisitions of businesses including the acquisition of JNI Corporation may result in substantial additional on-going costs. Such charges may cause fluctuations in our interim or annual operating results.

Acquired In-process Research and Development. For the three and six months ended September, 2003, we recorded $5.7 million of acquired in-process research and development resulting from the acquisition of assets and licenses associated with IBM’s PowerPRS Switch Fabric product line. This amount was expensed on the acquisition date because the acquired technology had not yet reached technological feasibility and had no future alternative uses. The total IPR&D charge related to five projects which were between 38% and 68% complete at the date of acquisition. The estimated aggregate cost to complete these projects was $5.3 million. The discount rate applied to calculate the IPR&D charge ranged from 20% to 30%. There can be no assurance that acquisitions of businesses, products or technologies by us in the future will not result in substantial charges for acquired in-process research and development that may cause fluctuations in our interim or annual operating results.

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

Restructuring Charges. We have announced a total of three restructuring programs between July 2001 and April 2003. A summary of each of the separate programs is as follows:

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

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

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

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

We have completed the restructuring activities contemplated by the July 2001 plan but have not yet disposed of the surplus leased facilities. As a result of our July 2001 restructuring activities, we realized approximately $4 million of annual savings relating to fixed cost of sales overhead and approximately $2 million of annual savings relating to operating expenses in fiscal 2003.

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

• Closure of the wafer manufacturing facility—In June 2002, we completed our plan to discontinue manufacturing non-communication ICs and close our internal wafer manufacturing facility in San Diego. As a result, we recorded a charge of

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$2.5 million in the first quarter of fiscal 2003. The charge was comprised of severance packages for approximately 70 employees in the manufacturing workforce, which had been notified of the reduction prior to June 30, 2002, and estimated facility restoration costs. This was the only wafer fabrication facility owned by us. In the fourth quarter of fiscal 2003, we recorded an addition $1.5 million for the closure of the facility due to higher than anticipated restoration and severance costs, and lower values for the semiconductor equipment sold then was originally anticipated.

Our wafer fabrication facility was closed at the end of March 2003 and the facility was exited at the end of June 2003. We have largely completed the wafer fabrication facility portion on the July 2002 plan and expect only nominal amounts of additional severance and facility restoration costs to be incurred. As a result of the closure of our internal wafer manufacturing facility, which was completed at the end of fiscal 2003, we expect to realize annual savings totaling approximately $14 million relating to fixed cost of sales overhead in fiscal 2004.

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

We have completed the activities contemplated by the global workforce reduction portion of the July 2002 plan, but have not yet disposed of the surplus lease commitments. As a result of the global workforce reduction we expect to realize $16 million annual savings relating to operating expenses in fiscal 2004.

As the downturn in the telecommunications continued, it became evident that further cost reductions were necessary. As a result, we announced a third workforce reduction and restructuring program in April 2003. The April 2003 restructuring program consisted of a workforce reduction, further consolidation of excess facilities and additional fixed asset disposals. In June 2002, the FASB issued SFAS 146 requiring that costs associated with exit or disposal activities be recognized when they are incurred rather than at the date of a commitment to an exit or disposal plan. Accordingly, restructuring costs of $23.5 million related to the restructuring plan were recognized in the first quarter of fiscal 2004 and approximately $281,000 was recognized in the fourth quarter of fiscal 2003 for severance packages communicated to employees in March 2003.

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

• Consolidation of excess facilities and other operating leases—As a result of the lower head count resulting from the workforce reduction, we were able to exit certain facilities, including our 58,000 square foot building in San Diego and a substantial portion of the Sunnyvale facility. As a result, we recorded a charge of $7.2 million representing the estimated discounted cash flow of the lease payments, less the estimated sublease income. These facilities are being actively marketed for a sublease tenant. In addition, as a result of the lower head count resulting from the workforce reduction, we disposed of certain software licenses used by the engineering workforce resulting in a $3.4 million charge in the first quarter of fiscal 2004, which will be paid over the term of the respective licenses.

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

As a result of our April 2003 restructuring activities, we expect to realize approximately $4 million of annual savings relating to fixed cost of sales overhead and approximately $36 million of annual savings relating to operating expenses in fiscal 2004.

Net Interest Income. Net interest income reflects interest earned on cash and cash equivalents and short-term investment balances, as well as realized gains and losses from the sale of short-term investments, less interest expense on our debt and capital lease obligations. Net interest income decreased to $8.9 million and $20.3 million for the three and six months ended September 30, 2003, respectively, from $13.6 million and $24.5 million for the three and six months ended September 30, 2002, due to lower interest income as a result of lower yields and cash balances. We expect interest income to decrease modestly in the third quarter of fiscal 2004 as a result of lower cash and short-term investment balances due to the cash paid for the JNI Corporation and the IBM asset acquisitions.

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Income Taxes. We recorded no income taxes for the three and six months ended September 30, 2003 and 2002. The difference between our effective tax rate and the federal statutory rate for those periods resulted from the establishment of valuation allowances for the deferred tax assets generated, as it is more likely than not that they will expire unused.

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

Financial Condition and Liquidity

As of September 30, 2003, our principal source of liquidity consisted of $955.9 million in cash, cash equivalents and short-term investments. Working capital as of September 30, 2003 was $931.3 million. At the end of September 30, 2003, we had contractual obligations not included on our balance sheet totaling $37.2 million, primarily related to facilities leases and engineering design software tools.

For the six months ended September 30, 2003, we used $21.1 million of cash to fund our operations compared to using $18.0 million for our operations in the six months ended September 30, 2002. Although we had a net loss of $76.3 million for the six months ended September 30, 2003, $38.8 million consisted of non-cash charges such as depreciation, amortization and non-cash restructuring charges. Excluding non-cash charges, operating cash flows for the six months ended September 30, 2003 primarily reflected increases in accounts receivables resulting from higher revenues and accrued liabilities primarily from our restructuring accruals and decreases in other assets and inventories. Operating cash flows for the six months ended September 30, 2002 consists of operating results before non-cash charges due to amortization or impairments of amounts recorded in connection with our purchase acquisitions of $414.3 million and reflects decreases in receivables due to lower revenues, and accounts payable as we cut spending, plus increases in other accrued liabilities related to the restructuring accruals.

We generated $98.5 million of cash from investing activities during the six months ended September 30, 2003, compared to using $192.2 million during the six months ended September 30, 2002. The inflow of cash for the six months ended September 30, 2003 primarily represented our decision to shorten the duration of the investment portfolio as we positioned cash needed for our acquisitions.

Capital expenditures totaled $9.1 million and $3.7 million for the six months ended September 30, 2003 and 2002, respectively. These capital expenditures primarily consisted of purchases of engineering hardware and design software.

We generated $4.7 million of cash for the six months ended September 30, 2003 from financing activities compared to generating $3.7 million for the six months ended September 30, 2002. The major financing source of cash was from the sale of our common stock through the exercise of employee stock options. The major use of cash from financing activities was for the repayment of debt and capital lease obligations.

In October 2002, our board of directors approved a stock repurchase program whereby we are authorized to expend up to $200.0 million to purchase our common stock. Depending on market conditions and other factors, purchases may be made from time to time in the open market and in negotiated transactions, including block transactions, at times and prices considered appropriate by us. Such program may be discontinued at any time. As of September 30, 2003, we had not made any purchases under the program.

On October 28, 2003, we completed the acquisition of JNI Corporation. Under the terms of the agreement we acquired all outstanding shares of JNI Corporation for approximately $196.4 million and assumed options to purchase approximately 4.3 million shares of AMCC’s common stock. Included in the assets acquired was approximately $80 million of cash and investments.

In connection with the acquisition of the assets and licenses from IBM Corporation, we are required to pay $3.0 million for certain assets, including an assembled workforce located in France, after certain local legal requirements are met.

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

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The following table summarizes our contractual obligations as of September 30, 2003 (in thousands):

	Notes Payable		Operating Leases		Other Commitments		Total
Six months ended March 31, 2004	$	159	$	10,943	$	3,000	$	14,102
Fiscal year 2005		—		12,280		—		12,280
Fiscal year 2006		—		3,906		—		3,906
Fiscal year 2007		—		2,213		—		2,213
Fiscal year 2008		—		1,672		—		1,672
Thereafter		—		3,147		—		3,147
Total	$	159	$	34,161	$	3,000	$	37,320

Note: The table above does not include the cash paid for the JNI Corporation acquisition on October 28, 2003 of approximately $196.4 million.

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RISK FACTORS

Before deciding to invest in us or to maintain or increase your investment, you should carefully consider the risks described below, in addition to the other information contained in this report and in our other filings with the SEC. We update our descriptions of the risks and uncertainties facing us in our periodic reports filed with the SEC in which we report our financial condition and results for the quarter and fiscal year-to-date. The risks and uncertainties described below and in our other filings are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs, our business, financial condition and results of operations could be seriously harmed. In that event, the market price for our common stock could decline and you may lose your investment.

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

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

• communications equipment industry, information technology industry and semiconductor industry conditions;

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

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

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

• the effects of the closure of our internal wafer fabrication facility;

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

• the availability of external foundry capacity, purchased parts and raw materials;

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

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

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

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

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

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

• competitive pressures on selling prices;

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

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

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

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

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

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

• costs associated with compliance with applicable environmental and other governmental regulations;

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

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

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

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

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

• general economic conditions.

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

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

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

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

• delays in the availability of our products;

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

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

• fabrication, test or assembly constraints for our devices, which adversely affects our ability to meet our production obligations;

• the reduction, rescheduling or cancellation of customer orders;

• declines in the average selling prices of our products; and

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

Our business is characterized by short-term orders and shipment schedules. Customer orders typically can be cancelled or rescheduled without significant penalty to the customer. Because we do not have substantial noncancellable backlog, we typically plan our production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. Our revenues are typically derived from sales of application specific standard products, or ASSPs, as compared to application specific integrated circuits, or ASICs. Customer orders for ASSPs typically have shorter lead times than orders for ASICs, which makes it more difficult for us to predict revenues and inventory levels and adjust production appropriately. If we are unable to plan inventory and production levels 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 suppliers and foundries, we may order materials in advance of anticipated customer demand. This advance ordering has in the past and may in the future result in excess inventory levels or unanticipated inventory write-downs if expected orders fail to materialize, or other factors render our products less marketable. Accordingly, our financial condition and operating results could be materially harmed.

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

If the downturn in the communications equipment industry continues, our revenues and profitability will continue to be adversely affected.

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

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

We derived significant revenues from product sales to customers in the ATE, high-speed computing and military markets in the past. The majority of these products were manufactured at our internal wafer fabrication facility, which closed in March 2003. Throughout fiscal 2003, we were fulfilling last-time-buy orders for parts manufactured in this facility. As a result of the last-time-buy program, our revenues from sales of our non-communications products decreased to 13% and 17% of net revenues for the three and six months ended September 30, 2003, respectively from 40% of net revenues for both the three and six months ended September 30, 2002. We expect that revenues from our non-communications products will continue to decline materially as we fulfill the last-time-buy orders throughout most of fiscal 2004. We will continue to sell products for these markets for the foreseeable future, but the volumes and revenues are expected to be modest.

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

A substantial portion of our business and revenue depends on the continued growth of the Internet. We sell our products primarily to communications equipment manufacturers that in turn sell their equipment to customers that depend on the growth of the Internet. As a result of the economic slowdown, the significant decline in the financial condition of many telecommunications companies and the reduction in capital spending, spending on Internet infrastructure has declined. To the extent that the economic slowdown and reduction in capital spending continues to adversely affect spending on Internet infrastructure, our business, operating results, and financial condition will continue to be materially harmed.

Our customers are concentrated. The loss of one or more key customers or the diminished demand for our products from a key customer could significantly reduce our revenues and profits.

A relatively small number of customers have accounted for a significant portion of our revenues in any particular period. We have no long-term volume purchase commitments from any of our key customers. Many of our key customers have announced dramatic declines in demand for their products into which our products are incorporated. As a result, new orders from these customers have been deferred, and customers may have overstocked our products. One or more of our key customers may discontinue operations as a result of consolidation, liquidation or otherwise. Continued reductions, delays and cancellation of orders from our key customers or the loss of one or more key customers could significantly further reduce our revenues and profits. We cannot assure you that our current customers will continue to place orders with us, that orders by existing customers will continue at current or historical levels or that we will be able to obtain orders from new customers.

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

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

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

• design wins with customers may not result in sales to such customers;

• the introduction of a customer’s new products may be late or less successful in the market than planned;

• a customer’s product line using our products may rapidly decline or be phased out;

• our agreements with customers typically do not require them to purchase a minimum amount of our products;

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

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

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

• the impact of terminating certain sales representatives or sales personnel; and

• the continued viability of these customers.

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

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

We typically sell products pursuant to purchase orders that customers can generally cancel or defer on short notice without incurring a significant penalty. Any significant cancellations or deferrals in the future could materially and adversely affect our business, financial condition and results of operations. Cancellations or deferrals could cause us to hold excess inventory, which could reduce our profit margins, increase product obsolescence and restrict our ability to fund our operations. We generally recognize revenue upon shipment of products to a customer. If a customer refuses to accept shipped products or does not pay for these products, we could miss future revenue projections or incur significant charges against our income, which could materially and adversely affect our operating results.

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

Our markets frequently undergo transitions in which products rapidly incorporate new features and performance standards on an industry-wide basis. If our products are unable to support the new features or performance levels required by OEMs in these markets, we would be likely to lose business from an existing or potential customer and would not have the opportunity to compete for new design wins 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 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. Although we have developed products for the Gigabit Ethernet and fibre channel communications standards, sales volumes of these products are modest, and we may not be successful in addressing the market opportunities for products based on these standards.

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

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

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

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

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

International sales account for a significant part of our revenues and may account for an increasing portion of our future revenues. As a result, an increasing portion of our revenues may be subject to certain risks, including:

• foreign currency exchange fluctuations;

• changes in regulatory requirements;

• tariffs and other barriers;

• timing and availability of export licenses;

• political and economic instability;

• difficulties in accounts receivable collections;

• difficulties in staffing and managing foreign subsidiary operations;

• difficulties in managing distributors;

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

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

• potentially adverse tax consequences.

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

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

We maintain an investment portfolio of various holdings, types and maturities. These securities are recorded on the consolidated balance sheets at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss), net of tax. Our investment portfolio is exposed to market risks related to changes in interest rates, credit ratings of the issuers and foreign currency exchange rates, as well as the risk of default by the issuer. Substantially all of these securities are subject to interest rate and credit rating risk and will decline in value if interest rates increase or one of the issuers’ credit ratings is reduced. We currently do not use derivative financial instruments to manage any of these risks. Increases in interest rates, decreases in the credit worthiness of one or more of the issuers in the portfolio or adverse changes in foreign currency exchange rates could have a material adverse impact on our financial condition or results of operations.

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

As a result of the continuing significant economic slowdown and the related uncertainties in our industry, we implemented a new restructuring plan in the first quarter of fiscal 2004. The plan focused on cost reductions and operating efficiencies, and included workforce reductions. Employees directly affected by the reductions may seek future employment with our customers or competitors. Although all employees are required to sign a confidentiality agreement with us at the time of hire, we cannot assure you that the confidential nature of our proprietary information will be maintained in the course of such future employment. Our restructuring efforts could divert the attention of our management away from our operations, harm our reputation and increase our expenses. We cannot assure you that our restructuring efforts will be successful, that future operations will improve or that the completion of restructuring will not disrupt our operations. If we continue to reduce our workforce, it may adversely impact our ability to respond rapidly to any renewed growth opportunities.

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

The markets for our products are characterized by:

• rapidly changing technologies;

• evolving and competing industry standards;

• short product life cycles;

• changing customer needs;

• emerging competition;

• frequent new product introductions and enhancements;

• increased integration with other functions; and

• rapid product obsolescence.

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

Products for communications applications are based on industry standards that are continually evolving. Our ability to compete in the future will depend on our ability to identify and ensure compliance with these evolving industry standards. The emergence of new industry standards could render our products incompatible with products developed by major systems manufacturers. As a result, we could be required to invest significant time and effort and to incur significant expense to redesign our products to ensure compliance with relevant standards. If our products are not in compliance with prevailing industry standards, we could miss opportunities to achieve crucial design wins. If we fail to do so, we may not achieve design wins with key customers or may subsequently lose such design wins, and our business will significantly suffer because once a customer has designed a supplier’s product into its system, the customer typically is extremely reluctant to change its supply source due to significant costs associated with qualifying a new supplier.

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

The communications IC markets are highly competitive and we expect that competition will increase in these markets, due in part to deregulation and heightened international competition. Our ability to compete successfully in our markets depends on a number of factors, including:

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

• product quality, reliability and performance;

• customer support;

• time-to-market;

• price;

• production efficiency;

• design wins;

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

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

• market acceptance of competitors’ products; and

• general economic conditions.

Our competitors may offer enhancements to existing products, or offer new products based on new technologies, industry standards or customer requirements, that are available to customers on a more timely basis than comparable products from us or that have the potential to replace or provide lower cost alternatives to our products. The introduction of such enhancements or new products by our competitors could render our existing and future products obsolete or unmarketable. Once a customer has designed a supplier’s product into its system, the customer is unlikely to change its supply source due to the significant costs associated with qualifying a new supplier. We expect that certain of our competitors and other semiconductor companies may seek to develop and introduce products that integrate the functions performed by our IC products on a single chip, thus eliminating the need for our products. Each of these factors could have a material adverse effect on our business, financial condition and results of operations.

In the communications markets, we compete primarily against companies such as Agere, Broadcom, Intel, Mindspeed, PMC-Sierra, and Vitesse. Certain of our customers or potential customers have internal IC design or manufacturing capability with which we compete. Any failure by us to compete successfully in these target markets, particularly in the communications markets, would have a material adverse effect on our business, financial condition and results of operations.

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

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

• we may be unable to repair or replace defective products;

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

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

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

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

In the past, we relied on outside foundries for the manufacture of the majority of our products. Now that we have closed our internal foundry, all of our products will be manufactured by outside foundries. These outside foundries generally manufacture our products on a purchase order basis, and we generally do not have long-term supply arrangements with these suppliers. A manufacturing disruption experienced by one or more of our outside foundries or a disruption of our relationship with an outside foundry, including discontinuance of our products by that foundry, would negatively impact the production of certain of our products for a substantial period of time. The transition to the next generation of manufacturing technologies at one or more of our outside foundries could be unsuccessful or delayed.

A majority of our products are only qualified for production at a single foundry. These suppliers can allocate, and in the past have allocated, capacity to the production of other companies’ products while reducing deliveries to us on a short notice. Because establishing relationships and ramping production with new outside foundries may take over a year, there is no readily available alternative source of supply for these products.

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

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

• reduced control over delivery schedules and quality;

• risks of inadequate manufacturing yields and excessive costs;

• difficulties selecting and integrating new subcontractors;

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

• limited warranties on products supplied to us;

• potential increases in prices; and

• potential misappropriation of our intellectual property.

Difficulties associated with adapting our technology and product design to the proprietary process technology and design rules of outside foundries can lead to reduced yields. 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.

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Our requirements typically represent a very small portion of the total production of the third-party foundries. As a result, we are subject to the risk that a producer will cease production of an older or lower-volume process that it uses to produce our parts. We cannot be certain our external foundries will continue to devote resources to the production of our products or continue to advance the process design technologies on which the manufacturing of our products are based. Each of these events could increase our costs and materially impact our ability to deliver our products on time.

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

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

We expect to transition our products to increasingly smaller line width geometries. This transition will require us to migrate to new manufacturing processes for our products and redesign certain products. We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies to reduce our costs and increase performance, and we have designed products to be manufactured at as little as .13 micron geometry processes. We have experienced some difficulties in shifting to smaller geometry process technologies or 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 products to smaller geometry processes. We are dependent on our relationships with our foundries to transition to smaller geometry processes successfully. We cannot assure you that our foundries will be able to effectively manage the transition or that we will be able to maintain our relationships with our foundries. If we or our foundries experience significant delays in this transition or fail to implement this transition, our business, financial condition and results of operations could be materially and adversely affected. As smaller geometry processes become more prevalent, we expect to continue to integrate greater levels of functionality into our products. We may not be able to achieve higher levels of design integration or deliver new integrated products on a timely basis.

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

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

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

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

We may also be required to make significant expenditures of capital and resources to resolve such problems. There can be no assurance that problems will not be found in new products after commencement of commercial production, despite testing by us, our suppliers or our customers. This could result in:

• additional development costs;

• loss of, or delays in, market acceptance;

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

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• 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.

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

There is intense competition for qualified personnel in the semiconductor industry, in particular design, product and test engineers, and we may not be able to continue to attract and retain engineers or other qualified personnel necessary for the development of our business, or to replace engineers or other qualified personnel who may leave our employment in the future. Periods of contraction in our business may inhibit our ability to attract and retain our personnel. Loss of the services of, or failure to recruit, key design engineers or other technical and management personnel could be significantly detrimental to our product development.

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

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

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

Several of our facilities, including our principal executive offices, are located in California. In 2001, California experienced prolonged energy alerts and blackouts caused by disruption in energy supplies. As a consequence, California continues to experience substantially increased costs of electricity and natural gas. We are unsure whether these alerts and blackouts will reoccur or how severe they may become in the future. Many of our customers and suppliers are also headquartered or have substantial operations in California. If we, or any of our major customers or suppliers located in California, experience a sustained disruption in energy supplies, our results of operations could be materially and adversely affected.

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

The effects of war, acts of terrorism or global threats, including, but not limited to, the outbreak of epidemic disease, could have a material adverse effect on our business, operating results and financial condition. The terrorist attacks on September 11, 2001 disrupted commerce throughout the world and intensified the uncertainty of the U.S. economy and other economies around the world. The continued threat of terrorism and heightened security and military action in response to this threat, or any future acts of terrorism, may cause further disruptions to these economies and create further uncertainties. To the extent that such disruptions or uncertainties result in delays or cancellations of customer orders, or the manufacture or shipment of our products, our business, operating results and financial condition could be materially and adversely affected.

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

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

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

The risks involved with acquisitions include:

• potential dilution to our stockholders, or use of a significant portion of our cash reserves;

• diversion of management’s attention;

• failure to retain key personnel;

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

• amortization of acquired intangible assets and deferred compensation;

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

• the cost associated with acquisitions;

• the difficulties associated with the integration of acquired companies;

• difficulties competing in markets that are unfamiliar to us;

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

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

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

As with past acquisitions, future acquisitions could adversely affect operating results. In particular, acquisitions may materially and adversely affect our results of operations because they may require large one-time charges or could result in increased debt or contingent liabilities, adverse tax consequences, substantial additional depreciation or deferred compensation charges. Our past purchase acquisitions required us to capitalize significant amounts of goodwill and purchased intangible assets. As a result of the slowdown in our industry and reduction of our market capitalization, we have been required to record various significant impairment charges against these assets as noted in our financial statements. At September 30, 2003, we have $126.7 million of goodwill and purchased intangible assets. There can be no assurance that we will not be required to take additional significant charges as a result of an impairment to the carrying value of these assets, due to further declines in market conditions.

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

Our chief executive officer, current and former chief financial officer and certain of our other executive officers and directors, have been sued for alleged violations of federal securities laws related to alleged misrepresentations regarding our financial prospects for the fourth quarter of fiscal 2001. We believe that the claims being brought against us, our officers and directors are without merit, and we intend to engage in a vigorous defense against such claims. If we are not successful in our defense against such claims, we could be forced to make significant payments to our stockholders and their lawyers, and such payments could have a material adverse effect on our business, financial condition and results of operations if not covered by our insurance carriers. Even if such claims are not successful, the litigation could result in substantial costs including, but not limited to, attorney and expert fees, and divert management’s attention and resources, which could have an adverse effect on our business.

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

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

To protect our intellectual property, we also rely on the combination of mask work protection under the Federal Semiconductor Chip Protection Act of 1984, trademarks, copyrights, trade secret laws, employee and third-party nondisclosure agreements, and licensing arrangements. Despite these efforts, we cannot be certain that others will not independently develop substantially equivalent 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.

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

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

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

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

Our stock price is volatile.

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

• our anticipated or actual operating results;

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

• technological innovations or setbacks by us or our competitors;

• conditions in the semiconductor, telecommunications, data communications or high-speed computing markets;

• the commencement or outcome of litigation;

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

• announcements of merger or acquisition transactions;

• management changes;

• our inclusion in certain stock indices; and

• other events or factors.

The stock market in recent years has experienced extreme price and volume fluctuations that have affected the market prices of many high technology companies, particularly semiconductor companies, and that have often been unrelated or disproportionate to the operating performance of those companies. These fluctuations may harm the market price of our common stock.

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

Our board of directors has the authority to issue up to 2,000,000 shares of preferred stock and to determine the price, rights, preferences and privileges and restrictions, including voting rights, of those shares without any further vote or action by our stockholders. The rights of the holders of common stock will be subject to, and may be harmed by, the rights of the holders of any shares of preferred stock that may be issued in the future. The issuance of preferred stock may delay, defer or prevent a change in control, as the terms of the preferred stock that might be issued could potentially prohibit our consummation of any merger, reorganization, sale of substantially all of our assets, liquidation or other extraordinary corporate transaction without the approval of the holders of the outstanding shares of preferred stock. The issuance of preferred stock could have a dilutive effect on our stockholders.

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

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

With the completion of our acquisition of JNI Corporation on October 28, 2003, we urge you to carefully consider the following additional risks before deciding to invest in us or to maintain or increase your investment, in addition to the other information contained in this report and in our other filings with the SEC.

Because JNI depends on a small number of OEM and distribution channel customers for a significant portion of its revenues in each period, the loss of any of these customers, the failure to obtain certifications or any cancellation or delay of a large purchase by any of these customers could significantly reduce its net revenues.

Before JNI can sell its products to an OEM, either directly or through the OEM’s associated distribution channel, that OEM must certify its products. The certification process can take up to 12 months. This process requires the commitment of OEM personnel and test equipment, and JNI competes with other suppliers for these resources. Any delays in obtaining these certifications or any failure to obtain these certifications would adversely affect JNI’s ability to sell its products. Because none of JNI’s customers is contractually obligated to purchase any fixed amount of products from JNI in the future, they may stop placing orders with them at any time, regardless of any forecast they may have previously provided. If any of JNI’s large customers stops or delays purchases, their revenues and operating results would be adversely affected. we cannot be certain that JNI will retain its current OEM or distribution channel customers or that JNI will be able to recruit additional or replacement customers. As is common in the technology industry, JNI’s agreements with OEMs and distribution channel customers typically are non-exclusive, contain no minimum purchase requirements and often may be terminated by either party with limited or no notice and without cause. Moreover, many of JNI’s OEM and distribution channel customers utilize or carry competing product lines. If JNI were to suddenly lose one or more important OEM or distribution channel customers to a competitor, its business and our operating results or financial condition could suffer. Some of JNI’s OEM customers could develop products internally that would replace its products. The resulting reduction in sales of JNI’s products to any such OEM customers, in addition to the increased competition presented by these customers, could have a material adverse effect on its business.

If JNI does not develop, market and sell host bus adapters that interoperate with operating systems other than the Sun Solaris operating system, it may not be able to achieve profitability.

JNI has derived a substantial majority of its historical revenues from sales of host bus adapters that include software designed to work with the Sun Microsystems Solaris operating system. To increase JNI’s revenues and grow its business JNI must maintain its leading position in Solaris environments and build market share with its newer products that interoperate with other operating systems. These products have not obtained market penetration comparable to what JNI has achieved in the Solaris environment, and its ability to increase market share is subject to the risks inherent in the commercialization of new products. In particular, competition in the market for non-Solaris Fibre Channel host bus adapters is fierce, and it will be challenging to displace incumbent suppliers such as Emulex and QLogic to expand JNI’s market share. To achieve increased market share, it may be necessary for JNI to reduce its product prices in these new markets. This strategy may not be successful in increasing JNI’s market share, and it could affect pricing in JNI’s existing markets. JNI may not be successful in marketing and selling the new products JNI develops, and we cannot assure you that JNI’s intended customers will purchase its products instead of competing products. JNI’s failure to obtain a significant share of the market for host bus adapters compatible with operating systems other than the Solaris operating system would impair its growth and harm our operating results.

Because a significant portion of JNI’s products are designed to work with servers from Sun Microsystems, its business could suffer if demand for Sun servers does not increase or if it is unable to adapt quickly to changes in the market for such equipment.

JNI’s host bus adapters have achieved their greatest market acceptance in computing environments built with high-end servers from Sun Microsystems due to JNI’s products’ interoperability with the Sun Solaris operating system. If the demand for Sun’s servers, and particularly its high-end servers, does not expand, our revenues and operating results may suffer.

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

We believe that the majority of JNI’s products are used to form connections to storage arrays manufactured by EMC, Hitachi Data Systems, Network Appliance, Storagetek or Sun Microsystems. To a material extent, JNI’s future revenue growth depends upon

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the continued acceptance of and increased demand for the storage products offered by these vendors. To maintain and expand its position with these vendors, JNI must continue to provide high quality, early-to-market, high performance host bus adapters at competitive prices. Even if JNI is able to meet the demands of these vendors, it is possible that they will develop or acquire products or technologies that make JNI’s products uncompetitive. These vendors may form alliances with other industry participants or competitive suppliers of host bus adapters that could adversely impact the demand for JNI’s products. If JNI is unable to timely obtain OEM certifications for new storage products offered by these vendors, they could make arrangements with competing host bus adapter manufacturers that would make JNI’s products less competitive for both existing and new storage arrays. If JNI is unable to maintain or expand its relationships with EMC, Hitachi Data Systems, Network Appliance, Storagetek or Sun Microsystems, our revenues may suffer.

The long lasting downturn in information technology spending has negatively affected JNI’s revenues and operating results.

Since late 2000, large enterprises throughout the global economy have significantly reduced their spending on information technology products, which has had a continuing negative effect on JNI’s revenues and operating results. We cannot predict the depth or duration of this downturn in spending, and if it grows more severe or continues for a long period of time, our ability to increase or maintain JNI’s revenues and operating results may be impaired. Because we intend to continue to make significant investments in research and development in JNI and to maintain its customer service and support capabilities, any resulting decline in its revenues will have a significant adverse impact on our operating results.

JNI’s operating results may suffer because of increasing competition.

The markets in which JNI compete are intensely competitive. As a result, JNI will face a variety of significant challenges, including rapid technological advances, price erosion, changing customer preferences and evolving industry standards. JNI’s competitors continue to introduce products with improved price/performance characteristics, and JNI will have to do the same to remain competitive. Increased competition could result in significant price competition, reduced revenues, lower profit margins or loss of market share, any of which would have a material adverse effect on JNI’s business. We cannot be certain that JNI will be able to compete successfully in the future.

As the Fibre Channel market continues to mature, the commoditization of the Fibre Channel market favors larger organizations such as JNI’s current and potential competitors in the Fibre Channel market, including Emulex, QLogic, Agilent Technologies, Hewlett-Packard and LSI Logic. To the extent that commoditization leads to significant pricing declines, whether initiated by JNI or by an existing or new competitor, JNI will be required to increase its product volumes and reduce its costs of goods sold to avoid resulting pressure on its profitability, and we cannot assure you that JNI will be successful in responding to these competitive pricing pressures. These companies all have substantially greater financial, marketing and distribution resources than we have. JNI’s primary competitors, Emulex and QLogic, have entered the Sun Solaris segment of the Fibre Channel market, which is the primary market for its Fibre Channel products. JNI may also face competition from new entrants to the Fibre Channel market, including larger technology companies that may develop or acquire differentiating technology and then apply their resources to its detriment. JNI’s Fibre Channel products may also compete at the end-user level with other current or future technology alternatives. Businesses that implement SANs may select fully-integrated SAN systems that are offered by large product solution companies. Because such systems typically do not interoperate with JNI’s products, customers that invest in these systems will be less likely to purchase its products. Because most of its current products are based on Fibre Channel, unless JNI is able to develop products based on other emerging connectivity technologies, its business could suffer if the market for Fibre Channel products grows more slowly than we anticipate as a result of competition from such technologies. To the extent that JNI develops products based on other standards, such as its InfiniBand products, it will face competition in the markets for such products that may come from larger technology companies such as Emulex, IBM, QLogic and Sun. If JNI is not successful, for competitive or other reasons, in achieving market penetration with its InfiniBand or other potential products, JNI may not be able to recover its investment in pursuing new markets.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange rates, interest rates and a decline in the stock market. We do not currently hold any derivative instruments. We are exposed to market risks related to changes in interest rates and foreign currency exchange rates.

We are also exposed to market risk as it relates to changes in the market value of our investments. At September 30, 2003, our investment portfolio included fixed-income securities classified as available-for-sale investments with a fair market value of $723.2 million. These securities are subject to interest rate risk, as well as credit risk, and will decline in value if interest rates increase or an issuer’s credit rating or financial condition is decreased. The following table presents the hypothetical changes in fair value of our short-term investments held at September 30, 2003 (in thousands):

	Valuation of Securities Given an Interest Rate Decrease of X Basis Points						Fair Value as of September 30, 2003		Valuation of Securities Given an Interest Rate Increase of X Basis Points
	(150 BPS)		(100 BPS)		(50 BPS)				(50 BPS)		(100 BPS)		(150 BPS)
Available-for-sale investments	$	765,969	$	751,526	$	737,130	$	723,167	$	710,057	$	697,777	$	686,610

These instruments are not leveraged. The modeling technique used measures the change in fair market value arising from selected potential changes in interest rates. Market changes reflect immediate hypothetical parallel shifts in the yield curve of plus or minus 50 basis points, 100 basis points, and 150 basis points.

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

We generally conduct business, including sales to foreign customers, in U.S. dollars, and as a result, we have limited foreign currency exchange rate risk. The effect of an immediate 10 percent change in foreign exchange rates would not have a material impact on our financial condition or results of operations.

ITEM 4. CONTROLS AND PROCEDURES

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

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

In May 2001, a series of similar state derivative actions were filed against the Company’s directors and certain executive officers. The state complaints have been coordinated and assigned to the Superior Court of California in the County of San Diego. Applied Micro Circuits Shareholders Cases, No. JCCP No. 4193. In November 2001, the court appointed liaison plaintiffs’ counsel in the coordinated proceeding, and plaintiffs filed a consolidated state complaint in December 2001. The consolidated state complaint alleges overstatement of the Company’s financial prospects, mismanagement, inflation of stock value and sale of stock at inflated prices for personal gain during the period from November 2000 through February 2001. The plaintiffs seek treble damages from the defendants alleged to have illegally sold stock and damages from all defendants for the other alleged violations of corporate law set forth in the complaint. In February 2002, the board of directors formed a special litigation committee to evaluate the claims in the consolidated state complaint. The special litigation committee retained independent legal counsel and submitted a report to the court in July 2002. Defendants filed a motion seeking dismissal of the consolidated action. In June 2003, the court denied defendants’ motion to dismiss. In July 2003, defendants filed a writ petition to the appellate court seeking reversal of the denial of the motion to dismiss, or in the alternative for summary judgment. In October 2003, the appellate court denied the defendants’ writ petition. Discovery in this lawsuit is continuing.

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

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

Since 1993, the Company has been named as a potentially responsible party, or PRP, along with a large number of other companies that used Omega Chemical Corporation in Whittier, California to handle and dispose of certain hazardous waste material. The Company is a member of a large group of PRPs that has agreed to fund certain remediation efforts at the Omega Chemical site for which the Company has accrued approximately $100,000. In September 2000, the Company entered into a consent decree with the Environmental Protection Agency, pursuant to which the Company agreed to fund its proportionate share of the initial remediation efforts at the Omega Chemical site.

In May 2003, the Company’s wholly owned subsidiary, AMCC Sales Corporation, filed a complaint against Mintera Corporation, a privately held telecommunications equipment supplier, in the Superior Court of California in the County of San Diego. AMCC Sales Corporation v. Mintera Corporation, no. GIC810669. The Company is seeking recovery of amounts owed by Mintera for products supplied to Mintera and seeking a declaration that it has fulfilled its contractual obligations to Mintera pursuant to a development partner agreement. In July 2003, Mintera filed a cross-complaint in which Mintera claims that the Company made misrepresentations in order to induce Mintera to rely on the Company’s promises to release these products to production. The cross-complaint also claims that the Company breached its obligations to Mintera under the development partner agreement. Mintera also alleges in the cross-complaint that as a result of the Company’s alleged misrepresentations and alleged failure to deliver product, Mintera has suffered substantial damages. Mintera has asked for unspecified damages and punitive damages in its cross-complaint. The Company and its subsidiary have filed answers to the cross-complaint denying Mintera’s allegations and claims. Discovery has commenced. The lawsuit has been tendered to the Company’s insurance carriers. Trial in this lawsuit is currently scheduled for May 14, 2004.

In September 2003, Silvaco Data Systems (“Silvaco”) filed a complaint against the Company in the Superior Court of the State of California in the County of Santa Clara. Silvaco Data Systems v. Applied Micro Circuits Corporation case no. 103cv005696. In its complaint, Silvaco claims that the Company misappropriated trade secrets and has engaged in unfair business practices by using software licensed to the Company by Circuit Symantics, Inc. (“Circuit Symantics”). The Company has filed an answer denying Silvaco’s allegations and has filed a motion seeking a stay of the lawsuit against the Company pending arbitration of terms of a settlement agreement between Circuit Symantics and Silvaco. The motion is expected to be decided in December 2003.

36

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

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

We held our annual meeting of stockholders on August 27, 2003. Of the 304,362,306 shares of our common stock that could be voted at the annual meeting, 268,812,615 shares, or 88%, were represented at the annual meeting in person or by proxy, which constituted a quorum. Voting results were as follows:

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

	For	Withheld
Cesar Cesaratto	258,296,923	10,515,691
Franklin P. Johnson, Jr.	255,807,841	13,004,773
Kevin N. Kalkhoven	196,835,267	71,977,347
L. Wayne Price	255,866,649	12,945,965
David M. Rickey	262,188,744	6,623,870
Roger A. Smullen, Sr.	265,574,676	3,237,938
Douglas C. Spreng	264,972,637	3,839,977
Arthur B. Stabenow	255,731,380	13,081,234
Harvey P. White	257,096,022	11,716,592

(b) Ratification of the appointment of Ernst & Young LLP as our independent auditors for the fiscal year ending March 31, 2004:

For	Against	Abstain
252,261,074	14,954,827	1,596,713

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

31.1 Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Exchange Act.

31.2 Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Exchange Act.

32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

10.41* Asset Purchase Agreement dated as of September 28, 2003 (the “Asset Purchase Agreement”) between the Company and International Business Machines Corporation (“IBM”).

10.42* Patent License Agreement dated as of September 28, 2003 (the “Patent License Agreement”) between IBM and the Company

10.43* Intellectual Property Agreement dated as of September 28, 2003 (the “Intellectual Property Agreement”) between IBM and the Company

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

(b) REPORTS ON FORM 8-K

We filed the following current reports on Form 8-K with the SEC during the three months ended September 30, 2003:

1) On July 15, 2003, we furnished the press release of our financial results for the quarter ended June 30, 2003.

2) On August 28, 2003, we announced the execution of a definitive agreement to acquire JNI Corporation.

37

SIGNATURES

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

Date: November 13, 2003

	APPLIED MICRO CIRCUITS CORPORATION
By:	/S/    STEPHEN M. SMITH
	Stephen M. Smith
	Senior Vice President and Chief Financial Officer
	(Duly Authorized Signatory and Principal Financial and Accounting Officer)

38

EX-10.41

Exhibit 10.41

***Text Omitted and Filed Separately

Confidential Treatment Requested

Under C.F.R. §§ 200.80(b)(4) and 240.24b-2

ASSET PURCHASE AGREEMENT

between

Applied Micro Circuits Corporation

(as “Buyer”),

and

International Business Machines Corporation,

(as “Seller”)

Dated: September 28, 2003

TABLE OF CONTENTS

Article I.	Purchase and Sale of Assets	5
1.1.	Transferred Assets and Transferred Contracts	5
1.2.	Excluded Assets	5
1.3.	Consideration	5
1.4.	Assumed Liabilities	6
Article II.	Closing	6
2.1.	Closing Date	6
2.2.	Closing Statement	7
Article III.	Tax Matters	7
3.1.	Allocation of Purchase Price	7
3.2.	Filing of Returns and Payment of Taxes	8
3.3.	Refunds and Credits	8
3.4.	Transfer Taxes	8
Article IV.	Additional Covenants and Agreements	8
4.1.	Solicitation of Employees	8
4.2.	Further Action	9
4.3.	Post Closing Payments	9
4.4.	Consents, Novations and Subcontracted Work	9
4.5.	Product Warranty Services	10
4.6.	Excluded Liabilities	11
4.7.	Provision of Omitted Assets	11
4.8.	Permitted Liens	11
Article V.	Representations and Warranties of Buyer	11
5.1.	Incorporation	11
5.2.	Authority	11
5.3.	No Conflict	12
5.4.	Governmental Consents	12
5.5.	No Broker	12

ii

Article VI.	Representations and Warranties of Seller	12
6.1.	Incorporation	12
6.2.	Authority	13
6.3.	No Conflict	13
6.4.	Governmental Consents	13
6.5.	No Broker	13
6.6.	Title to Personal Property	14
6.7.	Litigation	14
6.8.	No Rights In Others To Transferred Assets	14
6.9.	Contracts	14
6.10.	Warranties	14
6.11.	Other Information	15
6.12.	Transferred Contract Consents	15
6.13.	Revenues	15
6.14.	Inventory	15
Article VII.	Conditions to Buyer’s Obligations	15
7.1.	Representations and Warranties	15
7.2.	Consents, Approvals and Injunctions	16
7.3.	Governmental Rule	16
7.4.	Operative Agreements	16
7.5.	Closing Documents	16
7.6.	Proceedings	16
Article VIII.	Conditions to Seller’s Obligations	17
8.1.	Payment of Purchase Price	17
8.2.	Representations and Warranties	17
8.3.	Consents, Approvals and Injunctions	17
8.4.	Operative Agreements	17
8.5.	Closing Documents	17
8.6.	Proceedings	18
Article IX.	General Matters	18
9.1.	Survival of Representations and Warranties	18

iii

9.2.	Limitation of Liability	18
9.3.	Public Announcements	19
9.4.	Costs	19
9.5.	[…***…]	19
9.6.	Modification and Waiver	19
9.7.	Governing Law	20
9.8.	Notices	20
9.9.	Bulk Sales	21
9.10.	Assignment	21
9.11.	Counterparts	21
9.12.	No Third Party Beneficiaries	21
9.13.	Entire Agreement	21

Schedules:
Schedule A	Additional Permitted Liens
Schedule 1.1.	Transferred Assets
Schedule 1.4.	Assumed Liabilities
Schedule 3.1.	Allocation of Purchase Price
Schedule 4.4.	Required Consents to Assignment/Novation
Schedule 6.7.	Litigation
Schedule 6.13.	Revenues
Exhibits:
Exhibit A	Assignment and Assumption Agreement
Exhibit B	Bill of Sale
Exhibit C	Schedule of Disclosures and Exceptions

* Confidential Treatment Requested

iv

ASSET PURCHASE AGREEMENT

THIS ASSET PURCHASE AGREEMENT (the “Agreement”), executed and dated as of September 28, 2003, by and between Applied Micro Circuits Corporation, a Delaware corporation (“Buyer”), and International Business Machines Corporation, a New York corporation (“Seller” or “IBM”).

W I T N E S S E T H:

WHEREAS, Seller wishes to sell certain Transferred Assets (as defined herein) and assign certain Transferred Contracts used in the development and sale of certain switch fabric products; and

WHEREAS, Buyer wishes to purchase from Seller, and Seller wishes to sell and transfer to Buyer, the Transferred Assets and the Transferred Contracts for the purchase price and subject to the terms and conditions hereinafter set forth.

NOW, THEREFORE, in consideration of the premises set forth above and the respective covenants, agreements, representations and warranties hereinafter set forth, Buyer and Seller hereby agree as follows:

Definitions.

Certain Definitions. As used in this Agreement, the following terms shall have the meanings specified below.

“Affiliate” shall mean, as to any Person, any other Person which is controlling, controlled by or under common control with such Person.

“Allocation Statements” shall have the meaning set forth in Section 3.1.

“Assumed Liabilities” shall have the meaning set forth in Section 1.4.

“Assumption Agreement” shall mean the Assignment and Assumption Agreement in the form set out in Exhibit “A” to be entered into by the Buyer and the Seller on the Closing Date and by which Buyer assumes the Assumed Liabilities.

“Bill of Sale” shall mean the Bill of Sale in the form set out in Exhibit “B” to be entered into by the Buyer and Seller on the Closing Date.

1

“Burdensome Condition” shall mean any action taken, or credibly threatened, by or before any Governmental Authority or other Person to challenge the legality of the transactions contemplated by the Operative Agreements or that would otherwise deprive a Party of the material benefit of any such transaction, including (i) the pendency of an investigation by a Governmental Authority (formal or informal), (ii) the institution of any litigation, or threat thereof, (iii) an order by a Governmental Authority of competent jurisdiction preventing consummation of the transactions contemplated by the Operative Agreements or placing material conditions or limitations upon such consummation, or (iv) the issuance of any subpoena, civil investigative demand or other request for documents or information relating to such transactions which request is unreasonably burdensome in the reasonable judgment of the applicable Person.

“Closing” shall have the meaning set forth in Section 2.1.

“Closing Date” shall have the meaning set forth in Section 2.1.

“Closing Statement” shall have the meaning set forth in Section 2.2.

“Code” shall have the meaning set forth in Section 3.1.

“Confidentiality Agreement” shall mean that […***…].

“Custom Sales Agreement” shall mean the […***…].

“Date of Execution” shall mean the date this Agreement and the other Operative Agreements identified for signature in accordance with their terms on that date are signed.

“Disclosure Schedule” shall have the meaning set forth in the Schedule of Disclosures and Exceptions to this Agreement.

“Effective Date” shall mean the time the Closing has been completed.

“Final Determination” shall mean (i) in respect of U.S. Federal income taxes a “determination” as defined in Section 1313(a) of the Code or the execution of an Internal Revenue Service Form 870-AD, and (ii) in respect of Taxes other than U.S. Federal income taxes, any final determination of liability in respect of a Tax which determination, under applicable law, is not subject to further appeal, review or modification through proceedings or otherwise (including by reason of the expiration of a statute of limitations or a period for the filing of claims for refunds, amended returns or appeals from adverse determinations).

* Confidential Treatment Requested

2

“Framework Agreement” shall mean […***…].

“Governmental Actions” shall mean any authorizations, consents, approvals, waivers, exceptions, variances, franchises, permissions, permits, and licenses of, and filings and declarations with, Governmental Authorities, including the expiration or termination of waiting periods imposed under the HSR Act.

“Governmental Authority” shall mean any applicable Federal, state, local or foreign court, governmental or administrative agency or commission or other governmental agency, authority, instrumentality or regulatory body of competent jurisdiction.

“Governmental Rule” shall mean any applicable statute, law, treaty, rule, code, ordinance, regulation or order of any Governmental Authority or any judgment, decree, injunction, writ, order or like action of any Federal, state, local or foreign court, governmental or administrative agency or commission, or other governmental agency, authority, instrumentality or regulatory body, arbitrator or other judicial tribunal of competent jurisdiction.

“HSR Act” shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

“In Scope Products” shall have the meaning ascribed to it under the Intellectual Property Agreement.

“Intellectual Property Agreements” shall mean the agreements entitled (i) Intellectual Property Agreement and (ii) Patent License Agreement, each between the Seller and Buyer, entered into on the Date of Execution.

“Liens” shall mean pledges, claims, liens, charges, encumbrances and security interests of any kind whatsoever.

“Limitation Amount” shall have the meaning set forth in Section 9.2.

“Operative Agreements” shall mean this Agreement, the Intellectual Property Agreements, the Custom Sales Agreement, the Transition Services Agreement, the Framework Agreement, the Bill of Sale, and the Assumption Agreement.

“Parties” shall mean Buyer and Seller.

“Party” shall mean Buyer or Seller, as applicable.

“Permitted Liens” shall mean: (i) Liens for Taxes, assessments and governmental charges due and being contested in good faith by Seller; (ii) any Liens, that individually or in the aggregate, are not substantial in character or amount or do not materially adversely affect the value of the Transferred Assets; (iii) Liens for Taxes either not due and

* Confidential Treatment Requested

3

payable or due but for which notice of assessment has not been given, or which may thereafter be paid without penalty; (iv) any statutory Liens claimed or held by any Governmental Authority that have not at the time been filed or registered against title to the Transferred Assets or that relate to obligations that are not due or delinquent; (v) any imperfections of title or similar Liens, if any, which imperfections of title or similar Liens do not materially impair the use of the assets to which they relate; (vi) Liens created or granted by Buyer or otherwise arising in respect of claims against the Buyer (and not the Seller); and (vii) any Liens described on Schedule A.

“Person” shall mean any individual, firm, corporation, partnership, limited liability company, trust, joint venture, Governmental Authority or other entity, and shall include any successor (by merger or otherwise) of such entity.

“Purchase Price” shall have the meaning set forth in Section 1.3.

“Subcontracted Work” shall have the meaning set forth in Section 4.4.

“Subsidiary” of any Person shall mean a corporation, company, or other entity (i) more than fifty percent (50%) of whose outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) are, or (ii) which does not have outstanding shares or securities (as may be the case in a partnership, limited liability company, joint venture or unincorporated association), but more than fifty percent (50%) of whose ownership interest representing the right to direct, or cause the direction of, the management or policies of such entity is, now or hereafter owned or controlled, directly or indirectly, by such Person, but such corporation, company or other entity shall be deemed to be a Subsidiary only so long as such ownership or control exists.

“Tax” or “Taxes” shall mean all taxes, imposts, duties, withholdings, charges, fees, levies, or other assessments imposed by any Governmental Authority or taxing authority, whether domestic or foreign (including but not limited to, income, excise, property, sales, use, transfer, conveyance, payroll or other employment related tax, license and registration fees, ad valorem, value added, withholding, social security, national insurance (or other similar contributions or payments), franchise, severance or estimated severance, stamp taxes, taxes based upon or measured by capital stock, net worth or gross receipts and other taxes), together with all interest, fines, penalties and additions attributable to or imposed with respect to such amounts and any obligations under any agreement or arrangements with any Person with respect to such amounts.

“Transferred Assets” shall mean […***…].

“Transferred Contracts” shall mean […***…].

“Transition Services Agreement” shall mean […***…].

* Confidential Treatment Requested

4

Article I. Purchase and Sale of Assets.

1.1 Transferred Assets and Transferred Contracts. Upon the terms and subject to the conditions hereof, as of the Closing Date, Seller hereby sells, transfers, conveys, assigns and delivers to Buyer, and Buyer hereby purchases and accepts from Seller, all right, title and interest of Seller in and to the (i) Transferred Assets (in the case of inventory, subject to the Closing Statement adjustments) and (ii) the rights and benefits associated with the Transferred Contracts (subject to the provisions of Section 4.4). The Transferred Assets and the Transferred Contracts (subject to Section 4.4 and any obligations of confidentiality) will be made available on the Closing Date, where then located as identified by Seller to Buyer in writing, it being understood and agreed that for (a) any equipment on loan to a customer and located at a customer’s facility, such equipment will remain at the customer’s facililty pursuant to, and in accordance with, the terms and conditions of the applicable loan agreement between Seller and customer and (b) for all Transferred Assets other than those in the foregoing subsection (a), Seller will, on the Effective Date, ship (Ex Works Seller’s facility) such Transferred Assets to the Buyer.

1.2 Excluded Assets. Notwithstanding anything to the contrary in this Agreement, any assets which are not Transferred Assets or Transferred Contracts will be retained by Seller and are excluded from the transaction, including (i) any interest in any contractual arrangement with any Affiliate of Seller, (ii) any interests of Seller in real property or any fixtures, and (iii) all accounts receivables in respect of goods or services to the extent shipped or provided by Seller or Seller’s Affiliates, directly or indirectly, prior to the end of the Closing Date. All intellectual property matters related to this transaction are addressed exclusively in the Intellectual Property Agreements and no intellectual property matters are included in the subject matter of this Agreement.

1.3 Consideration. The purchase price to be paid by Buyer to Seller for the Transferred Assets and the Transferred Contracts shall be […***…] (the combined amounts, hereafter referred to as the “Purchase Price”). In addition to the Purchase Price and Buyer’s assumption of Assumed Liabilities under the terms and subject to the conditions of this Agreement, the consideration to be paid at Closing for the matters set forth in the Intellectual Property Agreements shall be […***…]. Therefore, on the Closing Date, Buyer shall pay to Seller the aggregate amount set forth in this Section 1.3, which is […***…] , by electronic funds transfer, such sum in immediately available funds. All payments shall be made in United States dollars. The Purchase Price shall be paid to the following account:

[…***…]

* Confidential Treatment Requested

5

The consideration for the Intellectual Property Agreements shall be paid to the following account:

[…***…]

1.4 Assumed Liabilities. Upon the terms and subject to the conditions hereof, as of the Closing, Seller will assign and transfer to Buyer, and Buyer will accept and assume, and thereafter shall fully perform and discharge, on a timely basis and in accordance with their respective terms and conditions, only (a) the liabilities, obligations and commitments of Seller listed on Schedule 1.4. hereto (including the Transferred Contracts) but only to the extent such obligations (i) do not arise from or relate to any breach by Seller of any provision of any of such Transferred Contracts and (ii) do not arise from or relate to any event, circumstance or condition occuring or existing on or prior to the Closing Date that, with notice or lapse of time, would constitute or result in a breach of any of such Transferred Contracts, (b) any warranty obligations of Seller for any In Scope Products sold, by Seller to any customers or distributors prior to Closing, including but not limited to, those warranty obligations listed in Schedule 1.4 hereto, and (c) the existing software maintenance obligations of Seller listed in Schedule 1.4 with respect to software licensed, by Seller prior to Closing, in connection with any In Scope Product, it being understood, in the case of (a) and (b) above, that Buyer shall perform such warranty or maintenance service obligations on behalf of and for Seller and Buyer will have no direct obligation or liability to Seller’s customers or distributors on account of such warranty or maintance obligations of the Seller or its Affiliates. (collectively, subsections (a), (b), (c) referred to as the “Assumed Liabilities”). Except for the Assumed Liabilities, Buyer is not assuming any liability, obligation or commitment of any nature of Seller related to Seller’s or its Affiliates’ operations or sales of the In Scope Product prior to the Closing date, and any such liability, obligation or commitment of the Seller or its Affiliates shall be an Excluded Liability. For purposes of this Agreement, all liabilities of Seller and any of its Affiliates not expressly listed in the definition of Assumed Liabilities, or expressly excluded from the definition of Assumed Liabilities under subsections (i) and (ii) of this Section 1.4, are referred to as “Excluded Liabilities.”

Article II. Closing

2.1 Closing Date. Subject to the conditions set forth in Articles VII and VIII below, the closing of the transaction provided for in this Agreement (the “Closing”) shall take place at the offices of Seller on or before September 30, 2003 (the “Closing Date”). All transactions provided for herein to occur on and as of the Closing Date shall be deemed to have occurred simultaneously and to be effective as of 11:59 p.m. (Eastern Standard Time) on the Closing Date.

* Confidential Treatment Requested

6

Notwithstanding anything to the contrary contained herein or in any of the Operative Agreements, in the event that the Closing shall not have been consummated by September 30, 2003, time being of the essence, then this Agreement and all other Operative Agreements (other than the Confidentiality Agreement) shall be deemed automatically terminated and null and void, without further action by either party, and there shall be no right, liability or obligation on the part of Seller or Buyer, except that Buyer shall immediately return to Seller any deliverables or other items Seller may have previously provided by Seller to Buyer under any of the Operative Agreements

2.2 Closing Statement. […***…] days after Closing, the Seller, with reasonable assistance from the Buyer, will prepare and deliver to Buyer a closing statement for the physical assets that constitute the Transferred Assets (the “Closing Statement”), as of the Closing Date. The purpose of the Closing Statement is to correctly reflect any changes in the listing of the inventory included in the Transferred Assets, which occur in the ordinary course of Seller’s business, between the Date of Execution and the Closing . The Closing Statement shall become final and binding upon the Parties unless Buyer gives written notice of its disagreement, which disagreement shall be based solely on the accuracy of the number of items included on or excluded from the Closing Statement, within […***…] days following Buyer’s receipt of the Closing Statement. Any such notice shall specify in reasonable detail the nature of any disagreement so asserted. Unless the Buyer agrees in writting, in no event will any assets be added to the list of Transferred Assets. In no event will any adjustment be made to the Purchase Price pursuant to this section.

Article III. Tax Matters

3.1 Allocation of Purchase Price. Except as otherwise required pursuant to a Final Determination, Buyer and Seller agree to act in accordance with the allocations of the Purchase Price set forth in Schedule 3.1 (the “Allocation Statements”) for all Tax purposes, including for purposes of any Returns, including any forms or reports (including IRS Form 8594) required to be filed pursuant to Section 1060 of the relevant version of the Internal Revenue Code (the “Code”) or any comparable provision of local, state or foreign law, to refrain from taking any position inconsistent with any such Return or the Allocation Statements, and to cooperate in the preparation of any such Section 1060 or comparable forms or reports and to timely file such Section 1060 or comparable forms or reports in the manner required by applicable law.

[…***…] shall prepare the Form 8594 under Section 1060 of the Code based on the Allocation Statements and deliver such form and all documentation used in the preparation and support of such form to […***…] within […***…] after the Closing Date.

* Confidential Treatment Requested

7

Buyer and Seller shall, and shall cause their respective Affiliates to cooperate with respect to Tax matters.

3.2 Filing of Returns and Payment of Taxes. [...***...] shall prepare and file, or cause to be prepared and filed, with the appropriate authorities all Tax returns, reports and forms (herein “Tax Returns”) and shall pay, or cause to be paid, when due all Taxes relating to the Transferred Assets attributable to any taxable period which ends on or prior to the Closing Date (herein “Pre-Closing Tax Period”). […***…] shall prepare and file, or cause to be prepared and filed, with the appropriate authorities all Tax Returns, and shall pay, or cause to be paid, when due all Taxes relating to the Transferred Assets attributable to taxable periods which are not part of the Pre-Closing Tax Period. If, in order to properly prepare its Tax Returns or other documents required to be filed with Governmental Authorities, it is necessary that a party be furnished with additional information, documents or records relating to the Transferred Assets, both Seller and Buyer agree to use reasonable efforts to furnish or make available such non-privileged information at the recipient’s request, cost and expense provided, however, that no party shall be entitled to review or examine the Tax Returns of any other party.

For purposes of this Section 3.2, in the case of any Taxable period that includes (but does not end on) the Closing Date (a “Straddle Period”), the Taxes for the Pre-Closing Tax Period shall be computed as if the Pre-Closing Tax Period ended as of the close of business on the Closing Date and the amount of Taxes for taxable periods that are not party of the Pre-Closing Tax Period shall be the excess, if any, of (x) the Taxes for the Straddle Period over (y) the Taxes for the Pre-Closing Tax Period.

3.3 Refunds and Credits. Any refunds and credits attributable to the Pre-Closing Tax Period shall be for the account of the [...***...] and any refunds and credits attributable to the period that is not part of the Pre-Closing Tax Period shall be for the account of the [...***...].

3.4 Transfer Taxes. All Taxes that are transfer, documentary, sales, use, registration, value-added or real estate transfer taxes, or any similar taxes and related fees incurred in connection with this Agreement and the other Operative Agreements and the transactions contemplated hereby and thereby shall be borne […***…]. To the extent legally able to do so, Buyer and Seller shall cooperate with each other to obtain exemptions from such Taxes, provided that neither Party shall be obligated to seek any exemption that would require any governmental audit of its books and records.

Article IV. Additional Covenants and Agreements

4.1 Solicitation of Employees. Buyer agrees that, for a period of […***…] from the Closing Date, it will not, without the Seller’s written consent, directly or indirectly, solicit for employment any employee of Seller (or any of its Subsidiaries) employed in the [...***...]

* Confidential Treatment Requested

8

[…***…] (other than the Transferred Employees as such term is defined under the Business Sale Agreement, which is attached to the Framework Agreement), as amended if so, any time during the period described in this Section 4.1,

Seller agrees that, for a period of […***…] from the Closing Date, […***…] will not, without the Buyer’s written consent, directly or indirectly, solicit for employment […***…]. For purposes of this Section 4.1, the term “solicit for employment” shall not include general employment advertising or the use of any independent employment agency or search firm not specifically directed to employees of the other Party (or any of its Subsidiaries).

4.2 Further Action. The Parties each agree to execute and deliver after the Closing Date such other documents, certificates, agreements and other writings and to take such other actions as may be necessary or desirable, in the opinion of the Parties’ counsel, in order to consummate or implement expeditiously the transactions contemplated hereby.

4.3 Post-Closing Payments. The Parties acknowledge that, for a period of […***…] after the Closing Date, Seller may make payments to third parties on behalf of Buyer associated with the Transferred Assets and Assumed Liabilities. Buyer agrees to reimburse Seller for such payments […***…] receipt of an invoice from Seller provided […***…]. Seller shall invoice Buyer monthly on the […***…] of each month. If Buyer disputes such invoice on the basis that such payment did not relate to the Transferred Assets or the Assumed Liabilities, Buyer shall, within […***…] of receiving such invoice, give notice to Seller of such dispute and the Parties shall attempt to immediately resolve such dispute. All amounts payable by Buyer to Seller pursuant to this Section 4.3, shall be paid in immediately available funds in U.S. dollars to Seller’s account set forth in Section 1.3. Any payments to third parties on behalf of Buyer associated with the Transferred Assets and Assumed Liabilities after the expiration of the […***…] period require Buyer’s prior written consent.

4.4 Consents, Novations and Subcontracted Work. Buyer and Seller shall use reasonable efforts to obtain, as soon as practicable, all requisite consents to transfers, assignments and novations, as the case may be, of all of the Transferred Assets, Transferred Contracts and the Assumed Liabilities. Buyer shall cooperate with Seller (including, where necessary, entering into appropriate instruments of assumption as shall be agreed upon) to have Seller released from all liability to the contract counterparty with respect to the Assumed Liabilities, and the Parties will each solicit such releases concurrently, in a manner acceptable to the Parties, with the solicitation of consents from third parties to the transfer, assignment and novation of the Transferred Assets, Transferred Contracts, and the Assumed Liabilities;

* Confidential Treatment Requested

9

provided, that neither Party shall be required to grant any additional consideration to any third party in order to obtain any such consent, novation, assignment or release. For any Assumed Liabilities for which Seller has any secondary liability to third parties, Buyer shall, upon prior written notice from Seller, provide Seller reasonable access and information in order for Seller to ascertain continuing compliance by Buyer with all contract terms and conditions applicable thereto. The consents to transfers, assignments and novations identified by the Parties as of the Date of Execution, if any, are listed on Schedule 4.4. If any such required consents and novations can be secured with the incurring of reasonable costs, Seller agrees to pay any such costs (excluding those of the Buyer). Where a Transferred Contract has not been assigned to Buyer on the Closing Date, the Parties agree to enter into such other arrangements, effective on the Closing Date, with respect to the underlying rights and obligations as shall permit Buyer to perform the obligations of Seller thereunder, as a subcontractor or otherwise, and Buyer to obtain the material benefit thereof (the “Subcontracted Work”) without regard to any costs or expenses incurred by the Seller in connection thereto other than (i) any costs or expenses to which Seller is entitled to payment or reimbursement under any of the other Operative Agreements or (ii) costs and expenses that would have been incurred by the Buyer had the applicable Transferred Contract been assigned to the Buyer on the Closing Date ; and until the requisite consents and novations are obtained, such obligations will not be deemed to be included in the Assumed Liabilities and nothing contained herein will be deemed to create an obligation or relationship that would constitute a breach of the contract underlying such rights and obligations. For the avoidance of doubt, “material benefit” as used in this Section 4.4 shall expressly include any payments received by Seller under the Transferred Contracts after the Closing Date for any products shipped under the Transferred Contracts after the Closing Date (i) directly by Buyer or (ii) by Seller on behalf of Buyer using inventory, including that listed on Schedule 1.1, provided, directly or indirectly, by Buyer. Buyer agrees to diligently perform and discharge the obligations of Seller in connection with the Subcontracted Work directly, or indirectly through Seller, as applicable and to the extent that consents to transfer, assignment and novation are obtained after the Closing, the Parties agree that such obligations will no longer be considered to be Subcontracted Work after such time, but will instead be deemed to be Assumed Liabilities for all purposes of this Agreement.

4.5 Product Warranty Services. Seller shall pay Buyer within […***…] after receipt of invoice from Buyer, for the actual reasonable cost of (a) warranty services performed by Buyer with respect to In Scope Products sold by Seller or its Affiliates prior to the Closing Date and (b) software maintenance services performed by Buyer with respect to any software maintenance obligations of Seller listed in Schedule 1.4 with respect to software licensed by Seller prior to the Closing Date. Within […***…] after the Closing Date, Buyer and Seller shall establish a reasonable mutually agreeable process pursuant to which Buyer shall provide such warranty services, it being understood that […***…]. At a minimum, such process shall address establishing warranty run rates and failure rate expectations for each product. In addition, neither Buyer’s obligation to provide such warranty services, nor Seller’s obligation to pay for such warranty services, shall cover claims occurring after the maximum applicable warranty period.

* Confidential Treatment Requested

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4.6 Excluded Liabilities. Seller acknowledges and agrees that Seller shall retain responsibility for the Excluded Liabilities and that neither Buyer nor any of Buyer’s Affiliates shall have any liability or obligation for any such Excluded Liabilities.

4.7 Provision of Omitted Assets. If within […***…] after the Closing Date of this Agreement the Buyer or Seller believes that certain tangible assets or material contracts (other than any vendor contracts, distributor contracts, or any contracts regarding intellectual property matters) exclusively or primarily used in the sale of the In Scope Products as of the Closing Date were omitted from Schedule 1.1 or Schedule 1.4, respectively, then the Parties will work in good faith to agree upon such omitted assets (the “Omitted Assets”). Once identified and agreed to, the Parties will, subject to Section 4.4, amend the necessary documents and the Seller shall, at its sole expense, promptly deliver (or transfer in the case of any contracts) such Omitted Assets to Buyer so as to remedy such error or omission. So long as there is no dispute as to whether a particular asset is an Omitted Asset, and the Parties have amended the necessary documents and the Seller has promptly transferred to Buyer such Omitted Assets, Seller shall have no further obligation or liability to Buyer regarding such Omitted Assets.

4.8 Permitted Liens. Seller shall reimburse Buyer for the actual reasonable costs incurred by Buyer to discharge any Permitted Lien existing as of the Closing Date that adversely affects the value or Buyer’s use of a Transferred Asset; provided, however, that Buyer must first give Seller at least […***…] prior written notice of Buyer’s intention to discharge the Permitted Lien and an opportunity for Seller, at its option and expense, to attempt to discharge the underlying Permitted Lien during such […***…] period; provided further that Seller shall have no obligation under this Section 4.8 to discharge any Lien that is created or granted by Buyer.

Article V. Representations and Warranties of Buyer

Buyer hereby represents and warrants, as of the date of the Agreement and of the Closing Date, to Seller as follows:

5.1 Incorporation. Buyer is a duly organized and validly existing corporation in good standing under the laws of the State of Delaware, with all requisite corporate power and authority to own its properties and conduct its business.

5.2 Authority. Buyer has the requisite corporate power and authority to execute and deliver each of the Operative Agreements and to perform its obligations under each such agreement. Each of the Operative Agreements has been duly and validly authorized, executed and delivered by Buyer and constitutes the valid and binding agreement of Buyer in accordance with its respective terms. No other corporate proceedings on the part of Buyer are necessary to authorize the Operative Agreements and the transactions contemplated thereby.

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5.3 No Conflict. The execution and delivery by Buyer of each of the Operative Agreements does not, and the performance of its obligations thereunder, will not:

(a) conflict with, or result in a breach of, any of the provisions of Buyer’s articles of incorporation or by-laws;

(b) breach, violate or contravene any Governmental Rule, or create any right of termination or acceleration or encumbrance, that, singly or in the aggregate, would have a material adverse effect on the authority or ability of Buyer to perform its obligations under this Agreement, the Confidentiality Agreement, the Custom Sales Agreement, the Intellectual Property Agreements, and the Assumption Agreement or the Assumed Liabilities; and

(c) conflict in any respect with, or result in a breach of or default under, any contract, license, franchise, permit or any other agreement or instrument to which Buyer is a Party or by which Buyer or any of its properties may be affected or bound that, singly or in the aggregate, would have a material adverse effect on the authority or ability of Buyer to perform its obligations under this Agreement, the Confidentiality Agreement, the Custom Sales Agreement, the Intellectual Property Agreements, and the Assumption Agreement or the Assumed Liabilities.

5.4 Governmental Consents. Other than compliance with the HSR Act pre-notification requirements, if required, no material consent, approval or authorization of, or designation, declaration or filing with, any Governmental Authority on the part of Buyer is required in connection with the execution or delivery by Buyer of this Agreement, the Intellectual Property Agreements, or the Assumption Agreement, or the consummation by Buyer of the transactions contemplated by any of the foregoing.

5.5 No Broker. Buyer has not engaged any corporation, firm or other Person who is entitled to any fee or commission as a finder or a broker in connection with the negotiation of the Operative Agreements or the consummation of the transactions contemplated thereby, and Buyer shall be responsible for all liabilities and claims (including costs and expenses of defending against same) arising in connection with any claim by a finder or broker that it acted on behalf of Buyer in connection with the transactions contemplated thereby.

Article VI. Representations and Warranties of Seller

Except as set forth on the disclosure schedule delivered by Seller to Buyer (the “Disclosure Schedule”), Seller hereby represents and warrants, as of the date of the Agreement and of the Closing Date, to Buyer as follows:

6.1 Incorporation. Seller is a duly incorporated and validly existing corporation in good standing under the laws of the State of New York, with all requisite corporate power and authority to own its properties and conduct its business, and is duly qualified in each jurisdiction

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in which its ownership of property requires such qualification except where the failure to so qualify would not have a material adverse effect upon the Transferred Assets.

6.2 Authority. Seller has the requisite corporate power and authority to execute and deliver the Operative Agreements and to perform its obligations under each of the foregoing. Each of the Operative Agreements has been duly and validly authorized, executed and delivered by Seller and constitutes the valid and binding agreement of Seller in accordance with its respective terms. No other corporate proceedings on the part of Seller are necessary to authorize the Operative Agreements and the transactions contemplated by any of the foregoing.

6.3 No Conflict. The execution and delivery by Seller of each of the Operative Agreements does not, and the performance by Seller of its obligations thereunder will not:

(a) conflict with, or result in a breach of, any of the provisions of its Articles of Incorporation or By-laws;

(b) breach, violate or contravene any Governmental Rule, or create any right of termination or acceleration or encumbrance, that, singly or in the aggregate, would have a material adverse effect on (i) its authority or ability to perform its obligations under this Agreement, the Confidentiality Agreement, the Custom Sales Agreement, the Intellectual Property Agreements, the Assumption Agreement or the Bill of Sale; or (ii) the Transferred Assets; and

(c) conflict in any respect with, or result in a breach of or default under, any contract, license, franchise, permit or any other agreement or instrument to which it is a party or by which it or any of the Transferred Assets may be bound that, singly or in the aggregate, would have a material adverse effect on (i) its authority or ability to perform its obligations under this Agreement, the Confidentiality Agreement, the Custom Sales Agreement, the Intellectual Property Agreements, the Assumption Agreement or the Bill of Sale; or (ii) the Transferred Assets (except for agreements and instruments that require the consent or approval of a third party for the transactions contemplated by this Agreement).

6.4 Governmental Consents. Other than compliance with the HSR Act pre-notification requirements, if required, no material consent, approval or authorization of, or designation, declaration or filing with, any Governmental Authority on the part of Seller is required in connection with the execution or delivery by Seller of the Operative Agreements or the consummation by Seller of the transactions contemplated by any of the foregoing.

6.5 No Broker. Seller has engaged no corporation, firm or other Person who is entitled to any fee or commission as a finder or a broker in connection with the negotiation of the Operative Agreements or the consummation of the transactions contemplated thereby, and Seller shall be responsible for all liabilities and claims (including costs and expenses of defending against same) arising in connection with any claim by a finder or broker that it acted on behalf of Seller in connection with the transactions contemplated thereby.

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6.6 Title to Personal Property. Seller has good and marketable title to all tangible personal property listed on Schedule 1.1 hereto, free and clear of any Liens other than Permitted Liens. At the Closing, Seller will transfer to the Buyer good and marketable title to all Transferred Assets, free and clear of any Liens other than Permitted Liens.

6.7 Litigation. Except as disclosed on Schedule 6.7, there are no actions, suits, proceedings or investigations pending or, to Seller’s knowledge, threatened in a writing to Seller against or directly affecting the Transferred Assets, at law or in equity, including any administrative proceedings or condemnation actions with any regulatory authority, which in the aggregate would have a material adverse effect on the Transferred Assets. There is no existing default by Seller with respect to any judgment, order, writ, injunction or decree of any Governmental Authority or arbitrator that materially adversely affects the Transferred Assets.

6.8 No Rights In Others To Transferred Assets. Neither Seller nor any Affiliate of Seller is party to any outstanding contracts or other arrangements giving any Person any present or future right to require Seller to transfer to any Person any ownership or possessory interest in, or to grant any lien on, any of the Transferred Assets, other than pursuant to this Agreement.

6.9 Contracts. Schedule 1.4. contains a true and complete list of all Transferred Contracts. Seller has performed or is performing all material obligations required to be performed by it under such contracts and is not (with or without notice, lapse of time or both) in breach or default in any material respect thereunder; and, to the knowledge of Seller, no other party to any of such contracts is (with or without notice, lapse of time or both) in breach or default in any material respect thereunder. Except for any such contracts that have expired as of the Closing Date, the contracts listed on Schedule 1.4 remain in full force and effect, and […***…], Seller has not received any notice or other written communication from the other contracting party that IBM is in possible breach or default of any obligation thereunder.

[…***…], Seller used all commercially reasonable efforts to identify all material: sales contracts; outbound software licenses; equipment loan agreements; and vendor contracts (other than any contracts relating to development or intellectual property matters.) of Seller that are exclusively or primarily related to those certain In Scope Products (as such capitalized term is defined in Schedule “A” of the IPA) being sold by Seller as of the Closing Date; provided, however, that nothing in the foregoing sentence shall be deemed or interpreted to modify Section 4.7 or the definition or scope of Transferred Contracts.

6.10 WARRANTIES. […***…].

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6.11 Other Information. This Agreement, the Exhibits, Appendices and Schedules hereto, as each may be amended prior to the Closing, and all certificates delivered to Buyer and its representatives from Seller at Closing in connection with this Agreement do not and will not contain any untrue statement of any material fact and do not and when delivered will not omit to state a material fact necessary to make the statement herein or therein not misleading.

6.12 Transferred Contract Consents. Schedule 4.4 sets forth a correct and complete list of all the Transferred Contracts that require third party consent to transfer or otherwise assign to Buyer.

6.13 Revenues. […***…], Schedule 6.13 represents in all material respects […***…] the gross revenues of the In Scope Products for the relevant periods set forth in Schedule 6.13.

6.14 Inventory. On the Closing Date, the inventory included in the Transferred Assets as set forth in Schedule 1.1 is of such a quality to be useable and saleable by Seller in the ordinary course of business. […***…].

Article VII. Conditions to Buyer’s Obligations

The obligation of Buyer to consummate the transactions contemplated herein is subject to the satisfaction (or waiver by Buyer) of the conditions set forth below in this Article.

7.1 Representations and Warranties. Subject to Section 9.2, the representations and warranties of Seller made in this Agreement shall be true and correct in all material respects as of the Date of Execution and as of the Closing Date with the same effect as if made at and as of the Closing Date, except to the extent such representations and warranties expressly relate to an earlier time. Seller shall have performed in all material respects its respective covenants and agreements contained in this Agreement and the other Operative Agreements required to be performed at or prior to the Closing.

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7.2 Consents, Approvals and Injunctions.

(a) Seller shall have obtained or made all consents, approvals, orders, licenses, permits and authorizations of, and registrations, declarations and filings with, any Governmental Authority or any other Person required to be obtained or made by or with respect to the Transferred Assets in connection with the execution,, delivery and performance of this Agreement.

(b) No injunction, order or decree of any Governmental Authority shall be in effect as of the Closing, and no lawsuit, claim, proceeding or investigation shall be pending or threatened by or before any Governmental Authority as of the Closing, which would restrain, prohibit or make unlawful the transfer of the Transferred Assets or Assumed Liabilities.

(c) No action or proceeding challenging the transactions or any provision of this Agreement or the other Operative Agreements shall be pending or threatened against any party.

(d) No Burdensome Condition shall exist with respect to Buyer in connection with the transactions contemplated by the Operative Agreements.

7.3 Governmental Rule. No Governmental Rule shall have been instituted, issued or proposed to restrain, enjoin or prevent the transfer of the Transferred Assets as contemplated hereby or to invalidate, suspend or require modification of any material provision of any Operative Agreement.

7.4 Operative Agreements. Seller shall have entered into each of the Operative Agreements to be executed by it and each such Operative Agreement shall be in full force and effect without breach thereunder.

7.5 Closing Documents. Seller shall have delivered to Buyer the following documents:

(a) a certificate of Seller, dated the Closing Date, to the effect that Seller’s representations and warranties in this Agreement are true and correct and that all actions required to be taken by Seller prior to the Closing have been duly taken; and

(b) a certificate of the secretary or assistant secretary of Seller, dated the Closing Date, […***…].

7.6 Proceedings. All corporate and legal proceedings taken by Seller in connection with the execution of the Operative Agreements and the transfer of the Transferred Assets shall be reasonably satisfactory in form and substance to Buyer and its counsel, and Buyer shall have received all such certified or other copies of all such documents as it shall have reasonably requested.

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Article VIII. Conditions to Seller’s Obligations.

The obligations of Seller to consummate the transactions contemplated herein shall be subject to the satisfaction (or waiver by Seller) of the conditions set forth below in this Article.

8.1 Payment of Purchase Price. The payment of the Purchase Price in the manner specified in Section 1.3, and any other consideration set forth in Section 1.3 or the other Operative Agreements due at Closing.

8.2 Representations and Warranties. The covenants, agreements, representations and warranties of Buyer made in this Agreement shall be true and correct in all material respects as of the Date of Execution and as of the Closing Date with the same effect as if made at and as of the Closing Date.

8.3 Consents, Approvals and Injunctions.

(a) Buyer shall have obtained or made all consents, approvals, orders, licenses, permits and authorizations of, and registrations, declarations and filings with, any Governmental Authority or any other Person required to be obtained or made by or with respect to Buyer in connection with the execution and delivery of this Agreement and the other Operative Agreements and the Closing.

(b) No injunction, order or decree of any Governmental Authority shall be in effect as of the Closing, and no lawsuit, claim, proceeding or investigation shall be pending or threatened by or before any Governmental Authority as of the Closing, which would restrain, prohibit or make unlawful the transfer of the Transferred Assets or the Assumed Liabilities or invalidate or suspend any provision of the Operative Agreements.

(c) No Burdensome Condition shall exist with respect to Seller in connection with the transactions contemplated by the Operative Agreements.

8.4 Operative Agreements. Buyer shall have entered into each of the Operative Agreements to be executed by it and each such Operative Agreement shall be in full force and effect without breach thereunder.

8.5 Closing Documents. Buyer shall have delivered to Seller the following documents:

(a) a certificate of an authorized signatory of Buyer, dated the Closing Date, to the effect that Buyer’s representations and warranties in this Agreement are true and correct and that all actions required to be taken by Buyer prior to the Closing have been duly taken; and

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(b) a certificate of the secretary of Buyer, dated the Closing Date, […***…], certifying the attached copy of the By-laws of Buyer, the authorization of the execution, delivery and performance of the Operative Agreements and the resolutions adopted by the Board of Directors of Buyer authorizing the actions to be taken by Buyer under the Operative Agreements.

8.6 Proceedings. All corporate and legal proceedings taken by Buyer in connection with the transactions contemplated by the Operative Agreements and all documents and papers relating to such transactions shall be reasonably satisfactory in form and substance to Seller and its counsel, and Seller shall have received all such certified or other copies of all such documents as it shall have reasonably requested.

Article IX. General Matters.

9.1 Survival of Representations and Warranties. All representations and warranties made by the Parties in this Agreement or in any schedule, document, certificate or other instrument delivered by or on behalf of the Parties pursuant to this Agreement shall survive the Closing for a period of […***…] after the Closing Date; provided, however, that all representations and warranties relating to the Assumed Liabilities shall survive the Closing Date until […***…].

9.2 Limitation of Liability. Notwithstanding anything to the contrary set forth in the Operative Agreements, unless this section is specifically excluded from application to a specific Operative Agreement or provision in an Operative Agreement, Seller shall not be liable for any amounts with respect to the breach of any representations or warranties contained in an Operative Agreement unless and until such amounts shall exceed in the aggregate […***…] (the “Limitation Amount”) (in which case […***…]). Notwithstanding anything to the contrary set forth in the Operative Agreements, unless this section is specifically excluded from application to a specific Operative Agreement or provision in an Operative Agreement, in no event shall Seller’s liability for any causes of action arising out of, or related to any representations or warranties contained in the Operative Agreements exceed [...***...] in the aggregate; provided, however, that such limitation shall not be applicable with respect to Seller’s representation set forth in Section 6.6.

For purposes of this Section 9.2 only, reference to the Operative Agreements shall exclude […***…].

Neither Seller nor Buyer shall be responsible for any indirect, incidental, punitive, special or consequential damages whatsoever, including but not limited to loss of profits ( except to the extent such loss of profits are determined by a court of competent jurisdiction to constitute direct damages) or goodwill, , even if advised of the possibility of such damages.

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9.3 Public Announcements. The Confidentiality Agreement between the Seller and Buyer continues to apply, and the Operative Agreements as well as the proposed transaction are subject to and confidential under that Confidentiality Agreement. For […***…] after the Closing Date, all public announcements in the form of a Press Release relating to the Operative Agreements or the transactions contemplated hereby shall be made only after consultation between the Parties, except for disclosures by either Party that in the opinion of counsel for such Party are necessary and proper under applicable law, rule or regulation (but only after the disclosing Party has taken all reasonable steps to advise the other Party about the Party’s intention to make, and the proposed contents of, such disclosures). Any direct disclosures to customers in connection with commercial relationships shall not reveal the consideration specified in Section 1.3 of this Agreement. Notwithstanding the foregoing, either Party shall have the right, in its sole discretion, to make such disclosures as it may deem necessary or advisable to any Governmental Authority. In the event of a breach or anticipatory breach of this Section 9.3. by either Party, the other Party shall be entitled, in addition to any and all other remedies available at law or in equity, to preliminary and permanent injunctive relief and specific performance without proving damages.

Each of the Parties hereto will rely on their own advisors with respect to advice regarding the tax treatment and structure of the transaction contemplated under this Agreement. The parties also recognize that under IRS regulations promulgated earlier this year with respect to tax shelters (“Tax Shelter Regulations”), a transaction may be deemed a “confidential transaction” thereunder unless the related agreements expressly permit the disclosure of the “tax treatment and tax structure” of the transaction. Therefore, notwithstanding anything to the contrary herein or in any other Operative Agreement, each of the parties agree that the other may disclose all information regarding the “tax treatment and tax structure” of the transaction contemplated under this Agreement, but only to the extent and in the manner required to avoid having the transaction contemplated under this Agreement be treated as a reportable transaction under the Tax Shelter Regulations.

9.4 Costs. […***…]. If any action or proceeding relating to this Agreement or the enforcement of any provision of this Agreement is brought against any party hereto, the prevailing party shall be entitled to recover reasonable attorneys’ fees, reasonable costs, and reasonable disbursements (in addition to any other relief to which the prevailing party may be entitled).

9.5 […***…].

9.6 Modification and Waiver. No modification or waiver of any provision of this Agreement and no consent by either Party to any departure therefrom shall be effective unless in a writing referencing the particular section of this Agreement to be modified or waived and signed by a duly authorized signatory of each Party, and the same will only then be effective for the period and on the conditions and for the specific instances and purposes specified in such writing.

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9.7 Governing Law. This Agreement has been delivered at and shall be deemed to have been made at […***…], and shall be interpreted, and the rights and liabilities of the Parties hereto determined, exclusively in accordance with the laws of the State of [...***...] applicable to agreements executed, delivered and performed within such State, without regard to the principles of conflicts of laws thereof. Each of the Parties hereby: (i) waives trial by jury, (ii) waives any objection to […***…] venue of any action instituted hereunder, and (iii) consents to the granting of such legal or equitable relief as is deemed appropriate by any aforementioned court.

9.8 Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given and shall be effective (a) when delivered by messenger or courier, or (b) five days after deposit for mailing by registered or certified mail, postage prepaid, return receipt requested, when also transmitted by telecopy as follows:

(a) if to Seller, to:

International Business Machines Corporation

New Orchard Road

Armonk, New York 10504

[…***…]

with a copy at the same address to:

[…***…]

(b) if to Buyer, to:

Applied Micro Circuits Corportation

6290 Sequence Druive

San Diego, CA 92191

Attention: General Counsel

[…***…]

with a copy to:

Paul, Hastings, Janofsky & Walker

3579 Valley Centre Drive

San Diego, CA 92130

[…***…]

or to such Person or address as the Parties shall hereafter designate to the other from time to time by similar written notice.

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9.9 Bulk Sales. Buyer hereby waives compliance by Seller with any applicable bulk sales or similar laws. Buyer shall discharge the Assumed Liabilities in accordance with their terms and Buyer agrees that Seller shall have no liability for any failure of Buyer to discharge the Assumed Liabilities in accordance with their terms.

9.10 Assignment. This Agreement shall be binding upon, and inure to the benefit of, and be enforceable by, the successors and assigns of the Parties; provided, that, no Party may assign its obligations, rights or privileges, in whole or in part, hereunder without the prior written consent of the other Party.

9.11 Counterparts. This Agreement may be executed by the Parties in one or more counterparts, each of which shall be an original and all of which shall constitute one and the same instrument. Once signed by both parties, any reproduction of this Agreement made by reliable means (e.g., photocopy or facsimile) is considered an original.

9.12 No Third Party Beneficiaries. This Agreement is for the sole benefit of the Parties and their permitted successors and assigns and nothing herein expressed or implied shall give or be construed to give any Person, other than the Parties and such permitted successors and assigns, any legal or equitable rights hereunder.

9.13 Entire Agreement. This Agreement, together with the other Operative Agreements, comprise the entire agreement between the Parties with respect to the subject matter hereof and thereof and supersede all prior agreements, understandings and representations, oral or written, between Buyer and Seller relating hereto and thereto. The Parties agree and acknowledge that the parties have an existing commercial relationship and that nothing in the Operative Agreements shall be construed to impair or limit the rights of the Parties under any other existing agreements between the Parties, and that nothing under any other existing agreements between the Parties shall be construed to impair or limit the rights of the Parties under the Operative Agreements.

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IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized signatories as of the date and year first above written.

INTERNATIONAL BUSINESS MACHINES CORPORATION		APPLIED MICRO CIRCUITS CORPORATION
By:	[. . .***. . .]	By:	[. . .***. . .]
Name:	[. . .***. . .]	Name:	[. . .***. . .]
Title:	[. . .***. . .]	Title:	[. . .***. . .]

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EX-10.42

Exhibit 10.42

***Text Omitted and Filed Separately

Confidential Treatment Requested

Under C.F.R. §§ 200.80(b)(4) and 240.24b-2

License Reference Number__L034488_______

EXECUTION COPY PATENT LICENSE AGREEMENT

LICENSE AGREEMENT (“Agreement”) dated Sept. 28,2003 (“Agreement Date”) between INTERNATIONAL BUSINESS MACHINES CORPORATION, a New York corporation (“IBM”), and APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation (“BUYER”).

WHEREAS, IBM and BUYER have executed concurrently herewith an “Asset Purchase Agreement” (APA), “Intellectual Property Agreement” (IPA), and other ancillary agreements identified in the APA as the “Operative Agreements” for the purpose of conveying certain assets and licensing certain intellectual property from IBM to BUYER in a divestiture and acquisition transaction relating to Switch Fabric PRS Products;

WHEREAS, the use of such assets and the exercise of such licenses may require a license under IBM patents;

WHEREAS, IBM has the right to license such patents, and BUYER desires to acquire a […***…] license under such patents;

WHEREAS, BUYER has the right to license its own patents, and IBM desires to acquire a […***…] license under such patents;

NOW THEREFORE, in consideration of the premises and mutual covenants herein contained, IBM and BUYER (each as “Grantee” and “Grantor”) agree as follows:

Section 1. Definitions

As used herein, the term “Agreement” means this Patent License Agreement. The following terms used in this Agreement shall have the respective meanings assigned in this Agreement unless the context otherwise requires. Certain capitalized terms used in this Agreement and not otherwise defined shall have the meanings set forth in the IPA.

1.1 “IBM Licensed Patents” shall mean […***…]

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[…***…]

Notwithstanding the foregoing, or any other provision of this Agreement or any other Operative Agreement, IBM Licensed Patents shall expressly exclude […***…].

IBM Licensed Patents shall include […***…].

1.2 “BUYER Licensed Patents” shall mean […***…].

Notwithstanding the foregoing or any other provision of this Agreement or any other Operative Agreement, Buyer Licensed Patents shall expressly exclude […***…]

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[…***…].

BUYER Licensed Patents shall include said […***…].

1.3 “IBM Licensed Product” shall mean […***…].

1.4 “BUYER Licensed Product” shall mean […***…].

1.5 “Licensed Products” shall mean IBM Licensed Products or BUYER Licensed Products as the context indicates.

1.6 “Licensed Software” shall mean the object code and source code for software embedded in or otherwise included in Licensed Products.

1.7 “Subsidiary” of a party hereto or of a third party shall mean a corporation, company or other entity:

(a) more than fifty percent (50%) of whose outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) are, now or hereafter, owned or controlled, directly or indirectly, by a party hereto or such third party, but such corporation, company or other entity shall be deemed to be a Subsidiary only so long as such ownership or control exists; or

(b) which does not have outstanding shares or securities, as may be the case in a partnership, joint venture or unincorporated association, but more than fifty percent (50%) of whose ownership interest representing the right to make the decisions for such corporation, company or other entity is now or hereafter, owned or controlled, directly or indirectly, by a party hereto or such third party, but such corporation, company or other entity shall be deemed to be a Subsidiary only so long as such ownership or control exists.

1.6 “Assigned Product Copyrights”, “Assigned Product Know-how”, “ Chip Carrier”, “Licensed Product Copyrights”, “Chip Carrier”, “Semiconductor Device”,

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“Semiconductor Material”, “Semiconductor Product”, “Switch Fabric PRS Product” and “Licensed Product Know-how” shall have the meanings set forth in the Intellectual Property Agreement.

1.7 “Derivative Work” shall mean a work which is based upon one or more preexisting works, including, but not limited to , a revision, modification, translation, abridgement, condensation, expansion or any other form which such preexisting work may be recast, transformed or adapted.

1.8 “Effective Date” shall mean Closing Date as identified in the APA.

1.9 “Licensed Patents” shall mean either IBM Licensed Patents or BUYER Licensed Patents as the context indicates.

Section 2. Grants of Rights

2.1 Each party, as Grantor, on behalf of itself and its Subsidiaries grants to the other, as Grantee, a […***…] license under Grantor’s Licensed Patents:

[…***…]

The license granted by BUYER to IBM is fully paid up. The license granted by IBM to BUYER shall become fully paid up upon the receipt by IBM of the consideration set forth in Section 4.

2.2 The license granted in Section 2.1(b) […***…]:

[…***…]

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[…***…].

Unless Grantee informs Grantor to the contrary, […***…].

2.3 Except as expressly provided herein, no license or immunity is granted under this Agreement by either party, either directly or by implication, estoppel or otherwise to any third parties acquiring items from either party for the combination of such acquired items with other items (including items acquired from either party hereto) or for the use of such combination.

2.4 Subject to Section 2.5, the licenses granted herein shall include the right of each party to grant sublicenses to its Subsidiaries existing on or after the Effective Date, which sublicenses may include the right of sublicensed Subsidiaries to sublicense other Subsidiaries of said party. No sublicense shall be broader in any respect at any time during the life of this Agreement than the license held at that time by the party that granted the sublicense.

2.5 A sublicense granted to a Subsidiary shall terminate on the earlier of:

(a) the date such Subsidiary ceases to be a Subsidiary; and

(b) the date of termination or expiration of the license of the party or Subsidiary that granted the sublicense.

If a Subsidiary ceases to be a Subsidiary and holds any patents under which a party hereto is licensed, such license shall continue for the term defined herein.

2.6 In the event that neither a party nor any of its Subsidiaries has the right to grant a license under any particular Licensed Patent of the scope set forth in Section 2, then the license granted herein under said Licensed Patent shall be of the broadest scope which said party or any of its Subsidiaries has the right to grant within the scope set forth above.

2.7 If, after the Effective Date, a party or any of its Subsidiaries (“Acquiring Party”) either acquires an entity or acquires substantially all of the assets from an entity, and said entity is, immediately prior to the date of acquisition, licensed by the other party (“Licensor”) under one or more Licensed Patents through an existing agreement pursuant to which royalties or other payments are made by said entity to Licensor, then the license and other rights granted herein to the Acquiring Party with respect to said Licensed Patents shall apply to products manufactured by said entity or through the use of said assets, provided that such royalties or other payments shall continue to be made by the Acquiring Party or said entity to the Licensor with respect to such products notwithstanding that the Acquiring Party may have been licensed for the same Licensed Products before the acquisition.

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2.8 Notwithstanding anything said in Section 2 of this Agreement, no license or immunity is granted by Grantor to Grantee, or anyone working under the direction of Grantee, directly or by implication or estoppel or other wise under any Grantor Licensed Patent to:

[…***…]

Section 3.

This section intentionally left blank.

Section 4. Payment

4.1 The license rights granted by BUYER to IBM shall be considered fully paid up by IBM upon execution of this Agreement. The license rights granted by IBM to BUYER shall be considered fully paid up by BUYER upon payment by BUYER to IBM of all amounts due under the IPA.

Section 5. Term of Agreement; Acquisition of a Party

5.1 The term of the licenses granted under this Agreement shall be from the Effective Date until the expiration of the last to expire of the Licensed Patent claims , unless earlier terminated under the provisions of this Agreement. For the avoidance of doubt however, unless there is a Closing, this Agreement shall be null and void ab initio and have no effect.

5.2 Grantor shall have the right to terminate the license and any other rights granted to Grantee under this Agreement, in whole or in part, if:

(a) Grantee fails at any time to make any payment required herein or in the APA; or

(b) Grantee intentionally and materially breaches any term or condition relating to intellectual property misuse or confidentiality provisions under any Operative Agreement, and if Grantee does not, after written notice specifying the nature of the breach, cure within […***…]. The termination of this license or rights under this Agreement shall be effective upon written notice.

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5.3 If BUYER is acquired by a third party, thereby becoming a Subsidiary of the third party, if BUYER notifies SELLER in writing prior to said acquisition, BUYER may retain its rights hereunder so long as such acquiring third party accepts the obligations of this Agreement and unless one of the following applies (in which case the Agreement will terminate upon such acquisition):

(a) SELLER has an unresolved intellectual property dispute with said third party;

(b) SELLER has ongoing litigation with said third party in which the claim is for injunctive relief, specific performance or damages in excess of […***…].

Section 6. Means of Communication

6.1 Notices and other communications shall be sent by facsimile or by registered or certified mail to the following addresses and shall be effective upon mailing:

For SELLER:	For BUYER:
[…***…] IBM Corporation North Castle Drive, […***…] Armonk, NY 10504-1785 United States of America	[…***…] […***…] Applied Micro Circuits Corporation 6290 Sequence Drive San Diego, CA 92121 United States of America
Facsimile: […***…]	Facsimile: […***…]

6.2 A License Reference Number will be assigned to our agreement upon execution. This number should be included in all communications including wire transfer payments, royalty reports, tax credit certificates, letters, faxes and E-Mail messages.

Section 7. Miscellaneous

7.1 Neither party shall assign or grant any right under any of its Licensed Patents unless such assignment or grant is made subject to the terms of this Agreement.

7.2 Neither party shall assign any of its rights (other than the right to receive payments) or delegate any of its obligations under this Agreement without the other party’s prior written consent (which shall not be unreasonably withheld). Any attempt to do so shall be void. However, a party which undergoes reorganization may assign its rights and delegate its obligations to its legal successor, provided that after the reorganization the successor and its Subsidiaries will have essentially the same assets as such party and its Subsidiaries had immediately prior to the reorganization.

7.3 Neither party shall use or refer to this Agreement or any of its provisions in any promotional activity.

7.4 Each party represents and warrants that it has the full right and power to grant the license set forth in Section 2. Except as set forth in Section 7 of the IPA, neither party makes any other

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representation or warranty, express or implied, nor shall either party have any liability in respect of any infringement of patents or other rights of third parties due to the other party’s operation under the license herein granted.

7.5 Nothing contained in this Agreement shall be construed as conferring any rights by implication, estoppel or otherwise, under any non-patent intellectual property right, or any patents or patent applications, other than the Licensed Patents. Neither party is required hereunder to furnish or disclose to the other any technical or other information (including copies of Licensed Patents) except as specifically provided herein.

7.6 Neither party shall have any obligation hereunder to institute any action or suit against third parties for infringement of any of its Licensed Patents or to defend any action or suit brought by a third party which challenges or concerns the validity of any of its Licensed Patents. Neither party shall have any right to institute any action or suit against third parties for infringement of any of the other party’s Licensed Patents. Neither party, nor any of its Subsidiaries, is required to file any patent application, or to secure any patent or patent rights, or to maintain any patent in force.

7.7 Each party shall, upon a request from the other party sufficiently identifying any patent or patent application under the control of the requested party, inform the other party as to the extent to which said patent or patent application is subject to the licenses and other rights granted hereunder. If such licenses or other rights under said patent or patent application are restricted in scope, copies of all pertinent provisions of any contract or other arrangement creating such restrictions shall, upon request, be furnished to the party making such request, unless such disclosure is prevented by such contract, and in such event, a statement of the nature of such restriction shall be provided.

7.8 If a third party has the right to grant licenses under a patent to a party hereto (as a “Licensee”) with the consent of the other party hereto, said other party shall provide said third party with any consent required to enable said third party to license said Licensee on whatever terms such third party may deem appropriate. Each party hereby waives any right it may have to receive royalties or other consideration from said third party as a result of said third party’s so licensing said Licensee within the scope of the licenses granted under Section 2 of this Agreement.

7.9 This Agreement shall not be binding upon the parties until it has been signed hereinbelow by or on behalf of each party. No amendment or modification hereof shall be valid or binding upon the parties unless made in writing and signed as aforesaid, except that IBM may amend Section 6.2 and either party may amend its address in Section 6.1 by written notice to the other party.

7.10 If any section of this Agreement is found by competent authority to be invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of such section in every other respect and the remainder of this Agreement shall continue in effect so

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long as the Agreement still expresses the intent of the parties. However, if the intent of the parties cannot be preserved, this Agreement shall be either renegotiated or terminated.

7.11 This Agreement shall be deemed to have been made in […***…], and all matters arising from or relating in any manner to the subject matter of this Agreement shall be interpreted, and the rights and liabilities of the parties determined, in accordance with the laws of the State of […***…] applicable to agreements executed, delivered and performed within such State, without regard to the principles of conflicts of laws thereof.

7.12 The headings of sections are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement.

7.13 Until […***…], each party agrees not to disclose the terms of this Agreement to any third party (other than its Subsidiaries) without the prior written consent of the other party. This obligation is subject to the following exceptions:

(a) disclosure is permissible if required by government or court order, provided the party required to disclose first gives the other prior written notice to enable it to seek a protective order;

(b) disclosure is permissible if otherwise required by law;

(c) disclosure is permissible if required to enforce rights under this Agreement;

(d) each party may use similar terms and conditions in other agreements; and

(e) each party may disclose this Agreement or its contents to the extent reasonably necessary, on a confidential basis, to its accountants, attorneys, financial advisors, its present or future providers of venture capital and/or potential investors in or acquirers of such party or product lines which qualify under Section 2.9.

This Agreement embodies the entire understanding of the parties with respect to the Licensed Patents, and replaces any prior oral or written communications between them.

7.14 This Agreement may be executed by the parties in one or more counterparts, each of which shall be an original and all of which shall constitute one and the same instrument.

Agreed to: APPLIED MICRO CIRCUITS CORPORATION.		Agreed to:         INTERNATIONAL BUSINESS         MACHINES CORPORATION
By:	[…***…]	By:	[…***…]
Name:	[…***…]	Name:	[…***…]
Title:	[…***…]	Title:	[…***…]
Date:	September 28, 2003	Date:	September 28, 2003

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EX-10.43

Exhibit 10.43

***Text Omitted and Filed Separately

Confidential Treatment Requested

Under 17 C.F.R. §§ 200.80(b)(4) and 240.24b-2

Agreement Reference Number L034488

092703 – EXECUTION COPY

INTELLECTUAL PROPERTY AGREEMENT dated as of September 28, 2003, between INTERNATIONAL BUSINESS MACHINES CORPORATION, a New York corporation (hereinafter called “SELLER”), and APPLIED
MICRO CIRCUITS CORPORATION, a Delaware corporation (hereinafter called “BUYER”)

WHEREAS, SELLER and BUYER have executed concurrently herewith an “Asset Purchase Agreement “ (“APA”) and other ancillary agreements identified in the APA as the “Operative Agreements” for the purpose of conveying certain assets and licensing certain intellectual property from SELLER to BUYER in a divestiture and acquisition transaction (the “Transaction”) associated with SELLER’s Switch Fabric PRS Products ; and

WHEREAS, following the “Closing” (as defined in the APA ) of the Transaction, BUYER desires to utilize certain of SELLER’s technical information, know-how, trade secrets, and rights under copyright associated with SELLER’s Switch Fabric PRS Products; and

WHEREAS, in this Agreement the term BUYER shall mean BUYER and its Subsidiaries as identified herein;

NOW THEREFORE, in consideration of the premises and mutual covenants herein contained, SELLER and BUYER agree as follows:

Section 1.0 Definitions

“Assigned Product Copyrights” shall mean, and be limited to, SELLER’s copyright interest in and to (i) […***…] to the extent that the aforesaid is contained in the documents or expressly disclosed by the items listed in Exhibit B and (ii) Assigned Software as expressly described in Exhibit C. Notwithstanding the foregoing, the term “Assigned Product Copyrights” shall not include any third party information, Licensed Product Copyrights or copyrights in Excluded Information, even if such written, graphic, or pictorial works and software are contained in the documents or expressly disclosed by the items listed in Exhibit B or Exhibit C.

“Assigned Product Know-how” shall mean, and be limited to, SELLER’s know-how and other technical information in and to (i) [...***...] to the extent that such know-how is contained in the documents or expressly disclosed by the items listed in Exhibit B and (ii) Assigned Software as expressly described in Exhibit C. Notwithstanding the foregoing, the term “Assigned Product Know-how” shall not include any third party information, Licensed Product Know-how or Excluded Information even if such know-how or information is contained in the documents or expressly disclosed by the items listed in Exhibit B or Exhibit C.

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“Assigned Software” shall mean the Object Code and Source Code identified in Exhibit C. Assigned Software shall not include third party software, Incidental Software or third party information, even if embedded in or included as part of the software programs listed in Exhibit C.

“BUYER Licensed Products” shall mean, and be limited to […***…].

[…***…].

[…***…].

“Customer Specific Products” shall mean the items identified in Exhibit A Sections II and III.

“Deliverable Items” shall mean the items identified in Exhibit B and Exhibit C.

[…***…].

“Effective Date” shall mean the Closing Date as set forth in the APA .

“Employees” shall mean SELLER’S employees who were assigned to and worked on development of the In Scope Products at SELLER’s […***…] development organization.

[…***…].

“Incidental Information” shall mean all or any information concerning a part or portions of any In Scope Product (software or hardware), system, service, information, documentation, mask, or intellectual property that was not originally conceived, developed, or reduced to practice as part

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of the In Scope Products development by one or more Employees, but was integrated with the In Scope Products as of the Effective Date.

“Incidental Software” shall mean any portions of any Assigned Software that was not originally conceived, developed, and reduced to practice as part of the In Scope Products development by one or more Employees, but was integrated with the Assigned Software as of the Effective Date.

[…***…].

“Licensed Product Copyrights” shall mean, and be limited to, SELLER’s copyright interest in and to written, graphic, or pictorial works and software in existence on the Effective Date and to the extent that the aforesaid is (i) not within the scope of the Assigned Product Copyrights, and (ii) contained in the documents or expressly disclosed by the items listed in Exhibit B or Exhibit C. Notwithstanding the foregoing, the term Licensed Product Copyrights shall expressly exclude copyrights in the […***…] even if such written, graphic, or pictorial works and software are contained in the documents or expressly disclosed by the items listed in Exhibit B or Exhibit C. Notwithstanding any definition of “Confidential Information” in the Confidentiality Agreement, the subject matter of Licensed Product Copyrights shall be deemed to be Confidential Information of SELLER, even if not labeled as such.

“In Scope Products” shall mean, and be limited to, the […***…] expressly listed in Exhibit A Sections I, II, III and IV.

“Licensed Product Know-how” shall mean, and be limited to, SELLER’s know-how and other technical information in existence on the Effective Date and to the extent that such know-how and other technical information is (i) not within the scope of the Assigned Product Know-How, and (ii) contained in the documents or expressly disclosed by the items listed in Exhibit B or Exhibit C. Notwithstanding the foregoing, the term “Licensed Product Know-how” shall expressly exclude the […***…] even if such know-how or information is contained in the documents or expressly disclosed by the items listed in Exhibit B or Exhibit C. Notwithstanding any definition of “Confidential Information” in the Confidentiality Agreement, the Licensed Product Know-how shall be deemed to be Confidential Information of SELLER, even if not labeled as such.

“Object Code” shall mean computer programming code, substantially or entirely in binary form, which is intended to be directly executable by a computer after suitable processing but without the intervening steps of compilation or assembly.

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[…***…].

“Source Code” shall mean computer programming code, other than Object Code, and related source code level system documentation, comments and procedural code, such as job control language, which may be printed out or displayed in human readable form.

“Subsidiary” shall mean a corporation, company or other entity:

(a) more than fifty percent (50%) of whose outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) are, now or hereafter, owned or controlled, directly or indirectly, by a party hereto, or

(b) which does not have outstanding shares or securities, as may be the case in a partnership, joint venture or unincorporated association, but more than fifty percent (50%) of whose ownership interest representing the right to make the decisions for such corporation, company or other entity is now or hereafter, owned or controlled, directly or indirectly, by a party hereto,

but such corporation, company or other entity shall be deemed to be a Subsidiary only so long as such ownership or control exists.

“Switch Fabric PRS Product” shall mean […***…]

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[…***…].

Capitalized terms used in this Agreement and not otherwise defined shall have the meanings given to them in the APA.

Section 2.0 Deliverables

2.1 Except for Customer Specific Product information requiring customer consents that have not on the Effective Date been received, SELLER shall provide to BUYER […***…] of each of the Deliverable Items on the Effective Date. Each Deliverable Item will be provided in the form of tangible media (tape, CD, etc) which BUYER may download onto its information systems. If mutually agreed in writing between BUYER and SELLER as of the Effective Date, the Deliverable Items shall be made accessible to BUYER by SELLER so that BUYER can download such Deliverable Item. BUYER shall use its reasonable efforts to download all Deliverable Items as promptly as practicable after being provided access by SELLER. If, not later than […***…] after the Effective Date, BUYER provides written notice to SELLER reasonably demonstrating (and SELLER agrees) that there are specific documents or other items or information: (i) which are within the scope of the assignments and licenses granted to BUYER herein; and (ii) which cannot be located by the BUYER (or in the case of remotely stored computer files, made accessible); SELLER agrees to provide or make accessible to BUYER so that BUYER may download such information, such specific documents or other items or information without additional charge to BUYER. The parties have entered into a Transition Services Agreement, pursuant to which SELLER will provide certain services to BUYER, including technical support services and information technology services. It is the intent of the parties that BUYER and any SELLER personnel providing technical support services shall have ongoing access to the Deliverable Items including any modification thereto during the term of the Transition Services Agreement. Nothing in this Agreement shall be understood to preclude or limit such access.

2.2 Except pursuant to the provisions of any other Operative Agreement and except as specifically set forth herein, SELLER shall have no obligation under this Agreement, at any time, to:

(a) provide any technology transfer support, assistance, training, or consultation to BUYER or any third party with respect to the subject matter hereof; or

(b) provide any improvements, enhancements, or updates with respect to the subject matter hereof.

2.3 BUYER hereby acknowledges that certain of the In Scope Products listed in Exhibit A are products under development and as such the Deliverable Items associated with such products or building blocks that are made accessible shall be accessible in such state of development that such Deliverable Items exist within the custody and control of SELLER’s […***…] operation in […***…] on the Effective Date. […***…]

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[…***…].

2.4 If within […***…] after the Effective Date, SELLER or BUYER learns of parts or items provided to BUYER that both SELLER and BUYER agree (which agreement shall not be unreasonably withheld)are not parts or items of the Deliverable Items, BUYER shall promptly notify SELLER in writing and return such parts or items to SELLER. Upon agreement in writing between BUYER and SELLER that any such parts or items do not properly belong in the Deliverable Items, then BUYER shall not be entitled to exercise any right of retention of any such parts or items under this Section 2.4. Notwithstanding anything to the contrary contained herein, BUYER’s sole obligation, with regard to such items provided to BUYER that are not parts or items of the Deliverable Items, shall be the prompt return of such items to SELLER and adherence to the “Confidentiality Agreement”.

2.5 With respect to Customer Specific Products identified in Exhibit A III, SELLER shall use all commercially reasonable efforts (and BUYER shall cooperate with respect thereto) to obtain the necessary permissions from the respective customers in order for SELLER to deliver or make accessible such items specified in Exhibit A III to the BUYER. SELLER and BUYER shall cooperate in negotiating with the customer and, provided such can be obtained on commercially reasonable terms, obtain an agreement with the customer granting BUYER the rights to use any customer intellectual property rights contained in the listed items. […***…]. When SELLER has obtained permission from the customer and after BUYER has a signed agreement with customer, SELLER will deliver to BUYER or otherwise make accessible to BUYER the items specified in Exhibit A III for the particular Customer Specific Product.

Section 3.0 Assignments

3.1 Effective upon SELLER’s receipt of the consideration specified in Section 5, subject to all rights granted to others prior to the Effective Date, and subject to SELLER’s reservation of rights as set forth in Section 3.2, SELLER hereby transfers and assigns to BUYER all of SELLER’s right, title and interest in and to any and all copyright ownership interest SELLER may have throughout the world in the Assigned Product Copyrights.

3.2 SELLER hereby reserves and retains, for the benefit of itself and its Subsidiaries, successors, and assigns, under the Assigned Product Copyrights, […***…]

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[…***…].

Unless otherwise agreed by the parties in writing, the term of such […***…] shall be […***…].

For avoidance of doubt and subject to the limitations of Section 3.2(c), […***…].

3.3 Effective upon SELLER’s receipt of the consideration specified in Section 5, subject to all rights granted to others prior to the Effective Date, and subject to SELLER’s reservation of rights as set forth in Sections 3.4 and 3.5, SELLER hereby transfers and assigns to BUYER all of SELLER’s right, title and interest to any and all know-how ownership interest SELLER may have throughout the world in the Assigned Product Know-how.

3.4 SELLER hereby reserves and retains, for the benefit of itself and its Subsidiaries, successors and assigns under the Assigned Product Know-how, an […***…]. “Residuals” shall mean any information, ideas, concepts, know-how, or techniques, which are contained in the Assigned Product Know-how and retained in the memories of SELLER’s employees or contractors who have had access to the Assigned Product Know-how at any time prior to the Effective Date.

3.5 SELLER hereby reserves and retains, for the benefit of itself and its Subsidiaries, successors, and assigns, under tangible embodiments of the Assigned Product Know-how, […***…]

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[…***…].

Unless otherwise agreed by the parties, the term of such […***…] under Section 3.5(b) shall be […***…].

For avoidance of doubt and subject to the limitations of Section 3.5(c), […***…].

Section 4.0 License Grants

4.1 Subject to: (i) an obligation to hold any SELLER Confidential Information in confidence in accordance with the Confidentiality Agreement; and (ii) SELLER’s receipt of the consideration set forth in Section 5; SELLER, on behalf of itself and its Subsidiaries, grants to BUYER, and its Subsidiaries, a […***…].

4.2 Subject to: (i) an obligation to hold any SELLER Confidential Information in confidence in accordance with the Confidentiality Agreement; and (ii) SELLER’s receipt of the consideration set forth in Section 5; SELLER, on behalf of itself and its Subsidiaries, grants to

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BUYER a […***…].

4.3 The licenses granted in Sections 4.1 and 4.2 shall not include rights to use any third party information, including, without limitation, computer programs, designs, specifications, drawings, schematics or blueprints to the extent that such third party information is specifically used in or relates to the manufacture or design of products for SELLER or for third parties. Such rights, if any, shall only be as expressly set forth in the Custom Sales Agreement.

4.4 The licenses granted in Sections 4.1(c) and 4.2(c) to BUYER for the purpose of having BUYER Licensed Products made by another manufacturer:

(a) shall only apply when the specifications for such BUYER Licensed Products were created by BUYER (either solely or jointly with one or more third parties), or were provided in whole or in a majority portion by SELLER or its Subsidiaries and provided to BUYER without the restrictions set forth in Section 4.3 (or similar restrictions if such specifications provided by SELLER relate to third party designs);

(b) shall not apply to (i) any methods used, or (ii) any products in the form manufactured or marketed, by said another manufacturer prior to BUYER’s or SELLER’s furnishing of said specifications;

(c) shall only be under that portion of the Licensed Product Know-how or Licensed Product Copyrights for which the use by said another manufacturer is necessitated by compliance with such specifications;

(d) shall not apply to any information or items generated or outputted by simulation tools or GDSII files; and

(e) shall only apply to the extent that any information embodied in materials provided to said another manufacturer are made subject to the terms and conditions of the Confidentiality Agreement.

4.5 No license, immunity, ownership interest, or other right is granted, assigned, or otherwise conveyed under this Agreement, either directly or indirectly, by implication, estoppel or otherwise, to BUYER with respect to any patent and/or patent application, (regardless of whether a license under the patents of IBM may be necessary to practice the rights granted in licenses and assignments granted hereunder) utility model, trade name, or trademark of SELLER, provided

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however, SELLER will not assert any trademark interest it may have in PRS (when followed by an alphanumerical sequence), alone and not in a combination, when used to identify a Product sold by BUYER . Except as specifically granted in Sections 3.0 and 4.0, no assignment, license, immunity, or other right is granted, either directly or indirectly, by implication, estoppel or otherwise, to BUYER with respect to any copyrights, trade secrets, computer programs, know-how, mask works or other intellectual property rights of SELLER. For the avoidance of doubt, there will be a Patent License Agreement between BUYER and SELLER providing for a license of patent rights to be signed contemporaneously with this Agreement.

4.6 Nothing in this Agreement shall be construed as granting BUYER, either directly or by implication or estoppel or otherwise, any intellectual property rights (including copyrights, mask works, trade secret, know-how, patent, patent applications, patentable inventions, inventions or other intellectual property rights) with respect to:

[…***…]

even if such method or process information is contained in information or expressly disclosed by the other items provided to BUYER.

Section 5.0 Consideration

5.1 In consideration for the assignments and licenses set forth in this Agreement, BUYER shall pay to SELLER, at Closing, the amount attributable to such assignments and licenses and specified in Section 1.3 of the APA, no portion of which shall be refundable.

5.2 […***…] shall bear and pay all taxes (including, without limitation, sales and value added taxes) imposed by any national, provincial or local government of any country in which BUYER is doing business as a result of the existence of this Agreement or the exercise of rights hereunder other than the taxes on the income, assets, facilities or personnel of SELLER and its Subsidiaries.

Section 6.0 Term; Termination and Assignability

6.1 This Agreement shall remain in effect until terminated in accordance with this Section 6. For the avoidance of doubt however, unless there is a Closing, this Agreement shall be null and void ab initio and have no effect.

6.2 SELLER shall have the right to terminate any or all licenses granted to BUYER under this Agreement, in whole or in part, if:

(a) BUYER fails at any time to make any payment required herein or in the APA; or

(b) BUYER intentionally and materially breaches any term or condition relating to intellectual property misuse or confidentiality provisions under any Operative Agreement, and if BUYER does not cure such breach within thirty (30) days after written notice from SELLER to BUYER specifying they nature of such breach.

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6.3 In addition, in the event that BUYER engages in or suffers any of the following events of default:

(a) becomes insolvent, is dissolved or liquidated, files or has filed against it a petition in bankruptcy, dissolution, or liquidation or similar action filed by or against it, is adjudicated as bankrupt, or has a receiver appointed for its business; or

(b) has all or a substantial portion of its capital stock or assets expropriated or attached by any government entity;

(c) then BUYER shall promptly notify SELLER in writing that such event has occurred. If any default as specified above in this Section 6.3 is not cured, or an acceptable plan for such cure is not proposed within thirty (30) days after written notice from SELLER specifying the nature of the default, SELLER shall have the right to terminate this Agreement, subject to Section 6.5, by giving written notice of termination to BUYER.

6.4 If BUYER is acquired by a third party, thereby becoming a Subsidiary of the third party, if BUYER notifies SELLER in writing prior to said acquisition, BUYER may retain its rights hereunder so long as such acquiring third party accepts the obligations of this Agreement and unless one of the following applies (in which case the Agreement will terminate):

(a) SELLER has an unresolved intellectual property dispute with said third party;

(b) SELLER has ongoing litigation with said third party in which the claim is for injunctive relief, specific performance or damages in excess of […***…].

6.5 Except as expressly permitted herein, neither BUYER nor SELLER shall assign or sublicense any of its rights or privileges hereunder without the other party’s prior written consent (which shall not be unreasonably withheld) . Any attempted act in derogation of the foregoing shall be considered void. However, a party which undergoes reorganization may assign such rights and delegate its obligations to its legal successor, provided that after the reorganization, the successor and its Subsidiaries will have essentially the same assets as such party and its Subsidiaries had prior to the reorganization.

6.6 No failure or delay on the part of SELLER in exercising its right of termination hereunder for any one or more causes shall be construed to prejudice its right of termination for such causes or any other or subsequent causes.

6.7 Upon termination of this Agreement, all licenses granted by SELLER in Section 4 will automatically terminate, and BUYER shall promptly return to SELLER or destroy all tangible information containing SELLER’s Confidential Information or third party Confidential Information for which SELLER has responsibility, and shall promptly certify to SELLER such return or destruction which BUYER shall have possession of at such time. Notwithstanding the foregoing, BUYER shall not be obligated to return to SELLER or destroy information which has been transferred or otherwise provided to customers prior to the date of any termination of this Agreement. The confidentiality obligations of the Confidentiality Agreement will remain in effect beyond any termination for the time period stated in the Confidentiality Agreement. No

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termination of this Agreement or any license granted hereunder shall relieve BUYER of any obligation or liability accrued hereunder prior to such termination. If this Agreement is terminated as a result of the exercise of SELLER’s right under Section 6.2(a) and (b), then all assignments granted by SELLER in Section 3 shall automatically revert to SELLER, and BUYER shall promptly return to SELLER or, at SELLER’s option destroy, all tangible information containing such assigned information.

Section 7.0 Representations and Warranties

7.1 SELLER represents and warrants that it has the full right and power to grant the assignments and licenses set forth in Section 3 and 4; provided however, that SELLER makes no representations or warranties with respect to any infringement of patents or other intellectual property rights of third parties other than that stated in Section 7.2.

7.2 SELLER represents and warrants that […***…] (which is the department responsible for the intellectual property affairs of the SELLER’s […***…] operation located in […***…]) and with the exception of the assertions from […***…] and […***…], for the period beginning […***…] prior to the Effective Date until the Effective Date, SELLER has not received from any third party, any written claim, alleging SELLER’s infringement of any intellectual property rights relative to the In Scope Products.

7.3 […***…]

7.4 SELLER represents and warrants that […***…] (which is the department responsible for the intellectual property and licensing affairs for the SELLER), the Assigned Product Copyrights and Assigned Product Know-how are not, as of the Closing Date, the subject of any pledge or security interest as collateral for the borrowing of any monies from a financial institution.

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7.5 SELLER represents and warrants that, […***…], Exhibit B and C of this Agreement, in conjunction with Section 2.0 “Deliverables”, identifies the IBM technical information supporting the In Scope Products.

Section 8. Communications

8.1 Any notice or other communication required or permitted to be made or given to either party hereto pursuant to this Agreement shall be sent to such party by facsimile with confirmation of receipt, or by registered airmail (except that registered or certified mail may be used where delivery is in the same country as mailing), postage prepaid, addressed to it at its address set forth below, or to such other address as it shall designate by written notice given to the other party. Notices and other communications shall be effective upon mailing or facsimile transmittal:

For SELLER:	For BUYER:
[…***…]	[…***…]
IBM Corporation	[…***…]
North Castle Drive, […***…]	Applied Micro Circuits Corporation
Armonk, NY 10504-1785	6290 Sequence Drive
United States of America	San Diego, CA 92121
	United States of America
Facsimile: […***…]	Facsimile: […***…]

8.3 An Agreement Reference Number will be assigned to this Agreement upon execution. This number should be included in all communications, including wire transfer payments, letters, faxes and e-mail messages.

Section 9. Applicable Law

9.1 This Agreement shall be deemed to have been made in […***…], and all matters arising from or relating in any manner to the subject matter of this Agreement shall be interpreted, and the rights and liabilities of the Parties determined, in accordance with the laws of the State of […***…] applicable to agreements executed, delivered and performed within such State, without regard to the principles of conflicts of laws thereof.

9.2 The parties hereby expressly waive any rights to a jury trial and agree that any proceedings hereunder shall be tried by a judge without a jury. Each party agrees to accept service of process by registered or certified mail.

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Section 10. Miscellaneous

10.1 Nothing contained in this Agreement shall be construed as conferring on either party any license or other right to copy any of the designs of the products of the other party.

10.2 Nothing contained in this Agreement shall be construed as conferring any right to use in advertising, publicity, or other promotional activities any name, trade name, trademark, trade dress or other designation of either party hereto (including any contraction, abbreviation or simulation of any of the foregoing), save as expressly stated herein. Each party hereto agrees not to use or refer to this Agreement or any provision hereof in any promotional activity without the express written approval of the other party.

10.3 BUYER agrees not to export or re-export, or cause to be exported or re-exported, any technical data received hereunder, or the direct product of such technical data, to any country or person which, under the laws of the United States, are or may be prohibited from receiving such technical data or the direct product thereof.

10.4 SELLER shall not have any obligation hereunder to institute any action or suit against third parties for infringement or misappropriation of any licensed copyrights or licensed know-how or to defend any action or suit brought by a third party which challenges or concerns the enforceability or validity thereof.

10.5 The headings of the several Sections are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement.

10.6 If any Section of this Agreement is found by competent authority to be invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such Section in every other respect and the remainder of this Agreement shall continue in effect so long as the Agreement still expresses the intent of the parties. If the intent of the parties cannot be preserved, this Agreement shall be either renegotiated or terminated.

10.7 The parties acknowledge that damages would be an inadequate remedy for any material breach of the confidentiality provisions of this Agreement or the Confidentiality Agreement. Therefore, each party agrees that its obligations hereunder may be specifically enforceable and each party agrees the other party may be entitled to an injunction, restraining order or other equitable relief from any court of competent jurisdiction, restraining the other party from committing any violations of the confidentiality provisions of this Agreement.

10.8 WITH THE EXCEPTION OF ANY DAMAGES RESULTING FROM MISUSE OF THE LICENSED KNOW HOW BY BUYER OR BREACH OF THE CONFIDENTIALITY OBLIGATIONS BY BUYER, NEITHER PARTY SHALL BE LIABLE, WHETHER IN CONTRACT, TORT (INCLUDING NEGLIGENCE AND STRICT LIABILITY) OR OTHERWISE, FOR ANY SPECIAL, INDIRECT, INCIDENTAL, PUNITIVE OR CONSEQUENTIAL DAMAGES WHATSOEVER, INCLUDING, BUT NOT LIMITED TO, LOSS OF PROFITS OR GOODWILL, BUSINESS INTERRUPTIONS OR CLAIMS OF CUSTOMERS, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.

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10.9 Except as permitted by the prior written consent of the other party, each party agrees to protect the terms and conditions of this Agreement in accordance with the obligations set forth in the Confidentiality Agreement as such obligations would be applicable to the other party’s confidential “Information.” This obligation is subject to the following additional exceptions:

(a) disclosure is permissible if required by government or court order, provided the party required to disclose first gives the other prior written notice to enable it to seek a protective order;

(b) disclosure is permissible if otherwise required by law;

(c) disclosure is permissible if required to enforce rights under this Agreement;

(d) each party may use similar terms and conditions in other agreements; and

(e) each party may disclose this Agreement or its contents to the extent reasonably necessary, on a confidential basis, to its accountants, attorneys, financial advisors, its present or future providers of venture capital and/or potential financial investors in such party, provided that the terms of this Agreement may not be disclosed to strategic investors of either party.

10.10 This Agreement will not be binding upon the parties until it has been signed herein below by or on behalf of each party, in which event it shall be effective as of the Effective Date. No amendment or modification hereof shall be valid or binding upon the parties unless made in writing and signed as aforesaid. This Agreement embodies the entire understanding of the parties with respect to the subject matter hereof and merges all prior discussions between them, and neither of the parties shall be bound by any conditions, definitions, warranties, understandings or representations with respect to the subject matter hereof other than as expressly provided herein. Notwithstanding any other terms or provision of the APA, and other Operative Agreement, any other agreement relating to the Transaction or the subject matter thereof, or any exhibit or attachment to any of the aforesaid, but except for the monetary consideration specified in Section 3.1 of the APA, this Agreement and its Exhibits A,B,and C are the sole and exclusive statement of the understanding of the parties with respect to the assignment or licensing to BUYER of SELLER copyrights, and rights under SELLER know how and other technical information, and SELLER’s reserved rights thereunder.

10.11 Notwithstanding anything to the contrary contained herein, the parties agree that Sections 1.0, 3.0 (subject to Section 5.0), 7.0, 8.0, 9.0 and 10.0 of this Agreement shall survive the termination of this Agreement or the termination of any licenses granted hereunder. All representations and warranties made by the parties in this Agreement or in any schedule, document, certificate or other instrument delivered by or on behalf of the parties pursuant to this Agreement shall survive the Effective Date for a period of [...***...] after the Effective Date.

10.12 This Agreement may be executed by the parties in one or more counterparts, each of which shall be an original and all of which shall constitute one and the same instrument.

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly signed as of the date first written above

Agreed to:	Agreed to:
APPLIED MICRO CIRCUITS CORPORATION	INTERNATIONAL BUSINESS MACHINES CORPORATION

By:	[…***…]	By:	[…***…]
Name:	[…***…]	Name:	[…***…]
Title:	[…***…]	Title:	[…***…]
Date:	September 28, 2003
		By:	[…***…]
		Name:	[…***…]
		Title:	[…***…]
		Date:	September 28, 2003

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EXHIBIT A

[…***…]

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EXHIBIT B

[…***…]

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EXHIBIT C

[…***…]

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EX-31.1

Exhibit 31.1

CERTIFICATION

I, David Rickey, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Applied Micro Circuits Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected or is likely to materially affect, the registrant’s internal control over financial reporting;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ DAVID RICKEY

David Rickey, Chief Executive Officer

Dated: November 13, 2003

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Stephen M. Smith, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Applied Micro Circuits Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected or is likely to materially affect, the registrant’s internal control over financial reporting;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ STEPHEN M. SMITH

Stephen M. Smith, Chief Financial Officer

Dated: November 13, 2003

EX-32.1

Exhibit 32.1

CERTIFICATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.§ 1350, as adopted), David Rickey, Chief Executive Officer of the registrant, hereby certifies that, to the best of his knowledge:

1. This report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934.

2. The information contained in this report fairly presents, in all material respects, the financial condition and results of operations of the registrant.

/s/ DAVID RICKEY

David Rickey, Chief Executive Officer

Dated: November 13, 2003

EX-32.2

Exhibit 32.2

CERTIFICATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.§ 1350, as adopted), Stephen M. Smith, Chief Financial Officer of the registrant, hereby certifies that, to the best of his knowledge:

1. This report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934.

2. The information contained in this report fairly presents, in all material respects, the financial condition and results of operations of the registrant.

Dated: November 13, 2003

/s/ STEPHEN M. SMITH

Stephen M. Smith, Chief Financial Officer