Form 10-Q

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.

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.

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.

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

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:

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):

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):

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.

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

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):

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):

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.

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:

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:

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.

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

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.

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):

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

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 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.

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.

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.

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.

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:

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.

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.

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

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

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.

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.

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.

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

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

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.

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.

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:

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:

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

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:

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:

$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.

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.

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.

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.

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.

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

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:

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

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.

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:

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

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:

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.

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:

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.

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:

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:

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.

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.

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:

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.

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.

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

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

We 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.

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:

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

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

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

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

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

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

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.

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.

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):

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.

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.

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.

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:

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

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

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

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.

		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)

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

		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

	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

	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

	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

	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

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

	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

	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

	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

	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

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

Balance as of September 30, 2003	$	106,555

	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

	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	)

	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

	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	)

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

	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

	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	%

	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

	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)		Fair Value as of September 30, 2003		(50 BPS)		(100 BPS)		(150 BPS)
Available-for-sale investments	$	765,969	$	751,526	$	737,130	$	723,167	$	710,057	$	697,777	$	686,610

	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