10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2009

OR

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

For the transition period from                      to                     .

Commission File Number: 000-23193

APPLIED MICRO CIRCUITS CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	94-2586591
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
215 Moffett Park Drive, Sunnyvale, CA	94089
(Address of principal executive offices)	(Zip code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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

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

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

As of June 30, 2009, 66,253,094 shares of the registrant’s common stock, $0.01 par value per share, were issued and outstanding.

APPLIED MICRO CIRCUITS CORPORATION

INDEX

		Page
Part I.	FINANCIAL INFORMATION (unaudited)
Item 1.	Condensed Consolidated Balance Sheets at June 30, 2009 and March 31, 2009	3
	Condensed Consolidated Statements of Operations for the three months ended June 30, 2009 and 2008	4
	Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2009 and 2008	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	35
Part II.	OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3.	Defaults Upon Senior Securities	52
Item 4.	Submission of Matters to a Vote of Security Holders	52
Item 5.	Other Information	52
Item 6.	Exhibits	53
Signatures		54

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APPLIED MICRO CIRCUITS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

	June 30, 2009			March 31, 2009
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	111,943		$	99,337
Short-term investments available-for-sale		88,432			84,672
Accounts receivable, net		15,203			17,537
Inventories		22,224			26,598
Other current assets		7,594			8,871
Assets of discontinued operations		—			8,558
Total current assets		245,396			245,573
Property and equipment, net		26,216			25,749
Purchased intangibles, net		28,377			32,965
Other assets		21,378			20,323
Total assets	$	321,367		$	324,610
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	16,525		$	16,715
Accrued payroll and related expenses		4,914			5,875
Other accrued liabilities		10,735			15,466
Deferred revenue		1,313			2,584
Total current liabilities		33,487			40,640
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value:
Authorized shares — 2,000, none issued and outstanding		—			—
Common stock, $0.01 par value:
Authorized shares — 375,000 at June 30, 2009 and March 31, 2009
Issued and outstanding shares — 66,253 at June 30, 2009 and 65,874 at March 31, 2009		663			659
Additional paid-in capital		5,905,141			5,910,493
Accumulated other comprehensive loss		(1,047	)		(6,273	)
Accumulated deficit		(5,616,877	)		(5,620,909	)
Total stockholders’ equity		287,880			283,970
Total liabilities and stockholders’ equity	$	321,367		$	324,610

See Accompanying Notes to Condensed Consolidated Financial Statements

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APPLIED MICRO CIRCUITS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three Months Ended June 30,
	2009			2008
Net revenues	$	45,052		$	61,199
Cost of revenues		22,175			28,426
Gross profit		22,877			32,773
Operating expenses:
Research and development		19,414			20,450
Selling, general and administrative		10,519			13,851
Amortization of purchased intangible assets		1,005			1,005
Restructuring charges (recoveries), net		(154	)		(258	)
Option investigation, net		—			347
Total operating expenses		30,784			35,395
Operating loss		(7,907	)		(2,622	)
Interest income (expense) and other-than-temporary impairment, net		1,372			(1,402	)
Other income, net		217			75
Loss from continuing operations before income taxes		(6,318	)		(3,949	)
Income tax expense (benefit)		(3,519	)		502
Loss from continuing operations		(2,799	)		(4,451	)
Income (loss) from discontinued operations and gain on sale of Storage Business, net of taxes		5,697			(723	)
Net income (loss)	$	2,898		$	(5,174	)
Basic income (loss) per share:
Loss per share from continuing operations	$	(0.04	)	$	(0.07	)
Income (loss) per share from discontinued operations		0.08			(0.01	)
Net income (loss) per share	$	0.04		$	(0.08	)
Shares used in calculating basic income (loss) per share		66,070			64,864
Diluted income (loss) per share:
Loss per share from continuing operations	$	(0.04	)	$	(0.07	)
Income (loss) per share from discontinued operations		0.08			(0.01	)
Net income (loss) per share	$	0.04		$	(0.08	)
Shares used in calculating diluted income (loss) per share		66,733			64,864

See Accompanying Notes to Condensed Consolidated Financial Statements

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APPLIED MICRO CIRCUITS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Three Months Ended June 30,
	2009			2008
Operating activities:
Net income (loss)	$	2,898		$	(5,174	)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Depreciation		1,558			1,742
Amortization of purchased intangibles		4,588			5,901
Stock-based compensation expense:
Stock options		1,037			2,110
Restricted stock units		1,578			1,098
Other-than-temporary impairment of marketable securities		175			3,393
Net loss on disposals of property		24			29
Net gain on sale of storage business unit		(10,654	)		—
Changes in operating assets and liabilities:
Accounts receivable		2,334			(633	)
Inventories		3,917			4,038
Other assets		184			634
Accounts payable		(1,305	)		(1,152	)
Accrued payroll and other accrued liabilities		(5,715	)		(1,475	)
Deferred tax liability		—			220
Deferred revenue		(1,271	)		349
Net cash provided by (used for) operating activities		(652	)		11,080
Investing activities:
Proceeds from sales and maturities of short-term investments		264,116			138,248
Purchases of short-term investments		(261,595	)		(135,162	)
Purchase of property, equipment and other assets		(2,014	)		(3,502	)
Proceeds from sale of storage business unit		20,815			—
Net cash provided by (used for) investing activities		21,322			(416	)
Financing activities:
Net proceeds from issuance of common stock		352			78
Funding of structured stock repurchase agreements		(11,797	)		—
Funds received from structured stock repurchase agreements		3,962			—
Other		(581	)		(109	)
Net cash used for financing activities		(8,064	)		(31	)
Net increase in cash and cash equivalents		12,606			10,633
Cash and cash equivalents at the beginning of the period		99,337			42,689
Cash and cash equivalents at the end of the period	$	111,943		$	53,322
Supplementary cash flow disclosures:
Cash paid for:
Interest	$	—		$	2
Income taxes		122			59
Unrealized gains (losses) on available-for-sale securities		5,322			(632	)

See Accompanying Notes to Condensed Consolidated Financial Statements

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include all the accounts of Applied Micro Circuits Corporation (“AppliedMicro” or the “Company”) and its wholly-owned subsidiaries and entities which are variable interest entities of which the Company is the primary beneficiary under FASB Interpretation No. 46R (“FIN 46R”), Consolidation of Variable Interest Entities. FIN 46R requires a variable interest entity (“VIE”) to be consolidated by its primary beneficiary. The primary beneficiary is the party that absorbs a majority of the VIE’s anticipated losses and/or a majority of the expected returns. The Company has evaluated its strategic alliances for potential classification as variable interest entities by evaluating the sufficiency of each entity’s equity investment at risk to absorb losses and the Company’s share of respective expected losses. We determined that the Company is the primary beneficiary of one variable interest entity and has included the accounts of this entity in the consolidated financial statements (see Note 11). All significant intercompany balances and transactions have been eliminated in consolidation.

Certain amounts in the consolidated financial statements have been reclassified to conform to the current year presentation. As described in Note 13 of the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2009, the Company has classified the financial results of its 3ware storage adapter business as discontinued operations for all periods presented due to the sale of its 3ware storage adapter business to LSI Corporation on April 21, 2009. The assets sold to LSI Corporation were classified as assets of discontinued operations on the balance sheet at March 31, 2009. These notes to the Company’s condensed consolidated financial statements relate to continuing operations only, unless otherwise indicated.

In preparing the financial statements, we have evaluated subsequent events, as defined by Statement of Financial Accounting Standards (SFAS) No. 165, Subsequent Events, through July 31, 2009, which is the date that the financial statements were issued.

Use of Estimates

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

Recent Accounting Pronouncements

In April 2009, the FASB issued FSP 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP 107-1/APB 28-1”). FSP 107-1/APB 28-1 amends the requirements in FASB 107, Disclosure about Fair Value of Financial Instruments, to require disclosure about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. The Company will disclose the fair value of financial instruments under FSP 107-1/APB 28-1 if they are not already carried fair value.

In May 2009, the FASB issued FAS 165, Subsequent Events (“FAS 165”). FAS 165 is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this Statement sets forth:

1. The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements;

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2. The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and

3. The disclosures that an entity should make about events or transactions that occurred after the balance sheet date.

FAS 165 is effective for periods ending after June 15, 2009 and its adoption did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued FSP 157-4, Determining Fair Value When Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP 157-4”). FSP 157-4 provides guidance in determining fair value when the volume and level of activity for the asset or liability have significantly decreased and on identifying transactions that are not orderly. FSP 157-4 requires disclosure in interim and annual periods of the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques. FSP 157-4 is effective for periods ending after June 15, 2009 and its adoption did not have a material impact on the Company’s consolidated financial statements or the fair value of its financial assets.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairment (“FSP 115-2/124-2”). FSP 115-2/124-2 amends the requirements for the recognition and measurement of other-than-temporary impairments for debt securities by modifying the pre-existing “intent and ability” indicator. Under FSP 115-2/124-2, an other-than-temporary impairment is triggered when there is an intent to sell the security, it is more likely than not that the security will be required to be sold before recovery, or the security is not expected to recover the entire amortized cost basis of the security. Additionally, FSP 115-2/124-2 changes the presentation of an other-than-temporary impairment in the income statement for those impairments involving credit losses. The credit loss component will be recognized in earnings and the remainder of the impairment will be recorded in other comprehensive income. FSP 115-2/124-2 is effective for periods ending after June 15, 2009 and the Company recorded a $1.1 million reclassification of prior other-than-temporary impairment charges from retained earnings to other comprehensive income as the impairment losses were determined to be non-credit related.

In November 2008, the FASB issued EITF Issue No. 08-06, Equity Method Investment Accounting Considerations (“EITF 08-06”). EITF 08-06 addresses questions that have arisen about the application of the equity method of accounting for investments after the effective date of both FAS 141(R), Business Combinations, and SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements. EITF 08-06 is effective for fiscal years beginning on or after December 15, 2008. The adoption of EITF 08-06 did not have a material impact on the Company’s results of operations and financial position.

2. CERTAIN FINANCIAL STATEMENT INFORMATION

Accounts receivable:

	June 30, 2009			March 31, 2009
	(In thousands)
Accounts receivable	$	16,185		$	18,688
Less: allowance for bad debts		(982	)		(1,151	)
	$	15,203		$	17,537

Inventories:

	June 30, 2009		March 31, 2009
	(In thousands)
Finished goods	$	16,196	$	20,170
Work in process		3,911		5,324
Raw materials		2,117		1,104
	$	22,224	$	26,598

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Other current assets:

	June 30, 2009		March 31, 2009
	(In thousands)
Prepaid expenses	$	6,057	$	7,434
Deposits		678		634
LSI transition services receivable, net		354		—
Other		505		803
	$	7,594	$	8,871

Property and equipment:

	Useful Life	June 30, 2009			March 31, 2009
	(In years)	(In thousands)
Machinery and equipment	5-7	$	33,301		$	34,546
Leasehold improvements	1-15		9,582			9,375
Computers, office furniture and equipment	3-7		49,643			51,843
Buildings	31.5		2,756			2,756
Land	N/A		9,800			9,800
			105,082			108,320
Less: accumulated depreciation and amortization			(78,866	)		(82,571	)
		$	26,216		$	25,749

Purchased intangibles (in thousands):

	June 30, 2009							March 31, 2009
	Gross		Accumulated Amortization and Impairments			Net		Gross		Accumulated Amortization and Impairments			Net
Developed technology	$	425,000	$	(405,111	)	$	19,889	$	425,000	$	(401,528	)	$	23,472
Customer relationships		6,330		(5,038	)		1,292		6,330		(4,976	)		1,354
Patents/core technology rights/tradenames		62,305		(55,109	)		7,196		62,305		(54,166	)		8,139
	$	493,635	$	(465,258	)	$	28,377	$	493,635	$	(460,670	)	$	32,965

As of June 30, 2009, the estimated future amortization expense of purchased intangible assets to be charged to cost of sales and operating expenses was as follows (in thousands):

	Cost of Sales		Operating Expenses		Total
Fiscal years ending March 31,
2010 (remaining)	$	8,514	$	3,013	$	11,527
2011		10,500		4,018		14,518
2012		875		852		1,727
2013		—		250		250
2014		—		250		250
Thereafter		—		105		105
Total	$	19,889	$	8,488	$	28,377

Other assets:

	June 30, 2009		March 31, 2009
	(In thousands)
Non-current portion of prepaid expenses	$	10,467	$	10,860
Strategic investments		7,000		7,000
Other		3,911		2,463
	$	21,378	$	20,323

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Strategic Investments

The Company has entered into certain equity investments in privately held businesses for the promotion of business and strategic objectives. The Company’s investments in equity securities of privately held businesses are accounted for under the cost method. Under the cost method, strategic investments in which the Company holds less than a 20% voting interest and on which the Company does not have the ability to exercise significant influence are carried at the lower of cost or cost reduced by other-than-temporary impairments, as appropriate. These investments are included in other assets on the Company’s balance sheets. The Company periodically reviews these investments for other-than-temporary declines in fair value based on the specific identification method and writes down investments when an other-than-temporary decline has occurred.

Short-term investments:

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

	June 30, 2009		March 31, 2009
	(In thousands)
Cash	$	16,268	$	8,047
Cash equivalents		95,675		91,290
U.S. Treasury securities and agency bonds		1,234		1,245
Corporate bonds		4,513		4,319
Mortgage-backed and asset-backed securities*		20,217		21,396
Closed-end bond funds		46,823		41,970
Preferred stock and options		15,645		15,742
	$	200,375	$	184,009
Reported as:
Cash and cash equivalents	$	111,943	$	99,337
Short-term investments available-for-sale		88,432		84,672
	$	200,375	$	184,009

* At June 30, 2009 and March 31, 2009 approximately $15.6 million and $16.6 million of the amounts presented were mortgage-backed securities, respectively.

At June 30, 2009, the cost and estimated fair values of available-for-sale securities with stated maturities are U.S. Treasury securities and agency bonds, corporate bonds, mortgage-backed, asset-backed securities and options, by contractual maturity are as follows (in thousands):

	Cost		Fair Value
Less than 1 year	$	113	$	34
Mature in 1–2 years		247		242
Mature in 3–5 years		9,014		8,989
Mature after 5 years		16,466		16,938
	$	25,840	$	26,203

The following is a summary of gross unrealized losses as of June 30, 2009 (in thousands):

	Less Than 12 Months of Unrealized Losses				12 Months or More of Unrealized Losses				Total
	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
U.S. Treasury securities and agency bonds	$	34	$	79	$	—	$	—	$	34	$	79
Corporate bonds		1,200		89		—		—		1,200		89
Mortgage-backed and asset-backed securities		4,920		498		—		—		4,920		498
Closed-end bond funds		12,274		848		—		—		12,274		848
Preferred stock and options		15,562		3,225		—		—		15,562		3,225
	$	33,990	$	4,739	$	—	$	—	$	33,990	$	4,739

Based on an evaluation of securities that have been in a continuous loss position and debt securities that had credit losses at June 30, 2009, the Company determined it holds certain debt securities that it intends to sell, and has therefore written down such securities by approximately $0.2 million, the extent of its unrealized losses. Based on an evaluation of securities that have been in a continuous loss position at June 30, 2008, the Company determined the decline in the fair value of certain securities to be other-than-temporary and accordingly has written down such securities by approximately $3.4 million. As of June 30, 2009, the Company has not recorded an other-than-temporary adjustment through earnings in connection with certain securities in a loss position with unrealized losses of approximately $4.7 million, as they believe that such losses are temporary. As of June 30, 2009, the Company also has $4.8 million in unrealized gains. The basis for computing realized gains or losses is by specific identification.

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Short-term investments measured at fair value:

SFAS No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 defines a three-level valuation hierarchy for disclosure of fair value measurements as follows:

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

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

Level 3 — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Valuation of instruments includes unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities.

FSP 157-4 provides additional guidelines for making fair value measurements more consistent with the principles presented in SFAS 157 and provides authoritative guidance in determining whether a market is active or inactive, and whether a transaction is distressed.

The following table summarizes the type of instruments measured at fair value on a recurring basis (in thousands):

	June 30, 2009								March 31, 2009
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash	$	16,268	$	—	$	—	$	16,268	$	8,047	$	—	$	—	$	8,047
Cash equivalents		95,675		—		—		95,675		91,290		—		—		91,290
US Treasury securities and agency bonds		1,234		—		—		1,234		1,245		—		—		1,245
Corporate bonds		—		4,513		—		4,513		—		4,319		—		4,319
Mortgage backed and asset backed securities		—		20,217		—		20,217		—		21,396		—		21,396
Closed-end bond funds		46,823		—		—		46,823		41,970		—		—		41,970
Preferred stock and options		—		15,645		—		15,645		—		15,742		—		15,742
	$	160,000	$	40,375	$	—	$	200,375	$	142,552	$	41,457	$	—	$	184,009
Reported as:
Cash and cash equivalents	$	111,943	$	—	$	—	$	111,943	$	99,337	$	—	$	—	$	99,337
Short-term investments available-for-sale		48,057		40,375		—		88,432		43,215		41,457		—		84,672
	$	160,000	$	40,375	$	—	$	200,375	$	142,552	$	41,457	$	—	$	184,009
Other accrued liabilities:
													June 30, 2009		March 31, 2009
													(In thousands)
Executive deferred compensation													$	3,911		2,463
Employee related liabilities														1,592		1,896
Warranty														1,129		1,285
Restructuring liabilities														862		4,142
Professional fees														625		644
Other taxes														382		220
Product development cost														—		2,000
Other														2,234		2,816
													$	10,735	$	15,466

Warranty reserves:

The Company’s products typically carry a one year warranty. Reserves are established for estimated product warranty costs at the time revenue is recognized. Although the Company engages in extensive product quality programs and processes, its warranty obligation is affected by product failure rates, use of materials and service delivery costs incurred in correcting any product failure.

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Should actual product failure rates, use of materials or service delivery costs differ from the Company’s estimates, additional warranty reserves could be required, which could reduce its gross margin. Additional changes to negotiated master purchase agreements could result in increased warranty reserves and unfavorably impact future gross margins.

The following table summarizes warranty reserve activity (in thousands):

	Three Months Ended June 30,
	2009			2008
Beginning balance	$	1,285		$	1,475
Charged to costs of revenues		118			112
Claims incurred		(111	)		(40	)
Adjustments to estimated liability		(163	)		(40	)
Ending balance	$	1,129		$	1,507

Interest income (expense) and other-than-temporary impairment, net (in thousands):

	Three Months Ended June 30,
	2009			2008
Interest income	$	1,659		$	2,455
Net realized loss on short-term investments		(112	)		(461	)
Impairment of marketable securities		(175	)		(3,394	)
Interest expense		—			(2	)
	$	1,372		$	(1,402	)

Other-Than-Temporary Impairment

The Company recognizes other-than-temporary impairments for available-for-sale debt instruments in accordance with FSP 115-2/124-2. Following the guidance requirements, the Company assessed whether it intends to sell or it is more likely than not that it will be required to sell an available-for-sale debt instrument before recovery of its amortized cost basis less any current-period credit losses. For available-for-sale debt instruments that are considered other-than-temporarily impaired and that the Company does not intend to sell and will not be required to sell prior to recovery of the amortized cost basis, we separate the amount of the impairment into the amount that is credit related and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the debt instrument’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the debt instrument’s fair value and the present value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive income (loss). The Company currently intends to sell certain of its available-for-sale debt instruments within a relatively short time frame and, therefore, has recorded the unrealized loss amount at June 30, 2009, as an other-than-temporary impairment of approximately $0.2 million for the three months ended June 30, 2009. The cumulative implementation adjustment was a $1.1 million reclassification of prior other-than-temporary impairment charges from retained earnings to other comprehensive income as the impairment losses were determined to be non-credit related. The $4.7 million of unrealized losses as of June 30, 2009 includes $0.7 million in non-credit related unrealized losses.

Other income, net (in thousands):

	Three Months Ended June 30,
	2009			2008
Net loss on disposals of property	$	(1	)	$	(29	)
Net foreign currency loss		(3	)		(1	)
Other		221			105
	$	217		$	75

Net loss per share:

Shares used in basic net income (loss) per share are computed using the weighted average number of common shares outstanding during each period. Shares used in diluted net income per share include the dilutive effect of common shares potentially issuable upon the exercise of stock options, vesting of RSUs and outstanding warrants. However, potentially issuable common shares are not used in computing net loss as their effect would be anti-dilutive due to the loss recorded during the period. The reconciliation of shares used to calculate basic and diluted net loss per share consists of the following (in thousands, except per share data):

	Three Months Ended June 30,
	2009		2008
Net income (loss)	$	2,898	$	(5,174	)
Shares used in net income (loss) per share computation:
Weighted average common shares outstanding		66,070		64,864
Net effect of dilutive common share equivalents		663		—
Shares used in diluted net income (loss) per share computation		66,733		64,864
Net income (loss) per share:
Basic net income (loss) per share	$	0.04	$	(0.08	)
Diluted net income (loss) per share	$	0.04	$	(0.08	)

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Because the Company incurred losses in the three months ended June 30, 2008, the effect of dilutive securities (comprising options and restricted stock units) totaling 240,000 equivalent shares have been excluded from the loss per share computation for the three months ended June 30, 2008 as their impact would be anti-dilutive.

3. RESTRUCTURING CHARGES

The Company accounts for restructuring costs in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which requires 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. Over the last several years, the Company has undertaken significant restructuring activities under several plans in an effort to reduce operating costs. A combined summary of the restructuring programs initiated by the Company is as follows (in thousands):

	Workforce Reduction			Facilities Consolidation and Operating Lease Commitments			Property and Equipment Impairments and Contract Cancellations			Total
Liability, March 31, 2008	$	725		$	853		$	—		$	1,578
Charged to continuing operations		5,850			792			2,359			9,001
Charged to discontinued operations		126			—			—			126
Cash payments		(3,745	)		(451	)		—			(4,196	)
Noncash charges		(1,130	)		—			(859	)		(1,989	)
Reductions to estimated liability		(258	)		(120	)		—			(378	)
Liability, March 31, 2009	$	1,568		$	1,074		$	1,500		$	4,142
Charged to continuing operations		—			—			—			—
Charged to discontinued operations		—			—			—			—
Cash payments		(1,395	)		(231	)		(1,500	)		(3,126	)
Noncash charges		—			—			—			—
Reductions to estimated liability		(154	)		—			—			(154	)
Liability, June 30, 2009	$	19		$	843		$	—		$	862

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The following table provides detailed activity related to the restructuring programs as of June 30, 2009 (in thousands):

	Workforce Reduction			Facilities Consolidation and Operating Lease Commitments			Property and Equipment Impairments and Contract Cancellations			Total
July 2007 Restructuring Program
Charged to continuing operations	$	733		$	—		$	—		$	733
Cash payments		(709	)		—			—			(709	)
Liability, March 31, 2008	$	24		$	—		$	—		$	24
Reductions to estimated liability		(24	)		—			—			(24	)
Liability, June 30, 2008	$	—		$	—		$	—		$	—
September 2007 Restructuring Program
Charged to continuing operations	$	812		$	—		$	—		$	812
Cash payments		(459	)		—			—			(459	)
Liability, March 31, 2008	$	353		$	—		$	—		$	353
Cash payments		(157	)		—			—			(157	)
Reductions to estimated liability		(196	)		—			—			(196	)
Liability, September 30, 2008	$	—		$	—		$	—		$	—
March 2008 Restructuring Program
Charged to continuing operations	$	421		$	853		$	316		$	1,590
Charged to discontinued operations		27			—			—			27
Cash payments		(100	)		—			—			(100	)
Noncash charge		—			—			(316	)		(316	)
Liability, March 31, 2008	$	348		$	853		$	—		$	1,201
Cash payments		(310	)		(451	)		—			(761	)
Reductions to estimated liability		(38	)		(120	)		—			(158	)
Liability, March 31, 2009	$	—		$	282		$	—		$	282
Cash payments		—			(94	)		—			(94	)
Reductions to estimated liability		—			—			—			—
Liability, June 30, 2009	$	—		$	188		$	—		$	188
September 2008 Restructuring Program
Charged to continuing operations	$	1,163		$	—		$	—		$	1,163
Charged to discontinued operations		126			—			—			126
Cash payments		(1,138	)		—			—			(1,138	)
Noncash charge		(57	)		—			—			(57	)
Liability, March 31, 2009	$	94		$	—		$	—		$	94
Cash payments		—			—			—			—
Reductions to estimated liability		(94	)		—			—			(94	)
Liability, June 30, 2009	$	—		$	—		$	—		$	—
February 2009 Restructuring Program
Charged to continuing operations	$	4,687		$	792		$	2,359		$	7,838
Cash payments		(2,140	)		—			—			(2,140	)
Noncash charge		(1,073	)		—			(859	)		(1,932	)
Liability, March 31, 2009	$	1,474		$	792		$	1,500		$	3,766
Cash payments		(1,395	)		(137	)		(1,500	)		(3,032	)
Reductions to estimated liability		(60	)		—			—			(60	)
Liability, June 30, 2009	$	19		$	655		$	—		$	674

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

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

In March 2008, the Company implemented another restructuring program. The March 2008 restructuring program was implemented to reduce job redundancies. The restructuring program consisted of the elimination of 20 positions. As a result of the March 2008 restructuring program, the Company recorded a net charge of $1.6 million, consisting of $0.4 million for employee severances, $0.9 million for operating lease impairment and $0.3 million for an asset impairment. During fiscal 2009, the Company paid down part of its remaining liabilities related to this restructuring program and recorded a reversal for part of its liabilities which was no longer required to complete the restructuring activities. During the three months ended June 30, 2009, the Company paid down part of its remaining liabilities.

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In September 2008, the Company implemented another restructuring program which was put into effect during the months of September and October 2008. The September 2008 restructuring program was implemented to realign and focus the Company’s resources on its core competencies. The restructuring program consisted of the elimination of 30 positions. As a result of the September 2008 restructuring program, the Company recorded a net charge of $1.2 million to continuing operations and $0.1 million to discontinued operations. During fiscal 2009, the Company paid down part of its remaining liabilities related to this restructuring program. During the three months ended June 30, 2009, the Company recorded a reversal of approximately $0.1 million for liabilities, which was no longer required to complete the restructuring activities.

In February 2009, the Company implemented another restructuring program. The February 2009 restructuring program was implemented to reduce its expenses and excess capacity in response to the worsening economic conditions. The restructuring program consisted of the elimination of approximately 100 positions. As a result of the February 2009 restructuring program, the Company recorded a net charge of $7.8 million, consisting of $4.7 million for employee severances, $0.8 million for operating lease impairment, $1.5 million in contract cancellation charges for a cancelled project and $0.8 million for an asset impairment. During fiscal 2009, the Company paid down part of its remaining liabilities related to this restructuring program. During the three months ended June 30, 2009, the Company paid down part of its remaining liabilities related to this restructuring program and recorded a reversal of approximately $0.1 million for part of its liabilities, which was no longer required to complete the restructuring activities.

4. COMPREHENSIVE INCOME (LOSS)

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

	Three Months Ended June 30,
	2009			2008
Net income (loss)	$	2,898		$	(5,174	)
Change in net unrealized gain (loss) on investments		7,123			632
Cumulative implementation reclassification for prior non-credit related other-than-temporary impairment charges		(1,134	)		—
Additions to non-credit related unrealized losses		(667	)		—
Foreign currency translation adjustment gain (loss)		(96	)		(1	)
	$	8,124		$	(4,543	)

5. STOCKHOLDERS’ EQUITY

Preferred Stock

The Certificate of Incorporation allows for the issuance of up to two million shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences, and the number of shares constituting any series of the designation of such series, without further vote or action by the stockholders.

Common Stock

At June 30, 2009, the Company had 375.0 million shares authorized for issuance and approximately 66.3 million shares issued and outstanding. At March 31, 2009, there were approximately 65.9 million shares issued and outstanding.

Employee Stock Purchase Plan

The Company has in effect an employee stock purchase plan under which 4.8 million shares of common stock have been reserved for issuance. Under the terms of this plan, purchases are made semiannually and the purchase price of the common stock is equal to 85% of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. During the three months ended June 30, 2009, no shares were issued under this plan. During the fiscal year ended March 31, 2009, approximately 0.5 million shares were issued under this plan. At June 30, 2009, approximately 3.6 million shares had been issued under this plan and approximately 1.2 million shares were available for future issuance.

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Stock Repurchase Program

In August 2004, the Board authorized a stock repurchase program for the repurchase of up to $200.0 million of the Company’s common stock. Under the program, the Company is authorized to make purchases in the open market or enter into structured agreements. In October 2008, the Board increased the stock repurchase program by $100.0 million. During the three months ended June 30, 2009, no shares were repurchased on the open market. During the fiscal year ended March 31, 2009, no shares were repurchased on the open market. From the time the program was first implemented in August 2004, the Company has repurchased on the open market a total of 8.9 million shares at a weighted average price of $11.74 per share. All repurchased shares were retired upon delivery to the Company. The Board has reinstated the stock repurchase program and the Company will begin to repurchase shares under the approved repurchase plan.

The Company also utilizes structured stock repurchase agreements to buy back shares which are prepaid written put options on its common stock. The Company pays a fixed sum of cash upon execution of each agreement in exchange for the right to receive either a pre-determined amount of cash or stock depending on the closing market price of its common stock on the expiration date of the agreement. Upon expiration of each agreement, if the closing market price of its common stock is above the pre-determined price, the Company will have its cash investment returned with a premium. If the closing market price is at or below the pre-determined price, the Company will receive the number of shares specified at the agreement inception. The Company considers the guidance in FAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity and EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. Any cash received, including the premium, is treated as additional paid in capital on the balance sheet.

During the three months ended June 30, 2009, the Company entered into structured stock repurchase agreements totaling $11.8 million. For those agreements that had been settled by June 30, 2009, the Company received approximately $4.0 million in cash. During the fiscal year ended March 31, 2009, the Company did not enter into any structured stock repurchase agreements. At June 30, 2009, the Company had two outstanding structured stock repurchase agreements for a total of $7.8 million, of which one settled for approximately $4.0 million in cash in July 2009. From the inception of the Company’s most recent stock repurchase program in August 2004, it entered into structured stock repurchase agreements totaling $227.5 million. Upon settlement of these agreements, the Company received $140.5 million in cash and 7.8 million shares of its common stock at an effective purchase price of $10.15 per share.

The table below is a plan-to-date summary of the Company’s repurchase program activity as of June 30, 2009 (in thousands, except per share data):

	Aggregate Price		Repurchased Shares	Average Price Per Share
Stock repurchase program
Authorized amount	$	300,000	—	$	—
Open market repurchases		103,966	8,856		11.74
Structured stock repurchase agreements*		90,517	7,797		11.61
Total repurchases	$	194,483	16,653	$	11.68
Available for repurchase	$	105,517

* The amounts above do not include gains of $11.4 million from structured stock repurchase agreements which settled in cash. The average price per share for structured stock repurchase agreements adjusted for gains from settlements in cash would have been $10.15 share and for total repurchases would have been $11.00 per share.

Stock Options

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

In March 2007, the Company’s stockholders also approved the amendment and restatement of the 1992 Stock Option Plan (i) to expand the type of awards available under the plan, (ii) to rename the plan as the 1992 Equity Incentive Plan, (iii) to extend the plan’s expiration date until January 10, 2017, (iv) to increase the shares reserved under the plan by 2.3 million shares, (v) to serve as a successor

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plan to the 2000 Equity Incentive Plan, which has no longer been used for equity awards following completion of the Company’s prior stock option exchange, and (vi) to provide that any shares subject to stock awards under the 2000 Equity Incentive Plan that terminate or are forfeited or repurchased (other than options issued under the 2000 Equity Incentive Plan that were tendered in the stock option exchange) are added to the share reserve under the 1992 Equity Incentive Plan.

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

In May 2009, Dr. Gopi, our CEO, was awarded 300,000 stock options for “Extraordinary Accomplishment.” These options will vest only if Company performance milestones are satisfied; otherwise they will expire unvested. The first milestone for 75,000 shares will vest only if we achieve an annual revenue target of $270 million or more for any fiscal year from fiscal 2010 through fiscal 2013. The next milestone for another 75,000 shares will vest only if we achieve an annual revenue target of $310 million or more for any fiscal year from fiscal 2010 through fiscal 2013 or an annual revenue target of $350 million or more for fiscal 2014. The last milestone for 150,000 shares will vest only if we achieve an annual operating margin of 13.5% of annual revenue by fiscal 2013.

At June 30, 2009 and March 31, 2009, there were no shares of common stock subject to repurchase. Options are granted at prices at least equal to fair value of the Company’s common stock on the date of grant.

Option activity under the Company’s stock incentive plans in the three months ended June 30, 2009 is set forth below:

	Number of Shares (in thousands)		Weighted Average Exercise Price Per Share
Outstanding at the beginning of the year	7,923		$	13.60
Granted	726			7.12
Exercised	(145	)		2.43
Forfeited	(1,138	)		13.13
Outstanding at the end of the period	7,366		$	13.25
Vested at the end of the period	4,641		$	16.90

At June 30, 2009, the weighted average remaining contractual term for options outstanding is 4.8 years and for options vested is 3.5 years.

The aggregate pretax intrinsic value of options exercised during the three months ended June 30, 2009 was $0.6 million. This intrinsic value represents the excess of the fair market value of the Company’s common stock on the date of exercise over the exercise price of such options.

The weighted average remaining contractual life and weighted average per share exercise price of options outstanding and of options exercisable as of June 30, 2009 were as follows (in thousands, except exercise prices and years):

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Number of Shares	Weighted Average Exercise Price
$    0.52  -  $        7.12	1,908	$	5.86	6.99	163	$	4.48
7.13  -          11.28	1,474		8.22	6.42	687		8.67
11.29  -          12.84	1,627		12.37	2.74	1,487		12.36
12.85  -          16.15	1,538		14.39	4.01	1,485		14.39
16.16  -        300.13	819		39.14	2.29	819		39.14
$    0.52  -  $    300.13	7,366	$	13.25	4.79	4,641	$	16.91

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As of June 30, 2009, the aggregate pre-tax intrinsic value of options outstanding and exercisable was $0.7 million and options outstanding was $4.8 million. The aggregate pretax intrinsic values were calculated based on the closing price of the Company’s common stock of $8.13 on June 30, 2009.

Restricted Stock Units

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

In May 2009, the Committee issued three-year grants, or “EBITDA Grants”, for fiscal 2010. Vesting for the EBITDA Grants is subject to (i) the Company’s performance as measured by earnings before interest, taxes, depreciation and amortization (“EBITDA”), and (ii) individual performance as measured by the accomplishment of goals and objectives. For fiscal 2010, up to 36% of the three-year performance pool can vest. Approximately 18% can vest for “at plan” Company performance, 24% can vest for “stretch” Company performance and 36% can vest for “extraordinary” Company performance.

Restricted stock unit activity for the three months ended June 30, 2009 is set forth below:

	Restricted Stock Units Outstanding Number of Shares
	(in thousands)
Outstanding at the beginning of the year	1,467
Awarded	3,173
Vested	(312	)
Cancelled	(393	)
Outstanding at the end of the period	3,935

The weighted average grant-date fair value per share for the restricted stock units was $6.53 for the three months ended June 30, 2009, and the weighted average remaining contractual term for the restricted stock units outstanding as of June 30, 2009 was 1.8 years.

Based on the closing price of the Company’s common stock of $8.13 on June 30, 2009, the total pretax intrinsic value of all outstanding restricted stock units on that date was $32.0 million.

Warrants

On May 17, 2009, the Company entered into agreements with Veloce Technologies, Inc. (“Veloce”) pursuant to which Veloce has agreed to perform development work for the Company on an exclusive basis for up to five years for cash and other consideration, including a warrant to purchase shares of the Company’s common stock, which would vest upon the achievement of certain performance and time-based milestones.

The warrant expires on July 15, 2014 and has an exercise price of $0.01. The first tranche is for 33% and will vest the earlier of 12 months after the date of the agreement or when a “certain” milestone is achieved assuming “other” milestones have been achieved but in no case earlier than the achievement of the “other” milestones. The remaining 67% will vest the earlier of achieving the “certain” milestone or 8% every three months beginning on the 15th month after the date of the agreement until the warrant is 100% vested, assuming the “other” milestones have been achieved but in no case earlier than the achievement of the “other” milestones. As of June 30, 2009, no shares have vested.

6. STOCK-BASED COMPENSATION

SFAS 123(R) requires companies to estimate the fair value of stock-based compensation on the date of grant using an option-pricing model. The Company uses the Black-Scholes model to value stock-based compensation. The Black-Scholes model determines the fair value of share-based payment awards based on the stock price on the date of grant and is affected by assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility

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over the term of the awards, and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Although the fair value of stock options granted by the Company is determined in accordance with SFAS 123(R) and SEC Staff Accounting Bulletin No. 107 (“SAB 107”), Share-Based Payment, as amended by SAB No. 110, using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

The fair value of the options granted during the three months ended June 30, 2009 and 2008 is estimated as of the grant date using the Black-Scholes option-pricing model assuming the weighted-average assumptions listed in the following table:

	Three Months Ended June 30,
	Employee Stock Options						Employee Stock Purchase Plans
	2009			2008			2009			2008
Expected life (years)		3.9			3.9			0.5			0.5
Risk-free interest rate		1.7	%		2.8	%		0.4	%		3.6	%
Volatility		62	%		43	%		81	%		54	%
Dividend yield		—	%		—	%		—	%		—	%
Weighted average fair value	$	3.46		$	3.04		$	1.50		$	2.98

The weighted average fair value per share of the restricted stock units awarded was $6.53 and $9.06 in the three months ended June 30, 2009 and 2008, respectively. The weighted average fair value per share was calculated based on the fair market value of the Company’s common stock on the respective grant dates.

Effective April 1, 2009, the Company revised its estimated forfeiture rate used in determining the amount of stock-based compensation from 5.2% to 5.8% as a result of an increasing rate of forfeitures in recent periods, which the Company believes is indicative of the rate it will experience during the remaining vesting period of currently outstanding unvested options.

The following table summarizes stock-based compensation expense related to stock options and restricted stock units under SFAS 123(R) (in thousands):

	Three Months Ended
	June 30,
	2009			2008
Stock-based compensation expense by type of awards
Stock options	$	1,035		$	1,970
Restricted stock units		1,593			899
Total stock-based compensation		2,628			2,869
Stock-based compensation expensed from (capitalized to) inventory		(13	)		—
Total stock-based compensation expense	$	2,615		$	2,869

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

	Three Months Ended
	June 30,
	2009			2008
Stock-based compensation expense by type of awards
Cost of revenues	$	124		$	174
Research and development		1,272			1,118
Selling, general and administrative		1,232			1,577
Total stock-based compensation	$	2,628		$	2,869
Stock-based compensation expensed from (capitalized to) inventory		(13	)		—
Total stock-based compensation expense	$	2,615		$	2,869

The amount of unearned stock-based compensation currently estimated to be expensed from now through fiscal 2014 related to unvested share-based payment awards at June 30, 2009 is $33.5 million. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is approximately 3.1 years. If there are any modifications or cancellations of the underlying unvested securities, the Company may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that the Company grants additional equity awards or assumes unvested equity awards in connection with acquisitions.

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7. CONTINGENCIES

Legal Proceedings

The Company acquired JNI Corporation (“JNI”) in October 2003. In November 2001, a class action lawsuit was filed against JNI and the underwriters of its initial and secondary public offerings of common stock in the U.S. District Court for the Southern District of New York, case no. 01 Civ 10740 (SAS). The complaint alleges that defendants violated the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in connection with JNI’s public offerings. This lawsuit is among more than 300 class action lawsuits pending in this District Court that have come to be known as the “IPO laddering cases.” In re Initial Public Offering Securities Litigation, No. 21 MC 92 (SAS). A settlement has been reached in all of the cases. On June 10, 2009, the Court granted preliminary approval to the settlement, and set a final settlement approval hearing for September 10, 2009. Should the settlement not obtain final approval (which cannot be assured), the Company’s liability, if any, could not be reasonably estimated at this time.

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

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

8. INCOME TAXES

The Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, on April 1, 2007. The adoption of FIN 48 was not material to the financial statements due to a full valuation allowance against deferred tax assets. The total amount of unrecognized tax benefits as of April 1, 2009, was $38.6 million, including interest and penalties. During the quarter ended June 30, 2009, additional unrecognized tax benefits of $32,000 were recorded. The Company does not foresee significant changes to its estimated amount of liability associated with its uncertain tax positions within the next twelve months.

The Company’s income tax expense consists of state taxes and foreign taxes. The federal statutory income tax rate was 35% for the three months ended June 30, 2009 and 2008. The Company’s income tax benefit for the three months ended June 30, 2009 was $3.5 million as compared to an income tax expense of $0.6 million during the three months ended June 30, 2008. The decrease in the income tax expense recorded for the three months ended June 30, 2009 compared to June 30, 2008, was primarily related to discontinued operations and an increase in refundable tax credits available to the Company. During the three months ended June 30, 2009, the Company recorded a tax charge of approximately $3.6 million to discontinued operations in connection with the sale of the Company’s 3ware storage adapter business and concurrently recorded the same amount as an income tax benefit to continuing operations.

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At April 1, 2009, the Company had net deferred tax assets of $458.2 million. These deferred tax assets are primarily composed of federal and state tax net operating loss (“NOL”) carryforwards and federal and state research and development (“R&D”) credit carryforwards. Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these assets, a full valuation allowance has been established to offset these net deferred tax assets. Federal and state laws impose restrictions on the utilization of net operating loss and tax credit carryforwards in the event of an “ownership change” for tax purposes as defined by Section 382 of the Internal Revenue Code. The Company has completed a Section 382 analysis regarding the limitation of net operating loss and research and development tax credit carryforwards though March 31, 2008. There were no ownership changes identified. However, no Section 382 analysis was done with respect to the Company’s acquired net operating losses and research and development tax credit carryforwards. As a result, utilization of the portion of the Company’s net operating loss and tax credit carryforwards attributable to acquired entities may be restricted. The Company has removed these acquired deferred tax assets for net operating losses and research and development credits from its deferred tax asset schedule. The Company has not recognized any accrued interest or penalties related to unrecognized tax benefits through the quarter ended June 30, 2009.

The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. The Company currently has no years under examination by the Internal Revenue Service or any state jurisdiction. Effectively, all of the Company’s historical tax years are subject to examination by the Internal Revenue Service and various state jurisdictions due to the generation of net operating loss and credit carryforwards. With few exceptions, the Company is no longer subject to foreign examinations by tax authorities for years before 2006.

9. PATENT PURCHASE AGREEMENT

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

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

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

10. SALE OF THE 3WARE STORAGE ADAPTER BUSINESS TO LSI CORPORATION

On April 5, 2009, the Company entered into a Purchase Agreement with LSI Corporation (“LSI”). Under the Purchase Agreement, the Company agreed to sell to LSI substantially all of the operating assets (other than patents) primarily used or held for use in its 3ware storage adapter business (the “Storage Business”) but retaining certain assets, including patents, cash, accounts receivable and accounts payable, even if related to the Storage Business (the “Transaction”). The assets sold included customer contracts, inventory, fixed assets, certain intellectual property and other assets, as well as rights to the name “3ware.”

The Company completed the Transaction on April 21, 2009. The purchase price for the Transaction was approximately $20.8 million, subject to an adjustment based on the level of inventory at the closing of the Transaction. The Company estimates the adjustment could increase the purchase price by up to $0.8 million. The Company is currently in discussions with LSI on the adjustment amount and will record the adjustment when an amount is agreed upon. As a result of the Transaction, the Company decreased its number of full-time employees by approximately 56.

As part of the Transaction, we entered into an intellectual property agreement, a transition services agreement and a master procurement agreement with LSI. These agreements are not material to the Company’s financial condition and operating results and do not constitute a significant continuing involvement with the Storage Business.

The Company has reclassified the financial results of the 3ware storage adapter business as discontinued operations for all periods presented.

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11. VELOCE

On May 17, 2009, the Company entered into agreements with Veloce pursuant to which Veloce has agreed to perform product development work for the Company on an exclusive basis for up to five years for cash and other consideration, including a warrant to purchase shares of the Company’s common stock, which will vest upon the achievement of certain performance and time-based milestones.

The Company has determined Veloce, a California corporation, is a VIE by evaluating the sufficiency of the entity’s equity investment at risk to absorb losses and the Company’s share of respective expected losses and determined that the Company is the primary beneficiary of the VIE. The Company has included the accounts of Veloce in the consolidated financial statements and all significant intercompany balances and transactions have been eliminated in consolidation.

Under a merger agreement between the Company and Veloce, which has been approved by Veloce’s Board of Directors and stockholders, the Company also agreed to acquire Veloce if certain performance milestones and delivery schedules set forth under the merger and other agreements are achieved. The Company also has the unilateral option to acquire Veloce in the event Veloce fails to meet the milestones and delivery schedules. Should the Company acquire Veloce pursuant to the merger agreement, the purchase price payable by the Company is estimated to be in the range of approximately $5 million up to approximately $100 million, subject to adjustments. The final price would be based upon multiple performance, delivery and other timing criteria and cannot be determined without reference to a number of future events and contingencies. The form of consideration used for the merger, cash or the Company’s stock, would be determined by the Company at the time of the merger. The merger agreement contains customary representations, warranties and covenants and may be terminated upon mutual agreement of the parties or unilaterally by the Company or Veloce if the other party fails to meet certain conditions set forth in the agreement. The agreements permit the Company to appoint one individual to serve on Veloce’s Board of Directors and Board committees.

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

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

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

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

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

• Results of operations. This section provides an analysis of our results of operations for the three months ended June 30, 2009 and 2008. A brief description is provided of transactions and events that impact the comparability of the results being analyzed.

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

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

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

OVERVIEW

Applied Micro Circuits Corporation (“AppliedMicro” or the “Company”) is a leader in semiconductor solutions for the enterprise, telecom and consumer/small medium business (“SMB”) markets. We design, develop, market and support high-performance low power integrated circuits (“ICs”), which are essential for the processing, transporting and storing of information worldwide. In the telecom and enterprise markets, we utilize a combination of design expertise coupled with system-level knowledge and multiple technologies to offer IC products for wireline and wireless communications equipment such as wireless access points, wireless base stations, multi-function printers, edge switches, gateways, metro transport platforms, core switches and routers. In the consumer/SMB markets, we combine optimized software and system-level expertise with highly integrated semiconductors to deliver comprehensive reference designs and stand-alone semiconductor solutions for wireline and wireless communications equipment such as wireless access points. Our corporate headquarters are located in Sunnyvale, California. Sales and engineering offices are located throughout the world.

Our business had three reporting units, Process, Transport and Store. On April 21, 2009, we completed the sale of our 3ware storage adapter business, which was substantially all the business of our Store unit, to LSI Corporation to focus on our Process and Transport reporting units. AppliedMicro is a semiconductor company that possesses fundamental and differentiated intellectual property for high speed signal processing, packet based communications processors and telecommunications transport protocols. This intellectual property enables us to be a key player in the datacenter, enterprise and telecommunications applications. Our focus is on the original equipment manufacturers (“OEMs”) and telecommunications companies that build and connect to datacenters.

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Certain amounts have been reclassified to conform to the current year presentation. We classified the financial results of our 3ware storage adapter business as discontinued operations for all periods presented due to the sale of our 3ware storage adapter business to LSI Corporation on April 21, 2009.

The following tables present a summary of our results of operations for the three months ended June 30, 2009 and 2008 (dollars in thousands):

	Three Months Ended June 30,
	2009					2008
	Amount			% of Net Revenue		Amount			% of Net Revenue		Increase (Decrease)			% Change
Net revenues	$	45,052		100.0	%	$	61,199		100.0	%	$	(16,147	)	(26.4	)%
Cost of revenues		22,175		49.2			28,426		46.4			(6,251	)	(22.0	)
Gross profit		22,877		50.8			32,773		53.6			(9,896	)	(30.2	)
Total operating expenses		30,784		68.3			35,395		57.8			(4,611	)	(13.0	)
Operating loss		(7,907	)	(17.5	)		(2,622	)	(4.2	)		(5,285	)	(201.6	)
Interest and other income (expense), net		1,589		3.5			(1,327	)	(2.2	)		2,916		219.7
Loss from continuing operations before income taxes		(6,318	)	(14.0	)		(3,949	)	(6.4	)		(2,369	)	(60.0	)
Income tax expense (benefit)		(3,519	)	(7.8	)		502		0.8			(4,021	)	(801.0	)
Loss from continuing operations		(2,799	)	(6.2	)		(4,451	)	(7.2	)		1,652		37.1
Income (loss) from discontinued operations, net of taxes		5,697		12.6			(723	)	(1.2	)		6,420		888.0
Net loss	$	2,898		6.4	%	$	(5,174	)	(8.4	)%	$	8,072		156.0	%

Net Revenues. We generate revenues primarily through sales of our IC products, embedded processors and printed circuit board assemblies to OEMs, such as Alcatel-Lucent, Ciena, Cisco, Brocade, Fujitsu, Hitachi, Huawei, Juniper, Ericsson, NEC, Nortel, Nokia Siemens Networks, and Tellabs, who in turn supply their equipment principally to communications service providers.

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

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

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

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

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

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

• general economic and market conditions in the semiconductor industry and communications markets, including the current global economic recession;

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

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

For these and other reasons, our net revenue and results of operations for the three months ended June 30, 2009 and prior periods may not necessarily be indicative of future net revenue and results of operations.

Based on direct shipments, net revenues to customers that was equal to or greater than 10% of total net revenues were as follows:

	Three Months Ended
	June 30,
	2009		2008
Avnet (distributor)	14	%	24	%
Hon Hai (sub-contract manufacturer)	12	%	10	%
Huawei (sub-contract manufacturer)	11	%	*

* Less than 10% of total net revenues for period indicated.

We expect that our largest customers will continue to account for a substantial portion of our net revenue for the foreseeable future.

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

	Three Months Ended June 30,
	2009				2008
	Amount		% of Net Revenue		Amount		% of Net Revenue
United States of America	$	15,538	34.5	%	$	17,541	28.7	%
Other North America		2,610	5.8			5,302	8.6
Europe		6,967	15.5			9,188	15.0
Asia		19,690	43.7			28,942	47.3
Other		247	0.5			226	0.4
	$	45,052	100.0	%	$	61,199	100.0	%

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

Sale of our 3ware storage adapter business. We completed the sale of our 3ware storage adapter business, a significant portion of our overall business, to LSI Corporation on April 21, 2009, after our 2009 fiscal year. As a result, we now expect to generate all of our sales from our remaining business, Process and Transport, which will require us to grow our remaining business in order to achieve profitability. Economic and other factors may prevent us from growing our remaining business. If we fail to grow our remaining business, it could have a material adverse impact on our business, financial condition and operating results. We may in the future dispose of additional assets or businesses that represent a significant portion of our business.

Under the Asset Purchase Agreement with LSI Corporation (the “Purchase Agreement”), which we entered on April 5, 2009, we sold substantially all of the operating assets (other than patents) of our 3ware storage adapter business. The assets sold included customer contracts, inventory, fixed assets, certain intellectual property and other assets, as well as rights to the name “3ware.” The purchase price was approximately $20.8 million, subject to an adjustment for changes in the level of inventory at the closing of the sale. We estimate the adjustment could increase the purchase price by up to $0.8 million. We are currently in discussions with LSI on the adjustment amount and will record the adjustment when an amount is agreed upon.

The Purchase Agreement contained customary representations, warranties, covenants and indemnities, including, among others, entering into an intellectual property agreement, a transition services agreement and a master procurement agreement with LSI Corporation.

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

• stock-based compensation expense;

• amortization of purchased intangibles;

• acquired in-process research and development;

• litigation settlement costs;

• restructuring charges;

• combinations of companies within our customer base;

• purchased intangible asset impairment charges;

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

• income tax expense (benefit).

Since the start of fiscal 2008, we have invested a total of $190.2 million in the research and development of new products, including higher-speed, lower-power and lower-cost products, products that combine the functions of multiple existing products into single highly integrated products, and other products to complete our portfolio of communications products. These products, and our customers’ products for which they are intended, are highly complex. Due to this complexity, it often takes several years to complete the development and qualification of these products before they enter into volume production. Accordingly, we have not yet generated significant revenues from some of the products developed during this time period. In addition, downturns in the telecommunications market can severely impact our customers’ business and usually results in significantly less demand for our products than was expected when the development work commenced. As a result of restructuring activities associated with these downturns, we have discontinued development of several products that were in process and slowed down development of others as we realized that demand for these products would not materialize as originally anticipated.

CRITICAL ACCOUNTING POLICIES

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

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

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Inventory Valuation and Warranty Liabilities

Our policy is to value inventories at the lower of cost or market on a part-by-part basis. This policy requires us to make estimates regarding the market value of our inventories, including an assessment of excess or obsolete inventories. We determine excess and obsolete inventories based on an estimate of the future demand for our products within a specified time horizon, generally 12 months. The estimates we use for future demand are also used for near-term capacity planning and inventory purchasing and are consistent with our revenue forecasts. If our demand forecast is greater than our actual demand we may be required to take additional excess inventory charges, which would decrease gross margin and net operating results. For example, as of June 30, 2009, reducing our future demand estimate to six months could decrease our current inventory valuation by approximately $5.6 million or increasing our future demand forecast to 18 months could increase our current inventory valuation by approximately $0.2 million.

Our products typically carry a one year warranty. We establish reserves for estimated product warranty costs at the time revenue is recognized. Although we engage in extensive product quality programs and processes, our warranty obligation is affected by product failure rates, use of materials and service delivery costs incurred in correcting any product failure. Should actual product failure rates, use of materials or service delivery costs differ from our estimates, additional warranty reserves could be required, which could reduce our gross margin. Additional changes to negotiated master purchase agreements could result in increased warranty reserves and unfavorably impact future gross margins.

Intangible Asset Valuation

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

We are required to assess intangible assets for potential impairment at least annually using the methodology prescribed by SFAS 144. SFAS 144 requires that intangible assets be tested for impairment at the reporting unit level on at least an annual basis and between annual tests in certain circumstances. Application of the intangible assets impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units and determining the fair value of each reporting unit. The intangible assets impairment test compares the fair value of the reporting unit with the carrying value of the reporting unit. The implied fair value of intangible assets is determined in the same manner as in a business combination. Determining the implied fair value of the intangible assets 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 for each reporting unit and market comparisons from relevant industries for each reporting unit. These approaches use significant estimates and assumptions, including projection and timing of future cash flows, discount rates reflecting the risk inherent in future cash flows, perpetual growth rates, determination of appropriate market comparables, and determination of whether a premium or discount should be applied to comparables. It is possible that the plans and estimates used to value these assets may differ from actual outcomes. As required by SFAS 144, we verified our long-lived assets, other than intangible assets deemed to have indefinite lives, were not impaired as of the time of the goodwill impairment.

Investments

We hold a variety of securities that have varied underlying investments. We review our investment portfolio periodically to assess for other-than-temporary impairment. We assess the existence of impairment of our investments in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and related guidance issued by the Financial Accounting Standards Board (“FASB”) in order to determine the classification of the impairment as “temporary” or “other-than-temporary”. The factors used to determine whether an impairment is temporary or other-than-temporary involve considerable judgment. The current rapidly changing

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economic climate and volatile financial markets have created an environment in which it is difficult to make accurate estimates and assumptions on which we base our judgments. The factors we consider in determining whether any individual impairment is temporary or other-than-temporary are primarily the length of the time and the extent to which the market value has been less than amortized cost, the nature of underlying assets (including the degree of collateralization), the financial condition, credit rating, market liquidity conditions and near-term prospects of the issuer. In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. The FSP established a new method of recognizing and reporting other-than-temporary impairments of debt securities. If the fair value of a debt security is less than its amortized cost basis at the balance sheet date, an assessment would have to be made as to whether the impairment is other-than-temporary. If we decided to sell the security, an other-than-temporary impairment shall be considered to have occurred. However, if we do not intend to sell the debt security, we shall consider available evidence to assess whether it more likely than not will be required to sell the security before the recovery of its amortized cost basis due to cash, working capital requirements, contractual or regulatory obligations indicate that the security will be required to be sold before a forecasted recovery occurs. If more likely than not, we are required to sell the security before recovery of its amortized cost basis, an other-than-temporary impairment is considered to have occurred. If we do not expect to recover the entire amortized cost basis of the security, we would not be able to assert that it will recover its amortized cost basis even if we do not intend to sell the security. Therefore, in those situations, an other-than-temporary impairment shall be considered to have occurred. Use of present value cash flow models to determine whether the entire amortized cost basis of the security will be recovered is expected. We will compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. An other-than-temporary impairment is said to have occurred if the present value of cash flows expected to be collected is less than the amortized cost basis of the security. In the three months ended June 30, 2009, we recorded other-than-temporary impairment charges of $0.2 million to current earnings. This charge was primarily driven by our intent to sell this security in the short-term. For the three months ended June 30, 2009, we did not record an impairment charge in connection with other securities in a continuous loss position (fair value less than carrying value) for less than 12 months with unrealized losses of $4.7 million as we believe that such unrealized losses are temporary. As of June 30, 2009, we also had $4.8 million in unrealized gains. For the year ended March 31, 2009 we recorded other-than-temporary impairment charges of $17.1 million to current earnings.

Fair Value of Financial Instruments

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

Beginning April 1, 2008, short term investments and long term marketable securities are recorded at fair value in our condensed consolidated balance sheet and are categorized based upon the level of judgment associated with inputs used to measure their fair value. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. In April 2009, the FASB issued FSP 157-4 to provide additional guidelines for making fair value measurements more consistent with the principles presented in SFAS 157 and provides authoritative guidance in determining whether a market is active or inactive, and whether a transaction is distressed. SFAS 157 defines a three-level valuation hierarchy for disclosure of fair value measurements as follows:

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

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

Level 3 — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Valuation of instruments includes unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities.

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

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We have no instruments for which the valuation inputs are classified as Level 3.

In April 2009, the FASB issued FSP 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP 157-4”). FSP 157-4 provides guidance in determining fair value when the volume and level of activity for the asset or liability have significantly decreased and on identifying transactions that are not orderly. FSP 157-4 requires disclosure in interim and annual periods of the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques. The adoption of FSP 157-4 did not have a significant impact on our consolidated financial statements or the fair values of our financial assets.

Restructuring Charges

Over the last several years we have undertaken significant restructuring initiatives, which have required us to develop formalized plans for exiting certain business activities and reducing spending levels. We have had to record estimated expenses for employee severance, long-term asset write downs, lease cancellations, facilities consolidation costs, and other restructuring costs. Given the significance, and the timing of the execution, of such activities, this process is complex and involves periodic reassessments of estimates made at the time the original decisions were made. In calculating the charges for our excess facilities, we have to estimate the timing of exiting certain facilities. Our assumptions for exiting certain facilities may differ from actual outcomes, which could result in the need to record additional costs or reduce estimated amounts previously charged to restructuring expense. Our policies require us to periodically evaluate the adequacy of the remaining liabilities under our restructuring initiatives. In fiscal 2009, we recorded a net charge of $8.7 million for our restructuring activities, of which $0.1 million has been reclassified to discontinued operations. In the three months ended June 30, 2009, we recorded a reversal of restructuring charges of approximately $0.2 million associated with our restructuring actions. For a full description of our restructuring activities, refer to our discussion of restructuring charges in Note 3 to the condensed consolidated financial statements, included in Part I, Item 1 of this report.

Valuation of Deferred Income Taxes

We record valuation allowances to reduce our deferred tax assets to an amount that we believe is more likely than not to be realized. We consider estimated future taxable income and ongoing prudent and feasible tax planning strategies, including reversals of deferred tax liabilities, in assessing the need for a valuation allowance. If we were to determine that we will not realize all or part of our deferred tax assets in the future, we would make an adjustment to the carrying value of the deferred tax asset, which would be reflected as income tax expense. Conversely, if we were to determine that we will realize a deferred tax asset, which currently has a valuation allowance, we would reverse the valuation allowance which would be reflected as an income tax benefit or as an adjustment to stockholders’ equity, for tax assets related to stock options, or goodwill, for tax assets related to acquired businesses. In determining taxable income for financial statement reporting purposes, we must make certain estimates and judgments. These estimates and judgments are applied in the calculation of certain tax liabilities and in the determination of the recoverability of deferred tax assets, which arise from temporary differences between the recognition of assets and liabilities for tax and financial statement reporting purposes. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax rules and the potential for future adjustment of our uncertain tax positions by the Internal Revenue Service or other taxing jurisdiction. If our estimates of these taxes are greater or less than actual results, an additional tax benefit or charge will result.

Stock-Based Compensation Expense

Effective April 1, 2006 we adopted revised SFAS No. 123, Share-Based Payment (“SFAS 123(R)”), which requires all share-based payments, including grants of stock options, restricted stock units and employee stock purchase rights, to be recognized in our financial statements based on their respective grant date fair values. Under this standard, the fair value of each employee stock option and employee stock purchase right is estimated on the date of grant using an option pricing model that meets certain requirements. We currently use the Black-Scholes option pricing model to estimate the fair value of our share-based payments. The Black-Scholes model meets the requirements of SFAS 123(R) but the fair values generated by the model may not be indicative of the actual fair values of our stock-based awards as it does not consider certain factors important to stock-based awards, such as continued employment, periodic vesting requirements and limited transferability. The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by our stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. We estimate the expected volatility of our stock options at grant date by equally weighting the historical volatility and the implied volatility of our stock over specific periods of time as the expected volatility assumption required in the Black-Scholes model. The expected life of the stock options is based on historical and other data including life of the option and

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vesting period. The risk-free interest rate assumption is the implied yield currently available on zero-coupon government issues with a remaining term equal to the expected term. The dividend yield assumption is based on our history and expectation of dividend payouts. The fair value of our restricted stock units is based on the fair market value of our common stock on the date of grant. Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ significantly from those estimated. We evaluate the assumptions used to value stock-based awards on a quarterly basis. If factors change and we employ different assumptions, stock-based compensation expense may differ significantly from what we have recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. We currently estimate when and if performance-based options will be earned. If the awards are not considered probable of achievement, no amount of stock-based compensation is recognized. If we consider the award to be probable, expense is recorded over the estimated service period. To the extent that our assumptions are incorrect, the amount of stock-based compensation recorded will be increased or decreased. To the extent that we grant additional equity securities to employees or we assume unvested securities in connection with any acquisitions, our stock-based compensation expense will be increased by the additional unearned compensation resulting from those additional grants or acquisitions.

Revenue Recognition

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

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

Allowance for Bad Debts

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

RESULTS OF OPERATIONS

Comparison of the Three Months Ended June 30, 2009 to the Three Months Ended June 30, 2008

Net Revenues. Net revenues for the three months ended June 30, 2009 were $45.1 million, representing a decrease of 26.4% from the net revenues of $61.2 million for the three months ended June 30, 2008. We classify our revenues into two categories based on the markets that the underlying products serve. The categories are Process and Transport. We use this information to analyze our performance and success in these markets. See the following tables (dollars in thousands):

	Three Months Ended June 30,
	2009				2008
	Amount		% of Net Revenue		Amount		% of Net Revenue		Decrease			% Change
Process	$	25,080	55.7	%	$	33,897	55.4	%	$	(8,817	)	(26.0	)%
Transport		19,972	44.3			27,302	44.6			(7,330	)	(26.8	)
	$	45,052	100.0	%	$	61,199	100.0	%	$	(16,147	)	(26.4	)%

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During the three months ended June 30, 2009, revenues, as anticipated, partially recovered from the prior two quarter’s economic recession and overall softness in demand reflected in the lower volumes that resulted in lower revenues. In addition, during the three months ended June 30, 2009, we also recorded $3.0 million in licensing revenues under Transport from the sale of certain non-core patents and associated rights. Net revenues for the three months ended June 30, 2008 represented a recovery from the prior downward inventory corrections by our customers and product transitions as well as an overall softness in demand. We expect revenues from continuing operations to increase by 5% to 9% in the three months ending September 30, 2009, compared to the three months ended June 30, 2009.

Gross Profit. The following table presents net revenues, cost of revenues and gross profit for the three months ended June 30, 2009 and 2008 (dollars in thousands):

	Three Months Ended June 30,
	2009				2008
	Amount		% of Net Revenue		Amount		% of Net Revenue		Decrease			% Change
Net revenues	$	45,052	100.0	%	$	61,199	100.0	%	$	(16,147	)	(26.4	)%
Cost of revenues		22,175	49.2			28,426	46.4			(6,251	)	(22.0	)
Gross profit	$	22,877	50.8	%	$	32,773	53.6	%	$	(9,896	)	(30.2	)%

The gross profit percentage for the three months ended June 30, 2009 decreased to 50.8% compared to 53.6% for the three months ended June 30, 2008. The decrease in our gross profit percentage was primarily due to an unfavorable product mix and an overall decrease in net revenues offset by $3.0 million in revenue from the sale of our non-core patents and associated rights to Qualcomm and the sale of $0.4 million of previously reserved inventory.

The amortization of purchased intangible assets included in cost of revenues during the three months ended June 30, 2009 was $3.6 million compared to $3.9 million for the three months ended June 30, 2008. Based on the amount of capitalized purchased intangibles on the balance sheet as of June 30, 2009, we expect amortization expense for purchased intangibles charged to cost of revenues to be $12.1 million in fiscal 2010, $10.5 million in fiscal 2011 and $0.9 million for fiscal 2012. Future acquisitions of businesses may result in substantial additional charges, which would impact the gross profit percentage in future periods.

Research and Development and Selling, General and Administrative Expenses. The following table presents research and development and selling, general and administrative expenses for the three months ended June 30, 2009 and 2008 (dollars in thousands):

	Three Months Ended June 30,
	2009				2008
	Amount		% of Net Revenue		Amount		% of Net Revenue		Decrease			% Change
Research and development	$	19,414	43.1	%	$	20,450	33.4	%	$	(1,036	)	(5.1	)%
Selling, general and administrative	$	10,519	23.4	%	$	13,851	22.6	%	$	(3,332	)	(24.1	)%

Research and Development. Research and development (“R&D”) expenses consist primarily of salaries and related costs (including stock-based compensation) of employees engaged in research, design and development activities, costs related to engineering design tools, subcontracting costs and facilities expenses. The decrease in R&D expenses of 5.1% for the three months ended June 30, 2009 compared to the three months ended June 30, 2008, was primarily due to a decrease of $2.0 million in personnel costs related to our recent restructuring actions, offset by an increase of $0.8 million in equipment and software costs and $0.2 million in stock-based compensation charges. We believe that a continued commitment to R&D is vital to our goal of maintaining a leadership position with innovative products. In addition to our internal R&D programs, our business strategy includes acquiring products, technologies or businesses from third parties. Future acquisitions of products, technologies or businesses may result in substantial additional on-going R&D costs.

Selling, General and Administrative. Selling, general and administrative (“SG&A”) expenses consist primarily of personnel related expenses, professional and legal fees, corporate branding and facilities expenses. The decrease in SG&A expenses of 24.1% for the three months ended June 30, 2009 compared to the three months ended June 30, 2008, was primarily due to a decrease of $1.3 million in personnel costs related to our recent restructuring actions, $1.0 million in contractor costs, $0.3 million in stock-based compensation charges, $0.3 million in travel expenses and $0.3 million in marketing communications expenses. Future acquisitions of products, technologies or businesses may result in substantial additional on-going SG&A costs.

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Stock-Based Compensation. The following table presents stock-based compensation expense for the three months ended June 30, 2009 and 2008, which was included in the tables above (dollars in thousands):

	Three Months Ended June 30,
	2009				2008
	Amount		% of Net Revenue		Amount		% of Net Revenue		Increase (Decrease)			% Change
Costs of revenues	$	111	0.3	%	$	174	0.3	%	$	(63	)	(36.2	)%
Research and development		1,272	2.8			1,118	1.8			154		13.8
Selling, general and administrative		1,232	2.7			1,577	2.6			(345	)	(21.9	)
	$	2,615	5.8	%	$	2,869	4.7	%	$	(254	)	(8.9	)%

The amount of unearned stock-based compensation currently estimated to be expensed from now through fiscal 2014 related to unvested share-based payment awards at June 30, 2009 is $33.5 million. This expense relates to equity instruments already issued and will not be affected by our future stock price. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is approximately 3.1 years. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Future stock-based compensation expense will increase to the extent that we grant additional equity awards. We anticipate we will continue to grant additional employee stock options and RSUs in fiscal 2010 and thereafter. The value of these grants cannot be predicted at this time because it will depend on the number of share-based payments granted and the then current fair values.

Restructuring Charges. The reversal of restructuring charges recorded for the three months ended June 30, 2009 and 2008 was related to accruals made for the restructuring actions for which the liability is no longer required.

Option Investigation and Related Expenses. During the first quarter of fiscal 2007, we initiated a review of our historical stock option granting policies. We incurred professional and legal fees as a result of our self-initiated review. Although we concluded our investigation during the fourth quarter of fiscal 2007, we continued to incur expenses for the related ongoing legal and regulatory proceedings as a result of the option investigation. During fiscal 2009, we incurred additional expenses, offset by insurance proceeds for the related ongoing legal and regulatory proceedings which were concluded during fiscal 2009.

Interest and Other Income (Expense) and Other-Than-Temporary Impairment, net. The following table presents interest and other income (expense) and other-than-temporary impairment, net for the three months ended June 30, 2009 and 2008 (dollars in thousands):

	Three Months Ended June 30,
	2009				2008
	Amount		% of Net Revenue		Amount			% of Net Revenue		Increase		% Change
Interest income (expense) and other-than-temporary impairment, net	$	1,372	3.0	%	$	(1,402	)	(2.3	)%	$	2,774	197.9	%
Other income, net	$	217	0.5	%	$	75		0.1	%	$	142	189.3	%

Interest and Other Income (Expense) and Other-Than-Temporary Impairment, net. Interest income (expense), net of management fees and other-than-temporary impairment, reflects interest earned on cash and cash equivalents, short-term investments and marketable securities as well as realized gains and losses from the sale of short-term investments and impairment charges on investments, less interest expense. The increase for the three months ended June 30, 2009, compared to the three months ended June 30, 2008 was primarily due to a $3.2 million decrease in other-than-temporary impairment charges offset by a decrease of $0.8 million in interest income.

Income Taxes. The federal statutory income tax rate was 35% for the three months ended June 30, 2009 and 2008. The decrease in the income tax expense recorded for the three months ended June 30, 2009 compared to the three months ended June 30, 2008, was primarily related to discontinued operations offset by an increase in refundable tax credits. During the three months ended June 30, 2009, we recorded a tax charge of approximately $3.6 million to discontinued operations in connection with the sale of our 3ware storage adapter business and concurrently recorded the same amount as an income tax benefit to continuing operations.

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Discontinued Operations. We completed the sale of our 3ware storage adapter business (“Storage Business”) to LSI Corporation on April 21, 2009. Under the Asset Purchase Agreement, we substantially sold all of the operating assets (other than patents) of our Storage Business. The assets sold included customer contracts, inventory, fixed assets, certain intellectual property and other assets, as well as rights to the name “3ware.” The purchase price was approximately $20.8 million, subject to an adjustment for changes in the level of inventory at the closing of the sale. We estimate the adjustment could increase the purchase price by up to $0.8 million. We are currently in discussions with LSI on the adjustment amount and will record the adjustment when an amount is agreed upon. We recorded a net gain of $10.7 million from the sale during the three months ended June 30, 2009.

3WARE STORAGE ADAPTER BUSINESS

CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended June 30,
	2009			2008
	(In thousands)
Net revenues	$	516		$	12,861
Cost of revenues		733			7,424
Gross profit (loss)		(217	)		5,437
Operating expenses:
Research and development		594			3,031
Selling, general and administrative		545			2,762
Amortization of purchased intangible assets		—			315
Total operating expenses		1,139			6,108
Operating loss		(1,356	)		(671	)
Gain on sale of Storage Business		10,654			—
Income (loss) from discontinued operations before income taxes		9,298			(671	)
Income tax expense		3,601			52
Income (loss) from discontinued operations	$	5,697		$	(723	)

FINANCIAL CONDITION AND LIQUIDITY

As of June 30, 2009, our principal source of liquidity consisted of $200.4 million in cash, cash equivalents and short-term investments. Working capital as of June 30, 2009 was $211.9 million. Total cash, cash equivalents, and short-term investments increased by $16.4 million during the three months ended June 30, 2009, primarily due to the proceeds from the sale of our Storage Business of approximately $20.8 million offset by open stock repurchase contracts of $7.8 million. At June 30, 2009, we had contractual obligations not included on our balance sheet totaling $42.7 million, primarily related to facility leases, engineering design software tool licenses and non-cancelable inventory purchase commitments.

For the three months ended June 30, 2009, we used $0.7 million of cash in our operations compared to generating $11.1 million for the three months ended June 30, 2008. Our net income of $2.9 million for the three months ended June 30, 2009 included $9.0 million of non-cash charges consisting of $1.6 million of depreciation, $4.6 million of amortization of purchased intangibles, $2.6 million of stock-based compensation and $0.2 million for marketable securities impairment. Our net loss of $5.2 million for the three months ended June 30, 2008 included $14.2 million of non-cash charges consisting of $1.7 million of depreciation, $5.9 million of amortization of purchased intangibles, $3.2 million of stock-based compensation and $3.4 million for marketable securities impairment. The remaining change in operating cash flows for the three months ended June 30, 2009 primarily reflected decreases in accounts receivable, inventories, other assets, accounts payable, accrued payroll and other accrued liabilities and deferred revenue, primarily due to the sale of our Storage Business to LSI. Our overall days sales outstanding was 31 days and 35 days for the three months ended June 30, 2009 and March 31, 2009, respectively.

We generated $21.3 million in cash from our investing activities during the three months ended June 30, 2009, compared to using $0.4 million during the three months ended June 30, 2008. During the three months ended June 30, 2009, we generated net proceeds of $2.5 million from short-term investment activities and received proceeds of $20.8 million for the sale of our Storage Business, offset by $2.0 million for the purchase of property, equipment and other assets. During the three months ended June 30, 2008, we used $3.5 million of cash for the purchase of property, equipment and other assets, offset by net proceeds of $3.1 million from short-term investment activities.

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For the three months ended June 30, 2009, we used $8.1 million of cash in financing activities. The major financing use of cash for the three months ended June 30, 2009 was the funding of our structured stock repurchase agreements for $11.8 million offset by proceeds of $4.0 million from the settlement of structured stock repurchase agreements. There was no material financing activities during the three months ended June 30, 2008.

In August 2004, the Board authorized a stock repurchase program for the repurchase of up to $200.0 million of our common stock. Under the program, we are authorized to make purchases in the open market or enter into structured agreements. In October 2008, the Board increased the stock repurchase program by $100.0 million. During the three months ended June 30, 2009, no shares were repurchased on the open market. During the fiscal year ended March 31, 2009, no shares were repurchased on the open market. From the time the program was first implemented in August 2004, we repurchased on the open market a total of 8.9 million shares at a weighted average price of $11.74 per share. All repurchased shares were retired upon delivery to us. The Board has reinstated the stock repurchase program and we will begin to repurchase shares under the approved repurchase plan.

We also utilize structured stock repurchase agreements to buy back shares which are prepaid written put options on our common stock. We pay a fixed sum of cash upon execution of each agreement in exchange for the right to receive either a pre-determined amount of cash or stock depending on the closing market price of our common stock on the expiration date of the agreement. Upon expiration of each agreement, if the closing market price of our common stock is above the pre-determined price, we will have our cash investment returned with a premium. If the closing market price is at or below the pre-determined price, we will receive the number of shares specified at the agreement inception. We considered the guidance in FAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity and EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. Any cash received, including the premium, is treated as additional paid in capital on the balance sheet.

During the three months ended June 30, 2009, we entered into structured stock repurchase agreements totaling $11.8 million. For those agreements that had been settled by June 30, 2009, we received $4.0 million in cash. During the fiscal year ended March 31, 2009, we did not enter into any structured stock repurchase agreements. At June 30, 2009, we had two outstanding structured stock repurchase agreements for $7.8 million, of which one settled with the receipt of $4.0 million in cash in July 2009. From the inception of our most recent stock repurchase program in August 2004, we entered into structured stock repurchase agreements totaling $227.5 million. Upon settlement of these agreements, we received $140.5 million in cash and 7.8 million shares of our common stock at an effective purchase price of $10.15 per share.

The table below is a plan-to-date summary of our repurchase program activity as of June 30, 2009 (in thousands, except per share data):

	Aggregate Price		Repurchased Shares	Average Price Per Share
Stock repurchase program
Authorized amount	$	300,000	—	$	—
Open market repurchases		103,966	8,856		11.74
Structured stock repurchase agreements*		90,517	7,797		11.61
Total repurchases	$	194,483	16,653	$	11.68
Available for repurchase	$	105,517

* The amounts above do not include gains of $11.4 million from structured stock repurchase agreements which settled in cash. The average price per share for structured stock repurchase agreements adjusted for gains from settlements in cash would have been $10.15 share and for total repurchases would have been $11.00 per share.

The following table summarizes our contractual operating leases and other purchase commitments as of June 30, 2009 (in thousands):

	Operating Leases		Other Purchase Commitments		Total
Fiscal Years Ending March 31, 2010	$	13,155	$	18,362	$	31,517
2011		10,972		—		10,972
2012		216		—		216
2013 and thereafter		—		—		—
Total minimum payments	$	24,343	$	18,362	$	42,705

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

OFF-BALANCE SHEET ARRANGEMENTS

We did not have any off-balance sheet arrangements as of June 30, 2009 or March 31, 2009.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

We are exposed to market risk as it relates to changes in the market value of our investments. At June 30, 2009, our investment portfolio included fixed-income securities classified as available-for-sale investments with an aggregate fair market value of $88.4 million and a cost basis of $88.3 million. These securities are subject to interest rate risk, as well as credit risk and liquidity risk, and will decline in value if interest rates increase or an issuer’s credit rating or financial condition is decreased. Based on an evaluation of securities that have been in a continuous loss position at June 30, 2009 and other qualitative factors, we have determined the decline in the fair value of certain securities to be other-than-temporary and we have accordingly written down such securities by approximately $0.2 million during the three months ended June 30, 2009. As of June 30, 2009, we have not recorded a write-down adjustment in connection with our other securities in a loss position with unrealized losses of $4.7 million, as we believe that such loss is not other-than-temporary. We also have $4.8 million in unrealized gains. The other-than-temporary assessment was performed based on FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments.

The following table presents the hypothetical changes in fair value of our short-term investments held at June 30, 2009 (in thousands):

	Valuation of Securities Given an Interest Rate Decrease of X Basis Points (“BPS”)						Fair Value as of June 30, 2009		Valuation of Securities Given an Interest Rate Increase of X Basis Points (“BPS”)
	(150 BPS)		(100 BPS)		(50 BPS)				50 BPS		100 BPS		150 BPS
Available-for-sale investments	$	93,875	$	91,991	$	90,171	$	88,432	$	86,823	$	85,296	$	83,762

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. While this modeling technique provides a measure of our exposure to market risk, the current economic turbulence could cause interest rates to shift by more than 150 basis points.

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

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

ITEM 4. CONTROLS AND PROCEDURES

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

As required by SEC Rule 13a-15(b), we conducted an evaluation, under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2009. Based on the foregoing, our CEO and CFO concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

Before deciding to invest in us or to maintain or increase your investment, you should carefully consider the risks described below, in addition to the other information contained in this report and in our other filings with the SEC. We update our descriptions of the risks and uncertainties facing us in our periodic reports filed with the SEC. The risks and uncertainties described below and in our other filings are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs, our business, financial condition and results of operations could be seriously harmed. In that event, the market price for our common stock could decline and you may lose your investment. The risks and uncertainties set forth below with an asterisk (“*”) next to the title contain changes to the description of the risks and uncertainties associated with our business as previously disclosed in Item 1A to our Annual Report on Form 10-K for the fiscal year ended March 31, 2009 filed with the SEC on May 12, 2009.

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*The current economic crisis and uncertain political conditions could harm our revenues, operating results and financial condition.

The economies of the United States and other developed countries are currently in a recession. We cannot predict either the depth or the duration of this economic downturn.

This recession has caused a decline in our near term revenues and it will take some time to return to our previous levels. The sale of our storage business could increase this time period. Our current operating plans are based on assumptions concerning levels of consumer and corporate spending. If global and domestic economic and market conditions persist or deteriorate further, we may experience further material impacts on our business, operating results and financial condition which could result in a decline in the price of our common stock. If economic conditions worsen, we may have to implement additional cost reduction measures or delay certain research and development spending.

We maintain an investment portfolio of various holdings, types of instruments and maturities. These securities are generally classified as available-for-sale and, consequently, are recorded on our consolidated balance sheets at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income. Our portfolio primarily includes fixed income securities, mutual funds and preferred stocks, the values of which are subject to market price volatility. The deterioration of these market prices has had an unfavorable impact on our portfolio and has caused us to record impairment charges to our earnings. During the three months ended June 30, 2009, we recorded an impairment charge of $0.2 million. During the fiscal year ended March 31, 2009, we recorded other-than-temporary impairment charge of $17.1 million. If the market prices continue to decline or securities continue to be in a loss position over time, we may recognize additional impairments in the fair value of our investments.

Adverse economic and market conditions could also harm our business by negatively affecting the parties with whom we do business, including our business partners, our customers and our suppliers. These conditions could impair the ability of our customers to pay for products they have purchased from us. As a result, allowances for doubtful accounts and write-offs of accounts receivable from our customers may increase. In addition, our suppliers may experience financial difficulties that could negatively affect their operations and their ability to supply us with the parts we need to manufacture our products.

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

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

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

• communications, information technology and semiconductor industry conditions;

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

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

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

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

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

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

• competitive pressures on selling prices;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• the effects of changes in accounting standards;

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

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

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

• global economic recession and industry conditions.

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

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

• the reduction, rescheduling or cancellation of customer orders;

• declines in the average selling prices of our products;

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

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

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

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

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

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

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

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

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

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

• global economic recession and industry conditions.

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

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

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

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

The technology equipment industry is cyclical and has in the past experienced significant and extended downturns. The current downturn is significant and we cannot predict how long it will last. A substantial portion of our business and revenue depends on the continued growth of the technology sector and the Internet. We sell our communications IC products primarily to communications equipment manufacturers that in turn sell their equipment to customers that depend on the growth of the Internet. The current downturn has already caused a reduction in capital spending on information technology. If this reduction continues or deepens, our business, operating results and financial condition may be materially harmed.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The recent sale of our 3ware storage adaptor business to LSI Corporation marks a change in our strategy. This change, or any further changes we might make, could have a significant impact on our business, financial condition and results of operations while we are implementing our new strategy. Furthermore, there is no assurance that our new strategy will not fail.

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

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

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

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

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

• potential dilution to our stockholders;

• use of a significant portion of our cash reserves;

• diversion of management’s attention;

• failure to retain or integrate key personnel;

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

• amortization of acquired intangible assets and deferred compensation;

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

• costs associated with acquisitions or mergers;

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

• difficulties competing in markets that are unfamiliar to us;

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

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

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

As with past acquisitions, future acquisitions could adversely affect operating results. In particular, acquisitions may materially and adversely affect our results of operations because they may require large one-time charges or could result in increased debt or contingent liabilities, adverse tax consequences, substantial additional depreciation or deferred compensation charges. Our past purchase acquisitions required us to capitalize significant amounts of goodwill and purchased intangible assets. As a result of the slowdown in our industry and reduction of our market capitalization, we have been required to record significant impairment charges against these assets as noted in our financial statements. In the fiscal year ended March 31, 2009 we recorded a goodwill impairment charge of $223.0

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million to continuing operations. The goodwill impaired was previously assigned to the Process and Transport reporting units in the amounts of $101.5 million, $121.5 million, respectively. In the fiscal years ended March 31, 2009 and 2008, we recorded goodwill impairment charges to discontinued operations of $41.1 million and $71.5 million, respectively, for the Store reporting unit. These market conditions continuously change and it is difficult to project how long this current economic downturn may last. These conditions have caused a decline in our near term revenues and it will take some time to ramp back up to our previous levels. Additionally, market values have deteriorated which has had an unfavorable impact on our valuations which are part of the goodwill and purchased intangible asset impairment tests. There can be no assurances that market conditions will not deteriorate further or that our market capitalization will not decline further. At June 30, 2009, we had $28.4 million of purchased intangible assets. We cannot assure you that we will not be required to take additional significant charges as a result of impairment to the carrying value of these assets, due to further adverse changes in market conditions.

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

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

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

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

• foreign currency exchange fluctuations;

• changes in regulatory requirements;

• tariffs, rising protectionism and other barriers;

• timing and availability of export licenses;

• political and economic instability;

• difficulties in accounts receivable collections;

• difficulties in staffing and managing foreign operations;

• difficulties in managing distributors;

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

• reduced or uncertain protection for intellectual property rights in some countries;

• longer payment cycles to collect accounts receivable in some countries;

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

• potentially adverse tax consequences; and

• a worsening economic condition that may trail any improvements in the United States.

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.

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Because sales of our products have been denominated to date primarily in United States dollars, increases in the value of the United States dollar could increase the price of our products so that they become relatively more expensive to customers in the local currency of a particular country, leading to a reduction in sales and profitability in that country. Future international activity may result in increased foreign currency denominated sales. Gains and losses on the conversion to United States dollars of accounts payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in our results of operations.

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

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

We maintain an investment portfolio of various holdings, types of instruments and maturities. These securities are recorded on our consolidated balance sheets at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss), net of tax. Our investment portfolio is exposed to market risks related to changes in interest rates and credit ratings of the issuers, as well as to the risks of default by the issuers and lack of overall market liquidity. Substantially all of these securities are subject to interest rate and credit rating risk and will decline in value if interest rates increase or one of the issuers’ credit ratings is reduced. Increases in interest rates or decreases in the credit worthiness of one or more of the issuers in our investment portfolio could have a material adverse impact on our financial condition or results of operations. For the three months ended June 30, 2009 we recorded an impairment charge associated with certain of these securities of $0.2 million to current earnings. During the fiscal year ended March 31, 2009, we recorded $17.1 million in write-downs in the carrying value of certain securities as we determined the decline in the fair value of these securities to be other than temporary. If the fair value of any of these securities does not recover to at least the amortized cost of such security or we are unable to hold these securities until they recover and there is a further deterioration in market conditions or there are additional losses incurred, we may be required to record a further decline in the carrying value of these securities resulting in further charges. At June 30, 2009, the unrealized losses on these securities, that were not written down as an other-than-temporary impairment charge, were approximately $4.7 million.

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

Over the past several years, we have initiated several restructuring activities in an effort to reduce operating costs, including new restructuring initiatives announced in October 2008 and February 2009. Employees whose positions were eliminated in connection with these restructuring activities may seek employment with our customers or competitors. Although each of our employees is required to sign a confidentiality agreement with us at the time of hire, we cannot guarantee that the confidential nature of our proprietary information will be maintained in the course of such future employment. Any additional restructuring efforts could divert the attention of our management away from our operations, harm our reputation and increase our expenses. We cannot guarantee that we will not undertake additional restructuring activities, that any of our restructuring efforts will be successful, or that we will be able to realize the cost savings and other anticipated benefits from our previous or future restructuring plans. In addition, if we continue to reduce our workforce, it may adversely impact our ability to respond rapidly to new growth opportunities.

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

The markets for our products are characterized by:

• rapidly changing technologies;

• evolving and competing industry standards;

• changing customer needs;

• frequent introductions of new products and enhancements;

• increased integration with other functions;

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• long design and sales cycles;

• short product life cycles; and

• intense competition.

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

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

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

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

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

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

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

• customer support;

• time-to-market;

• price;

• production efficiency;

• design wins;

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

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

• market acceptance of competitors’ products; and

• general economic conditions.

Our competitors may offer enhancements to existing products, or offer new products based on new technologies, industry standards or customer requirements that are available to customers on a more timely basis than comparable products from us or that have the potential to replace or provide lower cost alternatives to our products. The introduction of enhancements or new products by our competitors

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could render our existing and future products obsolete or unmarketable. We expect that certain of our competitors and other semiconductor companies may seek to develop and introduce products that integrate the functions performed by our IC products on a single chip, thus eliminating the need for our products. Each of these factors could have a material adverse effect on our business, financial condition and results of operations.

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

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

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

• reduced control over delivery schedules and quality;

• inadequate manufacturing yields and excessive costs;

• difficulties selecting and integrating new subcontractors;

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

• limited warranties on products supplied to us;

• potential increases in prices;

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

• potential misappropriation of our intellectual property.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• additional development costs;

• loss of, or delays in, market acceptance;

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

• claims by our customers or others against us; and

• loss of credibility with our current and prospective customers.

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

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

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

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

Our management has concluded, and our independent registered public accounting firm has attested, that our internal control over financial reporting was effective as of March 31, 2009. We cannot assure you that we or our independent registered public accounting firm will not identify a material weakness in our internal control in the future. A material weakness in our internal control over financial reporting would require management and our independent registered public accounting firm to assess our internal control as ineffective. If our internal control over financial reporting is not considered effective, we may experience another restatement and/or a loss of public confidence, which could have an adverse effect on our business and on the market price of our common stock.

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*Our leadership transition may not go smoothly and could adversely impact our future operations.

As previously announced, Kambiz Hooshmand has stepped down as our Chief Executive Officer and has been replaced by Dr. Paramesh Gopi, who was previously our Chief Operating Officer. A significant leadership change is inherently risky and we may be unable to manage this transition smoothly which could adversely impact our future strategy and ability to function or execute and could materially and adversely affect our business, financial condition and results of operations.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• unanticipated costs;

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

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

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

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

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

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

• incur debt;

• assume liabilities;

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

• incur large and immediate write-offs.

We cannot assure you that we will be able to successfully integrate any businesses, products, technologies or personnel that we might acquire.

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

We completed the sale of our 3ware storage adapter business, a significant portion of our business, to LSI Corporation on April 21, 2009. As a result, we now expect to generate all of our sales from our remaining business, which will require us to grow our remaining business in order to achieve profitability. Economic and other factors may prevent us from growing our remaining business. If we fail to grow our remaining business, it could have a material adverse impact on our business, financial condition and operating results. We may in the future dispose of additional assets or businesses that represent a significant portion of our business. The sale of our 3ware storage adapter business and any possible future dispositions may involve numerous risks, including:

• problems carving out or disposing of assets, operations, technologies and products;

• the disposal of such assets or businesses could have an unanticipated adverse effect on the remaining business;

• unanticipated costs;

• diversion of management’s attention from core ongoing operations;

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

• if we do not structure the disposition properly and scale expenses according to the size of the remaining business, we could continue to incur expenses that could be unsustainable given the scope of the remaining business.

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

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

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

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

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

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

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

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

*Our stock price is volatile.

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

• our anticipated or actual operating results;

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

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

• technological innovations or setbacks by us or our competitors;

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

• the commencement or outcome of litigation or governmental investigations;

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

• announcements of merger or acquisition transactions;

• management changes;

• our inclusion in certain stock indices; and

• other events or factors.

The stock market in recent years has experienced extreme price and volume fluctuations that have affected the market prices of many high technology companies, particularly semiconductor companies. In some instances, these fluctuations appear to have been unrelated or disproportionate to the operating performance of the affected companies. Any such fluctuation could harm the market price of our common stock. In addition, the current decline of the financial markets and related factors beyond our control, including the credit and mortgage crisis in both the U.S. and worldwide, may cause our stock price to decline rapidly and unexpectedly.

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

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

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

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

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

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

2.1+*	Agreement and Plan of Merger between the Company, Espresso Acquisition Corporation and Veloce Technologies, Inc., dated May 17, 2009
3.1(1)	Amended and Restated Certificate of Incorporation of the Company.
3.2(2)	Amended and Restated Bylaws of the Company.
4.1(3)	Specimen Stock Certificate.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 + Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the SEC.

 * Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company hereby undertakes to furnish supplementally copies of any of the omitted schedules upon request by the SEC.

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

(2) Incorporated by reference to Exhibit 3.1 filed with the Company’s Current Report on Form 8-K filed on May 1, 2009.

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

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SIGNATURES

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

Date: July 31, 2009

APPLIED MICRO CIRCUITS CORPORATION
By:	/s/    ROBERT G. GARGUS
	Robert G. Gargus
	Senior Vice President and Chief Financial Officer
	(Duly Authorized Signatory and Principal Financial and Accounting Officer)

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Exhibit Index

2.1+*	Agreement and Plan of Merger between the Company, Espresso Acquisition Corporation and Veloce Technologies, Inc., dated May 17, 2009
3.1(1)	Amended and Restated Certificate of Incorporation of the Company.
3.2(2)	Amended and Restated Bylaws of the Company.
4.1(3)	Specimen Stock Certificate.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 + Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the SEC.

 * Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company hereby undertakes to furnish supplementally copies of any of the omitted schedules upon request by the SEC.

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

(2) Incorporated by reference to Exhibit 3.1 filed with the Company’s Current Report on Form 8-K filed on May 1, 2009.

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

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EX-2.1

Exhibit 2.1

*** Text Omitted and Filed Separately

Confidential Treatment Requested

Under 17 C.F.R. §§ 200.80(b)(4)

and 240.24b-2

AGREEMENT AND PLAN

OF MERGER

THIS AGREEMENT AND PLAN OF MERGER is made and entered into as of May 17, 2009 (“Agreement Date”), by and among APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation (“Parent”), ESPRESSO ACQUISITION CORPORATION, a Delaware corporation and a wholly-owned subsidiary of Parent (“Merger Sub”), VELOCE TECHNOLOGIES, INC., a Delaware corporation (the “Company”), Jeffrey Harrell, an individual, as representative of the stockholders of the Company pursuant to Section 9.1(a) (the “Stockholders’ Representative”). Certain capitalized terms used herein and not otherwise defined are defined in Exhibit A to this Agreement.

RECITALS

WHEREAS, simultaneously with the execution and delivery of this Agreement, (i) Parent and the Company are entering into that certain Development Agreement, dated as of even date herewith, in the form attached hereto as Exhibit B (the “Development Agreement”), pursuant to which, among other things, the Company shall […***…], as described therein, for […***…], and (ii) Parent, the Company, the securityholders of the Company and Jeffrey Harrell, an individual, as the purchaser representative, are entering into that certain Securityholder Agreement, dated as of even date herewith, in the form attached hereto as Exhibit C (the “Securityholder Agreement”), pursuant to which, among other things, such securityholders agree to certain voting provisions with respect to their shares of Company Common Stock, and certain restrictions on the transferability thereof, and the Company agrees not to issue additional equity interests in the Company except in accordance with the terms of such agreement;

WHEREAS, as an inducement to Parent and the Company to enter into the Development Agreement and the Securityholder Agreement, and to perform each of their respective obligations to the other party pursuant thereto, Parent, Merger Sub and the Company are entering into this Agreement, whereby Parent may or shall acquire all of the outstanding capital stock and other equity interests of the Company pursuant to a merger of Merger Sub into the Company (the “Merger”) in accordance with this Agreement and the Delaware General Corporation Law (the “DGCL”) upon the terms set forth herein. Upon consummation of the Merger, Merger Sub will cease to exist, and the Company will become a wholly-owned subsidiary of Parent;

WHEREAS, this Agreement has been approved by the respective boards of directors of Parent, Merger Sub and the Company and has been approved by Parent, as the sole stockholder of Merger Sub, and it is intended that the stockholders of the Company approve this Agreement and the Merger pursuant to an Action by Written Consent in the form attached hereto as Exhibit D (the “Stockholder Written Consent”); and

NOW THEREFORE, in consideration of the foregoing and the respective covenants, agreements and representations and warranties set forth herein, the parties to this Agreement, intending to be legally bound, agree as follows:

SECTION 1.

DESCRIPTION OF TRANSACTION

1.1 Mandatory Closing Obligation. In the event the Company achieves the First Product Milestone, then subject to the satisfaction (or waiver) of each of the conditions set forth in Section 5 and

1 *Confidential Treatment Requested

Section 6 of the Agreement, the parties shall be obligated to consummate the Merger in accordance with the terms and conditions of this Agreement for the consideration set forth in this Section

1.2 Optional Closing Right. Subject to the obligations of the parties under Section 1.1, at any time during the period commencing on […***…] and ending on […***…] (the “Option Expiration Date”), Parent shall have the sole and exclusive right (the “Optional Closing Right”), but not the obligation, to require the Company to effect the Closing (as defined herein) and consummate the Merger in accordance with the terms and conditions of this Agreement (subject to the satisfaction by Parent (or written waiver by the Company) of each of the conditions set forth in Section 6) for the consideration set forth in this Section 1.

1.3 Notice of Exercise of Optional Closing Right. To exercise its Optional Closing Right pursuant to Section 1.2, Parent shall deliver written notice of such election to the Company (the “Notice of Exercise”) prior to the Option Expiration Date. The Notice of Exercise shall specify (i) the aggregate amount of consideration to be paid as determined pursuant to Section 1.8, and (ii) the aggregate amount of consideration to be paid in cash and/or to be paid in Parent Common Stock. The Closing shall occur no later than the date that is fifteen (15) Business Days after the date of delivery to the Company of the Notice of Exercise (the “Optional Closing Date”); provided, however, that: (a) if the Merger cannot be consummated by reason of any applicable judgment, decree, order, Law (including, but not limited to, regulatory approval) or other legal impediment, then, in each case, the Optional Closing Date may be extended by Parent to a date not more than fifteen (15) Business Days after the date on which such final impediment is removed or becomes inapplicable; and (b) if prior notification to or approval of any Governmental Body is required in connection with the Merger, the Company or Parent, as the case may be, shall promptly cause to be filed, and shall expeditiously process, the required notice or application for approval (and the parties shall cooperate with one another in the filing of any such notice or application required to be filed by any party and the obtaining of any such approval required to be obtained by any party), and the Optional Closing Date may be extended by Parent to a date that is not more than twenty (20) Business Days after the later of (Y) the date on which any required notification or waiting period has expired or been validly terminated, or (Z) the date on which any required approval has been obtained.

1.4 Merger of Merger Sub into the Company. Subject to the achievement of the First Product Milestone or the exercise of the Optional Closing Right, and upon the terms and subject to the conditions set forth in this Agreement, at the Effective Time (as defined herein), Merger Sub shall be merged with and into the Company, and the separate existence of Merger Sub shall cease. The Company will continue as the surviving corporation in the Merger (the “Surviving Corporation”) and shall continue its existence under the laws of Delaware.

1.5 Effect of the Merger. The Merger shall have the effects set forth in this Agreement and in the applicable provisions of the DGCL. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the property, rights, privileges, powers and franchises of Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities, obligations, restrictions, disabilities and duties of Merger Sub shall become the debts, liabilities, obligations, restrictions, disabilities and duties of the Surviving Corporation.

1.6 Closing; Effective Time. Unless otherwise mutually agreed in writing between Parent and the Stockholders’ Representative, the consummation of the transactions contemplated by this Agreement (the “Closing”) shall take place at the offices of Paul, Hastings, Janofsky & Walker LLP, 1117 S. California Avenue, Palo Alto, CA 94304-1106, at 10:00 a.m. Pacific Time on a date and time to be determined pursuant to (a) Section 1.1 or (b) Section 1.2 and Section 1.3 of this Agreement and after the date on which the last of the conditions set forth in Section 5 and Section 6, as applicable, has been satisfied or waived in writing and in accordance with this Agreement (except for conditions which in

2 *Confidential Treatment Requested

accordance with their terms must be satisfied at the Closing). The date on which the Closing actually takes place is referred to in this Agreement as the “Closing Date.” Contemporaneously with or as promptly as practicable after the Closing, (i) a certificate of merger conforming to the requirements of the DGCL and in the form of Exhibit 1.6 (the “Certificate of Merger”) shall be duly executed by the Company and shall be filed with the Secretary of State of the State of Delaware. The Merger shall become effective upon the date and time of the filing of the Certificate of Merger with the Secretary of State of the State of Delaware or such other date and time as Parent and the Company may mutually agree and include in the Certificate of Merger (the “Effective Time”).

1.7 Certificate of Incorporation and Bylaws; Directors and Officers. Unless otherwise mutually determined by Parent and the Company prior to the Effective Time:

(a) the Certificate of Incorporation of the Company in effect immediately prior to the Effective Time shall be the Certificate of Incorporation of the Surviving Corporation from and after the Effective Time, until thereafter changed or amended as provided therein or by applicable Law;

(b) the Bylaws of the Company in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation from and after the Effective Time, until thereafter changed or amended as provided therein or by applicable Law; and

(c) the directors and officers of Merger Sub as of immediately prior to the Effective Time shall be appointed as and shall be the directors and officers of the Surviving Corporation as of immediately after the Effective Time, until their successors are duly elected or appointed and qualified in accordance with applicable Law.

1.8 Consideration.

(a) Aggregate Merger Consideration. In the event the Closing is effected, at the Effective Time, by virtue of the Merger and without any further action on the part of Parent, Merger Sub, the Company or any securityholder of the Company:

(i) each share of Company Common Stock (other than Dissenting Shares (as defined herein)) outstanding as of immediately prior to the Effective Time shall be converted into the right to receive:

(1) at the Closing, an amount, payable (without interest) in such form as provided in Section 1.8(c), equal to the Per Share Initial Consideration;

(2) provided that the Final Merger Consideration is greater than the Preliminary Merger Consideration, at the time of the determination of the Final Merger Consideration, an amount, payable (without interest) in such form as provided in Section 1.8(c), equal to the Per Share Adjustment Consideration;

(3) upon the satisfaction of the First Target Reserve Consideration Conditions, an amount, payable (without interest) in such form as provided in Section 1.8(c), equal to (i) the Per Share First Target Reserve Consideration, plus (ii) the Per Share First Target Additional Reserve Consideration, minus (iii) in the event the Final Merger Consideration is less than the Preliminary Merger Consideration, the Per Share Adjustment Consideration;

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(4) upon the satisfaction of the Second Target Reserve Consideration Conditions, an amount, payable (without interest) in such form as provided in Section 1.8(c), equal to (i) the Per Share Second Target Reserve Consideration, plus (ii) Per Share Second Target Additional Reserve Consideration, plus (iii) the Per Share Contingent Consideration, minus (iv) in the event the Final Merger Consideration is less than the Preliminary Merger Consideration, the Per Share Adjustment Consideration (excluding the amount of any such Per Share Adjustment Consideration previously deducted pursuant to Section 1.8(a)(i)(3)); and

(5) upon release pursuant to the terms of the Escrow Agreement (as defined herein), an amount, payable (without interest) in such form as provided in Section 1.8(c), equal to the Per Share Initial Escrow Amount and the Per Share Adjustment Escrow Amount, provided that such amounts shall be subject to reduction, if any, to satisfy the indemnification obligations set forth in the Escrow Agreement and Section 8 of this Agreement.

(ii) Each share of common stock of Merger Sub outstanding immediately prior to the Effective Time shall be converted into one share of common stock of the Surviving Corporation.

(b) For purposes of this Agreement:

(i) The “Adjusted Per Share Consideration” shall mean the quotient obtained by dividing (A) the Adjustment Amount, by (B) the Fully Diluted Company Share Amount.

(ii) The “Adjusted Total Merger Consideration” shall mean (i) if the Merger is being effected pursuant to Section 1.1, an amount equal to (A) the Preliminary Merger Consideration, minus (B) the Excess Operations Payment, minus (C) the aggregate amount of all Transaction Expenses incurred by the Company but not paid as of the Closing Date that are not included in calculating Excess Liabilities, minus (D) the Excess Liabilities, plus (E) $60,000, and (ii) if the Merger is being effected pursuant to Section 1.2, an amount equal to (V) the Total Merger Consideration, minus (W) the Excess Operations Payment, minus (X) the aggregate amount of all Transaction Expenses incurred by the Company but not paid as of the Closing Date that are not included in calculating Excess Liabilities, minus (Y) the Excess Liabilities, plus (Z) $60,000.

(iii) The “Adjustment Amount” shall mean the absolute value of the Final Merger Consideration less the Preliminary Merger Consideration.

(iv) The “Adjustment Escrow Amount” shall mean the amount obtained by multiplying (A) the Adjustment Amount, where the Final Merger Consideration exceeds the Preliminary Merger Consideration, by (B) (i) 0.10, in the event the Company has not disclosed a breach of any representation, warranty or covenant of the Company contained herein as of the Closing, and (ii) up to 0.77, in the event the Company has disclosed a breach of any representation, warranty or covenant of the Company contained herein as of the Closing and the Initial Escrow Amount was insufficient to satisfy the amount that Parent believed was reasonable to fully cover Parent’s Losses in connection therewith (the “Additional Escrow Shortfall”), which amount shall be comprised of (Y) an amount up to 0.67 that Parent believes is necessary to cover the Additional Escrow Shortfall, which shall be held in escrow for purposes of satisfying the indemnification obligations with respect to such disclosed breach or breaches, and (Z) 0.10 of such amount shall be held in escrow for purposes of satisfying the indemnification obligations with respect to such other matters

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(v) The “Applicable Parent Share Price” shall mean, as of any date a payment is or becomes payable under Section 1.8(a) and for purposes of Section 8.3, the closing price of Parent Common Stock as quoted on The Nasdaq Global Select Market (or such other Nasdaq Stock Market, LLC securities exchange on which Parent Common Stock is then listed) for the ten (10) trading days immediately preceding the date such payment is or becomes payable, as applicable.

(vi) The “Closing Per Share Consideration” shall mean the quotient obtained by dividing (A) the Adjusted Total Merger Consideration, by (B) the Fully Diluted Company Share Amount.

(vii) The “Excess Liabilities” shall mean (i) $0.00, in the event the aggregate amount of cash and cash equivalents that the Company has on hand as of immediately prior to the Closing is equal to or greater than the absolute value of the aggregate amount of any Designated Liabilities as of immediately prior to the Closing, and (ii) in the event the aggregate amount of cash and cash equivalents that the Company has on hand as of immediately prior to the Closing is less than the absolute value of the aggregate amount of any Designated Liabilities as of immediately prior to the Closing, the absolute value of the aggregate amount of such Designated Liabilities as of immediately prior to the Closing minus the aggregate amount of cash and cash equivalents that the Company has on hand as of immediately prior to the Closing.

(viii) The “Excess Operations Payment” shall mean an amount equal to (A) the aggregate of all amounts paid by Parent to Company (and accepted by the Company) pursuant to the last sentence of Section 3.3 of the Development Agreement which have not, as of the Effective Time, been repaid by the Company to Parent in cash, plus (B) the aggregate of all amounts paid by Parent to Company in all calendar quarters after the twelfth (12th) calendar quarter in the Quarterly Payment Period (as defined in the Development Agreement) during which Parent is or may be required to make a payment to the Company pursuant to the Development Agreement.

(ix) The “Final Merger Consideration” shall mean the consideration determined using actual […***…] data and the First Product Consideration Date.

(x) The “First Target Reserve Consideration Conditions” shall mean the occurrence of (a) the First Module

[…***…] and (b) either (i) Parent terminates the Company’s development of the Test Module Deliverables on or prior to the date that is one hundred eighty (180) days after the First Module […***…] (the “Test Module Deadline”), or (ii) the Company delivers to Parent the Test Module Deliverables on or before the Test Module Deadline.

(xi) The “Fully Diluted Company Share Amount” shall mean the sum of (A) the Outstanding Company Share Amount, (B) the number of shares of Company Common Stock issuable pursuant to all unvested company stock options outstanding immediately prior to the Effective Time, (C) the number of shares of Company Common Stock issuable pursuant to all Company Warrants outstanding immediately prior to the Effective Time, and (D) the number of shares of Company Common Stock issuable upon the exercise or conversion of any convertible securities or any other rights (other than unvested company stock options and Company Warrants) to acquire shares of Company Common Stock that are outstanding immediately prior to the Effective Time.

(xii) The “Initial Escrow Amount” shall mean the amount obtained by multiplying (A) the Adjusted Total Merger Consideration, by (B) (i) 0.10, in the event the Company has not disclosed a breach of any representation, warranty or covenant of the Company contained herein as of the Closing, and (ii) up to 0.77, in the event the Company has disclosed a breach of any representation,

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warranty or covenant of the Company contained herein as of the Closing, which amount shall be comprised of (Y) an amount up to 0.67 that Parent believes is reasonable to fully cover Parent’s Losses in connection therewith which shall be held in escrow for purposes of satisfying the indemnification obligations with respect to such disclosed breach or breaches, and (Z) 0.10 of such amount shall be held in escrow for purposes of satisfying the indemnification obligations with respect to such other matters.

(xiii) The “Outstanding Company Share Amount” shall mean the number of shares of Company Common Stock outstanding immediately prior to the Effective Time.

(xiv) The “Per Share Adjustment Consideration” shall mean the amount equal to (A) (I) the Adjusted Per Share Consideration, multiplied by (II) 0.6, less (B) the Per Share Adjustment Escrow Amount.

(xv) The “Per Share Adjustment Escrow Amount” shall mean the amount equal to the quotient obtained by dividing (A) the Adjustment Escrow Amount, by (B) the Outstanding Company Share Amount.

(xvi) The “Per Share Contingent Consideration” shall mean an amount equal to the quotient obtained by dividing (A) $3,000,000, by (B) the Fully Diluted Company Share Amount.

(xvii) The “Per Share First Target Additional Reserve Consideration” shall mean an amount equal to (A) the Adjusted Per Share Consideration, multiplied by (B) 0.20.

(xviii) The “Per Share First Target Reserve Consideration” shall mean an amount equal to (A) the Closing Per Share Consideration, multiplied by (B) 0.20.

(xix) The “Per Share Initial Consideration” shall mean an amount equal to (A) (I) the Closing Per Share Consideration, multiplied by (II) 0.6, less (B) the Per Share Initial Escrow Amount.

(xx) The “Per Share Initial Escrow Amount” shall mean an amount equal to the quotient obtained by dividing (A) the Initial Escrow Amount, by (B) the Outstanding Company Share Amount.

(xxi) The “Per Share Second Target Additional Reserve Consideration” shall mean an amount equal to (A) the Adjusted Per Share Consideration, multiplied by (B) 0.20.

(xxii) The “Per Share Second Target Reserve Consideration” shall mean an amount equal to (A) the Closing Per Share Consideration, multiplied by (B) 0.20.

(xxiii) The “Preliminary Merger Consideration” shall mean the consideration determined using the […***…] on the First Product Consideration Chart and the First Product Consideration Date, with a […***…].

(xxiv) The “Second Target Reserve Consideration Conditions” shall mean the occurrence of: (A) the First Product Milestone, (B) the achievement of the First Target Reserve Consideration Conditions, and (C) either (i) Parent terminates the Company’s development of the Second Product on or prior to the date that is the one (1)-year anniversary of the first achievement of the First Target Reserve Consideration Conditions (the “Second Product Deadline”), or (ii) the Company delivers to Parent the Second Product on or before the Second Product Deadline.

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(xxv) The “Total Merger Consideration” shall mean either:

(A) if the Merger is being effected pursuant to Section 1.1, (i) the Preliminary Merger Consideration, plus (ii) the Adjustment Amount, in the event the Final Merger Consideration is greater than the Preliminary Merger Consideration, and minus (iii) the Adjustment Amount, in the event the Final Merger Consideration is less than the Preliminary Merger Consideration; or

(B) if the Merger is being effected pursuant to Section 1.2 and the Test Module has not been delivered by the Company to Parent as of […***…]:

i) on or before […***…], that amount, as indicated on the First Product Consideration Chart, obtained by referencing the calendar quarter in which Parent, in its sole discretion, delivers the Notice of Exercise to the Company and (A) in the event Parent actually receives the First Product prior to the delivery of such Notice of Exercise, using the same method of price determination that would be used if the Milestone had been achieved prior to […***…], which determination shall be subject to the procedures set forth in Section 9.2 in the event of the Company’s disagreement with Parent’s determination, and (B) in the event Parent has not actually received the First Product prior to the delivery of such Notice of Exercise or the First Product does not meet the Veloce Minimum Requirements or a price cannot otherwise be determined, by using (i) the […***…], as indicated on the First Product Consideration Chart, and (ii) a […***…] in the First Product Consideration Chart; or

ii) after […***…], $5 million.

(C) if the Merger is being effected pursuant to Section 1.2 and the Test Module has been delivered by the Company to Parent as of […***…], $12 million.

(c) Form of Merger Consideration. In the event the Merger is consummated and any amounts become payable by Parent to the holders of the Company Common Stock pursuant to Section 1.8(a), Parent may, in its sole and absolute discretion (subject to the provisions of this Section 1.8(c)), elect to pay such consideration in the form of all cash, in the form of shares of Parent Common Stock or in any combination of cash and shares of Parent Common Stock. In the event Parent elects to pay all or any portion of any amounts payable under Section 1.8(a) in cash, then such amount, when paid, shall be paid by wire transfer in immediately available funds. In the event Parent elects to pay all or any portion of any amounts payable under Section 1.8(a) in the form of shares of Parent Common Stock, then the number of shares of Parent Common Stock to be issued as consideration therefore shall be determined by dividing (A) the total amount Parent elects to pay in shares of Parent Common Stock, by (B) the Applicable Parent Share Price. Such shares of Parent Common Stock will be evidenced by a Parent stock certificate and, when payable, delivered to the holder of Company Common Stock entitled thereto at the address provided to Parent by such holder. Upon making a determination to issue Parent Common Stock in the Merger, Parent shall reserve sufficient shares of Parent Common Stock for issuance pursuant to this Section 1.8(c).

(d) Notwithstanding anything herein to the contrary, in no event shall the total consideration paid or payable by Parent in connection with the Merger exceed the amount equal to (a) the maximum amount included on page E-4 of the First Product Consideration Chart, minus (b) the Excess Operations Payment, minus (c) the aggregate amount of all Transaction Expenses incurred by the Company but not paid as of the Closing Date that are not included in calculating Excess Liabilities, minus (D) the Excess Liabilities, plus (E) $3,060,000.

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(e) Commercially Viable […***…]. In the event that the First Product is determined to be commercially viable by Parent in its reasonable discretion (which determination shall be based on actual written notice to the Company or commencement of shipment of commercial volumes of the First Product), notwithstanding the failure to meet the “Veloce Minimum Requirements” (as set forth in the First Product Consideration Chart), then the Total Merger Consideration shall be determined by using (i) the […***…], as indicated on the First Product Consideration Chart, (ii) the First Product Consideration Date and (iii) a […***…] in the First Product Consideration Chart.

(f) Test Module Purchase. In the event the Company delivers Parent the Test Module at or prior to […***…], but the Company fails to meet the First Product Milestone by […***…], and Parent does not elect to exercise its Optional Closing Right, then Parent and the Company shall negotiate in good faith regarding the consideration to be paid by Parent to the Company for the Test Module, provided that such consideration shall have a value agreed upon by the parties of at least $12 million.

1.9 Company Options. Prior to the Effective Time, the board of directors of the Company shall approve all resolutions required in order to provide that, as of immediately prior to the Effective Time, (i) each then outstanding: (A) subscription, option, call, warrant or other right (whether or not currently exercisable) to acquire any shares of capital stock or other securities of the Company; (B) security, instrument or obligation that is or may become convertible into or exchangeable for any shares of capital stock or other securities of the Company; (C) Contract under which the Company is or may become obligated to sell or otherwise issue any shares of its capital stock or any other securities of the Company; and (D) share of restricted stock of the Company (clauses (A) through (D) above, collectively “Company Options”), shall be accelerated in its and their entirety effective as of immediately prior to the Effective Time, and all forfeiture rights with respect thereto in favor of the Company shall lapse in their entirety as of such time, and (ii) that each Company Option that has not been exercised, or remains subject to a right of forfeiture in favor of the Company, in either case as of immediately prior to the Effective Time (but after giving effect to the acceleration provided under clause (i) hereof), shall terminate and be canceled and the holders thereof shall have no further rights with respect thereto.

1.10 Closing of the Company’s Transfer Books. At the Effective Time, holders of certificates representing shares of capital stock of the Company that were outstanding as of immediately prior to the Effective Time shall cease to have any rights as stockholders of the Company, except the right to receive any Closing Per Share Consideration as set forth in this Agreement, and the stock transfer books of the Company shall be closed with respect to all shares of such capital stock of the Company outstanding as of immediately prior to the Effective Time. No further transfer of any such shares of capital stock of the Company shall be made on such stock transfer books after the Effective Time. If, after the Effective Time, a valid certificate previously representing any shares of capital stock of the Company (a “Company Stock Certificate”) is presented to the Surviving Corporation or Parent, such Company Stock Certificate shall be canceled and shall be exchanged as provided in Section 1.11.

1.11 Exchange of Certificates.

(a) As soon as practicable but in any event within seven (7) days after the Effective Time, Parent will send to each of the registered holders of Company Stock Certificates a letter of transmittal in customary form and containing such provisions as Parent may reasonably specify and instructions for use in effecting the surrender of Company Stock Certificates in exchange for the Closing Per Share Consideration calculated in accordance with Section 1.8(a). Upon surrender of a Company Stock Certificate to Parent for exchange, together with a duly executed letter of transmittal and such other documents as may be reasonably required by Parent, Parent shall deliver to (i) the holder of such

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Company Stock Certificate, (A) that portion, if any, of the Closing Per Share Consideration that such holder has the right to receive at such time pursuant to Section 1.8(a) in cash, via wire transfer in immediately available funds, and (B) a certificate representing that number of shares of Parent Common Stock, if any, that such holder has the right to receive at such time pursuant to Section 1.8(a), less such holder’s Per Share Initial Escrow Amount, and (ii) deliver to the Escrow Agent (as defined herein) under the Escrow Agreement on behalf of such holder (A) that portion, if any, of such holder’s Per Share Initial Escrow Amount payable in cash, and (B) a certificate representing that number of shares of Parent Common Stock, if any, comprising such holder’s Per Share Initial Escrow Amount, provided that any certificates representing Parent Common Stock to be delivered to the holder of a Company Stock Certificate under clause (i) above and to the Escrow Agent under clause (ii) above shall, in each case, represent only whole shares of Parent Common Stock. In lieu of any fractional shares to which such holder would otherwise be entitled, after combining any fractional interests of such holder into as many whole shares as is possible, the holder of such Company Stock Certificate shall be entitled to receive cash in an amount equal to the sum of (1) the dollar amount (rounded to the nearest whole cent) determined by multiplying the Applicable Parent Share Price by the fraction of a share of Parent Common Stock that would otherwise be deliverable to such holder under clause (i) above and (2) the dollar amount (rounded to the nearest whole cent) determined by multiplying the Applicable Parent Share Price by the fraction of a share of Parent Common Stock that would otherwise be deliverable to the Escrow Agent under clause (ii) above. Notwithstanding the foregoing, Parent may deliver to the Escrow Agent one certificate representing the total number of shares of Parent Common Stock to be held in escrow pursuant to this Section 1.11(a) in lieu of issuing separate certificates representing any shares of Parent Common Stock comprising such holder’s Per Share Initial Escrow Amount. All Company Stock Certificates so surrendered shall be canceled. Until surrendered as contemplated by this Section 1.11, each Company Stock Certificate shall be deemed, from and after the Effective Time, to represent only the right to receive the Closing Per Share Consideration in accordance with this Agreement. If any Company Stock Certificate shall have been lost, stolen or destroyed, Parent may, in its discretion and as a condition precedent to the payment of any cash or issuance of any certificate representing Parent Common Stock or the payment of cash in lieu of fractional shares, require the owner of such lost, stolen or destroyed Company Stock Certificate to provide an appropriate affidavit and to deliver a bond (in such sum as Parent may reasonably direct) as indemnity against any claim that may be made against Parent or the Surviving Corporation with respect to such Company Stock Certificate.

(b) No dividends or other distributions declared or made with respect to Parent Common Stock with a record date after the Effective Time shall be paid to the holder of any unsurrendered Company Stock Certificate with respect to the shares of Parent Common Stock represented thereby, and no cash payment in lieu of any fractional share shall be paid to any such holder, until such holder surrenders such Company Stock Certificate in accordance with this Section 1.11 (at which time such holder shall be entitled to receive all such dividends and distributions and such cash payment).

(c) Each of Parent and the Surviving Corporation shall be entitled to deduct and withhold from any consideration payable or otherwise deliverable pursuant to this Agreement such amounts as it reasonably determines that it is required to deduct or withhold therefrom under the Code or under any provision of state, local or foreign tax law and to collect Forms W-8 or W-9, as applicable, or similar information from the holders of Company Common Stock and any other recipients of payments hereunder. To the extent such amounts are so deducted or withheld, such amounts shall be treated for all purposes under this Agreement as having been paid to the Person to whom such amounts would otherwise have been paid.

(d) Any portion of the Adjusted Total Merger Consideration which remains undistributed to the holders of Company Common Stock for one hundred eighty (180) days after the Effective Time shall be retained by Parent, and any holder of Company Common Stock who has not

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previously complied with this Section 1.11 shall thereafter look only to Parent, as a general unsecured creditor, for payment of its claim for cash, shares of Parent Common Stock, any cash in lieu of fractional shares of Parent Common Stock and any dividends or distributions with respect to shares of Parent Common Stock.

(e) Neither Parent nor the Surviving Corporation shall be liable to any holder or former holder of capital stock of the Company for any shares of Parent Common Stock (or dividends or distributions with respect thereto), or for any cash amounts, delivered to any public official pursuant to any applicable abandoned property, escheat or similar law. If any Company Stock Certificate shall not have been surrendered prior to one (1) year after the Effective Time (or immediately prior to such earlier date on which any shares of Parent Common Stock and any cash payable to the holder of such Company Stock Certificate or any dividends or distributions payable to the holder of such Company Stock Certificate pursuant to this Section 1.11 would otherwise escheat to or become the property of any Governmental Body), any such shares of Parent Common Stock, or cash, dividends or distributions in respect of such Company Stock Certificate, shall, to the extent permitted by applicable Law, become the property of Parent, free and clear of all claims or interest of any Person previously entitled thereto.

(f) The Company will calculate the proper amount of Taxes required to be withheld for each holder of Company Common Stock and/or required to be paid by the Surviving Corporation with respect to each distribution of the Closing Per Share Consideration, which such Taxes shall include, if applicable, full FICA, full FUTA, full Employment Insurance, federal income taxes and any applicable state and provincial income taxes. Such withholding information shall be certified by the Company and be provided to Parent at least five (5) Business Days prior to the Closing to facilitate the distributions by Parent to holders of Company Common Stock required by this Agreement and shall be subject to the review and reasonable approval of Parent in all respects. The Company shall provide Parent and its Representatives with reasonable access to all relevant information and documentation relating to the Tax withholding calculation and the preparation thereof, including, without limitation, access to supporting detail and schedules. Parent shall or shall cause the Surviving Corporation to remit such Tax withholdings on a timely basis to the relevant taxing authorities.

1.12 Appraisal Rights. Notwithstanding anything in this Agreement to the contrary, shares of the capital stock of the Company held by a holder who is entitled to demand and properly demands appraisal of such shares pursuant to, and who complies in all respects with, the provisions of Section 262 of the DGCL (the “Dissenting Shares”) shall not be converted into the right to receive any Closing Per Share Consideration. If, after the Effective Time, such holder withdraws, fails to perfect or loses any such right to payment, such holder’s Dissenting Shares shall be treated as having been converted as of the Effective Time into the right to receive the Closing Per Share Consideration, without interest, such holder would have otherwise been entitled to receive in accordance with Section 1.8 of this Agreement. At the Effective Time, any holder of Dissenting Shares shall cease to have any rights with respect thereto, except the rights provided in Section 262 of the DGCL or any respective successor provision to such provision and as provided in the immediately preceding sentence. The Company shall give prompt notice to Parent of any demands received by the Company for appraisal of shares of capital stock of the Company and the opportunity to participate in all negotiations and proceedings with respect to any such demand. Except to the extent otherwise required by the DGCL, the Company shall not make any payment or settlement offer prior to the Effective Time with respect to any such demand unless Parent shall have consented in writing to such payment or settlement offer.

1.13 Escrow of Consideration. Upon the Closing, Parent shall withhold an amount equal to the Initial Escrow Amount and deliver cash, shares of Parent Common Stock or a combination of cash and shares of Parent Common Stock (in the same proportion as Parent elects to pay pursuant to Section 1.8(c)) to La Salle Bank National Association, a national banking association, as escrow agent (or such

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other escrow agent agreed to in writing by Parent and the Stockholders’ Representative, the “Escrow Agent”), to be held by the Escrow Agent as collateral (such amount, along with any interest earned on any cash portion thereon, the “Escrow Fund”) and the sole and exclusive security to secure the rights of the Indemnified Parties under Section 8 hereof. The Escrow Fund shall be held pursuant to the provisions of an escrow agreement substantially in the form of Exhibit 1.13 (the “Escrow Agreement”). In the event the Final Merger Consideration is greater than the Preliminary Merger Consideration, the Adjustment Escrow Amount shall immediately be added to, and become a part of, the Escrow Fund and governed by the Escrow Agreement. Any shares of Parent Common Stock comprising the Escrow Fund will be represented by a certificate or certificates issued in the name of the Escrow Agent and will be held by the Escrow Agent until 11:59 p.m. Pacific Time on the date that is the first-year anniversary of the Closing Date (the “Escrow Period”); provided, however, that in the event any Indemnified Party has made a claim under Section 8 prior to the end of the Escrow Period, then, in accordance with and subject to the terms and conditions of the Escrow Agreement, the Escrow Period shall continue in respect of that portion of the Escrow Fund subject to the claim (and the Escrow Agent will continue to hold such portion of the Escrow Fund in escrow) until such claim is fully and finally resolved. Upon approval of this Agreement by the requisite majority of the Company’s stockholders, all such stockholders shall, without any further act of any Company stockholder, be deemed to have consented to and approved (i) the use of the Escrow Fund as collateral to secure the rights of the Indemnified Parties under Section 8 in the manner set forth herein and in the Escrow Agreement, and (ii) the appointment of the Stockholders’ Representative as the representative under the Escrow Agreement of the Persons receiving consideration under this Agreement and as the attorney-in-fact and agent for and on behalf of each such Person (other than holders of Dissenting Shares).

1.14 Further Action. If, at any time after the Effective Time, any further action is determined by Parent to be necessary or desirable to carry out the purposes of this Agreement and any Related Agreement or to vest the Surviving Corporation or Parent with full right, title and possession of and to all rights and property of Merger Sub and the Company effective as of the Effective Time, the officers and directors of the Surviving Corporation and Parent shall be fully authorized (in the name of Merger Sub, in the name of the Company and otherwise) to take any such action effective as of the Effective Time.

1.15 Treatment of the Merger. The Parties intend that the transactions contemplated by this Agreement be treated as a merger and neither Parent, the Surviving Corporation, nor any other party to this Agreement shall take a position on any Tax Returns or other statement or report to any Governmental Body or taxing authority inconsistent with such intention unless required to do so by applicable tax Laws.

SECTION 2.

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

Except as set forth on the Company Disclosure Schedule, the Company represents and warrants, as of the Agreement Date and as of the Closing Date, except for representations and warranties made as of a specific date, which shall remain true and correct as of such date, to and for the benefit of the Indemnified Parties, as follows:

2.1 Due Organization; Etc.

(a) The Company is a corporation duly organized, validly existing and in good standing under the Laws of the State of Delaware, has all requisite corporate power and authority to: (i) conduct its business in the manner in which its business is currently being conducted; (ii) own, lease and operate its properties and assets; and (iii) perform its obligations under all Company Contracts (as defined herein) to which it is a party.

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(b) The Company has not conducted any business under or otherwise used, for any purpose or in any jurisdiction, any fictitious name, assumed name, trade name or other name, other than the name “Veloce Technologies, Inc.”

(c) The Company is not and within the last two (2) years has not been required to be qualified, authorized, registered or licensed to do business as a foreign corporation in any jurisdiction other than the jurisdictions identified in Part 2.1(c) of the Company Disclosure Schedule. The Company is in good standing as a foreign corporation in each of the jurisdictions identified in Part 2.1(c) of the Company Disclosure Schedule.

(d) Part 2.1(d) of the Company Disclosure Schedule accurately sets forth (i) the names of the members of the Company’s board of directors, (ii) the names of the members of each committee of the Company’s board of directors, and (iii) the names and titles of the Company’s officers.

(e) Part 2.1(e) of the Company Disclosure Schedule accurately sets forth the Company’s Subsidiaries. The Company does not own, nor has it ever owned, beneficially or otherwise, any shares or other securities of, or any direct or indirect equity or other financial interest in, any Entity. The Company has not agreed and is not obligated to make any future investment in or capital contribution to any Entity. The Company has not guaranteed and is not responsible or liable for any obligation of any of the Entities in which it owns or has owned any equity or other financial interest. Neither the Company nor any of its stockholders has ever approved, or commenced any proceeding or made any election contemplating, the dissolution or liquidation of the business or affairs of the Company.

2.2 Certificate of Incorporation and Bylaws; Records. The Company has delivered to Parent accurate and complete copies of: (a) the Company’s Certificate of Incorporation and Bylaws, including all amendments and restatements thereto; (b) the stock records of the Company; and (c) the minutes and other records of the meetings and other proceedings (including any actions taken by written consent or otherwise without a meeting) of the Company’s stockholders, the Company’s board of directors and all committees of the Company’s board of directors (the items described in (a), (b) and (c) above, collectively, the “Company Constituent Documents”). There have been no formal meetings or other proceedings of the Company’s stockholders, the Company’s board of directors or any committee of the Company’s board of directors that are not fully reflected in the Company Constituent Documents. There has not been any violation of the Company’s Certificate of Incorporation and Bylaws, including all amendments thereto. The books of account, stock records, minute books and other records of the Company are accurate, up-to-date and complete in all material respects, and have been maintained in accordance with applicable Laws and prudent business practices. All the records of the Company are in the actual possession and direct control of the Company.

2.3 Authority; Binding Nature of Agreement. Subject only to the approval of this Agreement by the Company’s stockholders pursuant to the requirements of the Company’s Certificate of Incorporation and Bylaws and the DGCL, the Company has the absolute and unrestricted right, power and authority to enter into and to perform its obligations under this Agreement and any Related Agreement to which it is a party, and the execution, delivery and performance by the Company of this Agreement and any Related Agreement to which it is a party have been, and will be through the Effective Time, duly authorized by all necessary action on the part of the Company. This Agreement and each Related Agreement to which the Company is a party constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to (i) laws of general application relating to bankruptcy, insolvency and the relief of debtors, and (ii) rules of law governing specific performance, injunctive relief and other equitable remedies.

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2.4 Non-Contravention; Consents. Neither (1) the execution, delivery or performance by the Company of this Agreement or any of the Related Agreements, nor (2) the consummation of the Merger or any of the other transactions contemplated by this Agreement or any of the Related Agreements, will directly or indirectly (with or without the giving of notice or the lapse of time or both):

(a) contravene, conflict with or result in a violation of any of the provisions of the Company Constituent Documents;

(b) contravene, conflict with or result in a violation of, in any material respect, or give any Governmental Body the right to challenge any of the transactions contemplated by this Agreement (other than the right to exercise appraisal rights under the DGCL) or any of the Related Agreements or to exercise any remedy or obtain any relief under, any Law or any order, writ, injunction, judgment or decree to which the Company, or any of the assets owned, used or controlled by the Company, is subject;

(c) contravene, conflict with or result in a violation of any of the terms or requirements of, or give any Governmental Body the right to revoke, withdraw, suspend, cancel, terminate or modify, any Governmental Authorization that is held by the Company or that otherwise relates to the business of the Company or to any of the assets owned, used or controlled by the Company;

(d) contravene, conflict with or result in a violation or breach of, in any material respect, or result in a default under, any provision of any Company Contract, or give any Person the right to (i) declare a default under any such Company Contract, or (ii) modify, terminate, or accelerate any right, liability or obligation of the Company under any such Company Contract, or charge any fee, penalty or similar payment to the Company under any such Company Contract; or

(e) result in the imposition or creation of any Encumbrance (other than with respect to the transactions contemplated under this Agreement and the Related Agreements) upon or with respect to any asset owned or used by the Company.

Except for the filing of the Certificate of Merger and the approval of this Agreement by the Company’s stockholders pursuant to the requirements of the Company’s Certificate of Incorporation and Bylaws and the DGCL, no filing with, notice to or consent from any Person is required in connection with (i) the execution, delivery or performance of this Agreement or any of the Related Agreements, or (ii) the consummation of the Merger or any of the other transactions contemplated by this Agreement or any of the Related Agreements.

2.5 Capitalization.

(a) The authorized capital stock of the Company consists of: (i) ten million (10,000,000) shares of Company Common Stock, of which eight million one hundred thousand (8,100,000) shares have been issued and are outstanding as of the Agreement Date. All of the outstanding shares of Company Common Stock have been duly authorized and validly issued, and are fully paid and non-assessable. All of the outstanding shares of Company Common Stock and all outstanding Company Options have been issued and granted in compliance with (i) all applicable securities laws and other applicable Laws, and (ii) all requirements set forth in the Company Constituent Documents and applicable Contracts. Each of the Company’s stockholders is the record and beneficial owner of the shares of the Company Common Stock as set forth opposite such stockholder’s name on Part 2.5(a) of the Company Disclosure Schedule, and such shares are free and clear of all Encumbrances (other than those Encumbrances relating to applicable securities laws).

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(b) The Company has reserved two million forty thousand (2,040,000) shares of Company Common Stock for issuance under the Company Stock Option Plan, of which there are no outstanding options to purchase shares of Company Common Stock as of the Agreement Date.

(i) Part 2.5(b) of the Company Disclosure Schedule accurately sets forth, with respect to each Company Option outstanding as of the date hereof (whether vested or unvested and whether issued pursuant to any Company Stock Option Plan or otherwise): (A) the name of the holder of such Company Option and the type of such Company Option; (B) the total number of shares of Company Common Stock that are subject to such Company Option and the number of shares of Company Common Stock with respect to which such Company Option is immediately exercisable; (C) the date on which such Company Option was granted and the expiration date of such Company Option; (D) the vesting schedule for such Company Option; (E) the exercise, or purchase, price per share of Company Common Stock purchasable under such Company Option; (F) whether (and to what extent) the vesting of such Company Option will be accelerated in any way by the transactions contemplated by this Agreement or by the termination of employment or engagement or change in position of any holder thereof following consummation of the Merger; and (G) whether such Company Option has been designated an “incentive stock option” as defined in Section 422 of the Code.

(ii) The Company has not issued any debt securities which grant the holder thereof any right to vote on, or veto, any actions by the Company. The Closing Capitalization Certificate referred to in Section 4.8 is accurate and complete.

(c) From its inception through the Agreement Date, the Company has never repurchased, redeemed or otherwise reacquired any shares of capital stock or other securities of the Company. Part 2.5(c) of the Company Disclosure Schedule lists as of the Agreement Date all issued and outstanding shares of Company Common Stock that constitute restricted stock or that are otherwise subject to a repurchase or redemption right or right of first refusal in favor of the Company, indicating the name of the applicable stockholder, the class of any such shares, the lapsing schedule for any such shares, including the extent to which any such repurchase or redemption right or right of first refusal has lapsed as of the Agreement Date, whether (and to what extent) the lapsing will be accelerated in any way by the transactions contemplated by this Agreement or by termination of employment or change in position following consummation of the Merger, and whether such holder has the sole power to vote and dispose of such shares.

(d) Other than the Securityholder Agreement, the Company is not a party to or bound by any, and to the Knowledge of the Company, there are no, agreements or understandings with respect to the voting (including voting trusts and proxies) or sale or transfer (including agreements imposing transfer restrictions) of any shares of capital stock or other equity interests of the Company.

(e) The Company is not now, nor has it ever been, required to file with the SEC any periodic or other reports, or any registration statement, pursuant to the Securities Act or the Exchange Act.

2.6 Company Financial Status. Part 2.6(a) of the Company Disclosure Schedule lists the amount of the Company’s cash on hand as of May 17, 2009, and a schedule of the Company’s Liabilities as of such date

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2.7 Absence of Changes. Since the date of inception of the Company:

(a) no Company Material Adverse Effect has occurred, and no event, occurrence, development or state of circumstances or facts has occurred that will, or could reasonably be expected to, have such a Company Material Adverse Effect;

(b) there has not been any material loss, damage or destruction to, or any material interruption in the use of, any of the assets (whether or not covered by insurance) of the Company;

(c) the Company has not declared, accrued, set aside or paid any dividend or made any other distribution or payment to any stockholder, officer or director or any Person with whom any such stockholder, officer or director has any direct or indirect relation, other than the payment of salaries and bonuses in the ordinary course of business, and has not repurchased, redeemed or otherwise reacquired any shares of capital stock or other securities of the Company, except repurchases of unvested shares at cost in connection with the termination of the employment or consulting relationship with any Employee (as defined herein) or consultant pursuant to stock option or purchase agreements;

(d) no party to any Company Contract has given notice to the Company of any intention not to renew, not to extend, to cancel or otherwise terminate or materially modify its business relationship with the Company;

(e) there has been no amendment to any of the Company Constituent Documents, except for the addition of resolutions and minutes of the Company’s board of directors and the Company’s stockholders in the ordinary course, accurate and complete copies of which have been delivered by the Company to Parent, and the Company has not effected or been a party to any Strategic Transaction, recapitalization, reclassification of shares, stock split, reverse stock split or similar transaction;

(f) the Company has not formed any Subsidiary or acquired any equity interest or other interest in any other Entity except for the operating Subsidiaries set forth on Schedule 2.1(e) of the Company Disclosure Schedule;

(g) the Company has not (i) entered into or permitted any of the assets owned or used by it to become bound by any Contract that is a material Contract, (ii) entered into or permitted any of the assets owned or used by it to become bound by any Contract other than in the ordinary course of business, or (iii) amended or prematurely terminated, or waived any right or remedy under, any Company Contract;

(h) the Company has not (i) acquired, leased or licensed any right or other asset from any other Person, (ii) sold or otherwise disposed of, or leased or licensed, any right or other asset to any other Person, except for sales of inventory in the ordinary course of business, or (iii) waived or relinquished any right, except in each case for immaterial rights or other immaterial assets acquired, leased, licensed or disposed of in the ordinary course of business and consistent with the Company’s past practices;

(i) the Company has not (i) written off as uncollectible, or established any extraordinary reserve with respect to, any billed or unbilled account receivable or other indebtedness, or (ii) increased any reserves for contingent Liabilities (excluding any adjustment to bad debt reserves in the ordinary course of business)

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(j) the Company has not made any pledge of any of its assets or otherwise permitted any of its assets to become subject to any Encumbrance;

(k) the Company has not lent money to any Person (other than pursuant to routine travel advances made to employees of the Company (each an “Employee”) in the ordinary course of business or in connection with such Employee’s purchase of Company Common Stock);

(l) the Company has not changed any of its methods of accounting or accounting practices in any respect;

(m) there has not been any Tax election made or changed, annual tax accounting period changed, method of tax accounting adopted or changed, amended Tax Returns or claims for Tax refunds filed, closing agreement entered into, Tax claim, audit or assessment settled, or right to claim a Tax refund, offset or other reduction in Tax liability surrendered;

(n) the Company has not threatened, commenced or settled any Legal Proceeding; and

(o) the Company has not agreed to take, or committed to take, any of the actions referred to in clauses “(c)” through “(n)” above.

2.8 Title to Assets.

(a) The Company owns, and has good, valid and marketable title to, all assets purported to be owned by it, including, without limitation: (i) all assets referred to in Sections 2.1, 2.9 and 2.10 of this Agreement (subject, in the case of the assets referred to in Section 2.10, to the qualifications set forth therein); and (ii) all other assets reflected in the Company’s books and records as being owned by the Company. Except as set forth in Part 2.8(a) of the Company Disclosure Schedule, all of such assets are owned by the Company free and clear of any Encumbrances, except for (A) any lien for current Taxes not yet due and payable, and (B) minor liens that have arisen in the Company’s ordinary course of business and that do not (individually or in the aggregate) materially detract from the value of the assets subject thereto or materially impair the operations of the Company.

(b) Except for this Agreement, the Company does not have any Contract, absolute or contingent (i) to effect any Strategic Transaction; or (ii) to sell or otherwise transfer a material portion of the assets of the Company or any material asset of the Company, except in the Company’s ordinary course of business. All material tangible assets which are owned, leased or used by the Company are in good operating condition and repair, subject to normal wear and tear.

(c) All leases and licenses to the assets used by the Company are valid and enforceable in accordance with their terms against the parties thereto. Part 2.8(c) of the Company Disclosure Schedule identifies all material assets that are being leased or licensed to the Company.

2.9 Bank Accounts. Part 2.9 of the Company Disclosure Schedule provides accurate information with respect to each account maintained by or for the benefit of the Company at any bank or other financial institution including the name of the bank or financial institution, the account number and the balance as of the date hereof and the names of all individuals authorized to draw on or make withdrawals from such accounts

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2.10 Intellectual Property.

(a) Part 2.10(a) of the Company Disclosure Schedule accurately identifies (i) all Intellectual Property Rights or Intellectual Property licensed to the Company (other than any non-customized Software that (A) is so licensed solely in executable or object code form pursuant to a non-exclusive, internal use software license; (B) is not incorporated into, or used directly in the development, manufacturing, or distribution of, the Company’s products or services; and (C) is generally available on standard terms for less than $10,000); (ii) the corresponding Contract or Contracts pursuant to which such Intellectual Property Rights or Intellectual Property is licensed to the Company; and (iii) whether there are any royalties, license fees, or other fees payable by Company under such Contract or Contracts.

(b) Part 2.10(b) of the Company Disclosure Schedule accurately identifies each Contract pursuant to which any Person has been granted any license under, or otherwise has received or acquired any right (whether or not currently exercisable) or interest in, any Company IP.

(c) The Company has provided to Parent a complete and accurate copy of each standard form of Company IP Contract used by the Company, including, without limitation, each standard form of (i) employee agreement containing Intellectual Property assignment or license of Intellectual Property or Intellectual Property Rights or any confidentiality provision, and (ii) consulting or independent contractor agreement containing intellectual property assignment or license of Intellectual Property or Intellectual Property Rights or any confidentiality provision. The Company is not a party to any development agreement, except for the Development Agreement. Part 2.10(c) of the Company Disclosure Schedule accurately identifies each Company IP Contract that deviates in any material respect from the corresponding standard form agreement provided to Parent.

(d) As of the date hereof, the Company exclusively owns all right, title, and interest to and in the Company IP (other than Intellectual Property Rights exclusively licensed to the Company, as identified in Part 2.10(b) of the Company Disclosure Schedule) free and clear of any Encumbrances.

(e) Each Person who is or was an Employee or contractor of the Company and who is or was involved in the creation or development of any Company IP has signed a valid, enforceable agreement containing an assignment of Intellectual Property Rights to the Company and confidentiality provisions protecting the Company IP. No current or former Company stockholder, officer, director, or Employee has any claim, right (whether or not currently exercisable), or interest to or in any Company IP. To the Company’s Knowledge, no Employee is (a) bound by or otherwise subject to any Contract restricting him or her from performing his or her duties for the Company, or (b) in breach of any Contract with any former employer or other Person concerning Intellectual Property Rights or confidentiality.

(f) The Company has taken all reasonable steps to maintain the confidentiality of and otherwise protect and enforce its rights in all proprietary information that the Company holds, or purports to hold, as a trade secret. Without limiting the generality of the foregoing, no portion of the source code for any Software ever owned, developed, used, or distributed by the Company has been disclosed or licensed to any escrow agent or other Person and there are no contracts in existence that would permit, facilitate or provide any such disclosure or license.

(g) The Company is not and never was a member or promoter of, or a contributor to, any industry standards body or similar organization that could require or obligate the Company to grant or offer to any other Person any license or right to any Company IP.

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(h) To the Company’s Knowledge, no Person has infringed, misappropriated, or otherwise violated, and no Person is currently infringing, misappropriating, or otherwise violating, any Company IP.

(i) Neither the execution, delivery, or performance of this Agreement (or any of the Related Agreements) nor the consummation of any of the transactions contemplated by this Agreement (or any of the Related Agreements) will, with or without notice or lapse of time, result in, or give any other Person the right or option to cause or declare, (a) a loss of, or Encumbrance on, any Company IP; (b) a breach of any license agreement listed or required to be listed in Part 2.10(b) of the Company Disclosure Schedule; (c) the release, disclosure, or delivery of any Company IP by or to any escrow agent or other Person; or (d) the grant, assignment, or transfer to any other Person of any license or other right or interest under, to, or in any of the Company IP.

(j) To the Company’s Knowledge, it has never infringed (directly, contributorily, by inducement, or otherwise), misappropriated, or otherwise violated and does not currently infringe, misappropriate, or violate any Intellectual Property Right of any other Person. No infringement, misappropriation, or similar claim or Legal Proceeding is pending or, to the best the Company’s Knowledge, threatened against the Company. The Company has never received any notice or other communication (in writing or otherwise) relating to any actual, alleged, or suspected infringement, misappropriation, or violation of any Intellectual Property Rights of another Person.

(k) The Company will comply with all Laws, rules, judgments and regulations relating to its performance under the Development Agreement.

(l) The Company will perform the Project in a professional and workmanlike manner and dedicate sufficient resources, including qualified personnel to perform the Project in a timely manner.

(m) Before being allowed to begin performing the Project, all individuals (including Employees and agents of the Company) who contribute to or participate in the conception, creation, or development of the Work Product (as defined in the Development Agreement) will have unconditionally and irrevocably assigned in writing all of their right, title and interest in and to the Work Product to the Company.

(n) As of the date hereof, the Company knows of no facts or circumstances that would impair, limit, or delay its performance of the Project in accordance with the Development Agreement.

(o) The Company has full right, power and authority to enter into the Development Agreement, to perform its obligations under the Development Agreement in accordance with the Development Agreement, and to assign the rights in the Work Product and grant the licenses granted to Parent under the Agreement.

(p) The Company will not grant, directly or indirectly, any right or interest in the Work Product to any other Person.

(q) The Company may not incorporate into the Work Product any Technology (as defined in the Development Agreement) (excluding for purposes hereof any Third-Party Technology (as defined below) for which the Company has obtained approval from Parent for inclusion in the Work Product) that misappropriates a third party trade secret, infringes a third party copyright, or that, to the

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Company’s Knowledge, infringes a third party patent (including patents issuing from pending patent applications known to Company).

(r) Any Technology licensed or obtained by the Company from any third party or which the Company knows is owned by any third party or infringes any third party’s Intellectual Property Rights (including any pending patent applications) (collectively, “Third-Party Technology”) may not be used by the Company in the performance of the Project unless such Third-Party Technology has been specifically identified and its use approved by Parent in writing.

(s) For purposes of this Section 2.10 only, “Company Knowledge” means any of the following individuals is actually aware of such fact or other matter: any of the Company’s officers, directors, management or key technologists (or former officers, directors, management or key technologists of the Company who served in such capacity within ninety (90) days of the applicable measurement date); provided that for purposes of this Section 2.10, a Person shall be deemed to have “Knowledge” of the contents of any patent or patent application which lists such Person as an inventor.

2.11 Anti-Takeover Law. The Company (including the board of directors of the Company) has taken all action necessary or required to render inapplicable to the Merger, this Agreement or any Related Agreement and the transactions contemplated herein or therein (a) any state takeover law that may purport to be applicable to the Merger and the transactions contemplated by this Agreement and the Related Agreements, (b) any takeover provision in the Company Constituent Documents, and (c) any takeover provision in any Contract to which the Company is a party or by which it or its properties may be bound.

2.12 Contracts.

(a) Part 2.12(a) of the Company Disclosure Schedule sets forth a true, correct and complete list of the following Contracts (the “Company Contracts”) currently in force to which the Company is a party or under which the Company has continuing liabilities and/or obligations:

(i) each Contract relating to the employment of, or the performance of services by, any Person, including any Employee, consultant or independent contractor;

(ii) each Contract relating to the acquisition, transfer, use, development, sharing or license of any technology or any Intellectual Property;

(iii) all Contracts that: (A) limit, or purport to limit, the ability of the Company to compete in any line of business or with any Person or in any geographic area or during any period of time; (B) would by their terms purport to be binding upon or impose any obligation upon Parent or any of its Affiliates (other than the Surviving Corporation or its Subsidiaries); (C) contain any so called “most favored nation” provisions or any similar provision requiring the Company to offer a third party terms or concessions (including levels of service or content offerings) at least as favorable as offered to one or more other parties; or (D) provide for “exclusivity,” preferred treatment or any similar requirement or under which the Company is restricted, or which after the Closing would restrict Parent or any of its Affiliates, with respect to distribution, licensing, marketing, co-marketing or development;

(iv) each Contract creating or involving any agency relationship, distribution arrangement or franchise relationship on behalf of the Company;

(v) each Contract relating to the acquisition, issuance or transfer of any securities;

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(vi) bonds, debentures, notes, guarantees, credit or loan agreements or loan commitments, mortgages or other similar Contracts relating to the borrowing of money or the deferred purchase price of property or binding upon any properties or assets (real, personal or mixed, tangible or intangible) of the Company;

(vii) each Contract relating to the creation of any Encumbrance with respect to any asset of the Company;

(viii) each Contract involving or incorporating any guaranty, any pledge, any performance or completion bond, any indemnity or any surety arrangement;

(ix) each Contract creating or relating to any partnership or joint venture or any sharing of revenues, profits, losses, costs or liabilities;

(x) each Contract relating to the purchase or sale of any product or other asset by or to, or the performance of any services by or for, any Related Party;

(xi) each Contract providing for “earn outs,” “performance guarantees” or other similar contingent payments, by or to the Company involving more than $100,000 over the term of any such Contract;

(xii) Contracts for capital expenditures or the acquisition or construction of fixed assets requiring the payment by the Company of an amount in excess of $100,000 (unless otherwise approved in accordance with the procedures under Section 4.2(b)(vi));

(xiii) Contracts granting any Person an option or a right of first refusal, first-offer or similar preferential right to purchase or acquire any assets of the Company;

(xiv) Contracts for the granting or receiving of a license, sublicense or franchise or under which any Person is obligated to pay or has the right to receive a royalty, license fee, franchise fee or similar payment;

(xv) any Tax-sharing Contract;

(xvi) each Contract that was entered into outside the ordinary course of business; and

(xvii) any other Contract that (A) contemplates or involves (1) the payment or delivery of cash or other consideration in an amount or having a value in excess of $100,000 in the aggregate, or (2) the purchase or sale of any product, or performance of services by or to the Company having a value in excess of $250,000 in the aggregate, (B) has a term of more than sixty (60) days and that may not be terminated by the Company (without penalty) within sixty (60) days after the delivery of a termination notice by the Company, or (C) is material to the Company, individually or in the aggregate.

(b) The Company has delivered to Parent accurate and complete copies of all written Company Contracts. Part 2.12(b) of the Company Disclosure Schedule provides an accurate description of the terms of each Company Contract that is not in written form. Each Company Contract is valid and in full force and effect, is enforceable by the Company in accordance with its terms, and after the Effective Time will continue to be legal, valid, binding and enforceable on identical terms. No Consent is required to be obtained from any third party under any Company Contract in connection with the Merger. The

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consummation of the transactions contemplated hereby shall not (either alone or upon the occurrence of additional acts or events) result in any payment or payments becoming due from the Company, the Surviving Corporation, Parent or any of its Affiliates to any Person or give any Person the right to terminate or alter the provisions of any Company Contract. The consummation of the transactions described herein will not affect any of the Company Contracts in a manner that could reasonably be expected to result in a Material Adverse Effect on the Company.

(c) There is no term, obligation, understanding or agreement that would modify any term of a written Company Contract or any right or obligation of a party thereunder which is not reflected on the face of such Contract.

(d) The Company has not violated or breached, or committed any default under, any Company Contract, and, to the Knowledge of the Company, no other Person has violated or breached, or committed any default under, any Company Contract.

(e) No event has occurred, and no circumstance or condition exists, that (with or without notice or lapse of time) will, or could reasonably be expected to, (i) result in a violation or breach of any of the provisions of any Company Contract, (ii) give any Person the right to declare a default or exercise any remedy under any Company Contract, (iii) give any Person the right to accelerate the maturity or performance of any Company Contract, or (iv) give any Person the right to cancel, terminate or modify any Company Contract.

(f) The Company has not received any notice or other communication regarding any actual or possible violation or breach of, or default under, any Company Contract.

(g) The Company has not waived any of its rights under any Company Contract.

(h) No Person is renegotiating, or has a right pursuant to the terms of any Company Contract to renegotiate, any amount paid or payable to the Company under any Company Contract or any other material term or provision of any Company Contract.

(i) Part 2.12(i) of the Company Disclosure Schedule identifies and provides a brief description of each proposed Contract as to which any bid, offer, award, written proposal, term sheet or similar document has been submitted or received by the Company.

2.13 Liabilities. As of the Closing Date, the Company has no Liabilities, except for: (a) Liabilities identified as such in the “liabilities” column of the balance sheet most recently delivered by the Company to Parent prior to the Closing Date; (b) accounts payable or accrued compensation that have been incurred by the Company since the date of such balance sheet in the ordinary course of business; and (c) Liabilities under the Company Contracts, none of which, individually, exceeds $50,000.

2.14 Compliance with Laws. The Company is, and has at all times been, in compliance in all material respects with all Laws that are applicable to it or to the conduct of its business or the ownership or use of any of its assets. Since inception, the Company has not received any notice or other communication from any Governmental Body regarding any actual or possible violation of, or failure to comply with, any Laws. The Company has not received, at any time, any notice or other communication from any Governmental Body or any other Person regarding (a) any actual, alleged, possible or potential violation of, or failure to comply with, any Laws; or (b) any actual, alleged, possible or potential obligation on the part of the Company to undertake, or to bear all or any portion of the cost of, any cleanup or any remedial, corrective or response action of any nature. The Company has delivered or made available to Parent an accurate and complete copy of each report, study, survey or other document to

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which the Company has access that addresses or otherwise relates to the compliance of the Company with, or the applicability to the Company of, any Laws.

2.15 Governmental Authorizations.

(a) Part 2.15 of the Company Disclosure Schedule identifies each material Governmental Authorization held by the Company. The Governmental Authorizations held by the Company are valid and in full force and effect, and collectively constitute all material Governmental Authorizations necessary (i) to enable the Company to conduct its business in the manner in which its business is currently being conducted and in the manner in which its business is proposed to be conducted; and (ii) to permit the Company to own and use its assets in the manner in which they are currently owned and used and in the manner in which they are proposed to be owned and used. The Company is, and at all times since its inception has been, in compliance with the terms and requirements of the respective Governmental Authorizations held by the Company. Since the date of the Company’s inception, the Company has not received any notice or other communication from any Governmental Body regarding (A) any actual or possible violation of or failure to comply with any term or requirement of any Governmental Authorization; or (B) any actual or possible revocation, withdrawal, suspension, cancellation, termination or modification of any Governmental Authorization.

(b) (i) The Company and, to the Company’s Knowledge, its Employees are, and have at all times been, in full compliance with all of the terms and requirements of each Governmental Authorization identified or required to be identified in Part 2.15 of the Company Disclosure Schedule; (ii) no event has occurred, and no condition or circumstance exists, that might (with or without notice or lapse of time) (A) constitute or result directly or indirectly in a violation of or a failure to comply with any term or requirement of any Governmental Authorization identified or required to be identified in Part 2.15 of the Company Disclosure Schedule; or (B) result directly or indirectly in the revocation, withdrawal, suspension, cancellation, termination or modification of any Governmental Authorization identified or required to be identified in Part 2.15 of the Company Disclosure Schedule; (iii) the Company has never received, and, to the Knowledge of the Company, no Employee has ever received, any notice or other communication from any Governmental Body or any other Person regarding (x) any actual, alleged, possible or potential violation of or failure to comply with any term or requirement of any Governmental Authorization; or (y) any actual, proposed, possible or potential revocation, withdrawal, suspension, cancellation, termination or modification of any Governmental Authorization; and (iv) all applications required to have been filed for the renewal of the Governmental Authorizations required to be identified in Part 2.15 of the Company Disclosure Schedule have been duly filed on a timely basis with the appropriate Governmental Bodies, and each other notice or filing required to have been given or made with respect to such Governmental Authorizations has been duly given or made on a timely basis with the appropriate Governmental Body.

2.16 Tax Matters.

(a) All Tax Returns due to have been filed by the Company through the Agreement Date in accordance with all applicable Laws (pursuant to an extension of time or otherwise) have been duly filed and are true, correct and complete in all respects.

(b) All Taxes for which the Company has liability (whether or not shown on any Tax Return) have been paid in full or are accrued as Liabilities for Taxes on the books and records of the Company.

(c) The amounts accrued as Liabilities for Taxes (including Taxes accrued as currently payable but excluding any accrual to reflect timing differences between book and Tax income)

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on the books of the Company, shall be adequate based on the tax rates and applicable Laws in effect to satisfy all liabilities for Taxes of the Company in any jurisdiction through the Closing Date, including Taxes accruable upon income earned through the Closing Date.

(d) No claims have been asserted and no proposals or deficiencies for any Taxes of the Company are being asserted, proposed or, to the Knowledge of the Company, threatened, and no audit or investigation of any Tax Return of the Company is currently underway, pending or threatened.

(e) The Company has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any Employee, independent contractor, creditor or stockholder thereof or other third party.

(f) There are no outstanding waivers or agreements between any Governmental Body and the Company for the extension of time for the assessment of any Taxes or deficiency thereof, nor are there any requests for rulings, outstanding subpoenas or requests for information, notice of proposed reassessment of any property owned or leased by the Company or any other matter pending between the Company and any Governmental Body.

(g) There are no Encumbrances for Taxes with respect to the Company or the assets or properties of the Company, nor is there any such Encumbrance that is pending or, to the Knowledge of the Company, threatened.

(h) The Company is not a party to or bound by any Tax allocation or sharing agreement.

(i) The Company has never been a member of an “affiliated group” of corporations (within the meaning of Code § 1504) filing a consolidated federal income tax return (other than a group the common parent of which was the Company).

(j) The Company does not have any liability for the Taxes of any Person (other than for itself) under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local or foreign Law), as a transferee or successor, by contract or otherwise.

(k) None of the Tax Returns described in Subsection (a) of this Section 2.16 contains any position which is or would be subject to penalties under Section 6662 of the Code (or any similar provision of provincial, state, local or foreign law) and the Treasury Regulations issued thereunder.

(l) The Company has not made any payments, is obligated to make any payments, or is a party to any Contract that could obligate it to make any payments that will not be deductible under Section 280G of the Code (or any similar provision of provincial, state, local or foreign Law). The Company is not a party to any Contract, nor does it have any obligation (current or contingent), to compensate any individual for excise Taxes paid pursuant to Section 4999 of the Code. Notwithstanding any disclosure in the Company Disclosure Schedule, the Company has not made any distribution of stock of any “controlled corporation” as that term is defined in Section 355(a)(1) of the Code, the Company does not have any Liability for Taxes as a result of any such distribution, and the Merger shall not result in any such Taxes.

(m) The Company is, and has at all times been, in compliance with the provisions of Section 6011, 6111 and 6112 of the Code relating to tax shelter disclosure, registration and list maintenance and with the Treasury Regulations thereunder.

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(n) The Company has not, at any time, engaged in or entered into a “listed transaction” within the meaning of Treasury Regulation Sections 1.6011-4(b)(2), 301.6111-2(b)(2) or 301.6112-1(b)(2)(A), and no IRS Form 8886 has been filed with respect to the Company nor has the Company entered into any tax shelter or listed transaction with the sole or dominant purpose of the avoidance or reduction of a Tax liability with respect to which there is a significant risk of challenge of such transaction by a Governmental Body.

(o) The Company has not been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code.

2.17 Company Benefit Plans.

(a) Part 2.17(a) of the Company Disclosure Schedule contains a true, correct and complete list of each Company Benefit Plan and ERISA Affiliate Plan. Any special tax status or tax benefits for plan participants enjoyed or offered by a Company Benefit Plan or ERISA Affiliate Plan is noted on such schedule.

(b) With respect to each Company Benefit Plan and ERISA Affiliate Plan identified on Part 2.17(a) of the Company Disclosure Schedule, the Company has heretofore delivered to Parent true, correct and complete copies of the plan documents and any amendments thereto (or, in the event the plan is not written, a written description thereof), any related trust, insurance contract or other funding vehicle, any reports or summaries required under all applicable Laws, including ERISA or the Code, the most recent determination or opinion letter received from the IRS with respect to each current Company Benefit Plan or ERISA Affiliate Plan intended to qualify under Code Section 401, nondiscrimination and coverage tests for the most recent three (3) full plan years, the three (3) most recent annual reports (Form 5500) filed with the IRS and financial statements (if applicable), the three (3) most recent actuarial reports or valuations (if applicable) and such other documentation with respect to any Company Benefit Plan or ERISA Affiliate Plan (whether current or not) as is reasonably requested by Parent.

(c) To the Company’s Knowledge, the Company records accurately reflect the employment or service histories of its Employees, independent contractors, contingent workers and leased employees.

(d) With respect to each Company Benefit Plan, (i) there has not occurred any non-exempt “prohibited transaction” within the meaning of Section 4975(c) of the Code or Section 406 of ERISA that would subject the Surviving Corporation, its Subsidiaries or Parent to any material liability and (ii) no fiduciary (within the meaning of Section 3(21) of ERISA) of any Company Benefit Plan that is subject to Part 4 of Title I of ERISA has committed a breach of fiduciary duty that would subject the Surviving Corporation, its Subsidiaries or Parent to any liability. The Company has not incurred any excise Taxes under Chapter 43 of the Code and nothing has occurred with respect to any Company Benefit Plan that would reasonably be expected to subject the Surviving Corporation, its Subsidiaries or Parent to any such Taxes. The transactions contemplated by this Agreement will not trigger any Taxes under Section 4978 of the Code. No Company Benefit Plan or ERISA Affiliate Plan is or was subject to Title IV of ERISA, Section 302 of ERISA or Section 412 of the Code, and no Company Benefit Plan or ERISA Affiliate Plan is or was a “multiemployer plan” (as defined in Section 3(37) of ERISA), a “multiple employer plan” (within the meaning of Section 413(c) of the Code), or a “multiple employer welfare arrangement” (as defined in Section 3(40)(A) of ERISA), nor has the Company or any of its ERISA Affiliates ever sponsored, maintained, contributed to, or had any liability or obligation with respect to, any such Company Benefit Plan or ERISA Affiliate Plan.

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(e) Each Company Benefit Plan or ERISA Affiliate Plan has been established, registered, qualified, invested, operated and administered in all material respects in accordance with its terms and in compliance with all Applicable Benefit Laws. The Company has performed and complied in all material respects with all of its obligations under or with respect to the Company Benefit Plans. The Company has not incurred, and no fact exists that reasonably could be expected to result in, any liability to the Company with respect to any Company Benefit Plan or any ERISA Affiliate Plan, including any Liability, Tax, penalty or fee under any Applicable Benefit Law (other than to pay premiums, contributions or benefits in the ordinary course of business consistent with past practice). There are no current or, to the Knowledge of the Company, threatened or reasonably foreseeable Encumbrances on any assets of any Company Benefit Plan or ERISA Affiliate Plan.

(f) No fact or circumstance exists that reasonably could be expected to adversely affect the Tax-exempt status of a Company Benefit Plan or ERISA Affiliate Plan that is intended to be Tax-exempt. Further, each such plan intended to be “qualified” within the meaning of Section 401(a) of the Code and the trusts maintained thereunder that are intended to be exempt from taxation under Section 501(a) of the Code has received a favorable determination or opinion letter with respect to all Applicable Benefits Laws on which the IRS will issue a favorable determination letter on its qualification, and nothing has occurred subsequent to the date of such favorable determination letter that reasonably could be expected to adversely affect the qualified status of any such plan.

(g) There is no pending or, to the Knowledge of the Company, threatened (i) complaint, claim, charge, suit, proceeding or other action of any kind with respect to any Company Benefit Plan or ERISA Affiliate Plan (other than a routine claim for benefits in accordance with such Company Benefit Plan’s or ERISA Affiliate Plan’s claims procedures and that have not resulted in any litigation) or (ii) proceeding, examination, audit, inquiry, investigation, citation, or other action of any kind in or before any Governmental Body with respect to any Company Benefit Plan or ERISA Affiliate Plan and there exists no state of facts that after notice or lapse of time or both reasonably could be expected to give rise to any such claim, investigation, examination, audit or other proceeding or to affect the registration of any Company Benefit Plan or ERISA Affiliate Plan required to be registered. All benefit claims will be paid in accordance with Applicable Benefit Laws and the terms of the applicable Company Benefit Plan or ERISA Affiliate Plan.

(h) All contributions and premium payments (including all employer contributions and employee salary reduction contributions) that are due with respect to each Company Benefit Plan have been made within the time periods prescribed by ERISA and the Code, and all contributions and premium payments for any period ending on or before the Closing Date that are an obligation of the Company and not yet due have either been made to such Company Benefit Plan, or have been accrued on the Company’s financial statements delivered to Parent.

(i) With respect to each Company Benefit Plan that is an employee welfare benefit plan (within the meaning of Section 3(1) of ERISA), all claims incurred by the Company are (i) insured pursuant to a contract of insurance whereby the insurance company bears any risk of loss with respect to such claims, (ii) covered under a contract with a health maintenance organization (an “HMO”), pursuant to which the HMO bears the liability for claims, or (iii) reflected as a liability or accrued for on the Company’s financial statements delivered to Parent. Except as set forth on Part 2.17(i) of the Company Disclosure Schedule, no Company Benefit Plan provides or has ever provided benefits, including death, medical or health benefits (whether or not insured), after an Employee’s termination of employment, and the Company does not have any liabilities (contingent or otherwise) with respect thereto other than (A) continuation coverage required pursuant to Section 4980B of the Code and Part 6 of Title I of ERISA, and the regulations thereunder, and any other Applicable Benefit Laws, (B) death benefits or retirement benefits under any employee pension benefit plan, (C) deferred compensation benefits, reflected as

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liabilities on the Company’s financial statements delivered to Parent, or (D) benefits the full cost of which is borne by the current or former Employee (or the employee’s beneficiary).

(j) The transactions contemplated by this Agreement will not result (either alone or in combination with any other event) in: (i) any payment of, or increase in, remuneration or benefits, to any Employee, officer, director or consultant of the Company; (ii) any cancellation of indebtedness owed to the Company by any Employee, officer, director or consultant of the Company; (iii) the funding or time of any payment or benefit to any Employee, officer, director or consultant of the Company; or (iv) result in any “parachute payment” within the meaning of Section 280G of the Code (whether or not such payment is considered to be reasonable compensation for services rendered).

(k) The Company has not announced or entered into any plan or binding commitment to (i) create or cause to exist any additional Company Benefit Plan, or (ii) adopt, amend or terminate any Company Benefit Plan, other than any amendment required by Applicable Benefit Laws. Each Company Benefit Plan may be amended or terminated in accordance with its terms without liability to the Surviving Corporation, its Subsidiaries or Parent.

(l) Part 2.17(l) of the Company Disclosure Schedule identifies each Company Benefit Plan that is a “nonqualified deferred compensation plan” within the meaning of Section 409A of the Code and associated Treasury Department guidance, including IRS Notice 2005-1 (each a “NQDC Plan”). With respect to each NQDC Plan, it either (A) has been operated in compliance with Code Section 409A since January 1, 2005, or (B) does not provide for the payment of any benefits that have or will be deferred or vested after December 31, 2004 and since October 3, 2004, it has not been “materially modified” within the meaning of Section 409A of the Code and associated Treasury Department guidance, including IRS Notice 2005-1, Q&A 18.

2.18 Employee Matters.

(a) Part 2.18(a)(1) of the Company Disclosure Schedule contains a list of all Employees as of the date hereof and accurately reflects their salaries, any other compensation payable to them (including compensation payable pursuant to bonus, deferred compensation or commission arrangements), their dates of employment and their positions. All of the Employees are “at will” employees. Part 2.18(a)(2) of the Company Disclosure Schedule lists all Employees who are not citizens of the United States and identifies the visa or other similar permit under which such Employee is working and the dates of issuance and expiration of such visa or other similar permit.

(b) Part 2.18(b) of the Company Disclosure Schedule identifies each Employee who, as is not fully available to perform work because of disability or other leave and sets forth the basis of such leave and the anticipated date of return to full service.

(c) Part 2.18(c) of the Company Disclosure Schedule contains a list of all independent contractors used by the Company as of the Agreement Date, specifying the name of the independent contractor, type of labor, fees paid to such independent contractor from January 1, 2009 through April 30, 2009, work location and address. Each independent contractor listed on Part 2.18(c) has the requisite Governmental Authorizations required to provide the services such independent contractor provides to the Company.

(d) The Company is, and has at all times been, in compliance with all applicable Laws and Contracts relating to employment, employment practices, wages, bonuses and terms and conditions of employment, including Laws for job applicants and employee background checks, meal and rest period for Employees, accrual and payment of vacation pay and paid time off, classifying Employees

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as exempt or non-exempt, crediting all non-exempt Employees for all hours worked, deductions from final pay of all terminated Employees and classifying independent contractors.

(e) Except as otherwise provided in this Agreement, the Company has not made any written or verbal commitments to any officer, Employee, former Employee, consultant or independent contractor of the Company with respect to compensation, promotion, retention, termination, severance or similar matter in connection with the transactions contemplated hereby or otherwise.

(f) There are no employment related claims or charges, including federal or state or other claims based on sex, sexual or other harassment, age, disability, race or other discrimination or retaliation or common law claims, including claims of wrongful termination, by any current or former Employee; and no charges of discrimination in employment or employment practices, for any reason, are pending against the Company before the United States Equal Employment Opportunity Commission, or any other Governmental Body; and, to the Knowledge of the Company, no such claims or charges are threatened.

(g) As of the Effective Time, any bonus owed to any Employee or former Employee pursuant to any bonus arrangement, including, without limitation, any bonus payable as a result of the Merger and any Taxes related thereto, shall have been paid without Liability or obligation to the Company, the Surviving Corporation, Parent or any of its Affiliates after the Effective Time.

2.19 Insurance. Part 2.19 of the Company Disclosure Schedule sets forth a true, complete and accurate list of all insurance policies and fidelity bonds for the current policy year relating to the Company and its respective Employees, officers and directors, and the Company has delivered to Parent accurate and complete copies of the insurance policies and fidelity bonds identified on Part 2.19 of the Company Disclosure Schedule. The Company maintains, and has maintained, without interruption during its existence, policies of insurance covering such risk and events, including personal injury, property damage and general liability, in amounts that are adequate, in light of prevailing industry practices, for its business and operations. The Company has not received notice of termination or cancellation of any such policy. The Company has not reached or exceeded its policy limits for any insurance policy in effect at any time during the past five (5) years. All premiums required to be paid with respect thereto covering all periods up to and including the Effective Time have been or will be paid in a timely fashion and there has been no lapse in coverage under such policies or failure of payment that will cause coverage to lapse during any period for which the Company has conducted its operations. The Company does not have any material obligation for retrospective premiums for any period prior to the Effective Time. All such policies are in full force and effect and will remain in full force and effect up to and including the Effective Time, unless replaced with comparable insurance policies having comparable or more favorable terms and conditions. No insurer has put the Company on notice that coverage will be denied with respect to any claim submitted to such insurer by the Company. There are no material claims by the Company pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds or in respect of which such underwriters have reserved their rights.

2.20 Legal Proceedings; Orders.

(a) There is no pending Legal Proceeding, and to the Knowledge of the Company, no Person has threatened to commence any Legal Proceeding that: (i) involves the Company or any of the assets owned, used or controlled by the Company or any Person whose liability the Company has or may have retained or assumed, either contractually or by operation of law, or (ii) challenges, or that may have the effect of preventing, delaying, making illegal or otherwise interfering with, the Merger or any of the other transactions contemplated by this Agreement or any of the Related Agreements. To the

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Company’s Knowledge, no event has occurred, and no claim, dispute or other condition or circumstance exists, that will, or that could reasonably be expected to, give rise to or serve as a basis for the commencement of any such Legal Proceeding.

(b) No Legal Proceeding has ever been commenced by or has ever been pending against the Company that has not been fully adjudicated or settled prior to the Agreement Date. The Company has delivered to Parent accurate and complete copies of all pleadings, correspondence and other written materials to which the Company has access and that relate to any Legal Proceeding identified in the Company Disclosure Schedule.

(c) There is no order, writ, injunction, judgment or decree to which the Company, or any of the assets owned or used by the Company, is subject. To the Knowledge of the Company, no officer or other Employee is subject to any order, writ, injunction, judgment or decree that prohibits such officer or other Employee from engaging in or continuing any conduct, activity or practice relating to the business of the Company. To the Knowledge of the Company, there is no proposed order, writ, injunction, judgment or decree that, if issued or otherwise put into effect (i) could have an adverse effect on the Company’s business, condition, assets, Liabilities, operations, financial performance, net income or prospects or on the ability of the Company or any of its stockholders to comply with or perform any covenant or obligation under this Agreement or any of the Related Agreements; or (ii) could have the effect of preventing, delaying, making illegal or otherwise interfering with the Merger or any of the transactions contemplated under this Agreement.

2.21 Finder’s Fee. No broker, finder, investment banker, valuation firm or any other Person is entitled to any brokerage, finder’s or other fee or commission in connection with this Agreement or any of the other transactions contemplated hereby based upon arrangements made by or on behalf of the Company, or officer, member, director or employee of the Company, or any Affiliate of the Company.

2.22 Company Action.

(a) The board of directors of the Company (at a meeting duly called and held in accordance with the Company Constituent Documents) has (i) unanimously determined that the Merger is advisable and in the best interests of the Company and its stockholders, (ii) determined that the consideration to be paid for each outstanding share of Company Common Stock in the Merger is fair to and in the best interests of the Company and its stockholders, (iii) unanimously recommended that the stockholders of the Company adopt and approve this Agreement and the Escrow Agreement and the transactions contemplated hereby and thereby; and (iii) directed that this Agreement be submitted for a vote by written consent of the stockholders.

(b) The affirmative vote of holders of a majority of the outstanding shares of Company Common Stock in favor of adopting this Agreement is the only vote of the holders of any class or series of the Company’s capital stock necessary under all applicable Laws, the Company Constituent Documents and Company Contracts to approve or adopt this Agreement and the Escrow Agreement and otherwise approve the Merger or any transaction contemplated by this Agreement.

2.23 Full Disclosure.

(a) Neither this Agreement nor the Company Disclosure Schedule (i) contains any representation, warranty or information that is false or misleading with respect to any material fact, or (ii) omits to state any material fact necessary in order to make the representations, warranties and information contained herein and therein, in the light of the circumstances under which such representations, warranties and information were or will be made or provided, not false or misleading.

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(b) The information supplied by the Company for inclusion in the Information Statement (as defined below), will not, as of the date of the Information Statement or as of the effective date of the Stockholder Written Consent, (i) contain any statement that is inaccurate or misleading, in light of the circumstances under which they were made, with respect to any material facts; or (ii) omit to state any material fact necessary in order to make such information, in light of the circumstances under which they were made, not false or misleading.

SECTION 3.

REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB

Parent and Merger Sub represent and warrant to the Company as follows, as of the Agreement Date and as of the Closing Date:

3.1 Corporate Existence and Power. Each of Parent and Merger Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has all corporate power required to conduct its business as now conducted, and is duly qualified to do business and is in good standing in each jurisdiction in which the conduct of its business or the ownership or leasing of its properties requires such qualification, except where the failure to be so qualified would not have a material adverse effect on Parent’s business, financial condition or results of operations.

3.2 Authority; Binding Nature of Agreement. Parent and Merger Sub have the corporate right, power and authority to perform their obligations under this Agreement and under each Related Agreement to which either of them is a party; and the execution, delivery and performance by Parent and Merger Sub of this Agreement and each Related Agreement to which either of them is a party have been duly authorized by all necessary action, including all necessary action on the part of Parent and Merger Sub and their respective boards of directors. No vote of Parent’s stockholders is needed to adopt this Agreement or approve the Merger. This Agreement and each Related Agreement to which either of them is a party has been duly and validly executed and delivered by Parent and Merger Sub and constitutes the legal, valid and binding obligation of Parent or Merger Sub, as applicable, enforceable against Parent or Merger Sub, as applicable, in accordance with its terms, subject to (a) laws of general application relating to bankruptcy, insolvency and the relief of debtors; and (b) rules of law governing specific performance, injunctive relief and other equitable remedies.

3.3 No Conflict; Consents. The execution and delivery by Parent and Merger Sub of this Agreement and of each Related Agreement to which either of them is a party and the consummation of the transactions contemplated hereby and thereby by Parent and Merger Sub (a) are not prohibited by, and will not violate or conflict with, any provision of the formation documents of Parent or Merger Sub; and (b) are not prohibited by, and will not violate any Laws applicable to Parent, except for any anti-trust laws or comparable Laws related to concentration of business activities, competition or similar matters. Except for the filing of the Certificate of Merger, no filing with, notice to or Consent from any Person is required in connection with (i) the execution, delivery or performance of this Agreement or any Related Agreement by Parent or Merger Sub; or (ii) the consummation of the Merger or any of the other transactions contemplated by this Agreement or any Related Agreement.

3.4 Operations of Merger Sub. Merger Sub was formed solely for the purpose of engaging in the transactions contemplated by this Agreement, has engaged in no other business activities, and has conducted its operations only as contemplated by this Agreement. Merger Sub is a wholly-owned Subsidiary of the Parent.

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SECTION 4.

CERTAIN COVENANTS AND AGREEMENTS

4.1 Access and Investigation. During the period from the Agreement Date through the earlier of the Closing Date or the termination of this Agreement pursuant to Section 7 (the “Pre-Closing Period”), the Company shall, and shall cause its Affiliates and Representatives to: (a) provide Parent and Parent’s Representatives with reasonable access to the Company’s Representatives, personnel, properties and assets and to all existing books, records, Tax Returns, work papers and other documents and information relating to the Company and (b) provide Parent and Parent’s Representatives with copies of such books, records, Tax Returns, work papers and other documents and information and with such additional financial, operating and other data and information regarding the Company as Parent may reasonably request.

4.2 Operation of the Company’s Business.

(a) During the Pre-Closing Period, the Company shall: (i) use its reasonable best efforts to ensure that the Company conducts its business and operations (A) in the ordinary course and (B) in compliance with all applicable Laws and the requirements of all Company Contracts (including the Development Agreement) and Governmental Authorizations held by the Company; (ii) use its reasonable best efforts to ensure that the Company preserves intact its current business organization, keeps available the services of its current officers and Employees and maintains its relations and goodwill with all suppliers, customers, landlords, creditors, licensors, licensees, Employees and other Persons having business relationships with the Company; (iii) provide all notices, assurances and support required by any Company IP Contract in order to ensure that no condition under such Contract occurs which would reasonably be expected to result in any transfer or disclosure by the Company of any Intellectual Property Right other than in connection with the Development Agreement; and (iv) use its reasonable best efforts to keep in full force and effect (with the same scope and limits of coverage) all insurance policies in effect as of the Agreement Date covering all material assets of the Company. Neither the Company nor any Representative of the Company shall make any communication to Employees regarding any 401(k), group health, life insurance, disability, accidental death and dismemberment insurance or employee stock purchase plan or any other Employee Benefit Plan maintained or to be maintained by Parent or any of its Affiliates or any compensation or benefits to be provided after the Closing Date without the prior written approval of Parent.

(b) During the Pre-Closing Period, the Company shall not (without the prior written consent of Parent) except as expressly set forth on the Company Disclosure Schedule as of the Agreement Date:

(i) declare, accrue, set aside or pay any dividend or make any other distribution in respect of any shares of capital stock or repurchase, redeem or otherwise reacquire any shares of capital stock or other securities, except repurchases of unvested shares at cost in connection with the termination of the employment or consulting relationship with any Employee or consultant pursuant to stock option or purchase agreements;

(ii) amend or permit the adoption of any amendment to the Company’s Certificate of Incorporation or Bylaws, or effect, become a party to or authorize any Strategic Transaction, recapitalization, reclassification of shares, stock split, reverse stock split or similar transaction;

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(iii) except as required by applicable Laws, adopt or enter into any collective bargaining agreement or other labor union Contract applicable to the Employees;

(iv) adopt a plan of complete or partial liquidation or dissolution or resolutions providing for or authorizing such a liquidation or a dissolution;

(v) acquire any equity interest or other interest in any other Entity;

(vi) make any capital expenditure (a) outside the ordinary course of business, (b) that is between $250,000 and $500,000 unless the Company gives prior written notice thereof to Parent or (c) in an amount exceeding $500,000 in a particular instance (together with any related capital expenditure) unless such capital expenditure was contained in a capital expenditures budget created by the Company approved by Parent in writing prior to making such capital expenditure;

(vii) guarantee any indebtedness of another Person, guarantee any debt securities of another Person, enter into any “keep well” or other agreement to maintain any financial statement condition of another Person or enter into any arrangement having the economic effect of any of the foregoing;

(viii) grant, create, incur or suffer to exist any Encumbrance on the assets of the Company that did not exist on the date hereof or write down the value of any asset or investment on the books or records of the Company, except for depreciation and amortization in the ordinary course of business;

(ix) make any loans, advances or capital contributions to, or investments in, any other Person (other than to an operating Subsidiary of the Company);

(x) except as required by GAAP or applicable Laws, change its fiscal year, revalue any of its material assets or make any changes in financial or tax accounting methods, principles or practices;

(xi) make any material Tax election;

(xii) transfer any assets or Liabilities between the Company and any of its Affiliates (other than an operating Subsidiary of the Company);

(xiii) authorize, agree, commit or enter into any Contract to take any of the actions described in clauses “(i)” through “(xii)” of this Section 4.2(b).

4.3 Notification. During the Pre-Closing Period, the Company shall promptly notify Parent in writing if the Company has Knowledge of:

(i) any event, condition, fact or circumstance that occurred or existed on or prior to the Agreement Date and that caused or constitutes an inaccuracy in or breach of any representation or warranty made by the Company in this Agreement;

(ii) any event, condition, fact or circumstance that occurs, arises or exists after the Agreement Date and that would cause or constitute an inaccuracy in or breach of any representation or warranty made by the Company in this Agreement if (A) such representation or warranty had been made as of the time of the occurrence, existence or discovery of such event, condition,

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fact or circumstance, or (B) such event, condition, fact or circumstance had occurred, arisen or existed on or prior to the Agreement Date

(iii) any breach of any covenant or obligation of the Company;

(iv) any event, condition, fact or circumstance that is likely to make the timely satisfaction of any condition set forth in Section 5 or Section 6 impossible or unlikely or that has had or could reasonably be expected to have a Company Material Adverse Effect; or

(v) (A) any notice or other communication from any Person alleging that the consent or approval of such Person is or may be required in connection with the transactions contemplated by this Agreement and (B) any Legal Proceeding or material claim threatened, commenced or asserted against or with respect to the Company or the transactions contemplated by this Agreement.

Notification given to Parent pursuant to this Section 4.3 shall not limit or otherwise affect any of the representations, warranties, covenants or obligations of the Company, or any of the rights of Parent, contained in this Agreement.

4.4 Update to Disclosure Schedule.

(a) As promptly as practicable following each fiscal quarter prior to the Closing Date, the Company shall deliver to Parent an updated Company Disclosure Schedule specifying any change to the Company Disclosure Schedule resulting from (i) any event, condition, fact or circumstance that is required to be disclosed pursuant to Section 4.3, (ii) any event, condition, fact or circumstance that would require such a change assuming the Company Disclosure Schedule were dated as of the date of the occurrence, existence or discovery of such event, condition, fact or circumstance. To the extent requested by Parent, the Company and the securityholders of the Company shall cooperate in providing to Parent all information reasonably requested by Parent so that it can adequately evaluate the disclosures contained on any updated Company Disclosure Schedule delivered to Parent pursuant to this Section 4.4(a).

(b) The Company shall, within ten (10) Business Days of receiving a Notice of Exercise from Parent, prepare and deliver to Parent an updated Company Disclosure Schedule prepared in accordance with Section 4.4(a). To the extent reasonably requested by Parent, the Company and the securityholders of the Company shall cooperate in providing to Parent all information reasonably requested by Parent so that it can adequately evaluate the disclosures contained on the updated Company Disclosure Schedule delivered to Parent pursuant to this Section 4.4(b).

(c) It is expressly understood that the delivery of any notice pursuant to Section 4.3 or of any updated version of the Company Disclosure Schedule pursuant to this Section 4.4 shall not limit or otherwise affect the remedies available hereunder to Parent, and such notice or updated version of the Company Disclosure Schedule shall not be considered for purposes of determining whether the condition set forth in Section 5.1 has been satisfied or in determining whether any representation or warranty has been breached or is inaccurate for purposes of Section 8.2(a)(i) unless consented to in writing by Parent, which consent may be withheld by Parent in its sole and absolute discretion, and such determinations shall be made based solely on the Company Disclosure Schedule delivered to Parent on the Agreement Date.

4.5 No Negotiation.

(a) Until the earlier of the Closing or the termination of this Agreement pursuant to Section 7, the Company shall not directly or indirectly, and shall not authorize or permit any Affiliate,

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Subsidiary or Representative of the Company or any Representative of any such Affiliate, Subsidiary or Representative, directly or indirectly to, (i) solicit, initiate, encourage, induce or facilitate the making, initiation, submission or announcement of any expression of interest or inquiry or the making of any proposal or offer from any Person (other than Parent) relating to a possible Strategic Transaction (an “Acquisition Proposal”) or take any action that could reasonably be expected to lead to an Acquisition Proposal, (ii) furnish any non-public information regarding the Company to any Person in connection with or in response to an Acquisition Proposal or an inquiry or expression of interest that could reasonably be expected to lead to an Acquisition Proposal, (iii) engage in discussions or negotiations with any Person with respect to a potential Acquisition Proposal or an Acquisition Proposal, or (iv) entertain, consider or accept any Acquisition Proposal. Without limiting the generality of the foregoing, the Company acknowledges and agrees that any violation of or the taking of any action inconsistent with any of the restrictions set forth in the preceding sentence by any Representative of the Company, whether or not such Representative is purporting to act on behalf of the Company, shall be deemed to constitute a breach of this Section 4.5 by the Company.

(b) The Company shall promptly (and in no event later than twenty-four (24) hours after receipt by the Company, or by any Affiliate, Subsidiary or Representative of the Company or any Representative of any such Affiliate, Subsidiary or Representative, of any Acquisition Proposal or any inquiry or expression of interest that could lead to an Acquisition Proposal or any request for nonpublic information) advise Parent orally and in writing of any Acquisition Proposal, any inquiry or expression of interest that could lead to an Acquisition Proposal or any request for nonpublic information relating to the Company (including the identity of the Person making or submitting such Acquisition Proposal, inquiry, expression of interest or request, and the terms thereof) that is made or submitted by any Person during the Pre-Closing Period. The Company shall keep Parent fully informed with respect to the status of any such Acquisition Proposal, inquiry, indication of interest or request and any modification or proposed modification thereto.

(c) The Company shall immediately cease, and shall cause each of its Affiliates, Subsidiaries and Representatives and the Representatives of any such Affiliate, Subsidiary or Representative to cease, and cause to be terminated any existing discussions with any Person (other than Parent) that relate to any Acquisition Proposal.

4.6 Financials. The Company shall use its best efforts to deliver to Parent periodic financial reports in the form that it customarily prepares for its internal purposes and, if available, unaudited statements of the financial position of the Company as of the last day of such calendar month and statements of income and changes in financial position of the Company for the calendar month then ended, in each case within seven (7) days following the end of such calendar month; provided that such reports and statements shall be delivered to Parent by no later than fourteen (14) days following the end of such calendar month. The Company covenants that such interim statements (i) shall present fairly the financial condition of the Company as of their respective dates and the related results of its operations for the respective calendar month then ended and (ii) shall be prepared on a basis consistent with prior interim periods. Upon sixty (60) days’ advance written notice by Parent to the Company, the Company shall provide Parent with Unaudited Financial Statements for the latest fiscal quarter completed by the Company prior to the delivery of such notice, and for each fiscal quarter thereafter, provided that in either event if such fiscal quarter is the fourth quarter of a fiscal year of the Company (each, a “Fourth Fiscal Quarter”), then in lieu of providing Unaudited Financial Statements for such Fourth Fiscal Quarter, the Company shall provide Parent with Audited Financial Statements for the full fiscal year of which such Fourth Fiscal Quarter is a part. For purposes of this Section 4.6, (a) “Audited Financial Statements” shall include a balance sheet and the related statements of operation, changes in stockholders’ equity and cash flows and any required footnotes and such other disclosure materials, in each case, to the extent required to be included under rules and regulations of the SEC, prepared in accordance with GAAP, and in

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compliance with Regulation S-X and the General Rules and Regulations of the Exchange Act, and (b) “Unaudited Financial Statements” shall include a balance sheet and the related statements of operation, changes in stockholders’ equity and cash flows and any required footnotes and such other disclosure materials, in each case, to the extent required to be included under rules and regulations of the SEC, prepared in accordance with GAAP, and in compliance with Regulation S-X and the General Rules and Regulations of the Exchange Act. Parent shall have the right to select the Company’s independent auditors and shall pay the fees and expenses of the auditors of the Audited Financial Statements.

4.7 Employee Matters.

(a) No later than the day prior to the Closing, if and as requested by Parent, the Company shall terminate, or cause to be terminated, certain or all of the Company Benefit Plans and shall ensure that no current or former Employee has any rights under such Company Benefit Plans and that any Liabilities of the Company under such Company Benefit Plans (including any such Liabilities relating to services performed prior to the Closing) are fully extinguished at no cost to the Company, the Surviving Corporation, Parent or its Affiliates.

(b) Without the prior written consent of Parent, the Company shall not (i) adopt or amend any form of equity incentive or related plan, or any form of award or grant agreement used thereunder, pursuant to which any Person is eligible to receive equity of the Company, or (ii) enter into an employment or related agreement with any Person which provides for the grant of any equity award to such Person pursuant to any Company equity plan or agreement, the forms of which have not been approved by Parent in writing.

(c) Parent shall take such actions as are necessary to provide each Employee of the Company and its Subsidiaries with credit for service for the Company for purposes of vesting, eligibility, and participation and level of benefits (but not benefit accruals under any defined benefit plan) under any benefit plan or arrangement of Parent or an Affiliate thereof in which such Employee of the Company or a Subsidiary thereof participates on or after the Closing in the same manner as if such service had been service for the Parent or its Affiliate; provided, however, that no such credit shall be required to the extent that such credit would result in a duplication of benefits for the same period of service; and provided further that Parent shall have no obligation to hire or employ any Employee of the Company.

(d) Subject to the requirements of applicable Law, Parent shall take such actions as are necessary to cause the group health plan(s) maintained by Parent or any of its Affiliates, and applicable insurance carriers, third party administrators and any other third parties, to the extent such group health plan(s) is made available to employees of the Company and its Subsidiaries, to (i) waive any evidence of insurability requirements, waiting periods, and any limitations as to preexisting medical conditions under the group health plan applicable to employees of the Company and its Subsidiaries and their spouses and eligible dependents (but only to the extent that such preexisting condition limitations did not apply or were satisfied under the group health plan maintained by the Company or its affiliates prior to the Closing) and (ii) provide employees of the Company and its Subsidiaries with credit, for the calendar year in which the Closing occurs, for the amount of any out-of pocket expenses and co-payments or deductible expenses that are incurred by them during the calendar year in which the Closing occurs under a group health plan maintained by the Parent or any of its Affiliates; provided that Parent shall have no obligation to hire or employ any Employee of the Company.

(e) Parent shall take such commercially reasonable efforts as are necessary to cause a retirement plan maintained by it or one of its Affiliates that is qualified under Section 401(a) of the Code to accept direct and indirect rollover distributions, by the employees of the Company and its Subsidiaries who continue employment following the Closing, of account balances maintained by them under an

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employee plan that is intended to be a tax qualified plan under Section 401(a) of the Code, including promissory notes evidencing outstanding plan loans (if any), all to the extent that the Parent reasonably determines that doing so will not result in a risk of plan disqualification or other potential liability to Parent or its Affiliates.

4.8 Calculation of Consideration. Prior to the Effective Time, the Company shall provide to Parent for review (a) an update to Section 2.5 of this Agreement reflecting the capitalization of the Company as of immediately prior to the Effective Time, (b) a detailed list setting forth (i) the name of each holder of Company Common Stock, vested Company Options and unvested Company Options, as well as the number of shares of Company Common Stock subject thereto as of immediately prior to the Effective Time and the respective exercise price of each Company Option, and (ii) the amount of the Closing Per Share Consideration to which each holder of Company Common Stock is entitled to pursuant to this Agreement (the “Closing Capitalization Certificate”).

4.9 Public Announcements. During the Pre-Closing Period, (a) the Company shall not (and the Company shall not permit any of its Representatives to) issue any press release or make any public statement regarding this Agreement, or regarding any of the transactions contemplated by this Agreement, without Parent’s prior written consent, and (b) Parent will use reasonable efforts to consult with the Stockholders’ Representative prior to issuing any press release or making any public statement regarding the transactions contemplated by this Agreement; provided, however, that nothing herein shall be deemed to prohibit Parent from making any public disclosure that Parent deems necessary or appropriate under applicable Law; provided, further, without the prior written consent of Parent, the Company shall not at any time disclose to any Person who is not a party to a written non-disclosure agreement with the Company the form of which has been provided to, and approved in writing by, Parent the fact that this Agreement has been entered into or any of the terms of this Agreement other than to (i) such parties’ advisors who the Company reasonably determines needs to know such information for the purpose of advising the Company, and (ii) any Person receiving (or being considered to receive) any shares of Company Common Stock and/or a Company Option during the Pre-Closing Period, it being understood that such advisors and/or Persons receiving Company Common Stock and/or Company Options will be informed of the confidential nature of this Agreement and the terms of this Agreement and will be directed to treat such information as confidential in accordance with the terms of this Agreement.

4.10 Reasonable Efforts; Further Assurances; Cooperation. Subject to the other provisions hereof, each party shall use its reasonable, good faith efforts to perform its obligations hereunder and to take, or cause to be taken, and do, or cause to be done, all things necessary, proper or advisable under applicable Law to cause the transactions contemplated herein to be effected in accordance with either (a) Section 1.1 or (b) Section 1.2 and Section 1.3, but in any event on or prior to the Final Termination Date (as defined herein), in accordance with the terms hereof and shall cooperate fully with each other party and its Representatives in connection with any step required to be taken as a part of its obligations hereunder, including the following:

(a) Each party shall promptly make its filings and submissions and shall take all actions necessary, proper or advisable under applicable Laws to obtain any required approval of any Governmental Body with jurisdiction over the transactions contemplated hereby (except that Parent shall have no obligation to take or consent to the taking of any action required by any such Governmental Body that could adversely affect the business or assets of the Company or the transactions contemplated by this Agreement or any Related Agreement). The Company shall furnish to Parent all information required for any application or other filing to be made by the Company pursuant to any applicable Law in connection with the transactions contemplated hereby;

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(b) Each party shall promptly notify the other parties of (and provide written copies of) any communications from or with any Governmental Body in connection with the transactions contemplated hereby;

(c) In the event any claim, action, suit, investigation or other proceeding by any Governmental Body or other Person is commenced that questions the validity or legality of the transactions contemplated hereby or seeks damages in connection therewith, the parties shall (i) cooperate and use all reasonable efforts to defend against such claim, action, suit, investigation or other proceeding, (ii) in the event an injunction or other order is issued in any such action, suit or other proceeding, use all reasonable efforts to have such injunction or other order lifted, and (iii) cooperate reasonably regarding any other impediment to the consummation of the transactions contemplated hereby; and

(d) The Company shall give all notices to third parties and use its best efforts (in consultation with Parent) to obtain all third-party Consents (i) necessary, proper or advisable to consummate the transactions contemplated hereby, (ii) required to be given or obtained, whether prior to, on or following the Closing Date, or (iii) required to prevent a Company Material Adverse Effect.

4.11 Antitrust Approvals.

(a) Without limiting the generality of Section 4.10, the Company and Parent shall, promptly after it is determined by the parties that such notifications are required, prepare and file the notifications, if any, required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), in connection with the transactions contemplated hereunder. The Company and Parent shall respond as promptly as practicable to (i) any inquiries or requests received from the Federal Trade Commission or the Department of Justice for additional information or documentation, and (ii) any inquiries or requests received from any state attorney general or other Governmental Body in connection with antitrust or related matters. Each of the Company and Parent shall (a) give the other party prompt notice of the commencement of any Legal Proceeding by or before any Governmental Body with respect to the transactions contemplated by this Agreement, (b) keep the other party informed as to the status of any Legal Proceeding, and (c) promptly inform the other party of any communication to or from the Federal Trade Commission, the Department of Justice or any other Governmental Body regarding the transactions contemplated hereunder. The Company and Parent will consult and cooperate with one another, and will consider in good faith the views of one another, in connection with any analysis, appearance, presentation, memorandum, brief, argument, opinion or proposal made or submitted in connection with any Legal Proceeding under or relating to the HSR Act or any other federal or state antitrust or fair trade law. In addition, except as may be prohibited by the HSR Act or any Governmental Body or by any Law, in connection with any Legal Proceeding under or relating to any other federal or state antitrust or fair trade law or any other similar Legal Proceeding, each of the Company and Parent agrees to permit authorized Representatives of the other party to be present at each meeting or conference relating to any such Legal Proceeding and to have access to and be consulted in connection with any document, opinion or proposal made or submitted to any Governmental Body in connection with any such Legal Proceeding.

(b) Notwithstanding anything to the contrary contained in this Agreement, neither Parent nor any of its Subsidiaries shall have any obligation under this Agreement to do any of the following (or cause the other to do any of the following): (i) to dispose, or cause any of its Subsidiaries to, dispose of any assets; (ii) to discontinue, or cause any of its Subsidiaries to discontinue, offering any product; (iii) to license or otherwise make available, or cause any of its Subsidiaries to license or otherwise make available, to any Person, any technology, Software or other Intellectual Property; (iv) to hold separate, or cause any of its Subsidiaries to hold separate, any assets or operations (either before or

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after the Closing Date); or (v) to make, or cause any of its Subsidiaries to make, any commitment (to any Governmental Body or otherwise) regarding its future operations.

4.12 Information Statement. Within fifteen (15) calendar days of the Closing Date, the Company shall prepare and distribute to those holders of Company securities who, as of the Closing Date, have not executed the Stockholder Written Consent, a solicitation statement that will also include an information statement (the “Information Statement”), in compliance with all applicable Laws and the Company Constituent Documents and in a form reasonably satisfactory to Parent, for the purpose of seeking such securityholders’ consent to this Agreement and the Escrow Agreement and to the transactions contemplated hereby. The Company shall use its best efforts to obtain the written consents of such securityholders to this Agreement and the Escrow Agreement and to the transactions contemplated hereby by no later than twenty (20) calendar days after the Closing Date.

4.13 Information Rights. During the Pre-Closing Period, the Company will furnish the following reports to Parent: (i) within five (5) days of the end of each fiscal quarter of the Company, a table reflecting the Company’s current capitalization as of the end of such fiscal quarter; and (ii) at least fifteen (15) days prior to the first day of each fiscal quarter of the Company, commencing with the calendar quarter ending September 30, 2010, a rolling quarterly operating plan for the Company’s next four (4) quarters, including a quarterly budget covering such four (4)-quarter period, in each case in a form mutually agreed upon by the Company and Parent and, prior to the calendar quarter ending September 30, 2010, any quarterly or other operating plan prepared by the Company.

4.14 Proprietary Information and Inventions Agreement. During the Pre-Closing Period, the Company shall ensure that each current Employee, consultant and independent contractor of the Company and any Person who becomes an Employee, consultant or independent contractor of the Company during the Pre-Closing Period who has not executed a proprietary information and inventions agreement with the Company prior to the Agreement Date (which such agreement is in effect as of the Agreement Date) executes a valid and enforceable Proprietary Information and Inventions Agreement, in the form attached hereto as Exhibit 4.14.

4.15 Sale of Shares. The parties hereto acknowledge and agree that the shares of Parent Common Stock, if any, issuable to the Company’s stockholders pursuant to Section 1.8 shall constitute “restricted securities” within the meaning of Rule 144 under the Securities Act. The certificates for such shares of Parent Common Stock shall bear appropriate legends to identify such shares as being restricted under the Securities Act and, if applicable to comply with applicable state securities laws, to notice the restrictions on the transfer of such shares under such laws.

4.16 Blue Sky Laws. Parent shall take such steps as may be necessary to comply with the securities and blue sky laws of all jurisdictions which are applicable to the issuance of the shares of Parent Common Stock pursuant hereto. The Company shall use its best efforts to assist Parent as may be reasonably necessary to comply with the securities and blue sky laws of all jurisdictions which are applicable in connection with the issuance of the shares of Parent Common Stock pursuant hereto.

4.17 Charter Amendment. The Company shall use its best efforts to require, pursuant to the Company’s Certificate of Incorporation, that for such time as Parent shall be entitled to nominate an individual to the Company’s Board of Directors pursuant to the Securityholder Agreement (such Person, the “Parent Designee”), neither the Company’s Board of Directors nor any committee thereof shall consider, approve or disapprove of (i) the commencement of any Legal Proceeding by the Company (ii) the settlement of any Legal Proceeding by the Company if such settlement would impose any covenant on the Company, or (iii) the sale or transfer of any intellectual property of Company, in each case without the consent of the Parent Designee.

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SECTION 5.

CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER SUB

The obligations of Parent and Merger Sub to effect the Merger and otherwise consummate the transactions contemplated by this Agreement are subject to the satisfaction or written waiver by Parent, at or prior to the Closing, of each of the following conditions:

5.1 Accuracy of Representations. Each of the representations and warranties made by the Company set forth on Schedule 5.1 attached hereto shall be true and correct in all respects as of the Agreement Date and as of the Closing, as if made on and as of that time, except for representations and warranties made as of a specific date, which shall remain true and correct in all respects as of such date, except where the failure to be true and correct in all respects has not resulted in a Company Material Adverse Effect. Notwithstanding anything in this Agreement to the contrary, for purposes of this Section 5.1, all of the representations and warranties made by the Company set forth on Schedule 5.1 attached hereto that are qualified as to “material,” “materiality,” “material respects,” “Material Adverse Effect” or words of similar import or effect shall be deemed to have been made without any such qualification for purposes of determining whether each such representation or warranty is or was true and correct in all respects.

5.2 Performance of Covenants. Each of the covenants and obligations set forth herein that the Company are required to comply with or perform at or prior to the Closing shall have been complied with or performed in all material respects.

5.3 Stockholder Approval. This Agreement and the Escrow Agreement shall have been duly approved and adopted by the vote of the stockholders of the Company holding ninety percent (90%) of the issued and outstanding capital stock of the Company and such stockholders shall have signed a joinder agreement to the Securityholder Agreement agreeing to be bound by the terms and conditions thereof.

5.4 Consents. All Consents required to be obtained in connection with the Merger and the other transactions contemplated by this Agreement from any Governmental Body shall have been obtained and shall be in full force and effect.

5.5 HSR Act. The waiting period applicable to the consummation of the Merger under the HSR Act shall have expired or been terminated and any similar waiting period under any applicable foreign antitrust law or regulation shall have expired or been terminated.

5.6 No Derivative or Unvested Securities. There shall be no outstanding equity of the Company other than fully vested Company Common Stock.

5.7 Ancillary Agreements and Documents. Parent shall have received the following agreements and documents, each of which shall be in full force and effect:

(a) a certificate, dated as of the Closing Date, signed on behalf of the Company, by the Chief Executive Officer and the Chief Financial Officer of the Company, in their capacity as officers of the Company and not in their personal capacity (without in any way limiting the rights of the Indemnified Parties relating thereto pursuant to Section 8) representing and warranting after reasonable investigation: (i) that the conditions set forth in Section 5.1 and Section 5.2 have been duly satisfied; and (ii) that each of the representations and warranties made by the Company in this Agreement (a) that are qualified as to “material,” “materiality,” “material respects,” “Material Adverse Effect,” or words of similar import or effect are true and correct in all respects as of the Agreement Date and as of the Closing,

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as if made on and as of that time, except for representations and warranties made as of a specific date, which are true and correct as of such date, and (b) that are not so qualified by materiality are true and correct in all material respects as of the Agreement Date and as of the Closing, as if made on and as of that time, except for representations and warranties made as of a specific date, which are true and correct in all material respects as of such date, except for each such representation and warranty listed in such certificate (the “Company Compliance Certificate”);

(b) written resignations of the directors of the Company other than the director designated by AMCC, effective as of the Effective Time;

(c) the Escrow Agreement, executed by the Stockholders’ Representative and the Escrow Agent;

(d) a certificate, dated as of the Closing Date, signed on behalf of the Company by the Chief Executive Officer and the Chief Financial Officer of the Company, in their capacity as officers of the Company and not in their personal capacity (without in any way limiting the rights of the Indemnifies Parties relating thereto pursuant to Section 8) certifying, (i) the accuracy as of the Effective Time of the Closing Capitalization Certificate delivered pursuant to Section 4.8; (ii) the Transaction Expenses as of the Effective Time; and (iii) the Tax withholding information delivered pursuant to Section 1.11(f); and

(e) a certificate of good standing of the Company in its jurisdiction of incorporation and in each other jurisdiction where it is qualified to do business.

5.8 No Restraints. No temporary restraining order, preliminary or permanent injunction or other Order preventing the consummation of the Merger shall have been issued by any Governmental Body, and there shall not be any Law enacted or deemed applicable to the Merger that prevents or makes consummation of the Merger illegal.

5.9 No Litigation. There shall not be pending or threatened any Legal Proceeding in which a Governmental Body is or is threatened to become a party or is otherwise involved, and neither Parent nor the Company shall have received any communication from any Governmental Body in which such Governmental Body indicates the possibility of commencing any Legal Proceeding or taking any other action challenging or seeking to restrain or prohibit the consummation of the Merger or any of the other transactions contemplated by this Agreement or the Related Agreements.

5.10 Termination of Company Benefit Plans. As requested by Parent pursuant to Section 4.7(a), the Company shall have delivered (a) a true, correct and complete copy of resolutions adopted by the board of directors of the Company authorizing the termination of each of the Company Benefit Plans, including the Company’s 401(k) Plan, (b) an amendment to the Company’s 401(k) Plan, executed by the Company, that is sufficient to assure compliance with all applicable requirements of the Code and regulations thereunder so that the tax-qualified status of the Company’s 401(k) Plan shall be maintained at the time of its termination and (c) evidence reasonably satisfactory to Parent to ensure that no Employee or former Employee has any right under such plans and that all Liabilities of the Company under the Company Benefit Plans (including any Liabilities relating to services performed prior to the Closing) are fully extinguished at no cost, and with no liability, to the Surviving Corporation.

5.11 Liabilities. As of immediately prior to the Closing, the Company’s aggregate Liabilities do not equal or exceed sixty percent (60%) of the Adjusted Total Merger Consideration that would otherwise be payable at the Closing.

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5.12 Breaches of Representations and Warranties. Parent has not delivered a certificate signed by an authorized officer of Parent stating that Parent has determined, in its reasonable discretion, that the Company’s breaches of its representations, warranties and covenants set forth in this Agreement has resulted in, or could reasonably be expected to result in, Losses equal to or exceeding sixty percent (60%) of the Adjusted Total Merger Consideration that would otherwise be payable at the Closing, which certificate shall include detail Parent reasonably believes supports its determination.

SECTION 6.

CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY

The obligations of the Company to effect the Merger and otherwise consummate the transactions contemplated by this Agreement are subject to the satisfaction (or written waiver by the Company), at or prior to the Closing, of the following conditions:

6.1 Accuracy of Representations. Each of the representations and warranties of Parent and Merger Sub in this Agreement (a) that are qualified as to “Material Adverse Effect,” “material,” “materiality” or any similar qualifying language shall be true and correct in all respects as of the Agreement Date and as of the Closing, as if made anew at and as of that time, except for representations and warranties made as of a specific date, which shall remain true and correct as of such date, and (b) that are not so qualified by materiality shall be true and correct in all material respects as of the Agreement Date and as of the Closing, as if made anew at and as of that time, except for representations and warranties made as of a specific date, which shall remain true and correct in all material respects as of such date.

6.2 Performance of Covenants. Each of the covenants and obligations set forth herein that Parent and Merger Sub are required to comply with or perform at or prior to the Closing shall have been complied with or performed in all material respects.

6.3 Ancillary Agreements and Documents. The Company shall have received the following documents:

(a) a certificate, dated as of the Closing Date, signed by the Chief Executive Officer or Chief Financial Officer of Parent representing and warranting that the conditions set forth in Section 6.1 and Section 6.2 have been duly satisfied; and

(b) an Escrow Agreement in the form of Exhibit 1.13 executed by Parent and the Escrow Agent.

6.4 No Restraints. No temporary restraining order, preliminary or permanent injunction or other Order preventing the consummation of the Merger shall have been issued by any Governmental Body and shall remain in effect, and there shall not be any Law enacted or deemed applicable to the Merger that makes consummation of the Merger illegal.

6.5 No Governmental Litigation. There shall not be pending or threatened any Legal Proceeding in which a Governmental Body is or is threatened to become a party or is otherwise involved, and neither Parent nor the Company shall have received any communication from any Governmental Body in which such Governmental Body indicates the possibility of commencing any Legal Proceeding or taking any other action challenging or seeking to restrain or prohibit the consummation of the Merger or any of the other transactions contemplated by this Agreement or the Related Agreements.

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6.6 HSR Act. The waiting period applicable to the consummation of the Merger under the HSR Act shall have expired or been terminated and any similar waiting period under any applicable foreign antitrust law or regulation shall have expired or been terminated.

SECTION 7.

TERMINATION

7.1 Termination Events. This Agreement may be terminated prior to the Closing, notwithstanding approval of this Agreement by the Company’s stockholders in accordance with the terms hereof:

(a) by mutual written consent of Parent and the Company;

(b) by written notice from Parent to the Company, (i) if there has been a breach of any representation or warranty set forth in Schedule 5.1 attached hereto, except where such breach has not resulted in a Company Material Adverse Effect, or (ii) if there has been a breach of a covenant or agreement by the Company set forth in Section 4.2(b), Section 4.3, Section 4.5, Section 4.10 or Section 4.14, which breach would result in the failure to satisfy one or more of the conditions set forth in Section 5 hereof and such breach shall be incapable of being cured, as reasonably determined by Parent, by the Final Termination Date; provided, however, there shall be no right to terminate if Parent is in material breach of its representations and warranties under this Agreement or has failed in any material respect to perform its obligations under this Agreement;

(c) written notice from the Company to Parent, if there has been a material breach of any representation, warranty, covenant or agreement by Parent which breach would result in the failure to satisfy one or more of the conditions set forth in Section 6 hereof and such breach shall be incapable of being cured, as reasonably determined by the Company, by the Final Termination Date; provided, however, there shall be no right to terminate if the Company is in material breach of its representations and warranties under this Agreement or has failed in any material respect to perform its obligations under this Agreement;

(d) by either Parent or the Company, if there shall be any Law enacted or deemed applicable to the Merger that makes consummation of the Merger illegal, or if any Order by any Governmental Body of competent jurisdiction preventing or prohibiting consummation of the Merger shall have become final and nonappealable; provided, however, that the party seeking to terminate this Agreement pursuant to this Section 7.1(d) must have used all commercially reasonable efforts to remove any such Order prior to the Termination Date;

(e) by Parent, if this Agreement and the Merger shall not have been approved within twenty-four (24) hours from 11:59 p.m. Pacific Time on the Agreement Date by the vote of the stockholders of the Company holding ninety percent (90%) of the issued and outstanding shares of capital stock of the Company immediately prior to the Closing;

(f) by Parent or the Company, if at any time prior to the Closing the Development Agreement is terminated by either party thereto; or

(g) by written notice by the Company to Parent or Parent to the Company, as the case may be, in the event the Closing has not occurred on or prior to […***…] (the “Final Termination Date”) for any reason other than delay or nonperformance of or breach by the party seeking such termination.

41 *Confidential Treatment Requested

7.2 Termination Procedures. If either party wishes to terminate this Agreement pursuant to Section 7.1, it shall deliver to the other party a written notice stating that it is terminating this Agreement and setting forth a brief description of the basis on which it is terminating this Agreement.

7.3 Effect of Termination. In the event of termination of this Agreement pursuant to this Section 7, this Agreement shall forthwith become void and there shall be no liability on the part of any party to this Agreement or its partners, officers, directors or stockholders, except for obligations under Section 4.9 (Public Announcements), Section 9.4 (Fees and Expenses), Section 9.5 (Waiver), Section 9.6 (Amendment), Section 9.9 (Governing Law; Jurisdiction and Venue), Section 9.12 (Notices), Section 9.14 (Remedies Cumulative; Specific Performance), Section 9.15 (Severability) and this Section 7.3, all of which shall survive the Termination Date. Notwithstanding the foregoing, nothing contained herein shall relieve any party from liability for any breach hereof.

SECTION 8.

INDEMNIFICATION

8.1 Survival of Representations, Etc.

(a) The representations and warranties made by the Company in this Agreement, the Company Disclosure Schedule or any other certificate, schedule or instrument delivered or executed in connection with the transactions contemplated hereby (including the representations and warranties set forth in Section 2 and the representations set forth in the Company Compliance Certificate) shall survive the Closing and shall expire at 11:59 p.m. Pacific Time on the final day of the Escrow Period; provided, however, that (i) the representations and warranties of the Company set forth in Section 2.5 (Capitalization) (the “Company Special Representations”) shall survive until the two (2)-year anniversary of the Closing Date; and (ii) if, at any time prior to the expiration of the representations and warranties, any Indemnified Party delivers to the Stockholders’ Representative a written notice alleging the existence of an inaccuracy in or a breach of any of such representations and warranties (and setting forth in reasonable detail the basis for such Indemnified Party’s belief that such an inaccuracy or breach may exist) and asserting a claim for recovery under Section 8.2 based on such alleged inaccuracy or breach, then the representation or warranty underlying the claim asserted in such notice shall survive the end of the Escrow Period solely for the purpose of resolving such claim until such time as such claim is fully and finally resolved. The Company’s disclosure to Parent or Merger Sub of a breach of, or inaccuracy in, any of the representations and warranties made by the Company in this Agreement, the Company Disclosure Schedule or any other certificate, schedule or instrument delivered or executed in connection with the transactions contemplated hereby (including the representations and warranties set forth in Section 2 and the representations set forth in the Company Compliance Certificate), shall in no way limit the survival period of such representations and warranties set forth in the prior sentence of this Section 8.1(a).

(b) All of the covenants, agreements and obligations of the parties contained in this Agreement, the Company Disclosure Schedule or any other document, certificate, schedule or instrument delivered or executed in connection herewith shall survive (A) until fully performed or fulfilled, unless non-compliance with such covenants, agreements or obligations is waived in writing by the party or parties entitled to such performance; or (B) if not fully performed or fulfilled, until the expiration of the relevant statute of limitations. The Company’s disclosure to Parent or Merger Sub of a breach of any covenant, agreement or obligation of the Company contained in this Agreement, the Company Disclosure Schedule or any other document, certificate, schedule or instrument delivered or executed in connection herewith shall in no way limit the survival period of such covenant, agreement or obligation set forth in the first sentence of this Section 8.1(b).

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(c) All representations and warranties made by Parent and Merger Sub shall terminate and expire upon the Closing Date.

(d) The representations, warranties, covenants and obligations of each party, and the rights and remedies that may be exercised by the Indemnified Parties, shall not be limited or otherwise affected by or as a result of any information furnished to, or any investigation made by or knowledge of, any of such parties, other than to the extent set forth in the Company Disclosure Schedule. The parties recognize and agree that the representations and warranties also operate as bargained for promises and risk allocation devices and that, accordingly, any party’s knowledge, and, unless otherwise provided in writing by the parties hereto, the waiver of any condition based on the accuracy of any representation or warranty, or on the performance of or compliance with any covenant or obligation, shall not affect the right to indemnification or payment of Losses pursuant to this Section 8, or other remedy based on any inaccuracy in or breach of such representations, warranties, covenants, and obligations.

(e) For purposes of this Section 8, each statement or other item of information set forth in the Company Disclosure Schedule shall be deemed to be a representation and warranty made by the Company in this Agreement. Notwithstanding anything herein to the contrary, the representations and warranties of the Company contained in this Agreement shall, for the purposes of the indemnifying parties’ obligations pursuant to this Section 8, be deemed to be made as of the Agreement Date and as of the Closing Date (except to the extent any such representation or warranty expressly speaks of an earlier date) without regard to the exceptions set forth in the Company Compliance Certificate or any update to the Company Disclosure Schedule provided after the Agreement Date, but subject to the exceptions set forth in the Company Disclosure Schedule delivered on the Agreement Date.

8.2 Indemnification Obligations of the Stockholders.

(a) From and after the Closing, the Indemnified Parties shall be held harmless and shall be indemnified from and against, and shall be compensated, reimbursed and paid for, any and all Losses which are directly or indirectly suffered or incurred by any Indemnified Party or to which any Indemnified Party may otherwise become subject (regardless of whether or not such Losses relate to any third-party claim) and which arise from or as a result of, or are directly or indirectly connected with:

(i) any inaccuracy in or breach of any representation or warranty of the Company set forth in this Agreement, the Company Compliance Certificate, the Company Disclosure Schedule, or any other document, certificate, schedule or instrument delivered or executed in connection herewith (in each case, without regard to the words “material”, “Material Adverse Effect” or similar materiality qualifiers contained therein), including, but not limited to any inaccuracy in or breach of any representation or warranty of the Company set forth in this Agreement, the Company Compliance Certificate, the Company Disclosure Schedule, or any other document, certificate, schedule or instrument delivered or executed in connection herewith (in each case, without regard to the words “material”, “Material Adverse Effect” or similar materiality qualifiers contained therein) that is disclosed to any Indemnified Party, orally or in writing, at any time at or prior to the Closing, unless otherwise consented to in writing by each of the Indemnified Parties, which consent may be withheld by any such Indemnified Party in its, his or her sole and absolute discretion;

(ii) any breach of any covenant, obligation, agreement or undertaking made by the Company in this Agreement or in any Related Agreement (including, but not limited to, the covenants set forth in Section 4), including, but not limited to any breach of any covenant, obligation, agreement or undertaking made by the Company in this Agreement or in any Related Agreement (including, but not limited to, the covenants set forth in Section 4) that is disclosed to any Indemnified Party, orally or in writing, at any time at or prior to the Closing, unless otherwise consented to in writing

43

by each of the Indemnified Parties, which consent may be withheld by any such Indemnified Party in its, his or her sole and absolute discretion;

(iii) any demands by holders of the Company Common Stock under Section 262 of the DGCL (which shall include without limitation amounts paid to such holders with respect to such demands in excess of the Closing Per Share Consideration payable to holders of the Company’s capital stock pursuant to Section 1 of this Agreement, as well as reasonable attorneys’ fees and expenses incurred in connection with such demands, to the extent payable by the Company);

(iv) the amount of any Transaction Expenses in excess of the amount certified by the Chief Financial Officer of the Company pursuant to Section 5.7(d); and

(v) any Legal Proceeding relating to any matter referred to in clauses “(i)” through “(iv)” above (including any Legal Proceeding commenced by any Indemnified Party for the purpose of enforcing any of its rights under this Section 8).

Notwithstanding anything in this Agreement to the contrary, the Closing shall not be deemed to constitute a waiver of any rights under this Section 8.2(a) by, or on behalf of, any Indemnified Party, for any purpose, with respect to any Losses that arise from or as a result of, or are directly or indirectly connected with any matter set forth under clauses (i) through (v) of which such Indemnified Party had (or may have had) knowledge as of the Closing.

(b) In the event the Surviving Corporation suffers, incurs or otherwise becomes subject to any Losses as a result of or in connection with any inaccuracy in or breach or alleged breach of any representation, warranty, covenant or obligation of the Company, then (without limiting any of the rights of the Surviving Corporation as an Indemnified Party) Parent shall also be deemed, by virtue of its ownership of the stock of the Surviving Corporation, to have incurred Losses as a result of and in connection with such inaccuracy, breach or alleged breach. Notwithstanding anything in this Agreement to the contrary, the Closing shall not be deemed to constitute a waiver of any rights under this Section 8.2(b) by, or on behalf of, any Indemnified Party, for any purpose, with respect to any Losses subject to the foregoing sentence that arise from or as a result of, or are directly or indirectly connected with any matter of which Parent had (or may have had) knowledge as of the Closing.

(c) The Entitled Holders shall not have and shall not exercise or assert (or attempt to exercise or assert), any right of contribution, right of indemnity or other right or remedy against the Surviving Corporation in connection with any indemnification obligation or any liability to which such holders may become subject under or in connection with this Agreement or the Escrow Agreement.

8.3 Offset Against Escrow Fund. In the event any Indemnified Party shall suffer any Losses for which such Indemnified Party is entitled to indemnification under this Section 8, such Indemnified Party shall be entitled to recover such Losses by offsetting the amount of such Losses against (A) any Excess Cash and (B) the Escrow Fund by either (i) obtaining cash out of the Escrow Fund equal to the aggregate amount of the Losses, or (ii) canceling that number of shares of Parent Common Stock held in the Escrow Fund equal in value (as determined in accordance with the terms and conditions of the Escrow Agreement) to the aggregate amount of the Losses, or (iii) a combination of (i) and (ii) (pro-rata to the ratio of the value of the cash and Parent Common Stock held in the Escrow Fund) equal to the aggregate amount of the Losses, and such recovery shall be made from the Escrow Fund on a basis proportional to the Escrow Fund contributed under the Escrow Agreement by or on behalf of each stockholder of the Company. For purposes of determining the value of the shares of Parent Common Stock to be used to reimburse any claim for Losses, the shares of Parent Common Stock shall be valued at the Applicable Parent Share Price.

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8.4 Escrow Sole Remedy.

(a) Subject to Section 8.4(b), if the Merger is consummated, recovery from the Escrow Fund shall be the sole and exclusive remedy under this Agreement for the matters set forth in clauses (i)-(v) of Section 8.2(a), except in the case of fraud or willful breach or intentional misrepresentation by the Company. Nothing in this Agreement shall preclude Parent or the Company from seeking injunctive relief or specific performance with respect to any covenant, agreement or obligation of the Company or Parent contained in this Agreement.

(b) The limits set forth in Section 8.4(a) shall not apply to breaches of the Company Special Representations. In the case of breaches of the Company Special Representations, after the Indemnified Parties have exhausted all amounts in the Escrow Fund, the Indemnified Parties shall be permitted to seek recovery for Losses suffered by the Indemnified Parties directly from the Entitled Holders provided that each Entitled Holder shall be liable, on a several and not joint basis, solely for such Entitled Holder’s pro rata amount of any Losses resulting therefrom.

(c) In no event will an Entitled Holder be liable for any amount in respect of any Losses suffered by any of the Indemnified Parties pursuant to this Agreement in excess of the aggregate value of the consideration actually received by the Entitled Holder pursuant to this Agreement.

(d) Notwithstanding the foregoing, none of the limitations set forth in this Section 8.4 shall apply in the case of fraud or willful breach or intentional misrepresentation by the Company (or an Entitled Holder as applicable).

8.5 Defense of Third Party Claims.

(a) In the event of the assertion or commencement by any Person of any claim or Legal Proceeding (whether against the Surviving Corporation, against Parent or against any other Person) with respect to which any of the Indemnified Parties may be entitled to indemnification or any other remedy pursuant to this Section 8, Parent shall promptly give the Stockholders’ Representatives and the Escrow Agent written notice of such claim or Legal Proceeding (a “Claim”); provided, however, that any failure on the part of Parent to so notify the Stockholders’ Representative shall not limit any of the Indemnified Parties’ rights to indemnification under this Section 8 (except to the extent such failure materially prejudices the defense of such Legal Proceeding).

(b) Within ten (10) days of delivery of written notice pursuant to Section 8.5(a), the Stockholders’ Representative may elect (by written notice delivered to Parent) to take all necessary steps properly to contest any Claim involving third parties or to prosecute such Claim to conclusion or settlement. If the Stockholders’ Representative makes the foregoing election, an Indemnified Party will have the right to participate at its own expense in all proceedings. If the Stockholders’ Representative does not make such election within such period or fails to diligently contest such Claim after such election, then the Indemnified Party shall be free to handle the prosecution or defense of any such Claim, and will take all necessary steps to contest the Claim involving third parties or to prosecute such Claim to conclusion or settlement, and will notify the Stockholders’ Representative of the progress of any such Claim, will permit the Stockholders’ Representatives, at the sole cost of the Stockholders’ Representative, to participate in such prosecution or defense and will provide the Stockholders’ Representative with reasonable access to all relevant information and documentation relating to the Claim and the prosecution or defense thereof.

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(c) Notwithstanding the foregoing, if a Claim includes Losses equal to an amount in excess of the value of the Escrow Fund on the date of the Claim, or relates to Taxes, any Intellectual Property Rights or other Intellectual Property issues, or involves any action by any Governmental Body, Parent shall have the right, at its election, to proceed with the defense of such claim or Legal Proceeding on its own, subject to the information and consultation rights of the Stockholders’ Representative set forth in Section 8.5(b). In any case, the party not in control of the Claim will reasonably cooperate with the other party in the conduct of the prosecution or defense of such Claim.

(d) The Stockholders’ Representative will not compromise or settle any such Claim without the written consent of Parent. Notwithstanding anything in this Agreement to the contrary, Parent may only withhold its consent to any settlement that does not include a full general release of all the claims against any Indemnified Party contemplated by the Claim from all parties to the Legal Proceeding or to a settlement that requires Parent or any of its Affiliates to perform any covenant, take any action or refrain from engaging in any activity or taking any action.

(e) If Parent proceeds with the defense of any such claim or Legal Proceeding and if Parent is entitled to recovery from the Escrow Fund with respect to such claim or Legal Proceedings, then all reasonable expenses relating to the defense of such claim or Legal Proceeding shall be satisfied out of the Escrow Fund in the manner set forth in the Escrow Agreement.

8.6 Exercise of Remedies; Tax Treatment.

(a) No Indemnified Party (other than Parent or any successor thereto or assign thereof) shall be permitted to assert any indemnification claim or exercise any other remedy under this Agreement or under the Escrow Agreement unless Parent (or any successor thereto or assign thereof) shall have consented to the assertion of such indemnification claim or the exercise of such other remedy.

(b) The parties shall report any indemnification payment made pursuant to this Section 8 as a purchase price adjustment unless otherwise required by applicable Laws.

SECTION 9.

MISCELLANEOUS PROVISIONS

9.1 Stockholders’ Representative.

(a) The stockholders of the Company, by approving and adopting this Agreement and the Escrow Agreement and the transactions contemplated hereby and thereby, hereby irrevocably appoint the Stockholders’ Representative as their agent and attorney-in-fact for purposes of Section 8 and the Escrow Agreement, and consent to the taking by the Stockholders’ Representative of any and all actions and the making of any decisions required or permitted to be taken by him under the Escrow Agreement (including, without limitation, the exercise of the power to authorize delivery to the Indemnified Parties of cash or shares of Parent Common Stock, as applicable, out of the Escrow Fund in satisfaction of claims by the Indemnified Parties. The Stockholders’ Representative hereby agrees to negotiate, enter into settlements and compromises of Claims, including third-party Claims, and demand arbitration, and comply with orders of courts and awards of arbitrators with respect to such Claims, resolve any Claim made pursuant to Section 8; and take all actions necessary in the judgment of the Stockholders’ Representative for the accomplishment of the foregoing. Jeffrey Harrell hereby accepts his appointment as the Stockholders’ Representative for purposes of Section 8 and the Escrow Agreement. Parent shall be entitled to deal exclusively with the Stockholders’ Representative on all matters relating to Section 8 and the Escrow Agreement, and shall be entitled to rely conclusively (without further evidence

46

of any kind whatsoever) on any document executed or purported to be executed on behalf of any Company stockholder by the Stockholders’ Representative, and on any other action taken or purported to be taken on behalf of any Company stockholder by the Stockholders’ Representative, as fully binding upon such Company stockholder.

(b) If the Stockholders’ Representative shall die, become disabled or otherwise be unable to fulfill his responsibilities as agent of the stockholders of the Company, then a majority-in-interest of the Entitled Holders (calculated based upon their respective contributions to the Initial Escrow Amount pursuant hereto) shall, within ten (10) days after such death or disability, appoint a successor representative reasonably satisfactory to Parent. Any such successor shall become the “Stockholders’ Representative” for purposes of Section 8, the Escrow Agreement and this Section 9.1.

(c) The Stockholders’ Representative shall not be liable for any act done or omitted hereunder as Stockholders’ Representative while acting in good faith and in the absence of gross negligence. The Entitled Holders on whose behalf cash and/or share of Parent Common Stock were contributed to the Escrow Fund shall severally indemnify Stockholders’ Representative and hold Stockholders’ Representative harmless against any loss, liability or expense incurred without gross negligence, bad faith or willful misconduct on the part of such Stockholders’ Representative and arising out of or in connection with the acceptance or administration of such Stockholders’ Representative’s duties hereunder, including the reasonable fees and expenses of any legal counsel retained by such Stockholders’ Representative, as set forth in Section 9.1(e) below.

(d) The Stockholders’ Representative shall be entitled to rely upon any order, judgment, certificate, demand, notice, instrument or other writing delivered to it hereunder without being required to investigate the validity, accuracy or content thereof nor shall the Stockholders’ Representative be responsible for the validity or sufficiency of this Agreement. In all questions arising under this Agreement, the Stockholders’ Representative may rely on the advice of counsel, and for anything done, omitted or suffered in good faith by the Stockholders’ Representative based on such advice, the Stockholders’ Representative shall not be liable to anyone.

(e) The reasonable expenses incurred by the Stockholders’ Representatives while acting on behalf of the holders of Company Common Stock under the authorization granted in this Section 9.1 shall be borne by the Entitled Holders pro rata and shall be payable out of the Escrow Fund prior to any payment to the Entitled Holders, but in all cases, after payment of any and all amounts owing to Parent.

9.2 Resolution of Technical Disputes. In the event (a) that the Company believes that Parent’s determination of the “Performance Measurement Index,” as set forth in the First Product Consideration Chart, of the First Product was inaccurate, or (b) of any dispute or disagreement between Parent and the Company related to the technical aspects of any milestones or deliverables hereunder, including the measurement thereof, the Company (in the case of clause (a) or (b)), or the Parent (in the case of clause (b)), may request in writing a review of such matter; provided that, in the case of clause (a), the Company shall submit such request within fifteen (15) days of the receipt of Parent’s written determination of the Performance Index Multiplier for the First Product (the “Performance Review Request”). This review shall be conducted by an independent expert having a relevant technical background. The Company and Parent shall meet within five (5) days of the Performance Review Request and attempt to agree upon a technical expert. In the event that Parent and the Company cannot agree within ten (10) days of such meeting, each of Parent and the Company shall submit one (1) expert and such experts shall confer and select a third expert having a relevant technical background as soon as practicable (such person, whether agreed upon by the parties or selected through the process set forth in this sentence, shall be the “Performance Arbitrator”). The Performance Arbitrator will hear each party’s

47

presentation within five (5) days of his or her selection. The Performance Arbitrator will rule within fifteen (15) days following the conclusion of such presentation by the parties. The Performance Arbitrator’s role shall be limited to determining (i) in the case of a matter subject to clause (a) of this Section 9.2, the performance of the First Product and/or the calculation of Performance Index Multiplier, as set forth in the First Product Consideration Chart, and (ii) in the case of a matter subject to clause (b) of this Section 9.2, such technical matter. The determination rendered by the Performance Arbitrator shall be final, binding and non-appealable. The costs of the performance review, including without limitation, fees of the Performance Arbitrator shall be borne equally by the parties.

9.3 Further Assurances. Each party hereto shall execute and cause to be delivered to each other party hereto such instruments and other documents, and shall take such other actions, as such other party may reasonably request (prior to, at or after the Closing) for the purpose of carrying out or evidencing any of the transactions contemplated by this Agreement.

9.4 Fees and Expenses. Each party to this Agreement shall bear and pay all fees, costs and expenses (including legal fees and accounting fees) that have been incurred or that are incurred by such party in connection with the transactions contemplated by this Agreement; provided, however, that any fees incurred by the parties in filing any required notification under the HSR Act shall be borne one-half ( ¹/2) by the Company and one-half ( ¹/2) by Parent.

9.5 Waiver. No failure on the part of any Person to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of any Person in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy and no single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. No Person shall be deemed to have waived any claim arising out of this Agreement, or any power, right, privilege or remedy under this Agreement, unless the waiver of such claim, power, right, privilege or remedy is expressly set forth in a written instrument duly executed and delivered on behalf of such Person; and any such waiver shall not be applicable or have any effect except in the specific instance in which it is given.

9.6 Amendment. This Agreement may not be amended, modified, altered or supplemented other than by means of a written instrument duly executed and delivered on behalf of all the parties hereto.

9.7 Entire Agreement. This Agreement and the Related Agreements set forth the entire understanding of the parties hereto relating to the subject matter hereof and thereof and supersede all prior agreements and understandings among or between any of the parties relating to the subject matter hereof and thereof.

9.8 Execution of Agreement; Counterparts; Electronic Signatures.

(a) This Agreement may be executed in several counterparts, each of which shall be deemed an original and all of which, when taken together, shall constitute one and the same instrument, and shall become effective when counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterparts.

(b) The exchange of copies of this Agreement and of signature pages by facsimile transmission (whether directly from one facsimile device to another by means of a dial-up connection or whether mediated by the worldwide web), by electronic mail in “portable document format” (“.pdf”) form, or by any other electronic means intended to preserve the original graphic and pictorial appearance of a document, or by combination of such means, shall constitute effective execution and delivery of this

48

Agreement as to the parties and may be used in lieu of the original Agreement for all purposes. Signatures of the parties transmitted by facsimile shall be deemed to be their original signatures for all purposes.

9.9 Governing Law; Jurisdiction and Venue.

(a) This Agreement shall be construed in accordance with, and governed in all respects by, the internal laws of the State of Delaware (without giving effect to principles of conflicts of laws).

(b) Any legal action or other Legal Proceeding relating to this Agreement or the enforcement of any provision of this Agreement shall be brought or otherwise commenced exclusively in any state or federal court located in the County of Santa Clara, State of California. Each party to this Agreement:

(i) expressly and irrevocably consents and submits to the jurisdiction of each state and federal court located in the County of Santa Clara, State of California (and each appellate court located in the State of California), in connection with any Legal Proceeding;

(ii) agrees that service of any process, summons, notice or document by U.S. mail addressed to him at the address set forth in Section 9.12 shall constitute effective service of such process, summons, notice or document for purposes of any such legal proceeding;

(iii) agrees that each state and federal court located in the County of Santa Clara, State of California, shall be deemed to be a convenient forum; and

(iv) agrees not to assert (by way of motion, as a defense or otherwise), in any such Legal Proceeding commenced in any state or federal court located in the County of Santa Clara, State of California, any claim by either the Company or Parent that it is not subject personally to the jurisdiction of such court, that such Legal Proceeding has been brought in an inconvenient forum, that the venue of such proceeding is improper or that this Agreement or the subject matter of this Agreement may not be enforced in or by such court.

9.10 Assignment and Successors. No party may assign any of its rights or delegate any of its obligations under this Agreement without the prior written consent of the other parties, except that Parent may assign any of its rights and delegate any of its obligations under this Agreement to any Affiliate of Parent. Subject to the preceding sentence, this Agreement will apply to, be binding in all respects upon and inure to the benefit of the successors and permitted assigns of the parties (if any).

9.11 Parties in Interest. Except for the provisions of Section 1.8 and Section 8, none of the provisions of this Agreement is intended to provide any rights or remedies to any Person other than the parties hereto and their respective successors and assigns (if any).

9.12 Notices. Any notice or other communication required or permitted to be delivered to any party under this Agreement or to the Stockholders’ Representative shall be in writing and shall be deemed properly delivered, given and received (a) when received if hand delivered, (b) on confirmation by sender of receipt if sent by facsimile, or (c) on the first Business Day after being sent by registered overnight mail, return receipt requested, by overnight courier or by overnight express delivery service, to the address or facsimile number set forth beneath the name of such party below (or to such other address or facsimile number as such party shall have specified in a written notice given to the other parties hereto):

if to the Company:

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VELOCE TECHNOLOGIES, INC.

[...***...]

if to Stockholders’ Representative (on its own behalf and for the benefit of the stockholders of the

Company):

Jeffrey S. Harrell

[...***...]

if to Parent or Merger Sub:

APPLIED MICRO CIRCUITS CORPORATION

215 Moffett Park Drive

Sunnyvale, CA 94089

Attn: General Counsel

Phone: (408) 542-8600

Fax: (408) 542-8601

with a copy to (which copy shall not constitute notice to Parent or Merger Sub):

PAUL, HASTINGS, JANOFSKY & WALKER LLP

1117 S. California Avenue

Palo Alto, CA 94304-1106

Attn: Jeffrey T. Hartlin, Esq.

Fax: (650) 320-1904

9.13 Construction; Usage.

(a) Interpretation. In this Agreement, unless a clear contrary intention appears:

(i) the singular number includes the plural number and vice versa;

(ii) reference to any Person includes such Person’s successors and assigns but, if applicable, only if such successors and assigns are not prohibited by this Agreement, and reference to a Person in a particular capacity excludes such Person in any other capacity or individually;

(iii) reference to any gender includes each other gender;

(iv) reference to any agreement, document or instrument means such agreement, document or instrument as amended or modified and in effect from time to time in accordance with the terms thereof;

50 *Confidential Treatment Requested

(v) reference to any Law means such Law as amended, modified, codified, replaced or reenacted, in whole or in part, and in effect from time to time, including rules and regulations promulgated thereunder, and reference to any section or other provision of any Law means that provision of such Law from time to time in effect and constituting the substantive amendment, modification, codification, replacement or reenactment of such section or other provision;

(vi) “hereunder,” “hereof,” “hereto,” and words of similar import shall be deemed references to this Agreement as a whole and not to any particular Article, Section or other provision hereof;

(vii) “including” means including without limiting the generality of any description preceding such term; and

(viii) references to documents, instruments or agreements shall be deemed to refer as well to all addenda, exhibits, schedules or amendments thereto.

(b) Legal Representation of the Parties. This Agreement was negotiated by the parties with the benefit of legal representation and any rule of construction or interpretation otherwise requiring this Agreement to be construed or interpreted against any party shall not apply to any construction or interpretation hereof.

(c) Headings. The headings contained in this Agreement are for the convenience of reference only, shall not be deemed to be a part of this Agreement and shall not be referred to in connection with the construction or interpretation of this Agreement.

(d) Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP.

9.14 Remedies Cumulative; Specific Performance.

(a) The rights and remedies of the parties hereto shall be cumulative (and not alternative).

(b) The parties acknowledge and agree that Parent and Merger Sub would be irreparably damaged if any of the provisions of this Agreement are not performed in accordance with their specific terms and that any breach of this Agreement by the Company could not be adequately compensated in all cases by monetary damages alone. Accordingly, in addition to any other right or remedy to which Parent or Merger Sub may be entitled, at law or in equity, it shall be entitled to enforce any provision of this Agreement by a decree of specific performance and temporary, preliminary and permanent injunctive relief to prevent breaches or threatened breaches of any of the provisions of this Agreement, without posting any bond or other undertaking.

(c) The parties acknowledge and agree that the Company would be irreparably damaged if any of the provisions of this Agreement are not performed in accordance with their specific terms and that any breach of this Agreement by Parent or Merger Sub could not be adequately compensated in all cases by monetary damages alone. Accordingly, in addition to any other right or remedy to which the Company may be entitled, at law or in equity, it shall be entitled to enforce any provision of this Agreement by a decree of specific performance and temporary, preliminary and permanent injunctive relief to prevent breaches or threatened breaches of any of the provisions of this Agreement, without posting any bond or other undertaking.

51

9.15 Severability. In the event that any provision of this Agreement, or the application of any such provision to any Person or set of circumstances, shall be determined to be invalid, unlawful, void or unenforceable to any extent, the remainder of this Agreement, and the application of such provision to Persons or circumstances other than those as to which it is determined to be invalid, unlawful, void or unenforceable, shall not be impaired or otherwise affected and shall continue to be valid and enforceable to the fullest extent permitted by law.

9.16 Time of Essence. With regard to all dates and time periods set forth or referred to in this Agreement, time is of the essence.

9.17 Schedules and Exhibits. The Schedules and Exhibits (including the Company Disclosure Schedule) are hereby incorporated into this Agreement and are hereby made a part hereof as if set out in full herein.

9.18 No Double Counting. For the avoidance of doubt, no calculations with respect to any amounts payable hereunder (including the determination of Total Merger Consideration and Losses) shall include the same amount where such inclusion would have the effect of double counting such amount.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

52

The parties hereto have caused this Agreement to be executed and delivered as of the date first set forth above.

PARENT:

APPLIED MICRO CIRCUITS CORPORATION,
    a Delaware corporation

By: /s/    Robert Gargus

Name: Robert Gargus

Title: Senior Vice President & CFO

MERGER SUB:

ESPRESSO ACQUISITION CORPORATION,
    a Delaware corporation

By: /s/ Robert Gargus

Name: Robert Gargus

Title: President

COMPANY:

VELOCE TECHNOLOGIES, INC.,
    a Delaware corporation

By: /s/    Jeffrey Harrell

Name: Jeffrey Harrell

Title: President & COO

STOCKHOLDERS’ REPRESENTATIVE:

JEFFREY HARRELL

By: /s/    Jeffrey Harrell

Name: Jeffrey Harrell

[SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER]

EXHIBIT A

CERTAIN DEFINITIONS

For purposes of the Agreement (including this Exhibit A):

“Affiliate” means, with respect to any Person, any other Person, directly or indirectly, controlling, controlled by or under common control with such Person.

“Agreement” means this Agreement and Plan of Merger, as amended from time to time.

“Applicable Benefit Laws” means all Laws applicable to any Company Benefit Plan or ERISA Affiliate Plan.

“Business Day” means any day except Saturday, Sunday or any day on which banks are generally not open for business in the City of New York, New York.

“[…***…]” means the […***…] to determine the Final Merger Consideration at […***…].

“Code” means the Internal Revenue Code of 1986, as amended.

“Company Benefit Plan” means each Employee Benefit Plan sponsored or maintained or required to be sponsored or maintained at any time by the Company or to which the Company makes or has made, or has or has had an obligation to make, contributions at any time, or with respect to which the Company has any liability or obligation.

“Company Common Stock” means the common stock, $0.0001 par value per share, of the Company.

“Company Disclosure Schedule” means the disclosure schedule (dated as of the Agreement Date) delivered to Parent on behalf of the Company on the Agreement Date.

“Company IP” shall mean all Intellectual Property Rights and Intellectual Property owned by or solely or exclusively licensed to the Company and shall exclude any Intellectual Property Rights and Intellectual Property assigned under the Development Agreement.

“Company IP Contract” shall mean any Contract to which the Company is a party or by which the Company is bound that contains any assignment or license of, or covenant not to assert or enforce, any Intellectual Property Right or that otherwise relates to any Company IP or any Intellectual Property developed by, with, or for the Company.

“Company Material Adverse Effect” means any state of facts, change, event, effect, occurrence or circumstance that, individually or in the aggregate (considered together with all other states of facts, changes, events, effects, occurrences or circumstances) has, has had or could reasonably be expected to have or give rise to a material adverse effect on: (I) (a) the business, financial condition, capitalization, assets, liabilities or operations of the Company, or (b) the ability of the Company to consummate the

A-1 *Confidential Treatment Requested

transactions contemplated by this Agreement or to perform any of its obligations under the Development Agreement prior to the Termination Date; provided however that Company Material Adverse Effect shall not include any state of facts, change, event, effect, occurrence or circumstance that results from or arises solely in connection with (i) any actions taken in full compliance with the written direction or written request of Parent to the Company or (ii) changes in or generally affecting the industry in which the Company participates or from generally prevailing conditions in United States or global economies (provided that such changes do not disproportionately affect the Company); or (II) Parent’s ability to utilize the Work Product.

“Company Stock Option Plan” means the Company’s 2009 Stock Incentive Plan, dated March 20, 2009.

“Company Warrant” means any warrant to purchase shares of Company Common Stock issued and outstanding under any applicable Contract.

“Completed First Module Documentation” means the documentation that includes, at a minimum, […***…].

“Consent” shall mean any approval, consent, ratification, permission, waiver or authorization (including any Governmental Authorization).

“Contract” means any written, oral or other agreement, contract, subcontract, lease, understanding, instrument, note, warranty, license, sublicense, insurance policy, benefit plan or legally binding commitment or undertaking of any nature, whether express or implied.

“Designated Liabilities” shall mean Liabilities of the Company determined in accordance with GAAP excluding amounts payable under the Note.

“Employee Benefit Plan” means with respect to any Person, each plan, fund, program, agreement, arrangement or scheme, including each plan, fund, program, agreement, arrangement or scheme maintained or required to be maintained under applicable Laws, that is at any time sponsored or maintained or required to be sponsored or maintained by such Person or to which such Person makes or has made, or has or has had an obligation to make, contributions providing benefits to the current and former employees, directors, managers, officers, consultants, independent contractors, contingent workers or leased employees of such Person or the dependents of any such Persons (whether written or oral), or with respect to which such Person has any liability or obligation, including (a) each deferred compensation, bonus, incentive compensation, pension, retirement, employee stock ownership, stock purchase, stock option, profit sharing or deferred profit sharing, stock appreciation, phantom stock plan and other equity compensation plan, “welfare” plan (within the meaning of Section 3(1) of ERISA, determined without regard to whether such plan is subject to ERISA), (b) each “pension” plan (within the meaning of Section 3(2) of ERISA, determined without regard to whether such plan is either subject to ERISA or is tax-qualified under the Code), (c) each severance plan or agreement, and each other plan providing health, vacation, supplemental unemployment benefit, hospitalization insurance, medical, dental, disability, life insurance, death or survivor benefits, fringe benefits or legal benefits, and (d) each other employee benefit plan, fund, program, agreement or arrangement.

“Encumbrance” means any lien, pledge, hypothecation, charge, mortgage, security interest, encumbrance, license, claim, infringement, interference, option, right of first refusal, preemptive right, community property interest or restriction of any nature affecting property, real or personal, tangible or intangible, including any restriction on the voting of any security, any restriction on the transfer of any

A-2 *Confidential Treatment Requested

security or other asset, any restriction on the receipt of any income derived from any asset, any restriction on the use of any asset, any restriction on the possession, exercise or transfer of any other attribute of ownership of any asset, any lease in the nature thereof and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statute of any jurisdiction).

“Entitled Holders” shall mean (a) a holder of Company Common Stock as of immediately prior to the Effective Time, or (b) a holder of vested Company Options as of immediately prior to the Effective Time.

“Entity” means any corporation (including any non-profit corporation), general partnership, limited partnership, limited liability partnership, joint venture, estate, trust, company (including any limited liability company or joint stock company), firm or other enterprise, association, organization or entity.

“ERISA” means the United States Employee Retirement Income Security Act of 1974, as amended.

“ERISA Affiliate” means any Person that together with the Company would be deemed a “single employer” within the meaning of Section 414 of the Code.

“ERISA Affiliate Plan” means each Employee Benefit Plan sponsored or maintained or required to be sponsored or maintained at any time by any ERISA Affiliate, or to which such ERISA Affiliate makes or has made, or has or has had an obligation to make, contributions at any time, or with respect to which such ERISA Affiliate has any liability or obligation.

The “Excess Cash” shall mean (i) $0.00, in the event the aggregate amount of cash and cash equivalents that the Company has on hand as of immediately prior to the Closing is equal to or less than the absolute value of the aggregate amount of any Designated Liabilities as of immediately prior to the Closing, plus any Transaction Expenses, and (ii) in the event the aggregate amount of cash and cash equivalents that the Company has on hand as of immediately prior to the Closing is greater than the absolute value of the aggregate amount of any Designated Liabilities as of immediately prior to the Closing, plus any Transaction Expenses, the aggregate amount of cash and cash equivalents that the Company has on hand as of immediately prior to the Closing minus the absolute value of the aggregate amount of any Designated Liabilities, plus any Transaction Expenses as of immediately prior to the Closing.

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

“First Module […***…]” means the delivery by the Company of a […***…].

“First Product” means an […***…] designed by Parent.

“First Product Consideration Chart” means the table attached as Exhibit E hereto.

“First Product Consideration Date” means the earliest to occur of the (i) (A) the date of the First Module […***…], plus (B) ninety (90) days, plus (C) the number of additional days beyond ninety (90) days after the date of the First Module […***…] resulting from a delay caused by the Company; provided

A-3 *Confidential Treatment Requested

that, the First Product Milestone has been achieved, and (ii) the date of the First Product Milestone. Notwithstanding the foregoing, in the event the […***…] does not yield a valid price on the First Product Consideration Chart at the time of measurement pursuant to the foregoing sentence, the First Product Consideration Date shall be extended by the number of days equal to the number of days between such […***…] and the time such […***…] yields a valid price on the First Product Consideration Chart.

“First Product Milestone” means the actual receipt by Parent, pursuant to the Development Agreement, of a functional First Product that meets the First Product Performance Specifications, provided that such First Product is received on or before […***…].

“First Product Performance Specifications” means the “Veloce Minimum Requirements,” as set forth in the First Product Consideration Chart.

“FMLA” means the United States Family and Medical Leave Act.

“GAAP” means United States generally accepted accounting principles as in effect from time to time.

“Governmental Authorization” means any: (a) approval, permit, license, certificate, franchise, permission, clearance, registration, qualification or other authorization issued, granted, given or otherwise made available by or under the authority of any Governmental Body or pursuant to any Law; or (b) right under any Contract with any Governmental Body.

“Governmental Body” means any: (a) nation, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign, supranational or other government; or (c) governmental, self-regulatory or quasi-governmental authority of any nature (including any governmental division, department, agency, commission, instrumentality, official, organization, unit, body or Entity and any court or other tribunal).

“Indemnified Parties” means the following Persons: (a) Parent; (b) Parent’s current and future Affiliates (including the Surviving Corporation); (c) the respective Representatives of the Persons referred to in clauses (a) and (b) above; and (d) the respective successors and assigns of the Persons referred to in clauses (a), (b) and (c) above.

“Intellectual Property” shall mean and includes all algorithms, APIs, apparatus, assay components, biological materials, cell lines, clinical data, chemical compositions or structures, circuit designs and assemblies, gate arrays, IP cores, net lists, photomasks, semiconductor devices, test vectors, databases and data collections, diagrams, formulae, inventions (whether or not patentable), know-how, logos, marks (including brand names, product names, logos, and slogans), methods, network configurations and architectures, processes, proprietary information, protocols, schematics, specifications, software, software code (in any form including source code and executable or object code), subroutines, user interfaces, techniques, URLs, web sites, works of authorship, and other forms of technology (whether or not embodied in any tangible form and including all tangible embodiments of the foregoing such as instruction manuals, laboratory notebooks, prototypes, samples, studies, and summaries).

“Intellectual Property Rights” shall mean and includes all past, present, and future rights of the following types, which may exist or be created under the Laws of any jurisdiction in the world: (a) rights associated with works of authorship, including exclusive exploitation rights, copyrights, moral rights, and mask works; (b) trademark and trade name rights and similar rights; (c) trade secret rights; (d) patents and industrial property rights; (e) other proprietary rights in Intellectual Property of every kind and nature;

A-4 *Confidential Treatment Requested

and (f) all registrations, renewals, extensions, combinations, divisions, or reissues of, and applications for, any of the rights referred to in clauses (a) through (e) above.

“IRS” means the Internal Revenue Service of the United States.

“Knowledge” An individual shall be deemed to have “knowledge” of a particular fact or other matter if (a) such individual is actually aware of such fact or other matter, or (b) such individual could reasonably be expected to have knowledge of such fact or matter given the individual’s title, position and day-to-day responsibilities with the Company. The Company shall be deemed to have “knowledge” of a particular fact or other matter if any officer, director of the Company or management Employee, as applicable, (i) is actually aware of such fact or other matter, or (ii) could reasonably be expected to have knowledge of such fact or matter given the individual’s title, position and day-to-day responsibilities with the Company or a Subsidiary of the Company.

“Law” means any federal, state, local, municipal, foreign or international, multinational or other law, statute, constitution, principle of common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling or requirement issued, enacted, adopted, promulgated, implemented or otherwise put into effect by or under the authority of any Governmental Body.

“Legal Proceeding” means any ongoing or threatened action, suit, litigation, arbitration, proceeding (including any civil, criminal, administrative, investigative or appellate proceeding), hearing, inquiry, audit, examination or investigation commenced, brought, conducted or heard by or before, or otherwise involving, any court or other Governmental Body or any arbitrator or arbitration panel.

“Liabilities” shall mean any debt, obligation, duty or liability of any nature (including any unknown, undisclosed, unmatured, unaccrued, contingent, indirect, conditional, implied, vicarious, derivative, joint, several or secondary liability), regardless of whether such debt, obligation, duty or liability would be required to be disclosed on a balance sheet prepared in accordance with GAAP and regardless of whether such debt, obligation, duty or liability is immediately due and payable.

“Losses” means any and all claims, liabilities, obligations, damages, losses, penalties, fines, judgments, costs and expenses (including amounts paid in settlement, costs of investigation and reasonable attorney’s fees and expenses), whenever arising or incurred, and whether arising out of a third party claim or otherwise.

“Note” means that certain Unsecured Promissory Note, dated May 13, 2009, issued by the Company to Parent, in the initial aggregate principal amount of $1,500,000, as may be amended or restated from time to time.

“Order” means any decree, permanent injunction, order or similar action.

“Parent Common Stock” means the common stock, $0.01 par value per share, of the Parent.

“Person” means any individual, corporation, partnership, joint venture, limited liability company, trust, Governmental Body or other organization.

“[…***…] Module” has the meaning set forth on page E-7 of the First Product Consideration Chart.

“Project” means the development of a […***…] as described in Section 2.1 of the Development Agreement.

A-5 *Confidential Treatment Requested

“Related Agreement” means (i) the Development Agreement, (ii) the Securityholder Agreement, (iii) the Escrow Agreement, and (iv) any other certificate, agreement, document or other instrument to be executed and delivered by the Company, Merger Sub or Parent, as applicable, in connection with the transactions contemplated hereby.

“Related Party” means: (i) each individual who is, or who has at any time been, an officer or director of the Company; (ii) each member of the immediate family of each of the individuals referred to in clause (i) above; and (iii) any trust or other Entity (other than the Company) in which any one of the individuals referred to in clauses (i) and (ii) above holds (or in which more than one of such individuals collectively hold), beneficially or otherwise, a material voting, proprietary, equity or other financial interest.

“Representatives” means, with respect to a Person, the officers, directors, employees, agents, attorneys, accountants, advisors and representatives of such Person.

“SEC” means the United States Securities and Exchange Commission.

“Second Product” means a […***…], which is a part of the First Product that meets the First Product Milestone, and which includes […***…].

“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

“Software” means any computer software program, together with any error corrections, updates, modifications, or enhancements thereto, in both machine-readable form and human readable form, including all comments and any procedural code.

“Strategic Transaction” means any transaction, series of transactions or agreement(s) involving:

(i) the design, development or manufacture by the Company for any Person (other than Parent) of any […***…];

(ii) the sale, license, disposition or acquisition of (A) any of the Company’s Intellectual Property or Intellectual Property Rights, (B) any Intellectual Property or Intellectual Property Rights of any Subsidiary of the Company (other than with respect to the Development Agreement); or

(iii) any merger, consolidation, share exchange, business combination, issuance of securities, direct or indirect acquisition of securities, recapitalization, tender offer, exchange offer, reorganization or other similar transaction involving the Company or any direct or indirect Subsidiary of the Company.

“Subsidiary” any Entity shall be deemed to be a “Subsidiary” of another Person if such Person directly or indirectly (a) has the power to direct the management or policies of such Entity or (b) owns, beneficially or of record, (i) an amount of voting securities or other interests in such Entity that is sufficient to enable such Person to elect at least a majority of the members of such Entity’s board of directors or other governing body or (ii) at least fifty percent (50%) of the outstanding equity or financial interests of such Entity.

A-6 *Confidential Treatment Requested

“Tax” means any tax (including any income tax, franchise tax, capital gains tax, gross receipts tax, value-added tax, surtax, excise tax, ad valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax, business tax, withholding tax or payroll tax), levy, assessment, tariff, duty (including any customs duty), deficiency or fee, and any related charge or amount (including any fine, penalty or interest), imposed, assessed or collected by or under the authority of any Governmental Body.

“Tax Return” means any return (including any information return), report, statement, declaration, estimate, schedule, notice, notification, form, election, certificate or other document or information filed with or submitted to, or required to be filed with or submitted to, any Governmental Body in connection with the determination, assessment, collection or payment of any Tax.

“Termination Date” means the date prior to the Closing on which this Agreement is terminated in accordance with Section 7.

“Test Module” means a […***…] that contains the following […***…] on the Second Product; and (d) other Second Product structures to be determined by Parent and the Company by […***…].

“Test Module Deliverables” means the (i) Test Module and (ii) Completed First Module Documentation.

“Transaction Expenses” means the sum of all fees, costs and expenses (including legal fees, accounting fees and filing fees and including the amount of all special bonuses and other amounts that may become payable to any officers of the Company or other Persons in connection with the consummation of the transactions contemplated by this Agreement) that are incurred by or for the benefit of the Company in connection with the transactions contemplated by this Agreement.

“Treasury Regulations” means the temporary and final income Tax regulations promulgated under the Code.

******

Omitted Schedules:
Exhibit B	-	Development Agreement
Exhibit C	-	Securityholder Agreement
Exhibit D	-	Stockholder Written Consent
Exhibit E	-	First Product Consideration Chart
Exhibit 1.6	-	Form of Certificate of Merger
Exhibit 1.13	-	Form of Escrow Agreement
Exhibit 4.14	-	Form of Proprietary Information and Inventions Agreement
Schedule 5.1	-	Certain Representations and Warranties

A-7 *Confidential Treatment Requested

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Dr. Paramesh Gopi, President and Chief Executive Officer, certify that:

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

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

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

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

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

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

/s/ Paramesh Gopi

Dr. Paramesh Gopi

President and Chief Executive Officer

Date: July 31, 2009

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Robert G. Gargus, Senior Vice President and Chief Financial Officer, certify that:

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

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

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

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

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

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

/s/ ROBERT G. GARGUS

Robert G. Gargus,

Senior Vice President and Chief Financial Officer

Dated: July 31, 2009

EX-32.1

Exhibit 32.1

CERTIFICATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.§ 1350, as adopted), Dr. Paramesh Gopi, Chief Executive Officer of Applied Micro Circuits Corporation (the “Company”), hereby certifies that, to the best of his knowledge:

1. This Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission (“SEC”) or its staff upon request.

This certification accompanies the Report to which it relates, is not deemed filed with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act (whether made before or after the date of the Report), irrespective of any general incorporation language contained in such filing.

/s/ Paramesh Gopi

Dr. Paramesh Gopi

President and Chief Executive Officer

Dated: July 31, 2009

EX-32.2

Exhibit 32.2

CERTIFICATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.§ 1350, as adopted), Robert G. Gargus, Chief Financial Officer of Applied Micro Circuits Corporation (the “Company”), hereby certifies that, to the best of his knowledge:

1. This Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission (“SEC”) or its staff upon request.

This certification accompanies the Report to which it relates, is not deemed filed with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act (whether made before or after the date of the Report), irrespective of any general incorporation language contained in such filing.

/s/ ROBERT G. GARGUS

Robert G. Gargus,

Senior Vice President and Chief Financial Officer

Dated: July 31, 2009