SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The Condensed Consolidated Financial Statements include all the accounts of AppliedMicro (the "Company") and its wholly-owned subsidiaries including Veloce Technologies Inc. (“Veloce”), which was consolidated in prior accounting periods prior to its merger with the Company, as a variable interest entity (“VIE”) since the Company was determined to be its primary beneficiary. On June 20, 2012, the Company completed the acquisition of Veloce which became a wholly owned subsidiary of the Company as of this date. See Note 4, Veloce, to the Condensed Consolidated Financial Statements. All significant intercompany balances and transactions have been eliminated in consolidation.

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 its:


•	capitalized mask sets including their useful lives, which affect cost of goods sold and property and equipment or Research and Development ("R&D") expenses, if not capitalized;


•	inventory valuation, warranty liabilities and revenue reserves, which affects cost of sales, gross margin, and revenues;


•	allowance for doubtful accounts, which affects operating expenses;


•	unrealized losses or other-than-temporary impairments of short-term investments available for sale, which affects interest income (expense), net;


•	valuation of purchased intangibles and goodwill, which affects amortization and impairments of purchased intangibles, impairments of goodwill and apportionment of goodwill related to divestitures;

•

Veloce accrued liability which considers: (i) estimating the total value of the expected Veloce consideration, (ii) determining the stage at which a milestone is deemed to be probable of attainment, (iii) the estimated progress towards achieving the milestone at the time such milestone was deemed probable of achievement and (iv) estimating the approximate timing of the expected completion of the milestones and related payments;


•	potential costs of litigation, which affects operating expenses;


•	valuation of deferred income taxes, which affects income tax expense (benefit); and


•	stock-based compensation, which affects 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.

Recently Adopted Accounting Pronouncements

In July 2013, the FASB issued Accounting Standards Update 2013-11 amending Income Taxes: Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists that will require the presentation of certain unrecognized tax benefits as reductions to deferred tax assets rather than as liabilities in the condensed consolidated balance sheets when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendments will be effective for interim and annual periods beginning after December 15, 2013; however, early adoption and retrospective application are permitted. The Company does not expect the adoption of these amendments to have a significant impact on the Company’s Consolidated Financial Statements.