APPLIED MICRO CIRCUITS CORP
10-Q, 2000-11-14
SEMICONDUCTORS & RELATED DEVICES
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<PAGE>

                                 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 FISCAL QUARTER ENDED SEPTEMBER 30, 2000, 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                           (I.R.S. Employer
incorporation or organization)                           Identification No.)

                              6290 SEQUENCE DRIVE
                              SAN DIEGO, CA 92121
                   (Address of principal executive offices)
      Registrant's telephone number, including area code: (619) 450-9333

                                  ___________

     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90 days.

                               YES  [x]  NO ___
                                    ---

     As of November 6, 2000, 295,656,949 shares of the Registrant's Common Stock
were issued and outstanding.

<PAGE>

                       APPLIED MICRO CIRCUITS CORPORATION
                                     INDEX

<TABLE>
<CAPTION>
                                                                                                          PAGE
                                                                                                          ----
Part I.  FINANCIAL INFORMATION:
<S>         <C>                                                                                           <C>
Item 1.     a)  Condensed Consolidated Balance Sheets at September 30, 2000
                (unaudited) and March 31, 2000........................................................      3

            b)  Condensed Consolidated Statements of  Income (unaudited) for the three and six
                months ended September 30, 2000 and September 30, 2000 and 1999.......................      4

            c)  Condensed Consolidated Statements of Cash Flows (unaudited)...........................      5

            d)  Notes to Condensed Consolidated Financial Statements (unaudited)......................      6

Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations ....     10

Item 3.     Quantitative and Qualitative Disclosures About Market Risk.................................    25


Part II.  OTHER INFORMATION

Item 1.     Legal Proceedings..........................................................................    25

Item 2.     Changes in Securities......................................................................    25

Item 4.     Submission of Matters to a Vote of Security Holders........................................    25

Item 6.     Exhibits and Reports on Form 8-K...........................................................    26

Signatures ............................................................................................    26
</TABLE>

==============================================================================

<PAGE>

PART I.    FINANCIAL INFORMATION
ITEM 1.    Financial Statements

                      APPLIED MICRO CIRCUITS CORPORATION
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                       (In thousands, except par value)

<TABLE>
<CAPTION>
                                                                           September 30, 2000        March 31,
                                                                           ------------------        ---------
                                                                                  2000                  2000
                                                                                  ----                  ----
                                                                              (unaudited)
<S>                                                                        <C>                      <C>
                                  Assets
                                  ------
Current assets:
 Cash and cash equivalents                                                          $   79,224      $  170,102
 Short-term investments - available-for-sale                                           962,752         784,449
 Accounts receivable, net of allowance for doubtful accounts of $1,314
  and $314 at September 30, 2000 (unaudited) and March 31, 2000,                        49,032          25,459
  respectively

 Inventories                                                                            11,153          10,925
 Deferred income taxes                                                                      --           4,148
 Other current assets                                                                   14,932          10,321
                                                                                    ----------      ----------
   Total current assets                                                              1,117,093       1,005,404
Property and equipment, net                                                             52,815          37,842
Purchased intangibles, net of $10,847 of accumulated amortization at                   218,962              --
  September 30, 2000
Other assets                                                                             3,552           3,636
                                                                                    ----------      ----------
   Total assets                                                                     $1,392,422      $1,046,882
                                                                                    ==========      ==========
               Liabilities And Stockholders' Equity
               ------------------------------------
Current liabilities:
 Accounts payable                                                                   $   16,803      $    8,818
 Accrued payroll and related expenses                                                    8,108           7,618
 Other accrued liabilities                                                              18,348           6,448
 Deferred revenue                                                                        4,147           2,776
 Deferred income taxes, current                                                          1,154              --
 Current portion of long-term debt                                                       1,443           1,394
 Current portion of capital lease obligations                                              677             729
                                                                                    ----------      ----------
   Total current liabilities                                                            50,680          27,783
Deferred income taxes, long-term                                                        11,232
Long-term debt, less current portion                                                     2,865           3,599
Long-term capital lease obligations,  less current portion                               1,371           1,695
Stockholders' equity:
 Preferred Stock, $0.01 par value:
 2,000 shares authorized, none issued and outstanding                                       --              --
 Common Stock, $0.01 par value:
 Authorized shares - 630,000; issued and outstanding shares - 253,158 at                 1,266           1,218
  September 30, 2000 (unaudited) and 243,684 at March 31, 2000
 Additional paid-in capital                                                          1,273,854         944,512
 Deferred compensation, net                                                            (46,483)         (1,443)
 Accumulated other comprehensive income (loss)                                             488            (166)
 Retained earnings                                                                      97,149          70,139
 Notes receivable from stockholders                                                         --            (455)
                                                                                    ----------      ----------
   Total stockholders' equity                                                        1,326,274       1,013,805
                                                                                    ----------      ----------
   Total liabilities and stockholders' equity                                       $1,392,422      $1,046,882
                                                                                    ==========      ==========
</TABLE>

    See accompanying Notes to Condensed Consolidated Financial Statements.

                                       3
<PAGE>

                      APPLIED MICRO CIRCUITS CORPORATION
                  CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                  (UNAUDITED)
                     (in thousands, except per share data)



<TABLE>
<CAPTION>
                                                                   THREE MONTHS          SIX MONTHS
                                                                       ENDED                ENDED
                                                                    SEPTEMBER 30,       SEPTEMBER 30,
                                                                 ----------------------------------------
                                                                    2000      1999      2000      1999
                                                                 ----------------------------------------
<S>                                                              <C>        <C>       <C>       <C>
Net revenues....................................................  $ 97,007  $ 37,898  $171,195  $ 69,541
Cost of revenues................................................    24,532    11,326    43,846    21,609
                                                                  --------  --------  --------  --------
Gross profit....................................................    72,475    26,572   127,349    47,932
Operating expenses:
      Research and development..................................    19,806     7,194    34,643    13,548
      Selling, general and administrative.......................    14,780     6,548    25,391    12,117
      Amortization of goodwill and purchased intangibles........     8,563        --    10,847        --
      Acquired in-process research and development..............     3,600        --    25,400        --
                                                                  --------  --------  --------  --------
           Total operating expenses.............................    46,749    13,742    96,281    25,665
                                                                  --------  --------  --------  --------
Operating income................................................    25,726    12,830    31,068    22,267
Interest income, net............................................    13,465     1,005    25,742     1,889
                                                                  --------  --------  --------  --------
Income before income taxes......................................    39,191    13,835    56,810    24,156
Provision for income taxes......................................    15,576     4,738    29,800     8,273
                                                                  --------  --------  --------  --------
Net income......................................................  $ 23,615  $  9,097  $ 27,010  $ 15,883
                                                                  ========  ========  ========  ========
Basic earnings per share:
      Earnings per share........................................     $0.10     $0.04     $0.11     $0.08
                                                                  ========  ========  ========  ========
      Shares used in calculating basic earnings per share.......   248,046   210,172   245,376   207,946
                                                                  ========  ========  ========  ========
Diluted earnings per share:
      Earnings per share........................................     $0.09     $0.04     $0.10     $0.07
                                                                  ========  ========  ========  ========
      Shares used in calculating diluted earnings per share.....   271,798   231,728   268,480   229,976
                                                                  ========  ========  ========  ========
</TABLE>


    See accompanying Notes to Condensed Consolidated Financial Statements.

                                       4
<PAGE>

                      APPLIED MICRO CIRCUITS CORPORATION
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
                                (in thousands)

<TABLE>
<CAPTION>
                                                                                                SIX MONTHS ENDED
                                                                                                  SEPTEMBER 30,
                                                                                           --------------------------
                                                                                                  2000         1999
                                                                                           --------------------------
<S>                                                                                        <C>               <C>
Operating Activities
        Net income.......................................................................     $    27,010    $ 15,883
        Adjustments to reconcile net income to net cash provided by operating activities:
            Depreciation and amortization................................................           5,192       3,820
            Amortization of purchased intangibles........................................          10,847          --
            Acquired in-process research and development.................................          25,400          --
            Amortization of deferred compensation........................................             816         308
            Tax benefit of disqualifying dispositions....................................          30,413          --
            Changes in assets and liabilities:
                Accounts receivable......................................................         (23,477)        414
                Inventories..............................................................            (228)       (662)
                Other assets.............................................................          (3,693)        908
                Accounts payable.........................................................           7,300       1,689
                Accrued payroll and other accrued liabilities............................          10,265         422
                Deferred income taxes....................................................              --         300
                Deferred revenue.........................................................             463         735
                                                                                              -----------    --------
            Net cash provided by operating activities....................................          90,308      23,817
Investing Activities
       Proceeds from sales and maturities of short-term investments......................       1,095,381      68,976
       Purchase of short-term investments................................................      (1,273,013)    (74,375)
       Notes receivable from officers and employees......................................              11         840
       Payments for acquired businesses, less cash acquired..............................          (9,575)         --
       Purchase of property and equipment................................................         (19,486)     (7,962)
                                                                                              -----------    --------
                   Net cash used for investing activities................................        (206,682)    (12,521)
Financing Activities
       Proceeds from issuance of common stock............................................          26,172       3,800
       Repurchase of restricted stock....................................................             (54)        (10)
       Payments on capital lease obligations.............................................            (377)       (578)
       Payments on stockholder's notes...................................................             455          --
       Payments on long-term debt........................................................            (684)     (1,202)
       Other.............................................................................             (16)         --
                                                                                              -----------    --------
            Net cash provided by financing activities....................................          25,496       2,010
                                                                                              -----------    --------
            Net increase (decrease) in cash and cash equivalents.........................         (90,878)     13,306
Cash and cash equivalents at beginning of period.........................................         170,102      13,530
                                                                                              -----------    --------
Cash and cash equivalents at end of period...............................................     $    79,224    $ 26,836
                                                                                              ===========    ========

Supplemental disclosure of cash flow information:
        Cash paid for:
           Interest......................................................................     $       249    $    396
                                                                                              ===========    ========
           Income taxes..................................................................     $       437    $  5,583
                                                                                              ===========    ========
</TABLE>

    See accompanying Notes to Condensed Consolidated Financial Statements.

                                       5
<PAGE>

                      APPLIED MICRO CIRCUITS CORPORATION
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

1.  BASIS OF PRESENTATION - INTERIM FINANCIAL INFORMATION (UNAUDITED)

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

   The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and disclosures made in
the accompanying notes to the financial statements. These estimates include
assessing the collectability of accounts receivable, the use and recoverability
of inventory, estimates to complete engineering contracts, costs of future
product returns under warranty and provisions for contingencies expected to be
incurred. Actual results could differ from those estimates.

   On October 30, 2000, the Company effected a two-for-one stock split in the
form of a 100% stock dividend.   Accordingly, all prior share, per share, common
stock, and stock option amounts in this Quarterly Report on Form 10-Q have been
restated to reflect the stock split.

   The financial statements and related disclosures have been prepared with the
presumption that users of the interim financial information have read or have
access to the audited financial statements for the preceding fiscal year.
Accordingly, these accompanying financial statements should be read in
conjunction with the audited financial statements and the related notes thereto
contained in the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission for the year ended March 31, 2000.

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

2. EARNINGS PER SHARE

   The reconciliation of shares used to calculate basic and diluted earnings per
share, restated to reflect the two-for-one stock split, consists of the
following (in thousands):

<TABLE>
<CAPTION>
                                                            THREE MONTHS              SIX MONTHS
                                                               ENDED                     ENDED
                                                             SEPTEMBER 30,            SEPTEMBER 30,
                                                       -------------------------------------------------
                                                            2000       1999          2000         1999
                                                       -------------------------------------------------
<S>                                                    <C>             <C>           <C>         <C>
Shares used in basic earnings per share
   computations-weighted average common shares
   outstanding                                             248,046     210,172       245,376     207,946
Net effect of dilutive common share
   equivalents                                              23,752      21,556        23,104      22,030
                                                          --------    --------      --------     -------
Shares used in diluted earnings per share
   Computations                                            271,798     231,728       268,480     229,976
                                                           =======     =======      ========      =======
</TABLE>


                                       6
<PAGE>

3.  CERTAIN FINANCIAL STATEMENT INFORMATION


                                                SEPTEMBER 30,   MARCH 31,
                                                   2000           2000
                                               --------------------------
Inventories (in thousands):
  Finished goods                                      $ 2,346     $ 2,666
  Work in process                                       7,223       6,966
  Raw materials                                         1,584       1,293
                                                      -------     -------
                                                      $11,153     $10,925
                                                      =======     =======


                                                SEPTEMBER 30,   MARCH 31,
                                                    2000          2000
                                               --------------------------
Property and equipment (in thousands):
  Machinery and equipment                            $ 53,708     $46,375
  Leasehold improvements                               11,742       8,352
  Computers, office furniture and equipment            30,141      20,743
  Land                                                  4,808       4,808
                                                     --------     -------
                                                      100,399      80,278
Less accumulated depreciation and amortization        (47,584)    (42,436)
                                                     --------     -------
                                                     $ 52,815     $37,842
                                                     ========     =======

     In September 1999, the Financial Accounting Standards Board ("FASB") issued
Emerging Issues Task Force Topic No. D-83 ("EITF D-83"), "Accounting for Payroll
Taxes Associated with Stock Option Exercises." EITF D-83 requires that payroll
taxes paid on the difference between the exercise price and the fair value of
acquired stock in association with an employee's exercise of stock options be
treated as operating expenses. Payroll taxes on stock option exercises were $2.1
million and $2.5 million for the three and six months ended September 30, 2000,
respectively.

4.  COMPREHENSIVE INCOME

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


                                             THREE MONTHS        SIX MONTHS
                                                ENDED               ENDED
                                             SEPTEMBER 30,       SEPTEMBER 30,
                                        ---------------------------------------
                                           2000      1999     2000        1999
                                        ---------------------------------------
Net income                                $23,615    $9,097  $27,010    $15,883
Change in market value of
  available-for-sale investments              799        --      671       (174)
Foreign currency translation adjustment        (8)       --      (17)        --
                                          -------    ------  -------    -------
Comprehensive income                      $24,406    $9,097  $27,664    $15,709
                                          =======    ======  =======    =======

   Accumulated other comprehensive income (loss) presented in the accompanying
consolidated condensed balance sheets consists of the accumulated net unrealized
gain (loss) on available-for-sale investments and foreign currency translation
adjustments.

5.  BUSINESS COMBINATIONS

   On September 21, 2000, the Company acquired SiLUTIA, Inc. ("SiLUTIA"), a
digital and mixed-signal company focused on providing high-speed, low-power I/O
connectivity solutions for the broadband communications market.  According to
the terms of the merger agreement, the Company issued 566,834 shares of its
common stock and assumed options to purchase 69,148 shares of its common stock.
The transaction was accounted for as a purchase and accordingly, the
accompanying financial statements include the results of operations of SiLUTIA
subsequent to the acquisition date.

   On June 8, 2000, the Company completed the acquisition of YuniNetworks, Inc.,
a developer of scalable switch fabric silicon solutions for communication
equipment.  Under the terms of the merger agreement, in exchange for all
YuniNetworks' shares of common and preferred stock, AMCC issued 4,048,646 shares
of its common stock and assumed options to purchase 267,444 shares of its common
stock.  Pursuant to a separate agreement, AMCC purchased 10% of the
YuniNetworks' shares held by the majority stockholder of YuniNetworks for $8.9
million in


                                       7
<PAGE>

cash. The accompanying financial statements include the results of operations of
YuniNetworks from the date of acquisition.

   The Company conducted independent valuations of the intangible assets
acquired in these acquisitions in order to allocate the purchase price in
accordance with Accounting Principles Board Opinion No. 16. The Company has
allocated the excess purchase price over the fair value of net tangible assets
acquired to the following identifiable intangible assets: goodwill, developed
core technology, assembled workforce and acquired in-process research and
development ("IPR&D").

   In connection with the above mentioned purchase transactions, the Company
recorded charges for acquired IPR&D of approximately $25.4 million in the six
months ended September 30, 2000.  Any related purchased IPR&D for each of the
above acquisitions represents the present value of the estimated after-tax cash
flows expected to be generated by the purchased technology, which, at the
acquisition dates, had not yet reached technological feasibility.  The cash flow
projections for revenues were based on estimates of relevant market sizes and
growth factors, expected industry trends, the anticipated nature and timing of
new product introductions by the Company and its competitors, individual product
sales cycles and the estimated life of each product's underlying technology.
Estimated operating expenses and income taxes were deducted from estimated
revenue projections to arrive at estimated after-tax cash flows.  Projected
operating expenses include cost of goods sold, marketing and selling expenses,
general and administrative expenses, and research and development, including
estimated costs to maintain the products once they have been introduced into the
market and are generating revenue.  The remaining identified intangibles,
including goodwill, will be amortized on a straight-line basis over lives
ranging from 3 to 6 years.

   The following unaudited pro forma summary presents the consolidated results
of operations of the Company, excluding acquired IPR&D charges above, as if the
acquisitions had occurred at the beginning of each period presented and does not
purport to be indicative of what would have occurred had the acquisition been
made as of that date or of the results which may occur in the future.

                                                       Six Months Ended
                                                         September 30,
                                                ------------------------------
                                                     2000           1999
                                                     ----           ----
Net sales                                          $171,333        $69,659
                                                   ========        =======
Net income                                         $ 34,725        $ 6,643
                                                   ========        =======
Diluted earnings per share                         $   0.13        $  0.03
                                                   ========        =======


   During fiscal 2001, the Company also completed the acquisitions of pBaud
Logic, Inc. and Chameleon Technologies, which were accounted for as purchases.

   On October 25, 2000, the Company completed the merger with MMC Networks, Inc.
("MMC"), a fabless semiconductor company that provides network processors,
traffic management and switch fabric technology. Under the terms of the merger
agreement, in exchange for all of the outstanding stock of MMC, the company
issued 41,307,900 shares of its common stock and assumed options to purchase
8,152,638 shares of its common stock. The acquisition was accounted for as a
purchase.

6. CONTINGENCIES

   The Company is party to various claims and legal actions arising in the
normal course of business, including notification of possible infringement on
the intellectual property rights of third parties. In addition, since 1993 the
Company has been named as a potentially responsible party (``PRP'') along with a
large number of other companies that used Omega Chemical Corporation (``Omega'')
in Whittier, California to handle and dispose of certain hazardous waste
material. The Company is a member of a large group of PRPs that has agreed to
fund certain remediation efforts at the Omega site for which the Company has
accrued approximately $100,000. On September 14, 2000, the Company entered into
a consent decree with the Environmental Protection Agency, pursuant to which the
Company agreed to fund its proportionate share of the initial remediation
efforts at the Whittier site. Although the ultimate outcome of these matters is
not presently determinable, management believes that the resolution of all such
pending matters, net of amounts accrued, will not have a material adverse affect
on the Company's financial position or liquidity; however, there can be no
assurance that the ultimate resolution of these matters will not have a material
impact on the Company's results of operations in any period.

                                       8
<PAGE>

7.   NEW ACCOUNTING PRONOUNCEMENTS

     In March 2000, the FASB issued FASB Interpretation No. 44
("Interpretation"), "Accounting for Certain Transactions Involving Stock
Compensation - An Interpretation of Accounting Principles Board Opinion No. 25,"
clarifying the guidance for certain stock compensation issues, including the
treatment of unvested stock and stock options issued in purchase business
combinations. The Interpretation requires that unvested stock and stock options
granted by the acquiring Company in exchange for unvested stock and stock
options held by employees of the target company be accounted for at intrinsic
value and such amount be recorded as deferred compensation by the acquiring
company. Accordingly, the Company recorded approximately $43.4 million in
deferred compensation in conjunction with the acquisition of SiLUTIA (Note 5).
Additionally, the Interpretation requires companies to value vested options at
fair value and include such value in the determination of the total value of
consideration issued in a transaction.

     In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. The Company is
required to adopt SAB 101 in the quarter ending March 31, 2001. The Company does
not expect the impact of adopting SAB 101 on its financial position and results
of operations to be material.

     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities.  It requires that
an entity recognizes all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. The Company does not
believe this will have a material effect on the Company's operations.
Implementation of this standard has recently been delayed by the FASB for a 12-
month period. The Company will adopt SFAS 133 as required for its first
quarterly filing of fiscal year 2002.

                                       9
<PAGE>

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

     The following discussion should be read in conjunction with the
Consolidated Financial Statements and the notes thereto and with Management's
Discussion and Analysis of Financial Condition and Results of Operations that
are included in the Annual Report on Form 10-K for the year ended March 31, 2000
for Applied Micro Circuits Corporation. This Quarterly Report on Form 10-Q, and
in particular this Management's Discussion and Analysis of Financial Condition
and Results of Operations, contains forward-looking statements regarding future
events or the future financial performance of the Company that involve certain
risks and uncertainties including, but not limited to, those set forth in the
"Risk Factors" discussed below. Actual events or the actual future results of
the Company may differ materially from any forward-looking statements due to
such risks and uncertainties. Readers are cautioned not to place undue reliance
on these forward-looking statements, which reflect management's analysis only as
of the date hereof. The Company assumes no obligation to update these forward-
looking statements to reflect actual results or changes in factors or
assumptions affecting such forward-looking assumptions.

OVERVIEW

     We design, develop, manufacture and market high-performance, high-
bandwidth silicon solutions for the world's optical networks. We utilize a
combination of high-frequency analog, mixed-signal and digital design expertise
coupled with system-level knowledge and multiple silicon process technologies to
offer integrated circuit, or IC, products that enable the transport of voice and
data over fiber optic networks. Our products target the SONET/SDH, ATM, Gigabit
Ethernet and Fibre Channel semiconductor markets. In addition, we recently
introduced silicon ICs targeted for DWDM systems. We provide our customers with
complete silicon IC solutions ranging from physical media dependent devices such
as laser drivers and physical layer products such as transceivers to overhead
processor products such as framers and mappers. Our products span data rates
from OC-3, or 155 megabits per second, to OC-192, or 10 gigabits per second. We
also supply silicon ICs for the automated test equipment, or ATE, high-speed
computing and military markets.

RESULTS OF OPERATIONS

     The following table sets forth certain consolidated statement of operations
data as a percentage of revenues for the periods indicated:

<TABLE>
<CAPTION>
                                                  THREE MONTHS ENDED               SIX MONTHS ENDED
                                         ----------------------------------------------------------------------
                                            SEPTEMBER 30,   SEPTEMBER 30,   SEPTEMBER 30,   SEPTEMBER 30,
                                                2000            1999            2000            1999
                                         ----------------------------------------------------------------------
<S>                                      <C>                <C>             <C>             <C>
Net revenues............................            100.0%          100.0%          100.0%          100.0%
Cost of revenues........................             25.3%           29.9%           25.6%           31.1%
                                                    -----           -----           -----           -----
Gross profit............................             74.7%           70.1%           74.4%           68.9%
Operating expenses:
  Research and development..............             20.4%           19.0%           20.2%           19.5%
  Selling, general and administrative...             15.2%           17.3%           14.8%           17.4%
  Amortization of goodwill and
         purchased intangibles..........              8.8%             --             6.3%             --
  Acquired in-process R&D...............              3.7%             --            14.9%             --
                                                    -----           -----           -----           -----
     Total operating expenses...........             48.2%           36.3%           56.2%           36.9%
                                                    -----           -----           -----           -----
Operating income........................             26.5%           33.9%           18.1%           32.0%
Interest income, net....................             13.9%            2.7%           15.0%            2.7%
                                                    -----           -----           -----           -----
Income before income taxes..............             40.4%           36.5%           33.2%           34.7%
Provision for income taxes..............             16.1%           12.5%           17.4%           11.9%
                                                    -----           -----           -----           -----
Net income..............................             24.3%           24.0%           15.8%           22.8%
                                                    =====           =====           =====           =====
</TABLE>

   Net Revenues.  Net revenues for the three months and six months ended
September 30, 2000 were $97.0 million and $171.2, respectively, representing
increases of 156% and 146%, over net revenues of $37.9 million and $69.5 million
for the three and six months ended September 30, 1999, respectively.  Revenues
from sales of communications products increased to 83% of net revenues for both
the three and six months ended September 30,

                                       10
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2000 from 81% and 76% of net revenues for the three and six months ended
September 30, 1999, respectively. This increase reflects both unit growth in
shipments of existing products, as well as the introduction of new products for
these markets. Revenues from sales of non-communication products, consisting of
the ATE, high-speed computing and military products, decreased to 17% of net
revenues during both the three and six months ended September 30, 2000, from 19%
and 24% of net revenues for the three and six months ended September 30, 1999,
respectively. Sales to Nortel Networks, Inc., and its contract manufacturers,
accounted for 20% and 27% of net revenues for the three and six months ended
September 30, 2000, respectively, as compared to 36% and 33% for the three and
six months ended September 30, 1999, respectively. Sales to Insight Electronics,
Inc., our domestic distributor, accounted for 18% of net revenues in both the
three and six months ended September 30, 2000, compared to 15% for both the
three and six months ended September 30, 1999. Sales outside of North America
accounted for 15% and 17% of net revenues for the three and six months ended
September 30, 2000, respectively, as compared to 21% and 23% for the three and
six months ended September 30, 1999.

   Gross Margin.  Gross margin was 74.7% and 74.4% for the three and six months
ended September 30, 2000, as compared to 70.1% and 68.9% for the three and six
months ended September 30, 1999, respectively.  The increase in gross margin was
driven principally by the increasing mix of our communications standard
products.  Our gross margin is primarily impacted by the average selling prices
of our IC's, factory utilization, wafer yields, product mix, cost of material,
cost of labor and the timing of depreciation expense. Our strategy is to
maximize factory utilization whenever possible, maintain or improve
manufacturing yields, and focus on the development and sales of high-performance
products that can have higher gross margins. There can be no assurance, however,
that we will be successful in achieving these objectives. In addition, these
factors can vary significantly from quarter to quarter, which would likely
result in fluctuations in quarterly gross margin and net income.

   Research and Development.  Research and development ("R&D") expenses
increased 175% to approximately $19.8 million, or 20.4% of net revenues, for the
three months ended September 30, 2000, from approximately $7.2 million, or 19.0%
of net revenues, for the three months ended September 30, 1999, and increased to
$34.6 million, or 20.2% of net revenues, for the six months ended September 30,
1999, from $13.5 million, or 19.5% of net revenues for the six months ended
September 30, 1999. The increase in R&D expenses was due to accelerated new
product and process development efforts and an increase in personnel costs as a
result of additional R&D personnel, as well as increases in the amortization of
deferred compensation related to stock options assumed from acquired companies
and payroll taxes related to stock option exercises.  We believe that a
continued commitment to R&D is vital to maintain a leadership position with
innovative communications products. Accordingly, we expect R&D expenses to
increase in the future as we fund our development projects and as a result of
increased amortization of deferred compensation from stock options assumed
through our acquisitions. Currently, R&D expenses are focused on the development
of products and processes for the communications markets, and we expect to
continue this focus.

   Selling, General and Administrative. Selling, general and administrative
("SG&A") expenses were approximately $14.8 million, or 15.2% of net revenues,
and $25.4 million, or 14.8% of net revenues, for the three and six months ended
September 30, 2000, as compared to approximately $6.5 million, or 17.3% of net
revenues, and $12.1 million, or 17.4% of net revenues, for the three and six
months ended September 30, 1999. The increase in SG&A expenses for the three and
six months ended September 30, 2000 was primarily due to an increase in
personnel costs, including the amortization of deferred compensation, payroll
taxes on stock option exercises, recruiting, relocation, and travel and
increases in commissions earned by sales representatives. We expect SG&A
expenses to increase in the future due principally to additional staffing in our
sales and marketing departments, increased spending on information technology
and product promotion, as well as increases in the amortization of deferred
compensation related to stock options assumed through our acquisitions.

   Amortization of goodwill and Purchased Intangibles. Amortization of goodwill
and Purchased intangibles of $8.6 million and $10.8 million for the three and
six months ended September 30, 2000, respectively, related to the acquired
intangibles of SiLutia, Inc., YuniNetworks, Inc., pBaud Logic, Inc. and
Chameleon Technologies, Inc. In future periods, the Company expects amortization
of intangibles to increase significantly as a result of the acquisition of MMC,
which occurred after the end of the quarter.

   Acquired In-process Research and Development. For the three and six months
ended September 30, 2000, we recorded $3.6 million and $25.4 million of acquired
in-process research and development resulting from the

                                       11
<PAGE>

acquisition of YuniNetworks and SiLUTIA. See Note 5 of the Notes to Condensed
Consolidated Financial Statements. This amount was expensed on the acquisition
date because the acquired technology had not yet reached technological
feasibility and had no future alternative uses. There can be no assurance that
acquisitions of businesses, products or technologies by us in the future will
not result in substantial charges for acquired in-process R&D that may cause
fluctuations in our interim or annual operating results. During the third
quarter of fiscal 2001 we expect to record a signficant charge for the
acquired in process R&D related to the acquistion of MMC.

   Net Interest Income. Net interest income increased to $13.5 million for the
three months ended September 30, 2000 from $1.0 million for the three months
ended September 30, 1999 and increased to $25.7 million for the six months ended
September 30, 2000 from $1.9 million for the six months ended September 30,
1999. This increase was due principally to increased funds available for
investment.

   Provision for Income Taxes. The effective tax rate for the three and six
months ended September 30, 2000 was 40% and 52%, respectively. This amount
differed from statutory rates primarily due to the nondeductibility of in-
process R&D and the amortization of purchased intangibles.

   Deferred Compensation. During the three and six months ended September 30,
2000, we recorded $43.4 million and $45.9 million of deferred compensation
related to restricted stock and options granted to founders and employees of
acquired companies, resulting in amortization of $610,000 and $744,000,
respectively. In future periods we expect amortization of deferred compensation
to increase significantly as a result of the acquisition of MMC which occured
subsequent to quarter end and the acquisition of SiLUTIA which is only reflected
in the results from the date of acquisition.

   Backlog. Our sales are made primarily pursuant to standard purchase orders
for delivery of products. Quantities of our products to be delivered and
delivery schedules are frequently revised to reflect changes in customer needs,
and customer orders can be canceled or rescheduled without significant penalty
to the customer. For these reasons, our backlog as of any particular date is not
representative of actual sales for any succeeding period, and we therefore
believe that backlog is not a good indicator of future revenue. Our backlog for
products requested to be shipped and nonrecurring engineering services to be
completed in the next six months was $140.3 million on September 30, 2000,
compared to $45.8 million on September 30, 1999.

LIQUIDITY AND CAPITAL RESOURCES

   Our principal source of liquidity as of September 30, 2000 consists of
$1,042.0 million in cash, cash equivalents and short-term investments.  Working
capital as of September 30, 2000 was $1,066.4 million, compared to $977.6
million as of March 31, 2000.  This increase in working capital was primarily
due to net cash provided by operating activities, offset by payments for
acquired businesses and the purchase of property and equipment.

   For the six months ended September 30, 2000 and 1999, net cash provided by
operating activities was $90.3 million and $23.8 million, respectively.  Net
cash provided by operating activities for the six months ended September 30,
2000 primarily reflected net income before depreciation, amortization and other
non-cash charges plus increased accounts payable and accrued liabilities offset
by increases in accounts receivable.

   Capital expenditures totaled $19.5 million for the six months ended September
30, 2000, which included approximately $5.4 million for engineering hardware and
design software and $12.0 million for test and manufacturing equipment, compared
to capital expenditures of $8.0 million for the six months ended September 30,
1999.  We intend to increase our capital expenditures for engineering hardware
and software, manufacturing equipment and test equipment.

   We are exploring alternatives for the expansion of our manufacturing
capacity, including building a new wafer fabrication facility, purchasing a
wafer fabrication facility, and entering into strategic relationships to obtain
additional capacity. Any of these alternatives could require a significant
investment by us, and there can be no assurance that any of the alternatives for
expansion of our manufacturing capacity will be available on a timely basis.

                                       12
<PAGE>

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

RISK FACTORS

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:

     . the reduction, rescheduling or cancellation of orders by customers,
       whether as a result of stockpiling of our products or otherwise;

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

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

     . increases in the costs of products by suppliers;

     . discontinuance of products by suppliers;

     . fluctuations in product life cycles;

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

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

     . our ability to introduce new products and technologies on a timely basis;

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

     . competitive pressures on selling prices;

     . market acceptance of our products and of our customers' products;

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

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

     . the amount and timing of the costs associated with payroll taxes related
       to stock option exercises;

     . the timing of depreciation and other expenses that we expect to incur in
       connection with any expansion of our manufacturing capacity;

     . costs associated with acquisitions and the integration of acquired
       companies, including MMC Networks;

     . costs associated with compliance with applicable environmental
       regulations or remediation;

     . costs associated with litigation, including without limitation,
       litigation or settlements relating to the use or ownership of
       intellectual property;

                                       13
<PAGE>

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

     . general communications systems industry and semiconductor industry
       conditions; and

     . general economic conditions.

     Our expense levels are relatively fixed and are based, in part, on our
expectations of future revenues. We are continuing to increase our operating
expenses for additional manufacturing capacity, personnel and new product
development. We have limited ability to reduce expenses quickly in response to
any revenue shortfalls. 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:

     . significant pricing pressures that occur because of declines in average
       selling prices over the life of a product;

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

     . fabrication, test or assembly capacity constraints for internally
       manufactured devices which interrupt our ability to meet our production
       obligations; and

     . the reduction, rescheduling or cancellation of customer orders.

     Our business is characterized by short-term orders and shipment schedules,
and customer orders typically can be canceled or rescheduled without significant
penalty to the customer. Because we do not have substantial noncancellable
backlog, we typically plan our production and inventory levels based on internal
forecasts of customer demand which are highly unpredictable and can fluctuate
substantially. From time to time, in response to anticipated long lead times to
obtain inventory and materials from our outside suppliers and foundries, we may
order materials in advance of anticipated customer demand. This advance ordering
might result in excess inventory levels or unanticipated inventory write-downs
if expected orders fail to materialize, or other factors render the customers'
products less marketable. We currently anticipate that an increasing portion of
our revenues in future periods will be derived from sales of application-
specific standard products, or ASSPs, as compared to application specific
integrated circuits, or ASICs. Customer orders for ASSPs typically have shorter
lead times than orders for ASICs, which may make it increasingly difficult for
us to predict revenues and inventory levels and adjust production appropriately.
If we are unable to plan inventory and production levels effectively, our
business, financial condition and operating results could be materially harmed.

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

     We rely on outside foundries for the manufacture of certain products,
including all of our products designed on CMOS processes and silicon germanium
processes. The outside foundries manufacture our products on a purchase order
basis. We expect that, for the foreseeable future, a single foundry will
manufacture certain products. Since we place orders on a purchase order basis,
these suppliers can allocate, and in the past have allocated, capacity to the
production of other companies' products while reducing deliveries to us on a
short notice. Because establishing relationships and ramping production with new
outside foundries takes several months to over a year, there is no readily
available alternative source of supply for these products. A manufacturing
disruption experienced by one or more of our outside foundries or a disruption
of our relationship with an outside foundry would negatively impact the
production of certain of our products for a substantial period of time. The
transition to the next generation of manufacturing technologies at one or more
of our outside foundries could be unsuccessful or delayed.

If we do not successfully expand our manufacturing capacity on time, we may face
serious capacity constraints.

     We currently manufacture a significant portion of our IC products at our
fabrication facility in San Diego, California.  We believe that we will be able
to satisfy our production needs of the products built in the San Diego

                                       14
<PAGE>

facility through the end of fiscal 2001, although this date may vary depending
on, among other things, our rate of growth.

     We are exploring alternatives for the further expansion of our
manufacturing capacity, including:

     . entering into strategic relationships to obtain additional capacity;

     . building a new fabrication facility; or

     . purchasing a fabrication facility.

     Any of these alternatives, either singly or in combination, could require a
significant investment by us. We cannot assure you that any of the alternatives
for expansion of our manufacturing capacity will be available on a timely basis
or that we will be able to manage our growth and effectively integrate the
expansion into our current operations.

     The cost of any investment we may have to make to expand our manufacturing
capacity is expected to be funded through a combination of available cash, cash
equivalents and short-term investments, cash from operations and additional
debt, lease or equity financing. We may not be able to obtain the additional
financing necessary to fund the construction and completion of the expanded
manufacturing facility.

     Building a new fabrication facility or purchasing a fabrication facility
entails significant risks, including:

     . shortages of materials and skilled labor;

     . unforeseen environmental or engineering problems;

     . work stoppages;

     . weather interferences; and

     . unanticipated cost increases.

     Any one of these risks could have a material adverse effect on the
building, equipping and production start-up of a new facility or the expansion
of our existing facility. Unexpected changes or concessions required by local,
state or federal regulatory agencies with respect to necessary licenses, land
use permits, site approvals and building permits could involve significant
additional costs and delay the scheduled opening of a new facility and could
reduce our anticipated revenues. Also, the timing of commencement of operation
of a new facility will depend upon the availability, timely delivery, successful
installation and testing of the necessary process equipment. As a result of the
foregoing and other factors, a new facility may not be completed and in volume
production within budget or within the necessary timeframe.  In addition, we may
be unable to achieve adequate manufacturing yields in a new facility in a timely
manner, and our revenues may not increase commensurate with the increase in
manufacturing capacity associated with a facility.

We have in the past and may in the future make acquisitions where advisable,
which will involve numerous risks. There is no assurance that we will be able to
address these risks successfully without substantial expense, delay or other
operational or financial problems.

     The risks involved with acquisitions include:

     . diversion of management's attention;

     . failure to retain key personnel;

     . amortization of acquired intangible assets;

     . client dissatisfaction or performance problems with an acquired firm;

     . the cost associated with acquisitions and the integration of acquired
       operations; and

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

     A future acquisition could adversely affect operating results. In
particular, if we were to acquire a company or assets and record the acquisition
as a purchase, we may capitalize a significant goodwill asset. This asset would
be amortized over its expected period of benefit. The resulting amortization
expense could seriously impact operating results for many years.

     In addition, acquisitions accounted for using the pooling of interest
methods of accounting are subject to rules established by the Financial
Accounting Standards Board and the Securities and Exchange Commission. These
rules are complex and the interpretation of them is subject to change. The
availability of pooling of interests accounting treatment for a business
combination depends in part upon circumstances and events occurring after the
effective time. The failure of a past business combination or a future potential
business combination that has been accounted for under the pooling of interests
accounting method to qualify for this accounting treatment would materially harm
our reported and future earnings and likely, the price of our common stock.

     Any of these risks could materially harm our business, financial condition
and results of operations. We cannot assure you that any business that we
acquire will achieve anticipated revenues or operating results.

The merger with MMC Networks may not realize the anticipated benefits.

     On October 25, 2000, we completed a merger with MMC Networks. We entered
the merger agreement with MMC Networks with the expectation that the merger
would result in benefits to us including:

     . combining complementary technologies to permit us to provide products
       with more complete solutions than we can now provide on our own;

     . a combined company with greater financial, technology and human resources
       for developing new products and providing greater sales and marketing
       resources to promote and sell our products; and

     . providing us with access to MMC Networks' customer base to increase
       distribution of our products.

     Our success in achieving these benefits will depend on whether we can
integrate the technology, operations and personnel of the two companies in a
timely and efficient manner. We must minimize the risk that the merger will
result in the loss of key employees or the continued diversion of our
management's attention. The integration of sales of MMC Networks' products into
our business model may jeopardize our success. MMC Networks' technology and
products address the network processor market, which is a new market for us.

     As a result of the merger, we expect to capitalize a significant amount of
intangible assets, including goodwill. These intangible assets will be amortized
over the period of expected benefit and will materially adversely effect our
operating results reported on a GAAP basis. In addition, we expect to take a
charge for acquired in-process research and development which will further
decrease our GAAP basis operating results for the third quarter of fiscal 2001.

     We cannot assure you that MMC Networks will be successfully integrated or
that we will realize any of the anticipated benefits. Failure to successfully
integrate the two companies successfully could have a material adverse effect on
our business, financial condition and operating results.

Our operating results substantially depend on manufacturing output and yields,
which may not meet expectations.

     We manufacture most of our ICs at our San Diego fabrication facility.
Manufacturing ICs requires manufacturing tools which are unique to each product
being produced. If one of these unique manufacturing tools was damaged or
destroyed, then our ability to manufacture the related product would be impaired
and our business would suffer until the tool were repaired or replaced.

                                       15
<PAGE>

     Our yields 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. The ongoing
expansion of the manufacturing capacity of our existing fabrication facility
could increase the risk of contaminants in the facility. In addition, design
iterations and process changes by our suppliers can cause a risk of
contamination. Many of these problems are difficult to diagnose, and are time
consuming and expensive to remedy and can result in shipment delays.

     We estimate yields per wafer in order to estimate the value of inventory.
If yields are materially different than projected, work-in-process inventory may
need to be revalued. We have in the past, and may in the future from time to
time, 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 in a new or
expanded manufacturing facility.

     In addition, our manufacturing output or yields may decline as a result of
power outages, accidents, natural disasters or other disruptions to the
manufacturing process.

     Because the majority of our costs of manufacturing are relatively fixed,
yield decreases can result in substantially higher unit costs and may result in
reduced gross profit and net income. Yield decreases could force us to allocate
available product supply among customers, which could potentially harm customer
relationships.

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

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

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

     . reduced control over delivery schedules and quality;

     . risks of inadequate manufacturing yields and excessive costs;

     . difficulties selecting and integrating new subcontractors;

     . limited warranties on products supplied to us;

     . potential increases in prices; and

     . potential misappropriation of our intellectual property.

     Difficulties associated with adapting our technology and product design to
the proprietary process technology and design rules of outside foundries can
lead to reduced yields. The process technology of an outside foundry is
typically proprietary to the manufacturer. Since low yields may result from
either design or process technology failures, yield problems may not be
effectively determined or resolved until an actual product exists that can be
analyzed and tested to identify process sensitivities relating to the design
rules that are used. As a result, yield problems may not be identified until
well into the production process, and resolution of yield problems may require
cooperation between ourselves 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 delay product delivery, which would harm our
profitability and customer relationships.

If the 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 face production delays.

                                       16
<PAGE>

     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 on an older or lower-volume process that
it uses to produce our parts. We cannot be certain our external foundries will
continue to devote resources to the production of our products or continue to
advance the process design technologies on which the manufacturing of our
products are based. Each of these events could increase our costs and harm our
ability to deliver our products on time.

     Due to an industry transition to six-inch, eight-inch and twelve-inch wafer
fabrication facilities, there is a limited number of suppliers of the four-inch
wafers that we use to build products in our existing manufacturing facility, and
we rely on a single supplier for these wafers. Although we believe that we will
have sufficient access to four-inch wafers to support production in our existing
fabrication facility for the foreseeable future, we cannot be certain that our
current supplier will continue to supply us with four-inch wafers on a long-term
basis. The availability of manufacturing equipment needed for a four-inch
process is limited, and certain new equipment required for more advanced
processes may not be available for a four-inch process.

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

     Our future success will depend upon our ability to continue to improve
existing process technologies, to develop or acquire new process technologies
including silicon germanium processes, and to adapt our process technologies to
emerging industry standards. In the future, we may be required to transition one
or more of our products to process technologies with smaller geometries, other
materials or higher speeds in order to reduce costs and/or improve product
performance. We may not be able to improve our process technologies and develop
or otherwise gain access to new process technologies, including but not limited
to silicon germanium process technologies, in a timely or affordable manner. In
addition, products based on these technologies may not achieve market
acceptance.

Our customers are concentrated, so the loss of one or more key customers could
significantly reduce our revenues and profits.

     A relatively small number of customers has accounted for a significant
portion of our revenues in any particular period. We have no long-term volume
purchase commitments from any of our major customers. We anticipate that sales
of products to relatively few customers will continue to account for a
significant portion of our revenues. If a significant customer overstocked our
products, additional orders for our products could be harmed. A reduction, delay
or cancellation of orders from one or more significant 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 new
significant customers is subject to a variety of factors, including:

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

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

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

     . a significant customer's product line using our products may rapidly
       decline or be phased out;

     . significant customers may not incorporate our products in their future
       product designs;

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

                                       17
<PAGE>

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

     . we may not be able to successfully develop relationships with additional
       significant network equipment vendors; and

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

     Any one of the factors above could have a material adverse effect on our
business, financial condition and results of operation.

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

     There is intense competition for qualified personnel in the semiconductor
industry, in particular design engineers, and we may not be able to continue to
attract and train engineers or other qualified personnel necessary for the
development of our business or to replace engineers or other qualified personnel
who may leave our employ in the future. Our anticipated growth is expected to
place increased demands on our resources and will likely require the addition of
new management personnel and the development of additional expertise by existing
management 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 and process development programs.

Periods of rapid growth and expansion could continue to place a significant
strain on our limited personnel and other resources.

     To manage expanded operations effectively, we will be required to continue
to improve our operational, financial and management systems and to successfully
hire, train, motivate and manage our employees. The integration of past and
future potential acquisitions and the expansion of our manufacturing capacity
will require significant additional management, technical and administrative
resources. We cannot be certain that we will be able to manage our growth or
effectively integrate a new or expanded wafer fabrication facility into our
current operations.

An important part of our strategy is to continue our focus on the markets for
high-speed communications ICs and to begin focus on the market for network
processors. If we are unable to expand our share of these markets further, our
revenues could stop growing and may decline.

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

     A significant portion of our revenues in recent periods has been, and is
expected to continue to be, derived from sales of products based on SONET, SDH
and ATM transmission standards. If the communications market evolves to new
standards, we may not be able to successfully design and manufacture new
products that address the needs of our customers or gain substantial market
acceptance. Although we have developed products for the Gigabit Ethernet and
Fibre Channel communications standards, volume sales of these products are
modest, and we may not be successful in addressing the market opportunities for
products based on these standards.

     Customers for network processors have substantial technological
capabilities and financial resources.  They traditionally use these resources to
internally develop the ASIC components and develop programs for the general-
purpose processors utilized in our network processor products.  Our future
prospects are dependent upon our customers' acceptance of network processors as
an alternative to ASIC components and general-purpose processors.  Future
prospects also are dependent upon acceptance of third-party sourcing for network
processors as an alternative to in-house development.  Network equipment vendors
may in the future continue to use internally-developed ASIC components and
general-purpose processors.  They also may decide to develop or acquire
components, technologies or network processors that are similar to, or that may
be substituted for, our network processor products.

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

Our 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:

                                       18
<PAGE>

     . rapidly changing technologies;

     . evolving and competing industry standards;

     . short product life cycles;

     . changing customer needs;

     . emerging competition;

     . frequent new product introductions and enhancements;

     . increased integration with other functions; and

     . rapid product obsolescence.

     To develop new products for the communications markets, we must develop,
gain access to and use leading technologies in a cost-effective and timely
manner and continue to develop technical and design expertise. In addition, 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. If we fail to achieve design wins with key
customers, our business will significantly suffer because once a customer has
designed a supplier's product into its system, the customer typically is
extremely reluctant to change its supply source due to significant costs
associated with qualifying a new supplier.

     Products for communications applications, as well as for high-speed
computing applications, are based on industry standards that are continually
evolving. Our ability to compete in the future will depend on our ability to
identify and ensure compliance with these evolving industry standards. The
emergence of new industry standards could render our products incompatible with
products developed by major systems manufacturers. As a result, we could be
required to invest significant time and effort and to incur significant expense
to redesign our products to ensure compliance with relevant standards. If our
products are not in compliance with prevailing industry standards for a
significant period of time, we could miss opportunities to achieve crucial
design wins. We may not be successful in developing or using new technologies or
in developing new products or product enhancements that achieve market
acceptance. Our pursuit of necessary technological advances may require
substantial time and expense.

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

     The communications IC market is highly competitive and we expect that
competition will increase in these markets. Our ability to compete successfully
in our markets depends on a number of factors, including:

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

     . product quality, reliability and performance;

     . customer support;

     . time-to-market;

     . price;

     . the efficiency of production;

     . design wins;

                                       19
<PAGE>

     . 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.

     In addition, our competitors or customers may offer enhancements to our
existing products or offer new products based on new technologies, industry
standards or customer requirements including, but not limited to, all optical
networking systems 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 or higher performance alternatives to our products. The introduction
of enhancements or new products by our competitors could render our existing and
future products obsolete or unmarketable. We expect that certain of our
competitors and other semiconductor companies may seek to develop and introduce
products that integrate the functions performed by our IC products on a single
chip, thus eliminating the need for our products.

     In the communications markets, we compete primarily against Conexant, Giga
(acquired by Intel), Infineon, Lucent, Maxim, Philips, PMC-Sierra, TriQuint and
Vitesse. Some of these companies have significantly greater financial and other
resources than us, and some of these companies use other process technology such
as gallium arsenide which may have certain advantages over technology we
currently use. In certain circumstances, most notably with respect to ASICs
supplied to Nortel, our customers or potential customers have internal IC
manufacturing capabilities.

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

     We have derived significant revenues from product sales to customers in the
automated test equipment, or ATE, high-speed computing and military markets and
currently anticipate that we will continue to derive revenues from sales to
customers in these markets in the near term. We are not currently funding
product development efforts in these markets, and we expect that revenues from
products in these markets will decline in future periods. The market for ATE and
high-speed computing IC products is subject to extreme price competition, and we
may not be able to reduce the costs of manufacturing high-speed computing IC
products in response to declining average selling prices.

     We expect that certain competitors will seek to develop and introduce
products that integrate the functions performed by our ATE and high speed
computing IC products on single chips. One or more of our customers may choose
to utilize discrete components to perform the functions served by our high-speed
computing IC products or may use their own design and fabrication facilities to
create a similar product. In either case, the need for ATE and high-speed
computing customers to purchase our IC products could be eliminated.

                                       20
<PAGE>


The complexity of our network processor products frequently leads to errors,
defects and bugs when they are first introduced, which could negatively impact
our reputation with customers.

     Products as complex as network processors frequently contain errors,
defects and bugs when first introduced or as new versions are released. Our
network processors 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 network processor products.  This, in turn, could damage our reputation and
adversely affect our ability to retain existing customers and to attract new
customers.  Errors, defects or bugs could cause problems, interruptions, delays
or cessation of sales to our network processor customers.

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

     .   additional development costs;

     .   loss of, or delays in, market acceptance;

     .   diversion of technical and other resources from our combined company's
         other development efforts;

     .   claims by our customers or others against it; 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.

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 provide us with competitive
advantages or will not be challenged by third parties, or that if challenged,
will be found to be valid or enforceable, or that the patents of others will not
have an adverse effect on our ability to do business. Furthermore, others may
independently develop similar products or processes, duplicate our products or
processes or design around any patents that may be issued to us.

                                       21
<PAGE>

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

We could be harmed by litigation involving patents and proprietary rights.

     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
the intellectual property rights of third parties. We have certain
indemnification obligations to customers with respect to the infringement of
third-party intellectual property rights by our products. We cannot be certain
that infringement claims by third parties or claims for indemnification by
customers or end users resulting from infringement claims will not be asserted
in the future or that such assertions, if proven to be true, will not harm our
business.

     Any litigation relating to the intellectual property rights of third
parties, whether or not determined in our favor or settled by us, 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.

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

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

     . foreign currency exchange fluctuations;

     . changes in regulatory requirements;

     . tariffs and other barriers;

     . timing and availability of export licenses;

     . political and economic instability;

     . difficulties in accounts receivable collections;

     . natural disasters;

     . difficulties in staffing and managing foreign subsidiary and branch
       operations;

     . difficulties in managing distributors;

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

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

                                       22
<PAGE>

     . potentially adverse tax consequences.

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

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 restrict our ability to expand our facilities at the
present location or construct or operate a new fabrication facility or 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, 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 potentially responsible parties that has agreed to fund certain
remediation efforts at the Omega site, which efforts are ongoing. To date, our
payment obligations with respect to these funding efforts have not been
material, and we believe that our future obligations to fund these efforts will
not have a material adverse effect on our business, financial condition or
operating results. Although we believe that we are currently in material
compliance with applicable environmental laws and regulations, we cannot assure
you that we are or will be in material compliance with these laws or regulations
or that our future obligations to fund any remediation efforts, including those
at the Omega site, will not have a material adverse effect on our business.

Our ability to manufacture a sufficient number of products to meet demand could
be severely hampered by a shortage of water or natural disasters.

     We use significant amounts of water throughout our manufacturing process.
Previous droughts in California have resulted in restrictions being placed on
water use by manufacturers and residents in California. In the event of future
drought, reductions in water use may be mandated generally, and it is unclear
how such reductions will be allocated among California's different users. We
cannot be certain that near term reductions in water allocations to
manufacturers will not occur. Our existing fabrication facility is, and a
potential new fabrication facility may be, located in Southern California and
these facilities may be subject to natural disasters such as earthquakes or
floods. We do not have earthquake insurance for these facilities, because
adequate coverage is not offered at economically justifiable rates. A
significant natural disaster, such as an earthquake or flood, could have a
material adverse impact on our business, financial condition and 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;

                                       23
<PAGE>

     . technological innovations or setbacks by us or our competitors;

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

     . the commencement of litigation;

     . changes in estimates of our performance by securities analysts;

     . announcements of merger or acquisition transactions; and

     . other events or factors.

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

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

     Our board of directors has the authority to issue up to 2,000,000 shares of
preferred stock and to determine the price, rights, preferences and privileges
and restrictions, including voting rights, of those shares without any further
vote or action by our stockholders. The rights of the holders of common stock
will be subject to, and may 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 subsequent issuance of our common stock
may result in immediate dilution of our then current stockholders.

                                       24
<PAGE>

ITEM 3.  QUANTITATIVE AND QUALTITATIVE DISCLOSURE ABOUT MARKET RISK

     At September 30, 2000, our investment portfolio included fixed-income
securities of $962.8 million.  These securities are subject to interest rate
risk and will decline in value if interest rates increase.  Because the average
maturity date of the investment portfolio is relatively short, an immediate 100
basis point increase in interest rates would have no material impact on our
financial condition or results of operations.

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

PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

     From time to time, we may be involved in litigation relating to claims
arising out of its operations on the normal course of business.  As of the date
of this Quarterly Report on Form 10-Q, we are not engaged in any legal
proceedings that are expected, individually or in the aggregate, to have a
material adverse effect on our business, financial condition or operating
results.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

     (b) Recent Sales of Unregistered Securities

     On September 21, 2000, we acquired all the outstanding stock of SiLUTIA,
Inc. Under the terms of the related agreement, all of the outstanding stock of
SiLUTIA was exchanged for approximately 566,000 shares of our Common Stock and
the assumption of approximately 70,000 options.  At the time of the transaction,
the shares of Common Stock issued to the former SiLutia stockholders were not
registered under the Securities Act because the transaction involved a non-
public offering exempt from registration under Section 4(2) of the Securities
Act of 1933 and Regulation D promulgated thereunder.  On September 26, 2000, we
filed a registration statement on Form S-3 to cover the potential resale of
171,088 of our Common Stock issued pursuant to the agreement.  The
registration statement was subsequently amended on October 5, 2000 to increase
the shares of our Common Stock covered under the registration statement to
258,600 shares.

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

         We held our Annual Meeting of Stockholders (the "Annual Meeting") on
         August 29, 2000. Of the 248,671,846 shares of our Common Stock which
         could be voted at the Annual Meeting, 212,614,974 shares of our Common
         Stock, representing 86% of our outstanding Common Stock on the record
         date for the Annual Meeting of June 30, 2000, were represented at the
         Annual Meeting in person or by proxy, which constituted a quorum.
         Voting results were as follows:

               (a) Election of the following persons to our Board of Directors,
               to hold office until the next annual meeting of stockholders and
               until their successors have been duly elected and qualified:


                                                      For          Withheld
                                                      ---          --------
               William K. Bowes, Jr.                212,252,424     362,550
               R. Clive Ghest                       212,327,300     287,674
               Franklin P. Johnson, Jr.             212,248,902     366,072
               S. Atiq Raza                         212,312,338     302,636
               David M. Rickey                      212,325,610     289,364
               Roger A. Smullen, Sr.                212,310,160     304,814
               Arthur B. Stabenow                   212,328,632     286,342
               Harvey P. White                      212,324,866     290,108

                                       25
<PAGE>

          (b) Approval of the amendment to our Amended Restated Certificate of
          Incorporation to increase the authorized shares of our Common Stock by
          450,000,000 shares to a total of 630,000,000 shares:

             For            Against         Abstain          Broker non
             ---            -------         -------          ----------
          188,931,268       23,422,286         261,418                0



          (c) Ratification of the appointment of Ernst & Young LLP as our
          independent auditors for the fiscal year ending March 31, 2001:


             For            Against         Abstain
             ---            -------         -------
          212,408,456           53,634          152,866


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

   (A)  EXHIBITS

        10.35  Lease of Facilities in Andover Massachusetts between 200
               Minuteman Limited Partnership and Registrant dated September 13,
               2000

        27.1   Financial Data Schedule

   (B)  We filed the following current reports on Form 8-K with the Commission
   during the three months ended September 30, 2000:

        1)  On July 17, 2000, we filed an Amended Current Report on form 8-K/A
            to amend the Current Report on Form 8-K we filed on June 23, 2000,
            to announce the acquisition on June 8, 2000 of YuniNetworks, Inc.

        2)  On September 7, 2000, we filed a Current Report on Form 8-K to
            announce the execution of a definitive agreement to acquire MMC
            Networks, Inc.



                                  SIGNATURES

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

Date:  November 12, 2000        Applied Micro Circuits Corporation

                                        By: /s/ William Bendush
                                            -------------------
                                               William Bendush
                                Vice President
                                   And Chief Financial Officer
                                (Duly Authorized Signatory and Principal
                                   Financial and Accounting Officer)

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