APPLIED MICRO CIRCUITS CORP – 10-Q – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge)
This management's discussion and analysis of financial condition and results of
operations ("MD&A") is provided as a supplement to the accompanying condensed
consolidated financial statements and footnotes to help provide an understanding
of our financial condition, changes in our financial condition and results of
our operations. The MD&A is organized as follows:

• Caution concerning forward-looking statements. This section discusses how

forward-looking statements made by us in the MD&A and elsewhere in this
Annual Report are based on management's present expectations about future
events and are inherently susceptible to uncertainty and changes in
circumstances.

• Overview. This section provides an introductory overview and context for

the discussion and analysis that follows in the MD&A.

• Critical accounting policies. This section discusses those accounting

policies that are both considered important to our financial condition and

operating results and require significant judgment and estimates on the
part of management in their application.

• Results of operations. This section provides an analysis of our results of

operations for the three and nine months ended December 31, 2011 and 2010.

A brief description is provided of transactions and events that impact the

comparability of the results being analyzed.

• Financial condition and liquidity. This section provides an analysis of

our cash position and cash flows, as well as a discussion of our financing

arrangements and financial commitments.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

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

OVERVIEW

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

We are a semiconductor company that possesses fundamental and differentiated
intellectual property for high speed signal processing, packet based
communications processors and telecommunications transport protocols. This
intellectual property enables us to be a key player in the datacenter,
enterprise and telecommunications applications. Our customer focus is on the
OEMs and telecommunications companies that build and connect to datacenters. As
of December 31, 2011, our business had two reporting units, Process and
Transport.

Since the start of fiscal 2010, we have invested a total of $283.1 million in
the R&D of new products, including higher-speed, lower-power and lower-cost
products, products that combine the functions of multiple existing products into
single highly integrated products, and other products to complete our portfolio
of communications products. These products, and our customers' products for
which they are intended, are highly complex. Due to this complexity, it often
takes several years to complete the development and qualification of these
products before they enter into volume production. Accordingly, we have not yet
generated significant revenues from some of the products developed during this
time period. In addition, downturns in the telecommunications market can
severely impact our customers' business and usually results in significantly
less demand for our products than was expected when the development work
commenced.

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Our consolidated financial statements include all the financial results of
Veloce Technologies, Inc. ("Veloce"), the Company's variable interest entity
("VIE") of which the Company is the primary beneficiary. Under the amended
merger agreement between the Company and Veloce, the Company would acquire
Veloce if certain milestones and delivery schedules were achieved. Should the
Company acquire Veloce pursuant to the merger agreement, the purchase price
payable by the Company is estimated to be in the range of approximately $7
million up to approximately $135 million, subject to additional adjustments.

During the current quarter, we observed ongoing industry-wide demand softness
due to continued weakness in global macro economic conditions.

The following tables present a summary of our results of operations for the
three and nine months ended December 31, 2011 and 2010 (dollars in thousands):

Three Months Ended December 31,
2011 2010
% of Net % of Net Increase %

Amount Revenue Amount Revenue (Decrease) Change
Net revenues $ 56,347 100.0 % $ 62,364 100.0 % $ (6,017 ) (9.6 )%

Cost of revenues 23,795 42.2 23,886 38.3 (91 ) (0.4 )

Gross profit 32,552 57.8 38,478 61.7 (5,926 ) (15.4 )

Total operating expenses 40,337 71.6 42,934 68.8 (2,597 ) (6.0 )

Operating loss (7,785 ) (13.8 ) (4,456 ) (7.1 ) (3,329 ) (74.7 )

Interest and other income, net 914 1.6 2,325 3.7 (1,411 ) (60.7 )

Loss before income taxes (6,871 ) (12.2 ) (2,131 ) (3.4 ) (4,740 ) (222.4 )

Income tax expense (benefit) 206 0.4 (170 ) (0.3 ) 376 221.2

Net loss $ (7,077 ) (12.6 )% $ (1,961 ) (3.1 )% $ (5,116 ) (260.9 )%

Nine Months Ended December 31,
2011 2010
% of Net % of Net Increase %

Amount Revenue Amount Revenue (Decrease) Change
Net revenues $ 182,120 100.0 % $ 189,127 100.0 % $ (7,007 ) (3.7 )%

Cost of revenues 77,830 42.7 69,806 36.9 8,024 11.5

Gross profit 104,290 57.3 119,321 63.1 (15,031 ) (12.6 )

Total operating expenses 122,586 67.3 123,378 65.2 (792 ) (0.6 )

Operating loss (18,296 ) (10.0 ) (4,057 ) (2.1 ) (14,239 ) (351.0 )

Interest and other income, net 3,787

2.1 7,508 4.0 (3,721 ) (49.6 )

(Loss) income before income taxes (14,509 ) (8.0 ) 3,451 1.8 (17,960 ) (520.4 )

Income tax expense 597 0.3 446 0.2 151 33.9

Net (loss) income $ (15,106 ) (8.3 )% $ 3,005 1.6 % $ (18,111 ) (602.7 )%

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

In November 2009, we entered into a Patent Purchase Agreement with Acacia Patent
Acquisition LLC ("APAC"). Pursuant to this Agreement, we agreed to sell a series
of our patents, patent applications and associated rights related to certain
technologies for an aggregate purchase price of $2.5 million payable over two
years and a 25% share of royalty payments for assignment of rights under the
sale and/or use of the patents. Due to the nature of the payment terms, related
revenue is being recorded as the payments are received.

On a sell-through basis, we had approximately 70 days of inventory in the
distributor channel at December 31, 2011 as compared to 80 days at December 31,
2010.

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The gross margins for our solutions have historically declined over time. Some
factors that we expect to cause downward pressure on the gross margins for our
products include competitive pricing pressures, unfavorable product mix, the
cost sensitivity of our customers particularly in the higher-volume markets, new
product introductions by us or our competitors, and capacity constraints in our
supply chain. From time to time, for strategic reasons, we may accept orders at
less than optimal gross margins in order to facilitate the introduction of, or,
market penetration of our new or existing products. To maintain acceptable
operating results, we will need to offset any reduction in gross margins of our
products by reducing costs, increasing sales volume, developing and introducing
new products and developing new generations and versions of existing products on
a timely basis.

We classify our revenues into two categories based on the markets that the
underlying products serve. The categories are Process and Transport. We use this
information to analyze our performance and success in these markets.

We are continuing to focus our current transport investments on high growth 10G
and faster Ethernet solutions, data center, Optical Transport Network ("OTN")
and enterprise market opportunities while continuing to service the Telecom
(SONET/SDH) market. Over time, we believe customers will transition from the
SONET/SDH standard to higher speed, lower power products that utilize the OTN
standard in order to support the increasing demand for transmission of data over
networks. However, the timing and extent of this transition is uncertain due to
the significant investment that is needed to convert networks to the OTN
standard. As such, the rate of conversion to the OTN standard is, in part,
greatly influenced by global economic market conditions. Recessionary type
market conditions will result in a slower transition of networks to the OTN
standard. Additionally, there can be no assurance that our revenues will
increase as the OTN standard is adopted.

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

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

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

• the qualification, availability and pricing of competing products and

technologies and the resulting effects on the sales, pricing and gross
margins of our products.

• the rate at which our present and future customers and end-users adopt our

products and technologies in our target markets;

• general economic and market conditions in the semiconductor industry and

communications markets;

• combinations of companies in our customer base, resulting in the combined company choosing our competitor's IC standardization other than our

supported product platforms;

• the gain or loss of one or more key customers, or their key customers, or

significant changes in the financial condition of one or more of our key

customers or their key customers;

• our ability to meet customer demand due to capacity constraints at our suppliers; and

• natural disasters that could affect our supply chain or our customer's

supply chain which would affect their requirements of our products.

For these and other reasons, our net revenue and results of operations for the
three and nine months ended December 31, 2011 and 2010 may not necessarily be
indicative of future net revenue and results of operations.

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

Three Months Ended Nine Months Ended
December 31, December 31,
2011 2010 2011 2010

Wintec (global logistics provider) (1) 19 % * 21 % *

Avnet (distributor) 23 % 35 % 19 % 33 %

Flextronics (sub-contract manufacturer) * * 11 % *

Hon Hai (sub-contract manufacturer) (1) * 16 % * 15 %

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

We expect that our largest customers will continue to account for a substantial
portion of our net revenue for the foreseeable future. Distributor revenues for
the three and nine months ended December 31, 2011 were 46% and 36% of total
revenues, as compared to 45% and 43% for the three and nine months ended
December 31, 2010, respectively. The nine month over nine month decrease was
primarily due to increased demand from our distributors during the nine months
ended December 31, 2010.

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

Three Months Ended December 31, Nine Months Ended December 31,

2011 2010 2011 2010
% of Net % of Net % of Net % of Net

Amount Revenue Amount Revenue Amount Revenue Amount Revenue

United States of America (1) $ 24,044 42.7 % $ 21,735 34.8 % $ 82,455 45.3 % $ 62,365 33.0 %

Taiwan (1) 5,997 10.6 12,500 20.0 15,462 8.5 34,128 18.0

Hong Kong 5,094 9.0 5,529 8.9 17,601 9.6 19,701 10.4

China 1,062 1.9 2,603 4.2 4,152 2.3 6,977 3.7

Europe 9,220 16.4 8,659 13.9 31,895 17.5 32,131 17.0

Other Asia 10,702 19.0 10,678 17.1 29,851 16.4 31,647 16.7

Other 228 0.4 660 1.1 704 0.4 2,178 1.2

$ 56,347 100.0 % $ 62,364 100.0 % $ 182,120 100.0 % $ 189,127 100.0 %

(1) The change is primarily due to a major end customer changing its logistics

management program.

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

Key non-GAAP measurements. We use certain non-GAAP metrics such as Adjusted
Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted
EBITDA") to measure our performance. We define Adjusted EBITDA as net (loss)
income less interest income, income taxes, depreciation and amortization,
stock-based compensation, amortization of intangibles and other one-time and/or
non-cash items. The following table reconciles Adjusted EBITDA to the
accompanying financial statements (in thousands):

Three Months Ended Nine Months Ended
December 31, December 31,
2011 2010 2011 2010
Net (loss) income $ (7,077 ) $ (1,961 ) $ (15,106 ) $ 3,005

Adjustment to net (loss) income:
Stock-based compensation expense 4,433 5,089 11,735 12,910

Amortization of purchased intangibles 1,329 4,757 5,425 12,188

Restructuring charges 2 33 875 566

Acquisition related (recoveries) expenses* – - (2,267 ) 859

Depreciation and amortization 2,539 2,196 7,193 6,620

Interest and other income, net (853 ) (1,551 ) (3,121 ) (4,138 )

Impairment of marketable securities^ (61 ) (774 ) (666 ) (3,370 )

Other and income tax adjustments 204 (170 ) 598 450

Adjusted EBITDA $ 516 $ 7,619 $ 4,666 $ 29,090

* The recovery is from the TPack contingent consideration adjustment (see Note

10) of the Notes to Condensed Consolidated Financial Statements).

^ For non-GAAP purposes, any gain or loss relating to marketable securities is

not recognized until the underlying securities are sold and the actual gain or

loss is realized.

We believe that Adjusted EBITDA is a useful supplemental measure of our
operation's performance because it helps investors evaluate and compare the
results of operations from period to period by removing the accounting impact of
the company's financing strategies, tax provisions, depreciation and
amortization, restructuring charges, stock based compensation expense,
discontinued operations and certain other operating items. We adjust for these
excluded items because we believe that, in general, these items possess one or
more of the following characteristics: their magnitude and timing is largely
outside of the company's control; they are unrelated to the ongoing operations
of the business in the ordinary course; they are unusual or infrequent and the
company does not expect them to occur in the ordinary course of business; or
they are non-cash expenses.

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Adjusted EBITDA is not a measure determined in accordance with generally
accepted accounting principles in the United States, or GAAP, and should not be
considered a substitute for operating income, net income or any other measure
determined in accordance with GAAP. Adjusted EBITDA should not be considered in
isolation or as a substitute for measures of performance prepared in accordance
with GAAP. Adjusted EBITDA is used by our management as a measure of operating
efficiency and overall financial performance for benchmarking against our peers
and competitors and is used as a metric to determine the performance vesting of
our three-year RSU grants issued in May 2009 (the "EBITDA Grants") and May 2011
(the "EBITDA2 Grants"). Management believes Adjusted EBITDA provides meaningful
supplemental information regarding the underlying operating performance of our
business. Management also believes that Adjusted EBITDA is useful to investors
because it is frequently used by securities analysts, investors and other
interested parties to evaluate the company.

The book-to-bill ratio is another metric commonly used by investors to compare
and evaluate technology and semiconductor companies. The book-to-bill ratio is a
demand-to-supply ratio that compares the total amount of orders received to the
total amount of orders filled. This ratio tells whether the company has more
orders than it delivered (if greater than 1), has the same amount of orders that
it delivered (equals 1), or has less orders than it delivered (under 1). Though
the ratio provides an indicator of whether orders are rising or falling, it does
not consider the timing of or if the order will result in future revenues and
the effect of changing lead times on bookings. Our book-to-bill ratio was
approximately 0.9 at December 31, 2011 and 2010.

CRITICAL ACCOUNTING POLICIES

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

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

Investments

We hold a variety of securities that have varied underlying investments. We
review our investment portfolio periodically to assess for other-than-temporary
impairment. We assess the existence of impairment of our investments in order to
determine the classification of the impairment as "temporary" or
"other-than-temporary". The factors used to determine whether an impairment is
temporary or other-than-temporary involves considerable judgment. The factors we
consider in determining whether any individual impairment is temporary or
other-than-temporary are primarily the length of the time and the extent to
which the market value has been less than amortized cost, the nature of
underlying assets (including the degree of collateralization), the financial
condition, credit rating, market liquidity conditions and near-term prospects of
the issuer. If the fair value of a debt security is less than its amortized cost
basis at the balance sheet date, an assessment would have to be made as to
whether the impairment is other-than-temporary. If we decided to sell the
security, an other-than-temporary impairment shall be considered to have
occurred. However, if we do not intend to sell the debt security, we shall
consider available evidence to assess whether it is more likely than not we will
be required to sell the security before the recovery of its amortized cost basis
due to cash, working capital requirements, contractual or regulatory obligations
indicate that the security will be required to be sold before a forecasted
recovery occurs. If it is more likely than not that we are required to sell the
security before recovery of its amortized cost basis, an other-than-temporary
impairment is considered to have occurred. If we do not expect to recover the
entire amortized cost basis of the security, we would not be able to assert that
we will recover its amortized cost basis even if we do not intend to sell the
security. Therefore, in those situations, an other-than-temporary impairment
shall be considered to have occurred. Use of present value cash flow models to
determine whether the entire amortized cost basis of the security will be
recovered is expected. We will compare the present value of cash flows expected
to be collected from the security with the amortized cost basis of the security.

An other-than-temporary impairment is said to have occurred if the present value
of cash flows expected to be collected is less than the amortized cost basis of
the security. During the three and nine months ended December 31, 2011 and
fiscal year ended March 31, 2011, we did not record any other-than-temporary
impairment charges. As of December 31, 2011, we did not record an impairment
charge in connection with securities in a loss position (fair value less than
carrying value) with unrealized losses of $2.0 million, of which $1.9 million
has been at an unrealized loss for greater than 12 months, as we believe that
such unrealized losses are temporary. In addition, we also had $6.1 million in
unrealized gains.

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Inventory Valuation

Our policy is to value inventories at the lower of cost or market on a
part-by-part basis. This policy requires us to make estimates regarding the
market value of our inventories, including an assessment of excess or obsolete
inventories. We determine excess and obsolete inventories based on an estimate
of the future demand for our products within a specified time horizon, generally
12 months. The estimates we use for future demand are also used for near-term
capacity planning and inventory purchasing and are consistent with our revenue
forecasts. If our demand forecast is greater than our actual demand we may be
required to take additional excess inventory charges, which would decrease gross
margin and net operating results. Any impairment charges taken establishes a new
cost basis for the underlying inventory and the cost basis for such inventory is
not marked-up on changes in circumstances until a gain is realized upon its
eventual sale. This accounting is consistent with the guidance provided by SAB
Topic 5-BB. To illustrate the sensitivity of inventory valuations to future
estimates, as of December 31, 2011, reducing our future demand estimate to six
months would decrease our current inventory valuation by approximately $2.2
million and increasing our future demand forecast to 18 months would have a
negligible effect on our current inventory valuation.

Goodwill, Purchased Intangible Assets and Other Long-Lived Assets

The purchase method of accounting for acquisitions requires extensive use of
accounting estimates and judgments to allocate the purchase price to the fair
value of the net tangible and intangible assets acquired, such as purchased
technology. Goodwill and purchased intangible assets deemed to have indefinite
lives are not amortized, but are subject to annual impairment tests. The values
and useful lives assigned to other purchased intangible assets impact future
amortization. Determining the fair values and useful lives of intangible assets
requires the use of estimates and the exercise of judgment on factors such as
expectations for the success and life cycle of products and technology acquired.

While there are a number of different generally accepted valuation methods to
estimate the value of intangible assets acquired, we primarily use the
discounted cash flow method and the market comparison approach. These methods
require significant management judgment to forecast the future operating results
used in the analysis. In addition, other significant estimates are required such
as residual growth rates and discount factors. The estimates we use to value and
amortize intangible assets are consistent with the plans and estimates that we
use to manage our business and are based on available historical information and
industry estimates and averages. These judgments can significantly affect our
net operating results.

In accordance with ASC Topic 350-10 ("ASC 350-10") as it relates to Goodwill and
Other Intangible Assets, we perform our annual impairment review at the
reporting unit level each fiscal year end or more frequently if we believe
indicators of impairment are present. We recently finalized the purchase price
allocation for the TPack acquisition. ASC 350-10 requires that goodwill and
certain intangible assets be assessed for impairment using fair value
measurement techniques. Specifically, goodwill impairment is determined using a
two-step process. The first step of the goodwill impairment test is used to
identify potential impairment by comparing the fair value of a reporting unit
with its carrying amount, including goodwill. Goodwill is allocated to reporting
units based upon the type of products under development by the acquired company,
which initially generated the goodwill. If the fair value of a reporting unit
exceeds its carrying amount, goodwill of the reporting unit is considered not
impaired and the second step of the impairment test is unnecessary. If the
carrying amount of a reporting unit exceeds its fair value, the second step of
the goodwill impairment test is performed to measure the amount of impairment
loss. The second step of the goodwill impairment test compares the implied fair
value of the reporting unit's goodwill with the carrying amount of that
goodwill. If the carrying amount of the reporting unit's goodwill exceeds the
implied fair value of that goodwill, an impairment loss is recognized in an
amount equal to that excess. The implied fair value of goodwill is determined in
the same manner as the amount of goodwill recognized in a business combination.

That is, the fair value of the reporting unit is allocated to all of the assets
and liabilities of that unit (including any unrecognized intangible assets) as
if the reporting unit had been acquired in a business combination and the fair
value of the reporting unit was the purchase price paid to acquire the reporting
unit. The fair value is determined using a combination of the discounted cash
flow analysis and/or market comparisons. The determination of fair value
requires significant judgment and estimates. We evaluate the useful lives of our
intangible assets each reporting period to determine whether events and
circumstances require revising the remaining period of amortization.

We evaluate our long-lived assets such as property, plant and equipment and
purchased intangible assets with finite lives, for impairment whenever events or
changes in circumstances indicate the carrying value of an asset or asset group
may not be recoverable. The carrying value of an asset or asset group is not
recoverable if the amount of undiscounted future cash flows the assets are
expected to generate (including any net proceeds expected from the disposal of
the asset) are less than its carrying value. When we identify an impairment has
occurred, we reduce the carrying value of the assets to its comparable market
value (if available and appropriate) or to its estimated fair value based on a
discounted cash flow approach.

Revenue Recognition

We recognize revenue based on four basic criteria: 1) there is evidence that an
arrangement exists; 2) delivery has occurred; 3) the fee is fixed or
determinable; and 4) collectability is reasonably assured. We recognize revenue
upon determination that all criteria for revenue recognition have been met. In
addition, we do not recognize revenue until the applicable customer's acceptance
criteria have been met. The criteria are usually met at the time of product
shipment. Our standard terms and conditions of sale do not allow for product
returns and we generally do not allow product returns other than under warranty
or stock rotation agreements. Revenue from shipments to distributors is
recognized upon shipment. In addition, we record reductions to revenue for
estimated allowances such as returns not pursuant to contractual rights,
competitive pricing programs and rebates. These estimates are based on our
experience with stock rotations and the contractual terms of the competitive
pricing and rebate programs. Royalty revenues are recognized when cash is
received, only when royalty amounts cannot be reasonably estimated. Royalty
revenues are based upon sales of our customer's products that include our
software.

Shipping terms are generally FCA (Free Carrier) shipping point. If actual
returns or pricing adjustments exceed our estimates, we would record additional
reductions to revenue.

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From time to time we generate revenue from the sale of our internally developed
IP. We generally recognize revenue from the sale of IP when all basic criteria
outlined above are met, which is generally when the payments are received.

Mask Costs

We incur significant costs for the fabrication of masks used by our contract
manufacturers to manufacture our products. If we determine, at the time the cost
for the fabrication of masks are incurred, that technological feasibility of the
product has been achieved, we consider the nature of these costs to be
pre-production costs. Accordingly, such costs are capitalized as property and
equipment under machinery and equipment and are amortized as cost of sales over
approximately three years, representing the estimated production period of the
product. If we determine, at the time fabrication mask costs are incurred, that
either technological feasibility of the product has not occurred or that the
mask is not reasonably expected to be used in production manufacturing or that
the commercial feasibility of the product is uncertain, the related mask costs
are expensed to R&D in the period in which the costs are incurred. We will also
periodically assess capitalized mask costs for impairment. During the three and
nine months ended December 31, 2011, total mask costs of $1.3 million and $5.4
million were incurred, of which $0.7 million and $3.6 million, respectively, was
expensed as R&D expense because technological feasibility had not been achieved
and the remaining $0.6 million and $1.8 million, respectively, was capitalized.

During the three and nine months ended December 31, 2010, total mask costs of
$3.2 million and $9.3 million were incurred, of which $1.5 million and $4.6
million, respectively, was expensed as R&D expense because technological
feasibility had not been achieved and the remaining $1.7 million and $4.7
million, respectively, was capitalized.

Stock-Based Compensation Expense

All share-based payments, including grants of stock options, restricted stock
units and employee stock purchase rights, are required to be recognized in our
financial statements based on their respective grant date fair values. The fair
value of each employee stock option and employee stock purchase right is
estimated on the date of grant using an option pricing model that meets certain
requirements. We currently use the Black-Scholes option pricing model to
estimate the fair value of our share-based payments, excluding RSUs, for which
we use the fair market value of our common stock. The fair values generated by
the Black-Scholes model may not be indicative of the actual fair values of our
stock-based awards as it does not consider certain factors important to
stock-based awards, such as continued employment, periodic vesting requirements
and limited transferability. The determination of the fair value of share-based
payment awards utilizing the Black-Scholes model is affected by our stock price
and a number of assumptions, including expected volatility, expected life,
risk-free interest rate and expected dividends. We estimate the expected
volatility of our stock options at grant date by equally weighting the
historical volatility and the implied volatility of our stock over specific
periods of time as the expected volatility assumption required in the
Black-Scholes model. The expected life of the stock options is based on
historical and other data including life of the option and vesting period. The
risk-free interest rate assumption is the implied yield currently available on
zero-coupon government issues with a remaining term equal to the expected term.

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

To the extent that we grant additional equity securities to employees or we
assume unvested securities in connection with any acquisitions, our stock-based
compensation expense will be increased by the additional unearned compensation
resulting from those additional grants or acquisitions.

Restructuring Charges

Over the last several years we have undertaken significant restructuring
initiatives, which have required us to develop formalized plans for exiting
certain business activities and reducing spending levels. We have had to record
estimated expenses for employee severance, long-term asset write downs, lease
cancellations, facilities consolidation costs, and other restructuring costs.

Given the significance, and the timing of the execution, of such activities,
this process is complex and involves periodic reassessments of estimates made at
the time the original decisions were made. Our assumptions for exiting certain
facilities, such as estimating sublease incomes, may differ from actual
outcomes, which could result in the need to record additional costs or reduce
estimated amounts previously charged to restructuring expense. Our policies
require us to periodically evaluate the adequacy of the remaining liabilities
under our restructuring initiatives. During the three and nine months ended
December 31, 2011, we recorded net restructuring charges of a negligible amount
and $0.9 million associated with our restructuring actions, respectively, as
compared to a negligible amount and $0.6 million during three and nine months
ended December 31, 2010, respectively. As part of our ongoing cost reduction
efforts, we could implement additional restructuring programs and may incur
significant additional restructuring charges.

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RESULTS OF OPERATIONS

Comparison of the Three and Nine Months Ended December 31, 2011 to the Three and
Nine Months Ended December 31, 2010

Net Revenues. Net revenues for the three and nine months ended December 31, 2011
were $56.3 million and $182.1 million, representing a decrease of 9.6% and 3.7%
from net revenues of $62.4 million and $189.1 million for the three and nine
months ended December 31, 2010, respectively. We classify our revenues into two
categories based on the markets that the underlying products serve. The
categories are Process and Transport. We use this information to analyze our
performance and success in these markets. See the following tables (dollars in
thousands):

Three Months Ended December 31,
2011 2010
% of Net % of Net Increase %
Amount Revenue Amount Revenue (Decrease) Change
Process $ 33,658 59.7 % $ 33,167 53.2 % $ 491 1.5 %
Transport 22,689 40.3 29,197 46.8 (6,508 ) (22.3 )

$ 56,347 100.0 % $ 62,364 100.0 % $ (6,017 ) (9.6 )%

Nine Months Ended December 31,
2011 2010
% of Net % of Net Increase %
Amount Revenue Amount Revenue (Decrease) Change
Process $ 97,817 53.7 % $ 93,585 49.5 % $ 4,232 4.5 %
Transport 84,303 46.3 95,542 50.5 (11,239 ) (11.8 )

$ 182,120 100.0 % $ 189,127 100.0 % $ (7,007 ) (3.7 )%

For the three and nine months ended December 31, 2011, our process revenues grew
by 1.5% and 4.5%, respectively, primarily due to additional revenue generated
from new design wins.

For the three and nine months ended December 31, 2011, our transport revenues
declined by 22.3% and 11.8%, respectively. For the three months ended
December 31, 2011, the decline was due to the completion of the Qualcomm Patent
Purchase Agreement and lower revenues from our legacy products. The decline for
the nine months ended December 31, 2011, was due to the completion of the
Qualcomm Patent Purchase Agreement and lower revenues due to a slowdown in
global OTN rollouts. For the nine months ended December 31, 2011, revenues from
our OTN and 10 gigabit Ethernet products represented approximately 57%, and
SONET/SDH and Legacy Switch products represented approximately 43%,
respectively, of our total transport product revenues. For the nine months ended
December 31, 2010, such revenues were approximately 62% and 38%, respectively.

Our future revenues could be impacted by various factors, including the duration
and the severity of inventory corrections and other factors.

Gross Profit. The following table presents net revenues, cost of revenues and
gross profit for the three and nine months ended December 31, 2011 and 2010
(dollars in thousands):

Three Months Ended December 31,
2011 2010
% of Net % of Net %

Amount Revenue Amount Revenue (Decrease) Change
Net revenues $ 56,347 100.0 % $ 62,364 100.0 % $ (6,017 ) (9.6 )%

Cost of revenues 23,795 42.2 23,886 38.3 (91 ) (0.4 )

$ 32,552 57.8 % $ 38,478 61.7 % $ (5,926 ) (15.4 )%

Nine Months Ended December 31,
2011 2010
% of Net % of Net Increase %

Amount Revenue Amount Revenue (Decrease) Change
Net revenues $ 182,120 100.0 % $ 189,127 100.0 % $ (7,007 ) (3.7 )%

Cost of revenues 77,830 42.7 69,806 36.9 8,024 11.5

$ 104,290 57.3 % $ 119,321 63.1 % $ (15,031 ) (12.6 )%

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The gross profit percentage for the three and nine months ended December 31,
2011 decreased to 57.8% and 57.3%, compared to 61.7% and 63.1% for the three and
nine months ended December 31, 2010, respectively. The decrease in our gross
margin for the three and nine months ended December 31, 2011 was primarily due
to an unfavorable product mix of increased Process revenues which has lower
gross margins. The decrease in gross margins was also impacted by lower
licensing revenues.

The amortization of purchased intangible assets included in cost of revenues
during the three and nine months ended December 31, 2011 was $0.7 million and
$2.9 million compared to $3.3 million and $8.6 million for the three and nine
months ended December 31, 2010, respectively. The acquisition of TPack has
increased our amortization of purchased intangible assets, included in cost of
revenues by approximately $0.7 million per quarter. Future acquisitions of
businesses may result in substantial additional charges, which may impact the
gross profit percentage in future periods.

Research and Development and Selling, General and Administrative Expenses. The
following table presents research and development and selling, general and
administrative expenses for the three and nine months ended December 31, 2011
and 2010 (dollars in thousands):

Three Months Ended December 31,
2011 2010
% of Net % of Net %

Amount Revenue Amount Revenue (Decrease) Change
Research and development $ 28,279 50.2 % $ 28,684 46.0 % $ (405 ) (1.4 )%

Selling, general and administrative $ 11,406 20.2 % $ 12,729 20.4 % $ (1,323 ) (10.4 )%

Nine Months Ended December 31,
2011 2010
% of Net % of Net Increase %

Amount Revenue Amount Revenue (Decrease) Change
Research and development $ 86,256 47.4 % $ 81,800 43.3 % $ 4,456 5.4 %

Selling, general and administrative $ 32,903 18.1 % $ 37,440 19.8 % $ (4,537 ) (12.1 )%

Research and Development. Increases in research and development ("R&D") expenses
are primarily driven by the effect of the consolidation of Veloce, our VIE, our
internal costs related to the ARM 64-bit silicon server development effort, and
the cost relating to TPack, an entity we acquired in September 2010, offset by a
decrease in other R&D expenses. Total consolidated R&D expenses consist
primarily of salaries and related costs (including stock-based compensation) of
employees engaged in research, design and development activities, costs related
to engineering design tools, subcontracting costs and facilities expenses. The
decrease in R&D expenses of 1.4% for the three months ended December 31, 2011,
compared to the three months ended December 31, 2010 was primarily due to
decreases of $0.9 million in pre-production costs and $0.9 million in consumable
tools and supplies, offset by increases of $0.4 million in consumable equipment
and software costs, $0.2 million in personnel costs, $0.4 million in printed
circuit board costs, and $0.4 million in test costs and other items. The
increase in R&D expenses of 5.4% for the nine months ended December 31, 2011,
compared to the nine months ended December 31, 2010, was primarily due to
increases of $1.9 million in personnel costs primarily related to TPack and
Veloce, $1.5 million in consumable equipment and software costs, $0.4 million in
indirect materials, $0.4 million in other expenses, $1.3 million in technology
access fees, $1.2 million in printed circuit board costs, $0.3 million in test
costs, $0.4 million in characterization costs and another $0.6 million in other
R&D costs and $0.2 million in new product introduction costs. These were
partially offset by decreases of $1.0 million in pre-production costs, $1.8
million in consumable tools and supplies, $0.5 million in packaging costs and
$0.5 million in engineering samples-related costs. We believe that a continued
commitment to R&D is vital to our goal of maintaining a leadership position with
innovative products. In addition to our internal R&D programs, our business
strategy includes acquiring products, technologies or businesses from third
parties. Future acquisitions of products, technologies or businesses may result
in substantial additional ongoing R&D expenses.

Our overall total expenditures, which include amounts spent by Veloce as well as
expenses incurred directly by us, related to the ARM 64-bit processor core
effort was approximately $9.0 million and $21.4 million for the three and nine
months ended December 31, 2011, respectively, as compared to approximately $4.6
million and $11.7 million for the three and nine months ended December 31, 2010,
respectively. The increase is due to the ramping of the ARM 64-bit silicon
server project.

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Selling, General and Administrative. Selling, general and administrative
("SG&A") expenses consist primarily of personnel related expenses (including
stock-based compensation), professional and legal fees, corporate branding and
facilities expenses. The decrease in SG&A expenses of 10.4% for the three months
ended December 31, 2011 compared to the three months ended December 31, 2010 was
primarily due to decreases of $0.6 million in personnel costs, $0.4 million in
stock-based compensation charges, and $0.3 million in travel expenses. The
decrease in SG&A expenses of 12.1% for the nine months ended December 31, 2011
compared to the nine months ended December 31, 2010 was primarily due to
decreases of $0.7 million in personnel costs, $0.7 million in external
contractor costs, $1.0 million in stock-based compensation charges, $0.2 million
in travel costs, $0.2 million in marketing costs, $0.9 million on TPack
acquisition cost and a $2.3 million adjustment to reduce the estimated fair
value of the contingent consideration related to the TPack acquisition. These
were partially offset by increases of $0.9 million of indirect materials and
services, $0.4 million in fees for Professional Services and $0.2 million in
other items. Future acquisitions of products, technologies or businesses may
result in substantial additional ongoing SG&A costs.

Stock-Based Compensation. The following table presents stock-based compensation
expense for the three and nine months ended December 31, 2011 and 2010, which
was included in the tables above (dollars in thousands):

Three Months Ended December 31,
2011 2010
% of Net % of Net %

Amount Revenue Amount Revenue (Decrease) Change
Costs of revenues $ 83 0.2 % $ 164 0.3 % $ (81 ) (49.4 )%

Research and development 2,647 4.7 2,809 4.5 (162 ) (5.8 )

Selling, general and administrative 1,703 3.0 2,116 3.4 (413 ) (19.5 )

$ 4,433 7.9 % $ 5,089 8.2 % $ (656 ) (12.9 )%

Nine Months Ended December 31,
2011 2010
% of Net % of Net Increase %

Amount Revenue Amount Revenue (Decrease) Change
Costs of revenues $ 292 0.1 % $ 496 0.3 % $ (204 ) (41.1 )%

Research and development 6,761 3.7 6,712 3.5 49 0.7

Selling, general and administrative 4,682 2.6 5,702 3.0 (1,020 ) (17.9 )

$ 11,735 6.4 % $ 12,910 6.8 % $ (1,175 ) (9.1 )%

The amount of unearned stock-based compensation currently estimated to be
expensed from now through fiscal 2016 related to unvested share-based payment
awards at December 31, 2011 is $28.9 million, which includes stock-based
compensation from Veloce, our VIE. This expense relates to equity instruments
already issued and will not be affected by our future stock price. Vesting of
the EBITDA and EBITDA2 Grants is subject to (i) the Company's performance as
measured by earnings before interest, taxes, depreciation and amortization
("EBITDA"), and (ii) individual performance as measured by the accomplishment of
goals and objectives. Vesting of our Performance Retention Grants are subject to
(i) the accomplishment of goals and objectives of the individual's business unit
and (ii) individual performance as measured by the accomplishment of individual
goals and objectives. The weighted-average period over which the unearned
stock-based compensation is expected to be recognized is 18 months. If there are
any modifications or cancellations of the underlying unvested securities, we may
be required to accelerate, increase or cancel any remaining unearned stock-based
compensation expense. Future stock-based compensation expense will increase to
the extent that we grant additional equity awards. The value of these grants
cannot be predicted at this time because it will depend on the number of
share-based payments granted and the then current fair values.

Restructuring Charges. The restructuring charges recorded during the three and
nine months ended December 31, 2011 and 2010 was primarily for employee
severances. During the nine months ended December 31, 2011, we implemented a
restructuring plan as part of our ongoing cost reduction efforts and to better
align our global operations to achieve greater efficiencies. We moved more of
our functions offshore, which allow us to be closer and more connected to our
and our customer's third party subcontract manufacturers. The April 2011
restructuring plan includes eliminating or relocating 25 positions. As a result
of the April 2011 restructuring program, we recorded a charge of $0.9 million
for employee severances. We anticipate this restructuring plan will reduce our
ongoing net operating expenses by $1.5 million to $2.0 million annually. As part
of our ongoing cost reduction efforts, we could implement additional
restructuring programs and may incur significant additional restructuring
charges. For additional information on our restructuring activities, see Note 3
of the Notes to Condensed Consolidated Financial Statements.

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Interest and Other Income, net. The following table presents interest and other
income, net for the three and nine months ended December 31, 2011 and 2010
(dollars in thousands):

Three Months Ended December 31,
2011 2010
% of Net % of Net %

Amount Revenue Amount Revenue (Decrease) ChangeInterest income, net $ 828 1.5 % $ 2,199 3.5 % $ (1,371 ) (62.3 )%

Other income, net $ 86 0.2 % $ 126 0.2 % $ (40 ) (31.7 )%

Nine Months Ended December 31,
2011 2010
% of Net % of Net %

Amount Revenue Amount Revenue (Decrease) Change
Interest income, net $ 3,578 2.0 % $ 6,780 3.6 % $ (3,202 ) (47.2 )%

Other income, net $ 209 0.1 % $ 728 0.4 % $ (519 ) (71.3 )%

Interest Income, net. Interest income, net of management fees, reflects interest
earned on cash and cash equivalents, short-term investments and marketable
securities. The decrease in interest income, net for the three and nine months
ended December 31, 2011, compared to the three and nine months ended
December 31, 2010 was primarily due to our lower cash, cash equivalents and
short-term investments available-for-sale balances.

Income Taxes. The federal statutory income tax rate was 35% for the fiscal three
and nine months ended December 31, 2011 and 2010. Income tax expense recorded
for the nine months ended December 31, 2011 was $0.6 million compared to $0.4
million for the nine months ended December 31, 2010.

FINANCIAL CONDITION AND LIQUIDITY

As of December 31, 2011, our principal source of liquidity consisted of $117.3
million in cash, cash equivalents and short-term investments, which is
approximately $1.92 per share of outstanding common stock as compared to $2.64
per share at March 31, 2011. Working capital as of December 31, 2011 was $146.8
million. Total cash, cash equivalents, and short-term investments decreased by
$50.8 million during the nine months ended December 31, 2011, primarily due to
funding of our structured stock repurchase agreements for $10.0 million, the
repurchases of our common stock for $20.9 million, purchase of property and
equipment of $11.9 million, cash used for operations of $3.0 million, purchases
of strategic investments of $4.75 million and the funding of restricted stock
units withheld for taxes of $2.7 million offset by proceeds from stock issuance
of $3.9 million. At December 31, 2011, we had contractual obligations not
included on our balance sheet totaling $26.4 million, primarily related to
facility leases, engineering design software tool licenses and non-cancelable
inventory purchase commitments.

For the nine months ended December 31, 2011, we used $3.0 million of cash in our
operations compared to generating $35.9 million for the nine months ended
December 31, 2010. Our net loss of $15.1 million for the nine months ended
December 31, 2011 included $20.9 million of non-cash charges consisting of $6.0
million of depreciation, $5.5 million of amortization of purchased intangibles
and $11.7 million of stock-based compensation, offset by a $2.3 million
reduction to the estimated fair value of our contingent consideration. Our net
income of $3.0 million for the nine months ended December 31, 2010 included
$29.3 million of non-cash charges consisting of $5.4 million of depreciation,
$12.2 million of amortization of purchased intangibles, $12.9 million of
stock-based compensation and a credit of $1.2 million related to the
capitalization of prior years mask set costs. The remaining change in operating
cash flows for the nine months ended December 31, 2011 primarily reflected
increases in accounts receivable, other current assets, other accrued
liabilities and accrued payroll and related expenses and decreases in
inventories, accounts payable, and deferred revenue. Our overall days sales
outstanding were 50 days and 32 days for the three months ended December 31,
2011 and March 31, 2011, respectively. Increase in the revenues generated during
the last month of the quarter ended December 31, 2011 compared to the same
period for the quarter ended March 31, 2011 was the primary reason for the
increase in our days sales outstanding.

We used $1.2 million in cash for our investing activities during the nine months
ended December 31, 2011, compared to using $56.9 million during the nine months
ended December 31, 2010. During the nine months ended December 31, 2011, we
generated $15.4 million for net short-term investment activities offset by $11.9
million for the purchase of property and equipment and $4.75 million for
purchases of strategic investments. During the nine months ended December 31,
2010, we used $21.8 million for net short-term investment activities, $9.0
million for the purchase of property and equipment and $31.5 million for the
acquisition of a business, offset by proceeds of $5.0 million from the sale of a
strategic equity investment.

We used $30.0 million in cash for our financing activities during the nine
months ended December 31, 2011, compared to using $16.3 million during the nine
months ended December 31, 2010. The major financing use of cash for the nine
months ended December 31, 2011 was $20.9 million for the repurchase of common
stock, $10.0 million for the funding of our structured stock repurchase
agreements and $2.7 million for restricted stock units withheld for taxes,
offset by $3.9 million in proceeds from the issuance of common stock. The major
financing use of cash for the nine months ended December 31, 2010 was $23.3
million for the repurchases of common stock, $10.0 million for the funding of
our structured stock repurchase agreements and $2.5 million for restricted stock
units withheld for taxes, offset by proceeds of $15.5 million from the
settlement of structured stock repurchase agreements and $4.3 million in
proceeds from the issuance of common stock.

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In August 2004, our Board of Directors authorized a stock repurchase program for
the repurchase of up to $200.0 million of our common stock. Under the program,
we are authorized to make purchases in the open market or enter into structured
agreements. In October 2008, our Board of Directors increased the stock
repurchase program by $100.0 million. During the nine months ended December 31,
2011, 3.5 million shares were repurchased on the open market at a weighted
average price of $5.98 per share. During the nine months ended December 31,
2010, 2.1 million shares were repurchased on the open market at a weighted
average price of $11.25 per share. All repurchased shares were retired upon
delivery to us.

In February 2011, we entered into a Rule 10b5-1 plan to repurchase up to
3.0 million shares of its common stock at various price parameters. We cancelled
this Rule 10b5-1 plan in May 2011. Included in the open market repurchases
during the three months ended June 30, 2011 is 0.3 million shares that were
repurchased under this Rule 10b5-1 plan at a weighted average price of $9.98 per
share. At the time this Rule 10b5-1 plan was cancelled, we repurchased
1.0 million shares at a weighted average price of $10.00 per share under this
Rule 10b5-1 plan.

We also utilize structured stock repurchase agreements to buy back shares which
are prepaid written put options on our common stock. We pay a fixed sum of cash
upon execution of each agreement in exchange for the right to receive either a
pre-determined amount of cash or stock depending on the closing market price of
our common stock on the expiration date of the agreement. Upon expiration of
each agreement, if the closing market price of our common stock is above the
pre-determined price, we will have our cash investment returned with a premium.

If the closing market price is at or below the pre-determined price, we will
receive the number of shares specified at the agreement inception. Any cash
received, including the premium, is treated as additional paid in capital on the
balance sheet.

During the nine months ended December 31, 2011 and 2010, we entered into
structured stock repurchase agreements totaling $10.0 million during each
period. For those agreements that settled during the nine months ended
December 31, 2011, we received 1.0 million in shares of our common stock at an
effective purchase price of $9.74 per share from the settled structured stock
repurchase agreements. For those agreements that settled during the nine months
ended December 31, 2010, we received $15.5 million in cash and 0.5 million in
shares of our common stock at an effective purchase price of $10.01 per share.

At December 31, 2011, we had no outstanding structured stock repurchase
agreements.

In November 2010, we amended certain agreements with Veloce, initially entered
into in May 2009, pursuant to which Veloce has agreed to perform product
development work for us on an exclusive basis for up to five years for cash and
other consideration, including a warrant to purchase shares of our common stock,
which will vest in quarterly increments through December 2012.

Under the amended merger agreement between us and Veloce, which has been
approved by Veloce's Board of Directors and stockholders, we agreed to acquire
Veloce if certain performance milestones and delivery schedules set forth under
the merger and other agreements are achieved. We also have the unilateral option
to acquire Veloce in the event Veloce fails to meet the milestones and delivery
schedules. Should we acquire Veloce pursuant to the merger agreement, the
purchase price payable by us is estimated to be in the range of approximately $7
million up to approximately $135 million, subject to additional adjustments. At
this time the eventual outcome is not determinable and as such we are unable to
provide a narrower range for the estimated merger consideration. We will update
the range in the future when additional relevant information is available. The
form of consideration used for the merger, cash or our stock, would be
determined by us at the time of the merger. The merger agreement contains
customary representations, warranties and covenants and may be terminated upon
mutual agreement of the parties or unilaterally by us or Veloce if the other
party fails to meet certain conditions set forth in the agreement. Also, there
can be no assurance that the merger agreement and other agreements with Veloce
will not be further amended to provide for the possible acceleration of our
acquisition of Veloce.

In addition, we provided Veloce with a $1.5 million loan, to be forgiven over
eight quarters beginning on March 31, 2011. Through December 31, 2011,
approximately $0.75 million relating to this loan has been forgiven. If Veloce
commits a material breach of the merger agreement, then the remaining
outstanding principal amount of the promissory note evidencing the loan plus
accrued interest will become due to us. If we commit a material breach of the
merger agreement, then the remaining outstanding principal amount of the note
and accrued interest is to be forgiven by us. The amount under the promissory
note is eliminated in consolidation. Pursuant to the product development
agreement, as amended, we will pay Veloce $2.3 million per quarter for up to
twelve consecutive quarters in order to assist Veloce in meeting its expenses to
perform its obligations under the agreement. In July 2011, we agreed to pay
Veloce an additional $2.0 million over the next four quarters to cover certain
increased expenses under the development agreement. These additional payments
started in July 2011 and will end in the quarter ending June 30, 2012. We will
recognize the payments as R&D expenses when such operating costs have been
incurred by Veloce. We recognized $3.4 million and $9.6 million as research and
development expense relating to Veloce during the three and nine months ended
December 31, 2011, respectively, compared to $3.3 million and $7.7 million
during the three and nine months ended December 31, 2010, respectively. We also
paid, and will likely do so again, certain product development and manufacturing
expenses incurred by Veloce. We have no direct equity interest in Veloce.

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In July 2010, we entered into an agreement for a multi-year license with ARM
Holdings PLC, a leading semiconductor IP supplier, where the components of the
licensed technology are expected to be delivered over multiple years. We do not
regard the license as significant to our current business. We intend to use the
license to develop new products. The aggregate licensing fees are approximately
$18.1 million and are payable over five years.

On September 17, 2010, we acquired TPack A/S, a Corporation organized under the
laws of Denmark, in accordance with the terms and conditions of the stock
purchase agreement dated August 17, 2010. The total consideration paid at the
closing of the transaction was approximately $32 million. The former TPack
shareholders may also earn up to approximately $5 million in additional
consideration, subject to the achievement of certain revenue and performance
milestones by TPack within 18 months after the acquisition. As of December 31,
2011, we have accrued a contingent consideration liability of approximately $0.9
million. Approximately $5 million was placed in escrow to secure the
indemnification obligations of TPack which is included in the purchase price
allocation. In addition, we recorded acquisition related transaction costs of
$0.9 million, which were included in SG&A expense. See Note 10 of the Notes to
Condensed Consolidated Financial Statements for further discussion.

The following table summarizes our contractual operating leases and other
purchase commitments as of December 31, 2011 (in thousands):

Other
Operating Purchase
Leases Commitments* Total Fiscal Years Ending March 31, 2012 $ 557 $ 22,881

$ 23,438
2013 1,683 – 1,683
2014 1,061 – 1,061
2015 and thereafter 258 – 258

Total minimum payments $ 3,559 $ 22,881 $ 26,440

* Primarily includes inventory purchase commitments.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as at December 31, 2011.

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