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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

APPLIED MICRO CIRCUITS CORPORATION
(Exact name of Registrant as specified in its charter)

          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 o

          As of July 26, 2002, 301,100,945 shares of the Registrant’s Common Stock were issued and outstanding.

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APPLIED MICRO CIRCUITS CORPORATION

INDEX

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PART I.   FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS

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

See accompanying Notes to Condensed Consolidated Financial Statements.

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

See accompanying Notes to Condensed Consolidated Financial Statements.

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

See accompanying Notes to Condensed Consolidated Financial Statements.

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APPLIED MICRO CIRCUITS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

          The financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited financial statements and the related notes thereto contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended March 31, 2002.

Use of Estimates

          The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. These estimates include among others, assessing the collectibility of accounts receivable, inventory valuation, costs of future product returns under warranty, the valuation of deferred income taxes, the fair value and useful lives of intangible assets and the valuation of strategic equity investments. Actual results could differ from those estimates.

Reclassification

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

Accounting Change

          Effective April 1, 2002, the Company completed the adoption of Statement of Financial Accounting Standards (SFAS) 142, “Goodwill and Other Intangible Assets”.  SFAS 142 requires that the Company discontinue amortizing the remaining balances of goodwill. All remaining and future acquired goodwill will be subject to impairment tests annually, or earlier if indicators of potential impairment exist, using a fair-value-based approach. All other intangible assets will continue to be amortized over their estimated useful lives and assessed for impairment under SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  As a result of the implementation of SFAS 142, the Company recorded a non-cash charge of approximately $102.2 million to reduce the carrying value of its goodwill as of April 1, 2002. Such charge is reflected as the cumulative effect of an accounting change in the accompanying condensed consolidated statement of operations. See Note 4.

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          The following table presents the impact of SFAS 142 on the net loss and the net loss per share as if SFAS 142 had been in effect for all periods presented in the interim condensed consolidated statements of operations (in thousands):

2.   LOSS PER SHARE

          The reconciliation of the net loss and the shares used to calculate basic and diluted loss per share consists of the following (in thousands):

          Because the Company incurred losses for the three months ended June 30, 2002 and 2001, the effect of dilutive securities totaling 3,274 and 11,042 equivalent shares, respectively, have been excluded from the loss per share computations as their impact would be antidilutive.

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3.   CERTAIN FINANCIAL STATEMENT INFORMATION

        Interest income, net includes the following (in thousands):

4.   GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS

          As discussed in Note 1, effective April 1, 2002, the Company adopted SFAS 142, which requires the Company to discontinue amortizing goodwill and certain intangible assets with indefinite useful lives. Instead, all remaining balances of goodwill will be reviewed annually for impairment.  Upon adoption on April 1, 2002, the Company completed the first of its annual impairment tests, which resulted in the recording of a non-cash charge of $102.2 million to reduce the carrying value of its goodwill.  In calculating the impairment charge, the fair value of the impaired reporting unit was estimated using both the discounted cash flow methodology as well as a market comparable approach.  This charge is reflected as the cumulative effect of an accounting change in the accompanying condensed consolidated statement of operations.

          In performing the fair value analysis as required under SFAS 142, it became evident, as a result of lower revenue forecasts, that certain other purchased intangible assets were also impaired.   As a result of

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these indications of impairment to the carrying value of the Company’s other purchased intangible assets, the Company performed an additional analysis of these assets as required under SFAS 144 and recorded an additional non-cash charge of $187.9 million for the impairment of developed core technology.   In addition, the Company recorded a non-cash charge of $16.3 million as a result of the abandonment of the MMC Networks trademark in the first quarter of fiscal 2003.   These charges are reflected as operating expenses in the condensed consolidated statement of operations for the three months ended June 30, 2002.

          Net goodwill and other purchased intangible balances were as follows (dollar amounts in thousands):

          As required by SFAS 142, assembled workforce was reclassified to goodwill effective April 1, 2002. The total balances presented above are net of accumulated amortization and impairments of $4.0 billion and $3.7 billion at June 30, 2002 and March 31, 2002, respectively.

          Amortization of other purchased intangibles was $1.6 million and $15.9 million for the three months ended June 30, 2002 and 2001, respectively.

          In June 2001, as a result of the then current industry conditions, lower market valuations and reduced estimates of carrier capital equipment spending, the Company determined that there were indicators of impairment to the carrying value of goodwill.  Based on a review of the value of the intangible assets in accordance with SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-lived Assets to Be Disposed Of”, the Company recorded a charge of $3.1 billion to write down the value of intangible assets associated with its purchase acquisitions.  This charge is reflected as operating expense in the condensed consolidated statement of operations for the three months ended June 30, 2001.

5.   RESTRUCTURING COSTS

          As a result of the prolonged downturn in the telecommunications industry and the uncertainty as to when the telecommunication equipment market will recover, in July 2002 the Company announced its second workforce reduction and restructuring program in the last two years.  The July 2002 workforce reduction and restructuring program is comprised of the following:

          In July 2001, the Company announced the first of its restructuring programs.  The July 2001 plan was in response to the sharp downturn in business at the end of the Company’s fiscal 2001 and included reducing the Company’s overall cost structure and aligning manufacturing capacity with the then current demand. The July 2001 restructuring plan resulted in a total of $11.6 million of restructuring costs, which

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were recognized as operating expenses in the last three quarters of fiscal 2002.   The July 2001 restructuring plan was comprised of the following components:

          A summary of the July 2002 and July 2001 restructuring costs is as follows (in thousands):

          Payments in conjunction with the workforce reduction in the July 2001 plan were substantially paid by the end of fiscal 2002. Amounts related to the consolidation of facilities will be paid over the respective lease terms through fiscal 2005. The estimated costs to exit these facilities are based on available commercial rates and an estimate of the time required to sublet the facilities. The actual loss incurred in exiting these facilities may differ from our estimates.

6.   COMPREHENSIVE LOSS

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

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7. STOCK OPTION EXCHANGE OFFER

          On November 27, 2001, the Company completed the offering of a voluntary stock option exchange program to its employees, officers and board members. Under the program, participants were able to tender for cancellation stock options with an exercise price of at least $20 per share for an equal number of replacement options to be granted at least six months and one day from the cancellation. The Company accepted options to purchase approximately 31.1 million shares of Company stock for exchange pursuant to this program.  On May 28, 2002, the Company issued approximately 30.4 million options with an exercise price of $6.54 to complete the program.

8. CONTINGENCIES

          In April 2001, a series of similar federal complaints were filed against the Company and certain executive officers and directors of the Company.  The complaints have been consolidated into a single proceeding in the U.S. District Court for the Southern District of California.  In re Applied Micro Circuits Corp. Securities Litigation, lead case number 01-CV-0649-K(AB).  In November 2001, the court appointed the lead plaintiff and lead plaintiff’s counsel in the consolidated proceeding, and plaintiff filed a consolidated federal complaint in January 2002.  The consolidated federal complaint alleged violations of the Securities Exchange Act of 1934 (the “1934 Act”) and was brought as a purported shareholder class action under Sections 10(b), 20(a) and 20A of the 1934 Act and Rule 10b-5 under the 1934 Act.  Plaintiff sought monetary damages on behalf of the shareholder class.    Defendants brought a motion to dismiss the consolidated federal complaint in March 2002. On May 9, 2002, the court granted the motion, dismissing the complaint, but giving plaintiff 45 days to file an amended complaint. On June 23, 2002, plaintiff filed an amended consolidated complaint.  In general, the consolidated amended federal complaint alleges that the Company and the individual defendants misrepresented the Company’s financial prospects for the quarters ended December 31, 2000 and March 30, 2001, in order to inflate the value of the Company’s stock.  Defendants intend to bring a motion to dismiss the consolidated amended complaint as well.  The motion is expected to be heard in the fall of 2002.   No discovery has been conducted in this lawsuit.

          In May 2001, a series of similar state derivative actions were filed against the directors and certain executive officers of the Company.  The state complaints have been coordinated and assigned to the Superior Court of California in the County of San Diego.  Applied Micro Circuits Shareholders Cases, No. JCCP No. 4193.  In November 2001, the court appointed liaison plaintiffs’ counsel in the coordinated proceeding, and plaintiffs filed a consolidated state complaint in December 2001.  The consolidated state complaint alleges overstatement of the financial prospects of the Company, mismanagement, inflation of stock value and sale of stock at inflated prices for personal gain during the period from November 2000 through February 2001.  Defendants demurred to the consolidated state complaint, which demurrer was partially granted and partially overruled in February 2002.  In February 2002, the Company’s board of directors formed a special litigation committee to evaluate the claims in the consolidated state complaint.  The special litigation committee retained independent legal counsel and submitted a report to the court in July 2002.  Defendants intend to file motions seeking dismissal of the actions, which motions are expected to be heard by the court in the fall of 2002.  Limited discovery against the individual defendants in this lawsuit and third parties has commenced.  Discovery against the Company has been stayed by the court.

          The Company believes that the allegations in these lawsuits are without merit and intends to defend the lawsuits vigorously.  The Company cannot predict the likely outcome of these lawsuits, and an adverse result in either lawsuit could have a material adverse effect on the Company.  The lawsuits have been tendered to the Company’s insurance carriers.

          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. 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

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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.

9.  RELATED PARTY TRANSACTIONS

      From time to time the Company charters an aircraft for business travel from an aircraft charter company which manages an aircraft owned by a company that the Company’s Chairman of the Board and Chief Executive Officer controls. In the three months ended June 30, 2002 and 2001 the Company recorded expenses of $200,000 and $0 for amounts to be paid to the aircraft charter company, respectively.

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

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

          This MD&A should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended March 31, 2002. This Quarterly Report on Form 10-Q, and in particular the MD&A, contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those described in the section entitled “Risk Factors”. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect our present expectations and analysis and are inherently susceptible to uncertainty and changes in circumstances. We assume no obligation to update these forward-looking statements to reflect changes in factors or assumptions affecting such forward-looking statements.

OVERVIEW

          We design, develop, manufacture and market high-performance, high-bandwidth silicon solutions empowering intelligent wide area networks. We utilize a combination of digital, mixed-signal and high-frequency analog design expertise coupled with system-level knowledge and multiple silicon process technologies to offer integrated circuit products that enable the transport of voice and data over wide area networks.  Our system solution portfolio includes switch fabric, traffic management, network processor, framer/mapper, PHY and PMD devices that address the high-performance needs of the evolving intelligent wide area network.   In addition, we continue to supply silicon ICs for the ATE, high-speed computing and military markets.

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CRITICAL ACCOUNTING POLICIES

          The U.S. Securities and Exchange Commission (“SEC”) recently issued Financial Reporting Release No. 60, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies” (“FRR 60”), suggesting companies provide additional disclosure and commentary on their most critical accounting policies.  In FRR 60, the SEC defined the most critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and operating results, and require management to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain.  Based on this definition, our most critical accounting policies include: inventory valuation, which affects our cost of sales and gross margin; the valuation of purchased intangibles and goodwill, which affects our amortization and write-offs of goodwill and other intangibles; the valuation of strategic equity investments, which affects our other income and expense; and valuation of deferred income taxes, which affects our income tax expense and benefit.  We also have other key accounting policies, such as our policies for revenue recognition, including the deferral of a portion of revenues on sales to distributors, and allowance for bad debt.  The methods, estimates and judgments we use in applying these most critical accounting policies have a significant impact on the results we report in our financial statements.

          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 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 will decrease gross margin and net operating results in the future.   In addition, as a result of the expansion of our internal manufacturing capacity during fiscal 2001 and the subsequent downturn in the communications industry, we have excess capacity in our manufacturing facilities.   Currently, we are not capitalizing any inventory costs related to this excess capacity as the recoverability of such costs is not certain. The application of this policy adversely affects our gross margin.

          Goodwill and Intangible Asset Valuation

          The determination of the fair value of certain assets and liabilities acquired is subjective in nature and often involves the use of significant estimates and assumptions.  Determining the fair values and useful lives of intangible assets especially requires the exercise of judgment.  To assist us in this process we used an independent valuation firm.  While a number of different methods can be used for the estimation of the value of intangibles acquired, we primarily used the discounted cash flow method. This method relies on a number of estimates and assumptions, including projected future cash flows, residual growth rates and discount factors.  Most of these assumptions were made based on available historical information and industry averages. The judgments made in determining the estimated useful lives assigned to each class of assets acquired can also significantly affect net income.

          In the first quarter of fiscal 2003, we adopted the new rules for measuring the impairment of goodwill and certain intangible assets under SFAS 142 and SFAS 144.  Under the new accounting guidance, the estimates and assumptions described above, as well as the determination as to how goodwill is allocated to our operating segments, had an effect on the amount of the impairment charge we recorded in the first quarter of fiscal 2003.

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          In addition, the value of our intangible assets, including goodwill, is exposed to future impairments if we experience further declines in operating results or additional negative industry or economic trends or if our future performance is below projections and estimates.

          Valuation of Strategic Equity Investments

          We enter into certain equity investments for the promotion of business and strategic objectives. Our policy is to value these investments at our historical cost.   In addition, our policy requires us to periodically review these investments for impairment.  For these investments, an impairment analysis requires significant judgment, including an assessment of the investees’ financial condition, existence and valuation of subsequent rounds of financing and the impact of any contractual preferences, as well as the investees’ historical results, projected results and prospects for additional financing.  If the actual outcomes for the investees are significantly different from our estimates, our recorded impairments may be understated, and we may incur additional charges in future periods.

            Valuation of Deferred Income Taxes

          We record valuation allowances to reduce our deferred tax assets to an amount that we believe is more likely to be realized.  We consider estimated future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance.  If we determine that we will not realize all or part of our deferred tax assets in the future, we would make an adjustment to the carrying value of the deferred tax asset, which would be reflected as an income tax expense.  Conversely, if we determine that we will realize a deferred tax asset, which currently has a valuation allowance, we would be required to reverse the valuation allowance which would be reflected as an income tax benefit.

          Revenue Recognition

          We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101 “Revenue Recognition in Financial Statements” (“SAB 101”).  SAB 101 requires that four basic criteria be met before revenue can be recognized: 1) evidence 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. The criteria are usually met at the time of product shipment, except for shipments to distributors with rights of return.  Revenue from shipments to distributors with rights of return are deferred until all return or cancellation privileges lapse.   In addition, we record reductions to revenue for estimated allowances such as returns and competitive pricing programs.  If actual returns or pricing adjustments exceed our estimates, additional reductions to revenue would result.

          Allowance for Bad Debt

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

RESULTS OF OPERATIONS

          Net Revenues.   Net revenues for the three months ended June 30, 2002 were approximately $30.2 million, representing a decrease of 27% from the net revenues of approximately $41.2 million for the three months ended June 30, 2001. Revenues from sales of communications products decreased 49% to $18.1

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million, or only 60% of net revenues, for the three months ended June 30, 2002 from $35.7 million or 87% of net revenues for the three months ended June 30, 2001.

          The decline in revenues for the three months ended June 30, 2002 when compared to the three months ended June 30 2001 is primarily due to a decrease in the volume of shipments of our communications ICs. This volume decrease was driven by reduced demand from virtually all of our customers as they faced slower demand for their products.   This decrease in the volume of shipments of our communication ICs was partially offset by increases in the absolute dollar value of shipments of our non-communications ICs.  The increase in the non-communications IC revenue was driven by the fulfillment of certain last-time-buy orders generated as a result of the planned closure of the manufacturing facility in which our non-communications ICs are made.  We expect that our revenues for the remainder of fiscal 2003 will continue to benefit from the fulfillment of these last-time-buy orders.  However, due to the prolonged downturn in the communications portion of our business and lack of backlog visibility, we are not able to assess the expected near term trend for total net revenues.

          Based on direct shipments, net revenues to customers exceeding 10% were as follows:

          Looking through product shipments to distributors and subcontractors to the end customers, net revenues to an end customer exceeding 10% were as follows:

          Sales outside of North America accounted for 29.1% for the three months ended June 30, 2002, compared to 49.5% for the three months ended June 30, 2001.

          Gross Margin.    Gross margin was 46.3% for the three months ended June 30, 2002, as compared to (20.0%) for the three months ended June 30, 2001. The increase in gross margin was primarily attributable to prior year charges for excess inventory of $15.9 million and the non-cash acquisition-related charge of $14.6 million, as well as decreases in expenses in our internal manufacturing departments. This increase was offset in part by the decrease in the volume of our product shipments.

          In the three months ended June 30, 2002 and 2001, cost of revenues included approximately $1.6 million and $14.6 million, respectively, of non-cash purchased intangible charges. Excluding the effect of these non-cash accounting charges and the special inventory charge in the three months ended June 30, 2001, gross margin was 51.5% and 53.9% for the three months ended June 30, 2002 and 2001, respectively. This decrease in gross margin, exclusive of non-cash purchase accounting charges and the special inventory charge, reflects the under utilization of our manufacturing facilities and a decrease in the volume of our product shipments. Due to the current market conditions and uncertainty with respect to expected shipment volumes, we anticipate that gross margin will continue to be affected by the under utilization of our manufacturing facilities, fluctuations in the volume of our product sales, fluctuations in wafer costs and ongoing non-cash amortization of purchased intangibles.  At June 30, 2002, the balance of purchased intangible assets expected to be charged to cost of revenues was $20.4 million.  See “Amortization of Goodwill and Purchased Intangibles.”

          Research and Development.    Research and development (“R&D”) expenses consist primarily of salaries and related costs of employees engaged in research, design and development activities, costs

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related to engineering design tools, subcontracting costs and facilities expenses.  R&D expenses decreased 9.1% to approximately $35.5 million for the three months ended June 30, 2002, from approximately $39.1 million for the three months ended June 30, 2001. The decrease in the absolute dollars spent on R&D is a result of streamlining and prioritizing our product and process development efforts and reducing subcontracting costs.  We believe that a continued commitment to R&D is vital to maintain a leadership position with innovative communications products. Currently, R&D expenses are focused on the development of products and processes for the communications markets, and we expect to continue this focus. We expect R&D in absolute dollars to decrease modestly on a quarterly basis throughout fiscal 2003 as we continue to streamline our cost structure and implement our workforce reduction program. See “Restructuring Costs” below.

          Selling, General and Administrative.    Selling, general and administrative (“SG&A”) expenses consist primarily of personnel-related expenses, professional and legal fees, corporate branding and facilities expenses. SG&A expenses were approximately $16.3 million, or 54.1% of net revenues, for the three months ended June 30, 2002, as compared to approximately $20.4 million, or 49.6% of net revenues, for the three months ended June 30, 2001. The decrease in SG&A expenses for the three months ended June 30, 2002 was primarily attributable to the decrease in payroll and related benefits as a result of reduced headcount, decreases in commissions as a result of lower net revenues and lower travel and marketing expenses as we continue to focus on reducing discretionary spending. We expect SG&A in absolute dollars to decrease modestly on a quarterly basis throughout fiscal 2003, as we continue cost reduction programs, reduce discretionary spending and implement our workforce reduction program. See “Restructuring Costs” below.

          Stock-based Compensation.    Stock-based compensation expense represents the amortization of deferred compensation as well as any expense related to options subject to variable accounting. Deferred compensation is the difference between the fair value of our common stock at the date of each acquisition and the exercise price of the unvested stock options assumed in the acquisition. In fiscal 2001, we recorded approximately $438.8 million of deferred compensation, in connection with stock options assumed in our purchase acquisitions. Stock-based compensation charges were $68.7 million and $36.8 million for the three months ended June 30, 2002 and 2001, respectively. The increase is related to an acceleration of the compensation charge in the first quarter of fiscal 2003 resulting from the voluntary cancellation of certain employees’ stock options in connection with our stock option exchange program. We currently expect to record amortization of deferred compensation with respect to these assumed options of approximately $135.6 million, $33.2 million, and $506,000 during the fiscal years ending March 31, 2003, 2004, and 2005, respectively. These charges could be reduced based on the level of employee turnover. Future acquisitions of businesses may result in substantial additional charges. Such charges may cause fluctuations in our interim or annual operating results.

          Amortization of Goodwill and Purchased Intangibles.    Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired. Intangible assets acquired include developed technology, trademarks and assembled workforce.  In April 2002, we adopted SFAS 142. As required by SFAS 142, we ceased amortizing goodwill as of the beginning of April 2002 and reclassified $6.3 million of assembled workforce to goodwill. Including the amortization of developed core technology, which is included in cost of revenues, amortization of goodwill and purchased intangible assets was $1.6 million and $184.1 million for the three months ended June 30, 2002 and 2001, respectively.  The decrease is primarily related to discontinuing the periodic amortization of goodwill and the impairment of other purchased intangible assets recorded as of the beginning of April 2002.  See “Other Intangible Asset Impairment Charges” below.

          We expect amortization expense for other purchased intangibles, including amounts which will be charged to cost of revenues, to be $4.7 million throughout the remainder of fiscal 2003, $6.3 million annually through fiscal 2005 and $3.1  million for the fiscal year ending March 31, 2006.

          Other Intangible Asset Impairment Charges.    In performing the fair value analysis as required under SFAS 142, it became evident, as a result of lower revenue forecasts, that certain other purchased intangible assets were also impaired.   As a result of these indicators of impairment to the carrying value of our other

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purchased intangible assets, we performed an additional analysis of these assets as required under SFAS 144, and recorded an additional non-cash charge of $187.9 for the impairment of developed core technology.   We also recorded a non-cash charge of $16.3 million as a result of the abandonment of the MMC Networks trademark in the first quarter of fiscal 2003.

          Goodwill Impairment Charge.    In the first quarter of fiscal 2002, as a result of the then current industry conditions, lower market valuations and reduced estimates of carrier capital equipment spending, we determined that there were indicators of impairment to the carrying value of our goodwill.  Based on our review of the value of our intangible assets in accordance with SFAS 121, we recorded a charge of $3.1 billion to write down the value of intangible assets associated with our purchase acquisitions.

          Restructuring Costs.    As a result of the prolonged downturn in the telecommunications industry and the uncertainty as to when the telecommunication equipment market will recover, in July 2002 we announced our second workforce reduction and restructuring program in the last two years.  The July 2002 workforce reduction and restructuring program is comprised of the following:

          In July 2001, we announced the first of our restructuring programs.  The July 2001 plan was in response to the sharp downturn in our business at the end of fiscal 2001 and included reducing our overall cost structure and aligning manufacturing capacity with the then current demand. The July 2001 restructuring plan resulted in a total of $11.6 million of restructuring costs, which were recognized as operating expenses in the last three quarters of fiscal 2002.  The July 2001 restructuring plan was comprised of the following components:

          Net Interest Income.     Net interest income decreased 20.3% to $10.9 million for the three months ended June 30, 2002, compared to $13.6 million for the three months ended June 30, 2001. This decrease was due principally to lower yields on investments and lower cash  and investment balances.

          Other Income (Expense).    Other income (expense) for the three months ended June 30, 2002, primarily reflects losses on the disposal of fixed assets.  Other income (expense) for the three months ended June 30, 2001, includes a gain on our strategic equity investments of $1.2 million, offset by a recognized impairment charge of $10 million for certain other strategic equity investments and certain losses on fixed asset disposals.

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          Income Taxes.     We recorded income tax benefits of $0 and $32.8 million for the three months ended June 30, 2002 and 2001, respectively, which resulted in effective tax rates of approximately 0% and 1.0% for the three months ended June 30, 2002 and 2001, respectively. The differences between our effective tax rates for the three months ended June 30, 2002 and 2001 and the federal statutory rate primarily resulted from the effect of certain of our net operating loss carry forwards and tax credits being recorded without tax benefit and the non-deductibility of certain acquisition-related expenses from our purchase transactions completed during fiscal 2001.  At June 30, 2002, we have provided a valuation allowance against our net deferred tax assets in the amount of $182.0 million. As a result, our net deferred tax asset balance as of June 30, 2002 was $0.

          Accounting Change.    In June 2001, the FASB issued SFAS 142. Under these new rules, goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are subject to annual impairment tests. Other intangible assets will continue to be amortized over their estimated useful lives.  As required by SFAS 142, we ceased amortizing goodwill as of the beginning of April 2002 and reclassified $6.3 million of assembled workforce to goodwill.  In addition, as a result of the initial impairment review as required by the adoption of the new accounting standard, we recorded a non-cash charge of $102.2 million as the cumulative effect of an accounting change.  The following table presents the impact of SFAS 142 on the net loss and the net loss per share as if SFAS 142 had been in effect for all periods presented in the interim condensed consolidated statements of operations (in thousands):