711065--1/10/2007--APPLIED_MICRO_CIRCUITS

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{product, market, service}

{financial, litigation, operation}

{stock, price, share}

{acquisition, growth, future}

{system, service, information}

{property, intellectual, protect}

{cost, regulation, environmental}

{regulation, change, law}

{cost, operation, labor}

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{operation, international, foreign}

Our operating results may fluctuate because of a number of factors, many of which are beyond our control. Our business, financial condition and operating results would be harmed if we do not achieve anticipated revenues. Our business substantially depends upon the continued growth of the technology sector and the Internet. The loss of one or more key customers, the diminished demand for our products from a key customer, or the failure to obtain certifications from a key customer or its distribution channel could significantly reduce our revenues and profits. Any significant order cancellations or order deferrals could adversely affect our operating results. Our products typically have lengthy design cycles. A customer may decide to cancel or change its product plans, which could cause us to lose anticipated sales. An important part of our strategy is to continue our focus on the markets for communications and storage equipment. If we are unable to further expand our share of these markets, our revenues may not grow and could further decline. The discontinuance of our Fibre Channel host bus adapter products have resulted in a decline in revenue that we realize from sales of these products and we may incur significant costs due to customer obligations relating to these products. Our industry and markets are subject to consolidation, which may result in stronger competitors, fewer customers and reduced demand. Our operating results are subject to fluctuations because we rely heavily on international sales. Our cash and cash equivalents and portfolio of short-term investments are exposed to certain market risks. Our restructuring activities could result in management distractions, operational disruptions and other difficulties. Our markets are subject to rapid technological change, so our success depends heavily on our ability to develop and introduce new products. The markets in which we compete are highly competitive, and we expect competition to increase in these markets in the future. We do not have an internal wafer fabrication capability, which could result in unanticipated liability and reduced revenues. Our dependence on third-party manufacturing and supply relationships increases the risk that we will not have an adequate supply of products to meet demand or that our cost of materials will be higher than expected. Our operating results depend on manufacturing output and yields of our ICs and printed circuit board assemblies, which may not meet expectations. We may experience difficulties in transitioning to smaller geometry process technologies or in achieving higher levels of design integration and that may result in reduced manufacturing yields, delays in product deliveries and increased expenses. We must develop or otherwise gain access to improved IC process technologies. The complexity of our products may lead to errors, defects and bugs, which could negatively impact our reputation with customers and result in liability. A change in the accounting treatment of stock-based awards will adversely affect our results of operations. If our internal controls over financial reporting are not considered effective, our business and stock price could be adversely affected. Our future success depends in part on the continued service of our key senior management, design engineering, sales, marketing, and manufacturing personnel and our ability to identify, hire and retain additional, qualified personnel. Our ability to supply a sufficient number of products to meet demand could be severely hampered by a shortage of water, electricity or other supplies, or by natural disasters or other catastrophes. We have been named as a party to several derivative action lawsuits arising from our internal option review, and we may be named in additional litigation, all of which could require significant management time and attention and result in significant legal expenses and may result in an unfavorable outcome which could have a material adverse effect on our business, financial condition, results of operations and cash flows. As a result of our option review and restatement, we are subject to investigations by the SEC and Department of Justice ( DOJ ), which may not be resolved favorably and has required, and may continue to require, a significant amount of management time and attention and accounting and legal resources, which could adversely affect our business, results of operations and cash flows. The process of restating our financial statements, its associated disclosures, and complying with SEC requirements are subject to uncertainty and evolving requirements. If we do not maintain compliance with Nasdaq listing requirements, our common stock could be delisted, which could have a material adverse effect on the trading price of our common stock and cause some investors to lose interest in our company. We could incur substantial fines or litigation costs associated with our storage, use and disposal of hazardous materials. Environmental laws and regulations could cause a disruption in our business and operations. Our business strategy contemplates the acquisition of other companies, products and technologies. Merger and acquisition activities involve numerous risks and we may not be able to address these risks successfully without substantial expense, delay or other operational or financial problems. Any acquisitions we make could disrupt our business and harm our results of operation and financial condition. Our subsidiary has been named as a defendant in litigation that could result in substantial costs and divert management s attention and resources. We may not be able to protect our intellectual property adequately. We could be harmed by litigation involving patents, proprietary rights or other claims. Our stock price is volatile. The anti-takeover provisions of our certificate of incorporation and of the Delaware general corporation law may delay, defer or prevent a change of control. If we issue additional shares of stock in the future, it may have a dilutive effect on our stockholders.

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711065--1/10/2007--APPLIED_MICRO_CIRCUITS_CORP