This Quarterly Report on Form 10-Q, and in particular the following Management's Discussion and Analysis of Financial Condition and Results of Operations, includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended ("the Exchange Act"). These forward-looking statements involve risks and uncertainties. Forward-looking statements are identified by words such as "anticipates," "believes," "expects," "intends," "may," "will," and other similar expressions. In addition, any statements which refer to expectations, projections, or other characterizations of future events, or circumstances, are forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including those set forth in this report under "Risk Factors," those described elsewhere in this report, and those described in our other reports filed with the Securities and Exchange Commission ("SEC"). We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report, and we undertake no obligation to update these forward-looking statements after the filing of this report. You are urged to review carefully and consider our various disclosures in this report and in our other reports publicly disclosed or filed with the SEC that attempt to advise you of the risks and factors that may affect our business.

Overview

We are a fabless semiconductor company that designs, develops and markets Very Fast static random access memories, or SRAMs, and low latency dynamic random access memories, or LLDRAMs, primarily for the networking and telecommunications markets. We are subject to the highly cyclical nature of the semiconductor industry, which has experienced significant fluctuations, often in connection with fluctuations in demand for the products in which semiconductor devices are used. Beginning in fiscal 2001, the networking and telecommunications markets experienced an extended period of severe

contraction, during which our operating results sharply declined. Between fiscal 2004 and fiscal 2006, demand for networking and telecommunications equipment recovered. During the first three quarters of fiscal 2007, demand for such equipment accelerated and, as a result, our operating results improved. In the fourth quarter of fiscal 2007 and the first quarter of fiscal 2008, revenues again declined due, in part, to the implementation of a "lean manufacturing" program by our largest customer, Cisco Systems. Our revenues have been substantially impacted by the fluctuations in sales to Cisco Systems, and we expect that future direct and indirect sales to Cisco Systems will continue to fluctuate significantly on a quarterly basis. The worldwide financial crisis and the resulting economic impact on the end markets we serve adversely impacted our financial results since the second half of fiscal 2009, and we expect that the unsettled global economic environment will continue to affect our operating results in future periods. However, with no debt, substantial liquidity and a history of positive cash flows from operations, we believe we are in a better financial position than many other companies of our size.
Revenues. Our revenues are derived primarily from sales of our Very Fast SRAM products. Sales to networking and telecommunications original equipment manufacturers, or OEMs, accounted for 65% to 80% of our net revenues during our last three fiscal years. We also sell our products to OEMs that manufacture products for defense applications such as radar and guidance systems, for professional audio applications such as sound mixing systems, for test and measurement applications such as high-speed testers, for automotive applications such as smart cruise control and voice recognition systems, and for medical applications such as ultrasound and CAT scan equipment.
As is typical in the semiconductor industry, the selling prices of our products generally decline over the life of the product. Our ability to increase net revenues, therefore, is dependent upon our ability to increase unit sales volumes of existing products and to introduce and sell new products with higher average selling prices in quantities sufficient to compensate for the anticipated declines in selling prices of our more mature products. Although we expect the average selling prices of individual products to decline over time, we believe that, over the next several quarters, our overall average selling prices will increase due to a continuing shift in product mix to a higher percentage of higher price, higher density products. Our ability to increase unit sales volumes is dependent primarily upon increases in customer demand but, particularly in periods of increasing demand, can also be affected by our ability to increase production through the availability of increased wafer fabrication capacity from Taiwan Semiconductor Manufacturing Company, or TSMC, and Powerchip, our wafer suppliers, and our ability to increase the number of good integrated circuit die produced from each wafer through die size reductions and yield enhancement activities.
We may experience fluctuations in quarterly net revenues for a number of reasons. Historically, orders on hand at the beginning of each quarter are insufficient to meet our revenue objectives for that quarter and are generally cancelable up to 30 days prior to scheduled delivery. Accordingly, we depend on obtaining and shipping orders in the same quarter to achieve our revenue objectives. In addition, the timing of product releases, purchase orders and product availability could result in significant product shipments at the end of a quarter. Failure to ship these products by the end of the quarter may adversely affect our operating results. Furthermore, our customers may delay scheduled delivery dates and/or cancel orders within specified timeframes without significant penalty.
We sell our products through our direct sales force, international and domestic sales representatives and distributors. Revenues from product sales, except for sales to distributors, are generally recognized upon shipment, net of sales returns and allowances. Sales to consignment warehouses, who purchase products from us for use by contract manufacturers, are recorded upon delivery to the contract manufacturer. Sales to distributors are recorded as deferred revenues for financial reporting purposes and recognized as revenues when the products are resold by the distributors to the OEM. Sales to distributors are made under agreements allowing for returns or credits under certain circumstances. We therefore defer recognition of revenue on sales to distributors until products are resold by the distributor.
Cisco Systems, our largest OEM customer, purchases our products primarily through its consignment warehouses, SMART Modular Technologies, Jabil Circuit and Flextronics Technology, and also purchases some products through its contract manufacturers and directly from us. Historically, purchases by Cisco Systems have fluctuated from period to period. Based on information provided to us by Cisco Systems' consignment warehouses and contract manufacturers, purchases by Cisco Systems represented approximately 43%, 37%, 35% and 26% of our net revenues in the nine months ended December 31, 2011 and in fiscal 2011, 2010 and 2009, respectively. Our revenues have been substantially impacted by the fluctuations in sales to Cisco Systems, and we expect that future direct and indirect sales to Cisco Systems will continue to fluctuate significantly on a quarterly basis and that such fluctuations may significantly affect our operating results in future periods. To our knowledge, none of our other OEM customers accounted for more than 10% of our net revenues in fiscal 2011, 2010 or 2009.
Cost of Revenues. Our cost of revenues consists primarily of wafer fabrication costs, wafer sort, assembly, test and burn-in expenses, the amortized cost of production mask sets, stock-based compensation and the cost of materials and overhead from operations. All of our wafer manufacturing and assembly operations, and a significant portion of our wafer sort testing

operations, are outsourced. Accordingly, most of our cost of revenues consists of payments to TSMC and independent assembly and test houses. Because we do not have long-term, fixed-price supply contracts, our wafer fabrication and other outsourced manufacturing costs are subject to the cyclical fluctuations in demand for semiconductors. Cost of revenues also includes expenses related to supply chain management, quality assurance, and final product testing and documentation control activities conducted at our headquarters in Sunnyvale, California and our branch operations in Taiwan.
Gross Profit. Our gross profit margins vary among our products and are generally greater on our higher density products and, within a particular density, greater on our higher speed and industrial temperature products. We expect that our overall gross margins will fluctuate from period to period as a result of shifts in product mix, changes in average selling prices and our ability to control our cost of revenues, including costs associated with outsourced wafer fabrication and product assembly and testing.
Research and Development Expenses. Research and development expenses consist primarily of salaries and related expenses for design engineers and other technical personnel, the cost of developing prototypes, stock-based compensation and fees paid to consultants. We charge all research and development expenses to operations as incurred. We charge mask costs used in production to costs of revenues over a 12-month period. However, we charge costs related to pre-production mask sets, which are not used in production, to research and development expenses at the time they are incurred. These charges often arise as we transition to new process technologies and, accordingly, can cause research and development expenses to fluctuate on a quarterly basis. We believe that continued investment in research and development is critical to our long-term success, and we expect to continue to devote significant resources to product development activities. Accordingly, we expect that our research and development expenses will increase in future periods, although such expenses as a percentage of net revenues may fluctuate.
Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of commissions paid to independent sales representatives, salaries, stock-based compensation and related expenses for personnel engaged in sales, marketing, administrative, finance and human resources activities, professional fees, costs associated with the promotion of our products and other corporate expenses. We expect that our sales and marketing expenses will increase in absolute dollars in future periods as we continue to grow and expand our sales force but that, to the extent our revenues increase in future periods, these expenses will generally decline as a percentage of net revenues. We also expect that, in support of our continued growth, general and administrative expenses will continue to increase in absolute dollars for the foreseeable future and that, as we continue to incur substantial legal expenses in connection with our pending litigation with Cypress Semiconductor, our general and administrative expenses, as a percentage of net revenues, will be substantially higher than their historical levels.

Results of Operations

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

                                  Three Months Ended December 31,         Nine Months Ended December 31,
                                     2011                  2010               2011                2010
Net revenues                         100.0  %              100.0  %            100.0 %              100.0 %
Cost of revenues                      56.1                  53.8                56.1                 53.7
Gross profit                          43.9                  46.2                43.9                 46.3
Operating expenses:
Research and development              13.2                  10.0                12.5                 10.6
Selling, general and
administrative                        27.3                  10.6                20.8                 10.9
Total operating expenses              40.5                  20.6                33.3                 21.5
Income from operations                 3.4                  25.6                10.6                 24.8
Interest and other income
(expense), net                         0.8                  (0.2 )               0.6                  0.3
Income before income taxes             4.2                  25.4                11.2                 25.1
Provision for income taxes            (0.7 )                 3.1                 1.9                  4.7
Net income                             4.9  %               22.3  %              9.3 %               20.4 %

Net Revenues. Net revenues decreased by 23.9% from $26.2 million in the three months ended December 31, 2010 to $20.0 million in the three months ended December 31, 2011. Net revenues decreased by 15.9% from $75.9 million in the nine months ended December 31, 2010 to $63.8 million in the nine months ended December 31, 2011. Net revenues in the three months ended December 31, 2010 were somewhat anomalous as contract manufacturers for a major customer drew down $1.9 million from inventories at the end of the third quarter rather than in the fourth quarter as we had originally expected, benefitting third quarter net revenues. Net revenues in the three and nine month periods of fiscal 2012 have decreased as a result of excess inventories acquired by our customers in prior year periods that have been drawn down in the current fiscal year. Direct and indirect sales to Cisco Systems, our largest customer, increased by $100,000 from $9.8 million in the three months ended December 31, 2010 to $9.9 million in the three months ended December 31, 2011 but decreased by $1.9 million from $29.3 million in the nine months ended December 31, 2010 to $27.4 million in the nine months ended December 31, 2011. Sales to Cisco Systems during the three months ended December 31, 2011 increased by $2.0 million over the preceding second quarter, largely as a result of production problems experienced by another supplier. We believe that third quarter revenues were negatively impacted by uncertainty regarding our pending patent litigation with Cypress Semiconductor and that this uncertainty will continue to affect our revenue. Shipments of our SigmaQuad product line accounted for 33.3% of total shipments in the nine months ended December 31, 2011 compared to 31.3% of total shipments in the nine months ended December 31, 2010.

Cost of Revenues. Cost of revenues decreased by 20.6% from $14.1 million in the three months ended December 31, 2010 to $11.2 million in the three months ended December 31, 2011 and by 12.2% from $40.8 million in the nine months ended December 31, 2010 to $35.8 million in the nine months ended December 31, 2011. These decreases were primarily due to the corresponding decreases in net revenues, partially offset by increases in manufacturing overhead expenses as we prepare to support expected increases in the production levels of new and existing products, including our low latency DRAMs. Cost of revenues included stock-based compensation expense of $79,000 and $60,000, respectively, for the three months ended
December 31, 2011 and 2010 and $237,000 and $236,000, respectively, for the nine months ended December 31, 2011 and 2010.

Gross Profit. Gross profit decreased by 27.7% from $12.1 million in the three months ended December 31, 2010 to $8.8 million in the three months ended December 31, 2011 and by 20.3% from $35.1 million in the nine months ended December 31, 2010 to $28.0 million in the nine months ended December 31, 2011. Gross margin decreased from 46.2% in the three months ended December 31, 2010 to 43.9% in the three months ended December 31, 2011 and from 46.3% in the nine months ended December 31, 2010 to 43.9% in the nine months ended December 31, 2011. The decreases in gross profit were primarily related to the decreased net revenues. The decrease in gross margin was primarily related to the increases in manufacturing overhead expenses described above.

Research and Development Expenses. Research and development expenses were unchanged at $2.6 million in the three months ended December 31, 2010 and in the three months ended December 31, 2011. A decrease of $247,000 in research

and development mask expense was primarily offset by increases in payroll related expenses and stock-based compensation. Research and development expenses included stock-based compensation expense of $275,000 and $208,000, respectively, for the three months ended December 31, 2011 and 2010. Research and development expenses were unchanged at $8.0 million in the nine months ended December 31, 2010 and in the nine months ended December 31, 2011. A decrease of $738,000 in research and development mask expense was primarily offset by increases in payroll related expenses and stock-based compensation. The increase in payroll expenses were related to increases in headcount to support our low latency DRAM project and various high speed SRAM projects. Research and development expenses included stock-based compensation expense of $787,000 and $622,000, respectively, for the nine months ended December 31, 2011 and 2010.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 95.4% from $2.8 million in the three months ended December 31, 2010 to $5.5 million in the three months ended December 31, 2011. This increase was primarily due to an increase of $2.9 million in legal fees related to the pending patent infringement and antitrust litigation involving Cypress Semiconductor Corporation, partially offset by a decrease in independent sales representative commissions of $229,000. Selling, general and administrative expenses included stock-based compensation expense of $178,000 and $160,000, respectively, for the three months ended December 31, 2011 and 2010. Selling, general and administrative expenses increased 61.2% from $8.3 million in the nine months ended December 31, 2010 to $13.3 million in the nine months ended December 31, 2011. This increase was primarily related to an increase of $5.6 million in legal fees related to the pending patent infringement and antitrust litigation involving Cypress Semiconductor Corporation, partially offset by a decrease in independent sales representative commissions of $481,000 and a lesser decrease in non-legal professional fees. Selling, general and administrative expenses included stock-based compensation expense of $533,000 and $446,000, respectively, for the nine months ended December 31, 2011 and 2010.

Interest and Other Income (Expense), Net. Interest and other income (expense), net increased from an expense of $48,000 in the three months ended December 31, 2010 to income of $157,000 in the three months ended December 31, 2011. Interest income decreased by $25,000 due to lower interest rates received on our cash and short-term and long-term investments. In addition, we recorded an exchange loss of $218,000 for the three months ended December 31, 2010 compared to an exchange gain $12,000 for the three months ended December 31, 2011. Interest and other income (expense), net increased 86.1% from $216,000 in the nine months ended December 31, 2010 to $402,000 in the nine months ended December 31, 2011. Interest income decreased by $109,000 due to lower interest rates received on our cash and short-term and long-term investments. In addition, we recorded an exchange loss of $308,000 for the nine months ended December 31, 2010 compared to $13,000 for the nine months ended December 31, 2011. The exchange loss in each period was related to our Taiwan branch operations.

Provision for Income Taxes. The provision for income taxes decreased from $814,000 in the three months ended December 31, 2010 to a benefit of $147,000 in the three months ended December 31, 2011 and from $3.6 million in the nine months ended December 31, 2010 to $1.2 million in the nine months ended December 31, 2011. These decreases were due to the decreased pre-tax income in the three and nine month periods.

Net Income. Net income decreased 83.0% from $5.8 million in the three months ended December 31, 2010 to $991,000 in the three months ended December 31, 2011 and 61.7% from $15.5 million in the nine months ended December 31, 2010 to $5.9 million in the nine months ended December 31, 2011. These decreases were primarily due to the decreases in net revenues, gross profit and gross margin and the increases in operating expenses discussed above.

Liquidity and Capital Resources

As of December 31, 2011, our principal sources of liquidity were cash, cash equivalents and short-term investments of $52.0 million compared to $52.0 million as of March 31, 2011.

Net cash provided by operating activities was $11.3 million for the nine months ended December 31, 2011 compared to $10.9 million for the nine months ended December 31, 2010. The primary sources of cash in the current nine month period were net income of $5.9 million and a decrease in accounts receivable of $6.7 million, partially offset by an increase in prepaid expenses and other assets of $2.6 million and a decrease in accounts payable of $2.5 million. The decrease in accounts receivable was due to the lower level of shipments in the current nine month period compared to the year ago period.

Net cash used in investing activities was $4.9 million in the nine month period ended December 31, 2011. Investment activities consisted primarily of the purchase of state and municipal obligations and corporate notes of $30.3 million. This use was primarily offset by sales and maturities of investments of $26.1 million. Net cash used in investing activities was $14.3 million in the nine month period ended December 31, 2010. Investment activities consisted primarily of the purchase of state and municipal obligations and corporate notes and purchases of property and equipment. These uses were offset by sales and

maturities of investments of $28.3 million.

Net cash provided by financing activities in the nine months ended December 31, 2011 and December 31, 2010 primarily consisted of the net proceeds from the sale of common stock pursuant to our employee stock plans. We repurchased $4.5 million of our common stock at an average price of $4.78 per share in the nine months ended December 31, 2011.

We believe that our existing balances of cash, cash equivalents and short-term investments, and cash flow expected to be generated from our future operations will be sufficient to meet our cash needs for working capital and capital expenditures for at least the next 12 months, although we could be required, or could elect, to seek additional funding prior to that time. Our future capital requirements will depend on many factors, including the rate of revenue growth that we experience, the extent to which we utilize subcontractors, the levels of inventory and accounts receivable that we maintain, the timing and extent of spending to support our product development efforts and the expansion of our sales and marketing efforts. Additional capital may also be required for the consummation of any acquisition of businesses, products or technologies that we may undertake. We cannot assure you that additional equity or debt financing, if required, will be available on terms that are acceptable or at all.

Contractual Obligations

The following table describes our contractual obligations as of December 31,
2011:

                                                          Payments due by period
                                           Up to       1-3       3-5       More than
                                           1 year     years     years       5 years       Total
Facilities leases                         $   179    $    -    $     -    $         -    $   179
Wafer, test and mask purchase obligations   2,131       830          -              -      2,961
                                          $ 2,310    $  830    $     -    $         -    $ 3,140

As of December 31, 2011, the current portion of our unrecognized tax benefits was $609,000, and the long-term portion was $2,027,000. The unrecognized tax benefits balance as of December 31, 2011 of $2,780,000 would affect our effective tax rate if recognized. As of December 31, 2011, $346,000 of unrecognized tax benefits have been recorded as a reduction to net deferred tax assets.

Critical Accounting Policies and Estimates

Our critical accounting policies and estimates are disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2011.

Off-Balance Sheet Arrangements

At December 31, 2011, we did not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Accordingly, we are not exposed to the type of financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Recent Accounting Pronouncements

In June 2011, the FASB amended its guidance on the presentation of comprehensive income. Under the amended guidance, we have the option to present comprehensive income in either one continuous statement or two consecutive financial statements. A single statement must present the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for comprehensive income. In a two-statement approach, we must present the components of net income and total net income in the first statement. That statement must be immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. We are also required to present on the face of its financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the

statement(s) where the components of net income and the components of other comprehensive income are presented. The option under previous guidance that permits the presentation of components of other comprehensive income as part of the statement of changes in stockholders' equity has been eliminated. In December 2011, the FASB further amended its guidance to defer changes related to the presentation of reclassification adjustments indefinitely as a result of concerns raised by stakeholders that the new presentation requirements would be difficult for preparers and add unnecessary complexity to financial statements. The amendment (other than the portion regarding the presentation of reclassification adjustments which, as noted above, has been deferred . . .