This discussion contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, risks and uncertainties, including the risk factors set forth in this discussion, as more fully described in Part II, Item 1.A "Risk Factors" in this quarterly report on Form 10-Q. Generally, the words "anticipate," "expect," "intend," "believe" and similar expressions identify forward-looking statements. These forward-looking statements include, without limitation, our expectation that a small number of OEMs will continue to account for a substantial portion of our revenue; our existing and expected cash, cash equivalents and cash flows will be sufficient to meet our anticipated cash needs for at least the next twelve months; our belief in the effectiveness of our internal controls; our expectation that significant customer concentration in a small number of OEM customers will continue for the foreseeable future; our expectation that our foreign currency exposure will increase as our operations in India and other countries expand; and future costs and expenses and financing requirements. The forward-looking statements made in this Form 10-Q are made as of the filing date with the Securities and Exchange Commission and future events or circumstances could cause results that differ significantly from the forward-looking statements included here. Accordingly, we caution readers not to place undue reliance on these statements and, except as required by law, we assume no obligation to update any such forward-looking statements.

The following discussion and analysis should be read in conjunction with the condensed financial statements and notes thereto in Part I, Item 1 above and with our financial statements and notes thereto for the year ended December 30, 2007, contained in our Annual Report on Form 10-K filed on February 22, 2008.

Overview

We are a leading global provider of high-performance silicon and software for interactive broadband. We develop and market end-to-end products for the last mile and the digital home, which enable carriers to offer enhanced triple play services, including voice, video and data. Our products power digital subscriber line access multiplexers (DSLAMs), optical network units (ONUs), concentrators, customer premise equipment, modems and residential gateways for leading network equipment manufacturers. Our products have been deployed by carriers in Asia, Europe and North America. We believe that we can offer advanced products by continuing to push existing limits in silicon, systems and software. We have developed programmable, scalable chip architectures, which form the foundation for deploying and delivering triple play services. Expertise in the creation and integration of unique DSP algorithms with advanced digital, mixed signal and analog semiconductors enables us to offer high-performance, high-density and low power VDSL products. Flexible network processor architecture with wire-speed packet processing capabilities enables high-performance residential gateways for distributing advanced services in the home. These industry-leading products thus support carriers' triple play deployment plans to the digital home while keeping their capital and operating expenditures low.

We outsource all of our semiconductor fabrication, assembly and test functions, which enable us to focus on design, development, sales and marketing of our products and reduce the level of our capital investment. Our customers consist primarily of original design manufacturers (ODMs), contract manufacturers (CMs) and original equipment manufacturers (OEMs), who in turn sell our semiconductors as part of their solutions to carriers. We also sell to third-party sales representatives, who in turn sell to ODMs, CMs and OEMs. We were incorporated in April 1999 and through December 31, 2001, we were engaged principally in research and development. We began commercial shipment of our products in the fourth quarter of 2002. Over the last three years, our revenue was $85.1 million in 2005, $134.7 million in 2006 and $107.5 million in 2007.

Quarterly revenue fluctuations are characteristic of our industry and affect our business, especially due the concentration of our revenue among a few significant customers. For instance, in the fourth quarter of 2006, our revenue declined by $15.7 million, or 43%, from the third quarter of 2006. These quarterly fluctuations can result from a mismatch of supply and demand. Specifically, carriers purchase equipment based on planned deployment. However, carriers may deploy equipment more slowly than initially planned, while OEMs continue for a time to manufacture equipment at rates higher than the rate at which equipment is deployed. As a result, periodically and usually without significant notice, carriers will reduce orders with OEMs for new equipment, and OEMs in turn will reduce orders for our products, which will adversely impact the quarterly demand for our products, even when deployment rates may be increasing.

Furthermore, our future revenue growth depends upon new carriers beginning to deploy new platforms with our products, among other factors. It is inherently difficult to predict if and when platforms will pass qualification, when carriers will begin to deploy the equipment and at what rate, because we do not control the qualification criteria or process, and the systems manufacturers and carriers do not always share all of the information available to them regarding qualification and deployment decisions. For example, a carrier began to deploy a platform including our products, but temporarily put the deployment on hold due to a regulatory constraint causing our revenue projection to be lower than originally anticipated.

In February 2006, we acquired network processing and ADSL assets from ADI for $32.7 million in cash and began deriving revenue relating to network processing and ADSL products in the same quarter. This acquisition enabled us to enter the growing residential gateway semiconductor market and diversified our product offerings, allowing us to sell into new markets worldwide. As a result of this acquisition, we incurred significant additional expenses related to the addition of employees and related expenses of developing and marketing products as well as non-cash acquisition-related charges.

In February 2008, we purchased the DSL technology and related assets from Centillium Communications, Inc. for approximately $11.9 million in cash. The team of engineers, DSL products, technology, patents and other intellectual property allow us to extend our market leadership as well as accelerate our digital home initiatives and next generation VDSL2 development.

Critical Accounting Policies and Estimates

In preparing our condensed consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on amounts reported in our consolidated financial statements. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates and make changes accordingly. We also discuss our critical accounting estimates with the Audit Committee of the Board of Directors. We believe that the assumptions, judgments and estimates involved in the accounting for revenue, cost of revenue, marketable securities, accounts receivable, inventories, warranty, income taxes, impairment of goodwill and related intangibles, acquisitions and stock-based compensation expense have the greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.

The critical accounting policies, are described in Item 7, "Management Discussion and Analysis of Financial Condition and Results of Operations," of our Annual Report on Form 10-K for the year ended December 30, 2007, and have not changed materially as of September 28, 2008.

Results of Operations

Revenue

Our revenue is derived from sales of our semiconductor products. Revenue from product sales is generally recognized upon shipment, net of sales returns, rebates and allowances. As is typical in our industry, the selling prices of our products generally decline over time. Therefore, our ability to increase revenue is dependent upon our ability to increase unit sales volumes of existing products and to introduce and sell new products in greater quantities. Our ability to increase unit sales volume is dependent primarily upon our ability to increase and fulfill current customer demand and obtain new customers.

Revenue decreased by $3.1 million, or 11%, to $24.2 million in the three months ended September 28, 2008 from $27.3 million in the three months ended September 30, 2007. The majority of the decrease relates to an approximate 29% decrease in units shipped, offset by roughly a 24% increase in average sales price and reflects lower revenue from Korea and Japan. Revenue from Korea was down as OEMs reduced purchases due to the weakening of the Korean Won versus the U.S. dollar. Japanese revenue was lower because the third quarter of 2007 was the first strong quarter of sales following a three-quarter inventory correction with our OEMs in Japan. Sales in Japan for the third quarter of 2008 are more consistent with recent quarters.

Revenue increased by $6.1 million, or 8%, to $83.7 million in the nine months ended September 28, 2008 from $77.6 million in the nine months ended September 30, 2007. The majority of the increase relates to an approximate 8% increase in units shipped, offset by roughly a 1% decrease in average sales price. We experienced significant unit growth in Europe as a number of carriers began to deploy VDSL2 solutions, which accounted for the majority of the increase in revenue from Europe. Additionally, in the first quarter of last year, there was a correction in Japan as OEMs slowed orders as they lowered their existing equipment levels. Orders from Japan returned to a more normal volume in 2008 and resulted in the increase in Asia revenue from the year ago period.

We generally sell our products to OEMs through a combination of our direct sales force and third-party sales representatives. Sales are generally made under short-term, non-cancelable purchase orders. We also have volume purchase agreements, and certain customers who provide us with non-binding forecasts. Although certain OEM customers may provide us with rolling forecasts, our ability to predict future sales in any given period is limited and subject to change based on demand for our OEM customers' systems and their supply chain decisions. Historically, a small number of OEM customers, the composition of which has varied over time, have accounted for a substantial portion of our revenue, and we expect that significant customer concentration will continue for the foreseeable future, but it may diversify across more carrier customers as we expect more carriers world-wide to begin deployments of broadband solutions and Gateway products. The following direct customers accounted for more than 10% of our revenue for the years indicated. Sales made to OEMs are based on information that we receive at the time of ordering.

                                                                  Three Months Ended                   Nine Months Ended
                                                            September 28,     September 30,     September 28,     September 30,
Our Direct Customer                  OEM Customer               2008              2007              2008              2007
NEC Corporation of America   NEC Corporation (Magnus)                  29 %              31 %              24 %              30 %
Paltek Corporation           Sumitomo Electric Industries              28 %               * %              25 %               * %
Altima                       Sumitomo Electric Industries               * %              22 %               * %              17 %
Sagem                        Sagem                                     21 %              20 %              18 %              21 %
Alcatel-Lucent and its CMs   Alcatel-Lucent                             * %               * %              12 %               * %
Uniquest                     Various                                    * %              12 %               * %              12 %

* Less than 10%

Revenue by Region as a Percentage of Total Revenue



                         Three Months Ended                   Nine Months Ended
                   September 28,     September 30,     September 28,     September 28,
                       2008              2007              2008              2007
   Asia                       64 %              74 %              62 %              68 %
   Europe                     23                24                31                26
   North America              13                 2                 7                 6

The table above reflects sales to our direct customers based on where they are headquartered. It does not necessarily reflect carrier deployment of our products as we do not sell direct to them. Revenue from Asia has decreased in absolute dollars and decreased as a percentage of total revenue for both the three and nine month periods ended September 28, 2008 as compared to the same periods in prior year due to the increase in revenue from Europe. Revenue from Europe increased as a percentage of total revenue for the first nine months of 2008 as compared to the prior year as Alcatel-Lucent ramped up their production as a number of carriers, such as Belgacom, Swisscom and KPN, began or increased deployments of VDSL products. Revenue in North America increased for the three months ended September 28, 2008 as compared to the prior year due to increased sales so a specific OEM that is headquartered in the U.S., but its end customer is located in Europe.

Revenue by Product Family as a Percentage of Total Revenue



                      Three Months Ended                   Nine Months Ended
                September 28,     September 30,     September 28,     September 30,
                    2008              2007              2008              2007
      Access               44 %              56 %              52 %              54 %
      Gateway              56                44                48                46

The change in mix for the three and nine months ended September 28, 2008 is primarily attributed to decreased sales of our Access products in Korea and, to a lesser extent, Europe.

Cost and Operating Expenses



                                                  Three Months Ended                                 Nine Months Ended
                                      September 28,      September 30,       %           September 28,      September 30,       %
                                          2008               2007          Change            2008               2007          Change
Cost of revenue                      $        14,212    $        17,190       (17 )%    $        48,265    $        47,060         3 %
Research and development                      10,282             13,908       (26 )              33,516             38,940       (14 )
Sales, general and administrative              8,142              6,832        19                20,282             20,973        (3 )
Operating asset impairments                   12,496                 -         nm                12,496                 -         nm
Restructuring charges                             -               3,468        nm                    -               3,468        nm

Cost and Operating Expenses as a Percentage of Total Revenue:



                                               Three Months Ended                        Nine Months Ended
                                       September 28,        September 30,        September 28,        September 30,
                                           2008                 2007                 2008                 2007
Cost of revenue                                   59 %                 63 %                 58 %                 61 %
Research and development                          43                   51                   40                   50
Sales, general and administrative                 34                   25                   24                   27
Operating asset impairments                       52                   -                    15                   -
Restructuring charges                             -                    13                   -                     4

Cost of Revenue

Our cost of revenue consists primarily of cost of silicon wafers purchased from third-party foundries and third-party costs associated with assembling, testing and shipping of our semiconductors. Because we do not have formal, long-term pricing agreements with our outsourcing partners, our wafer costs and services are subject to price fluctuations based on the cyclical demand for semiconductors among other factors. In addition, after we purchase wafers from foundries, we also incur yield loss related to manufacturing these wafers into "good" die. Manufacturing yield is the percentage of acceptable product resulting from the manufacturing process, as identified when the product is tested. When our manufacturing yields decrease, our cost per unit increases, which could have a significant adverse impact on our cost of revenue. Cost of revenue also includes accruals for actual and estimated warranty obligations and write-downs of excess and obsolete inventories, payroll and related personnel costs, licensed third-party intellectual property, depreciation of equipment, stock-based compensation expenses and amortization of acquisition-related intangibles.

Cost of revenue decreased to $14.2 million for the three months ended September 28, 2008 as compared to $17.2 million for the three months ended September 30, 2007. Our gross margins were 41% for the three months ended September 28, 2008 as compared to 37% for the year ago period. The lower gross margins in the third quarter of 2007 were primarily the result of a $1.6 million product feasibility study with a customer that we entered into in that period, which was an offset to revenue.

Cost of revenue increased to $48.3 million for the nine months ended September 28, 2008 as compared to $47.1 million for the nine months ended September 30, 2007. Our gross margins were 42% for the nine months ended September 28, 2008 as compared to 39% for the year ago period. The lower gross margins for the nine months ended September 30, 2007 were primarily the result of a $1.6 million product feasibility study with a customer that we entered into in Q3 2007, which was an offset to revenue. Additional reasons for the increase in gross margins include favorable prices from our suppliers, test reductions and to a lesser extent, sales of previously written off inventory.

Research and development expenses

All research and development, or R&D, expenses are expensed as incurred and generally consist of compensation and associated costs of employees engaged in research and development; contractors; tape-out costs; reference board development; development testing, evaluation kits and tools; stock based compensation expenses and depreciation expense. Before releasing new products, we incur charges for mask sets, amortization of acquisition-related intangibles, prototype wafers, mask set revisions, bring-up boards and other qualification materials, which we refer to as tape-out costs. These tape-out costs cause our research and development expenses to fluctuate because they are not incurred uniformly every quarter.

R&D expenses decreased $3.6 million, or 26%, to $10.3 million for the three months ended September 28, 2008 as compared to $13.9 million for the three months ended September 30, 2007. The change was primarily attributed to a $1.5 million decrease in design and tape-out costs, a $0.9 million decrease in stock based compensation and a $0.9 million decrease in software and depreciation costs associated with our outsourcing back-end physical design a year ago. The decrease in design and tapeout costs as compared to the prior year is because we had a 65 nanometer tape-out in the year-ago period.

R&D expenses decreased $5.4 million, or 14%, to $33.5 million for the nine months ended September 28, 2008 as compared to $38.9 million for the nine months ended September 30, 2007. The change was primarily attributed to a $2.1 million decrease in design and tape-out costs, a $2.0 million decrease in software and depreciation costs and a $1.6 million decrease in stock based compensation. These decreases were offset by a $0.7 million increase in personnel costs and a $0.3 million increase in in-process research and development charges as a result of the Centillium DSL acquisition.

The majority of our R&D personnel are located in the United States or India. As of September 28, 2008, we had 207 people engaged in research and development of which 103 were located in India and 90 were located in the United States. As of September 30, 2007, we had 193 people engaged in research and development of whom 101 were located in India and 90 were located in North America.

Selling, general and administrative expenses

Selling, general and administrative, or SG&A, expenses generally consist of compensation and related expenses for personnel; public company costs; legal, recruiting and auditing fees; and deprecation. SG&A expenses increased by $1.3 million for the three months ended September 28, 2008, or 19%, to $8.1 million as compared to $6.8 million for the three months ended September 30, 2007. The increase is primarily attributed to $0.6 million in stock based compensation, $0.6 million in severance costs and $0.4 million in amortization of acquisition related intangible assets as a result of the Centillium DSL acquisition offset by a decrease of $0.4 million in personnel costs.

SG&A expenses decreased by $0.7 million for the nine months ended September 28, 2008, or 3%, to $20.3 million as compared to $21.0 million for the nine months ended September 30, 2007. The decrease is primarily attributed to a $1.1 million decrease in legal fees, a $1.0 million decrease in personnel cost, a $0.4 million decrease in audit and accounting expenses and a $0.3 million decrease in stock based compensation offset by a $1.2 million increase in amortization of acquisition related intangible assets as a result of the Centillium DSL acquisition and $0.6 million in severance costs.

As of September 28, 2008, SG&A headcount was 95, which compares to 84 at September 30, 2007.

Operating asset impairments

During the third quarter of 2008, as a result of our market capitalization being significantly lower than the carrying value of our net assets, we recorded a goodwill impairment charge of $7.4 million. Also during the third quarter of 2008, we recorded asset impairment charges related to prepaid license fees of $4.0 million and acquisition related intangible assets of $1.1 million. The prepaid license fees originated from a vendor that provided memory and input/output interfaces to facilitate the design of semiconductors at a particular third-party wafer foundry. Payments to this vendor were capitalized until semiconductor mask set was created at this foundry. Based on our planned tape-out decisions for 2009 and the foreseeable future, we concluded that there was no future economic benefit to the intellectual property and impaired the related prepaid license fees. The impaired intangible assets related to trademarks and patents from our 2006 acquisition of the network processing and ADSL assets and the 2008 purchase of the DSL technology and assets. Based on our review of our business, we concluded that these intangible assets had no future economic benefit. The total combination of the asset impairments during the third quarter of 2008 totaled $12.5 million.

Restructuring

During the third quarter of 2007, we incurred restructuring and severance expenses of $3.5 million as we outsourced our back-end physical semiconductor design process and terminated four members of senior management. The restructuring charges consist of approximately $2.9 million in contract termination costs and asset impairments and $0.6 million in severance costs. We have not incurred any restructuring charges in 2008.

Investment Impairment

During the third quarter of 2008, we recorded an impairment charge related to our auction rate securities totaling $6.2 million as we determined that the decrease in value was "other than temporary." We considered a number of factors in making this determination, including the duration of the failed auctions, the worsening financial condition of the underlying issuers and the related insurance agencies and the general worsening of the global credit markets. The write-down of $6.2 million represents approximately 85% of the face value of the securities and was determined using a discounted cash flow as documented in Note 5 of our unaudited condensed consolidated financial statements.

Interest Income, Net

Interest income, net consists primarily of interest income earned on our cash, cash equivalents and investments, which is partially offset by other non-operating expenses. Interest income, net decreased to $0.4 million for the three months ended September 28, 2008 as compared to $1.2 million for the three months ended September 30, 2007. Interest income, net decreased to $1.7 million for the nine months ended September 28, 2008 as compared to $3.9 million for the nine months ended September 30, 2007. The decrease was due to our lower balance of cash and investments as well as a decrease in interest rates.

Provision for Income Taxes

Income taxes are comprised of foreign, federal and state alternative minimum income taxes. There was an insignificant income tax benefit for the three months ended September 28, 2008 compared to a provision of $0.1 million for the three months ended September 30, 2007, because we recorded a deferred tax asset related to our Indian operations during the third quarter of 2008. The provision for income taxes was $0.1 million and $0.2 million for the nine months ended September 28, 2008 and September 30, 2007, respectively.

Net Loss

As a result of the above factors, we had a net loss of $26.7 million for the three months ended September 28, 2008 compared to a net loss of $13.0 million for the three months ended September 30, 2007. We had a net loss of $35.4 million for the nine months ended September 28, 2008 compared to a net loss of $29.2 million for the nine months ended September 30, 2007.

Liquidity and Capital Resources

Year to date, cash and investments decreased by $23.8 million to $67.2 million as of September 28, 2008 versus $91.0 million as of December 30, 2007. We used $11.9 million in cash in our acquisition of the Centillium DSL business and an . . .