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 28, 2008, contained in our Annual Report on Form 10-K filed on March 11, 2009.

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 DSLAMs, ONTs, concentrators, CPE, modems and RGs for leading OEMs. 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 ODMs, CMs and OEMs, who in turn sell our semiconductors as part of their solutions to carriers. We also sell to distributors, 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 $134.7 million in 2006, $107.5 million in 2007, $106.5 million in 2008 and $42.3 million in the first half of 2009.

Quarterly revenue fluctuations are characteristic of our industry and affect our business, especially due the concentration of our revenue among a few customers. For instance, in the fourth quarter of 2006, our revenue declined by $15.7 million, or 43%, from the third quarter of 2006. In the third quarter of 2008, our revenue declined by $5.7 million, or 19% from the second quarter of 2008. 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. 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.

On April 22, 2009, the Company announced the signing of a definitive agreement to purchase the Broadband Access Product Line of Conexant Systems, Inc. for $54.0 million in cash and the assumption of certain employee related liabilities. Subject to customary closing conditions, including stockholder and regulatory approvals, the transaction is expected to be completed in the third quarter of 2009. In connection with this transaction, Tallwood Venture Capital has agreed to purchase 24.0 million shares of the Company's common stock at $1.75 per share. Tallwood will also receive warrants to purchase an additional 7.8 million shares of common stock at $1.75. We believe the Broadband Access Product Line will provide us the scale to expand our product portfolio beyond DSL and to achieve profitability.

Critical Accounting Policies and Estimates

In preparing our condensed consolidated financial statements, we make assumptions, judgments and estimates that may 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's Discussion and Analysis of Financial Condition and Results of Operations," of our Annual Report on Form 10-K for the year ended December 28, 2008, and have not changed materially as of June 28, 2009.

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. We believe that the current worldwide recession has impacted the businesses of service providers around the world, causing them to re-evaluate how they employ capital. Consequently the rate at which broadband infrastructure is upgraded may slow or new broadband programs could be delayed. We further believe that the weak economy has contributed to the decline in our revenue over the past three quarters.

The effect of the economic downturn on currencies has also impacted our business. For example, the Korean won devalued greatly against the U.S. dollar in the third quarter of 2008, affecting the gross profit our OEM customers made on their products. In turn, they significantly reduced their orders to us. This situation has continued through the first six months of 2009.

Revenue decreased by $7.5 million, or 25%, to $22.4 million in the three months ended June 28, 2009 from $29.9 million in the three months ended June 29, 2008. Revenue decreased by $16.4 million, or 28%, to $43.2 million in the six months ended June 28, 2009 from $59.6 million in the six months ended June 29, 2008. The majority of the decrease for both the three and six months ended June 28, 2009 as compared to the same periods in the prior year relates to an approximate 22% and 30% decrease in units shipped, respectively. The reduction reflects continuing lower revenue from Korea and Japan, offset partially by an increase in Taiwan. Revenue from Korea was down as OEMs continued to reduce purchases due to the relative weakness of the value of the Korean Won against the U.S. dollar. Japanese revenue declines reflect the worldwide economic slowdown and a slower rate of capital investment in VDSL access.

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 each 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                     Six Months Ended
Our Direct Customer          OEM Customer                   June 28, 2009      June 29, 2008      June 28, 2009      June 29, 2008
Sagem                        Sagem                                     22 %               16 %               30 %               17 %
Paltek Corporation           Sumitomo Electric Industries              17                 26                 12                 23
NEC Corporation of America   NEC Corporation (Magnus)                  13                 26                 18                 22
Benchmark Electronics        Motorola                                  11                  *                  *                  *
Alcatel-Lucent and its CMs   Alcatel-Lucent                             *                 12                  *                 16
Uniquest                     Dasan, Millinet and Ubiquoss               *                 10                  *                 11

* Less than 10%

Revenue by Region as a Percentage of Total Revenue



                        Three Months Ended                     Six Months Ended
                 June 28, 2009      June 29, 2008      June 28, 2009      June 29, 2008
 Asia                       41 %               65 %               44 %               61 %
 Europe                     56                 31                 45                 35
 North America               3                  4                 11                  4

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 directly to them. Revenue from Asia has decreased in absolute dollars and decreased as a percentage of total revenue for the three and six months ended June 28, 2009 as compared to the same periods in the prior year due to the decrease in volume. Revenue from Europe increased as a percentage of total revenue for the first three and six months of 2009 as compared to the prior year due to an increase in revenue in the second quarter as well as the decrease in Asian revenue.

Revenue by Product Family as a Percentage of Total Revenue



                     Three Months Ended                     Six Months Ended
              June 28, 2009      June 29, 2008      June 28, 2009      June 29, 2008
    Access               22 %               56 %               28 %               56 %
    Gateway              78                 44                 72                 44

The change in mix is primarily attributed to decreased sales of our Access products in Japan, Korea and Europe. Gateway improvement as a percentage of sales reflects more stable European sales.

Cost and Operating Expenses



                                                  Three Months Ended                                Six Months Ended
                                                                            %                                                %
                                       June 28, 2009     June 29, 2008    Change        June 28, 2009     June 29, 2008    Change
Cost of revenue                       $        13,139   $        16,420      (20 )%    $        25,393   $        34,053      (25 )%
Research and development                        9,591            11,571      (17 )              18,454            23,234      (21 )
Sales, general and administrative               6,042             6,270       (4 )              11,680            12,140       (4 )
Restructuring charges                             279                -        nm                   546                -        nm

Cost and Operating Expenses as a Percentage of Total Revenue:



                                               Three Months Ended                           Six Months Ended
                                       June 28, 2009         June 29, 2008         June 28, 2009         June 29, 2008
Cost of revenue                                   59 %                  55 %                  59 %                  57 %
Research and development                          43                    39                    43                    39
Sales, general and administrative                 27                    21                    27                    20
Restructuring charges                              1                    -                      1                    -

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 usable 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. Such increased costs 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 $13.1 million for the three months ended June 28, 2009 as compared to $16.4 million for the three months ended June 29, 2008. Cost of revenue decreased to $25.4 million for the six months ended June 28, 2009 as compared to $34.1 million for the six months ended June 29, 2008. The reduction in cost of revenue for both the three and six month periods ended June 28, 2009 compared to the same period last year is directly attributable to our reduced sales volume. Our gross margins were 41% for the three months ended June 28, 2009 as compared to 45% for the year ago period. Our gross margins were 41% for the six months ended June 28, 2009 as compared to 43% for the year ago period. For both the three and six months ended June 28, 2009, the decrease in gross margins was mainly attributable to product mix as Japanese sales, whose margins are generally higher, declined as a percent of total sales while European sales, whose margins are generally lower, increased as a percent of total sales.

Research and development expenses

All research and development (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 $2.0 million, or 17%, to $9.6 million for the three months ended June 28, 2009 as compared to $11.6 million for the three months ended June 29, 2008. The change was primarily attributed to a decrease in personnel costs of $0.9 million, a decrease in stock based compensation of $0.8 million, a decline in depreciation and intangible amortization of $0.5 million and general cost reductions of $1.4 million. These were partially offset by higher tape out cost of $1.6 million.

R&D expenses decreased $4.8 million, or 21%, to $18.5 million for the six months ended June 28, 2009 as compared to $23.2 million for the six months ended June 29, 2008. The change was primarily attributed to a decrease in personnel costs of $1.2 million, a decrease in stock based compensation $1.6 million, a reduction in depreciation and intangible amortization costs of $1.1 million and other general cost reductions of $1.7 million. These were partially offset by higher design and tapeout costs of $0.8 million.

The majority of our R&D personnel are located in the United States or India. As of June 28, 2009, we had 137 people engaged in research and development of whom 65 were located in India and 63 were located in the United States. As of June 29, 2008, we had 189 people engaged in research and development of whom 101 were located in India and 78 were located in North America. Furthermore, the headcount reduction related to our restructuring activities (discussed below) took place later in the first quarter of 2009.

Selling, general and administrative expenses

Selling, general and administrative (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 decreased by $0.2 million for the three months ended June 28, 2009, or 4%, to $6.0 million as compared to $6.3 million for the three months ended June 29, 2008. The decrease is primarily attributed to decreases of $0.3 million in personnel costs, of $0.4 million in stock based compensation and $0.4 million in amortization of intangible assets offset by costs of $0.9 million related to the proposed Broadband Access acquisition.

SG&A expenses decreased by $0.5 million for the six months ended June 28, 2009, or 4%, to $11.7 million as compared to $12.1 million for the six months ended June 29, 2008. The decrease is primarily attributed to decreases of $0.4 million in personnel costs, $0.9 million in stock based compensation and $0.5 million in amortization of intangible assets offset by costs of $1.4 million related to the proposed Broadband Access acquisition.

As of June 28, 2009, SG&A headcount was 71 compared to 87 at June 29, 2008.

Restructuring

During the first quarter of 2009, we implemented a restructuring plan to combine design centers in India and to reduce its cost structure in North America. Restructuring charges of $0.3 million related to the termination of 23 persons, 12 of whom were located in India and 11 in the United States. In addition, we relocated our remaining personnel and equipment from Hyderabad, India to Bangalore, India during the second quarter of 2009. In the second quarter we incurred additional costs of $0.2 million related to this relocation.

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 was $0.2 million for the three months ended June 28, 2009 as compared to $0.5 million for the three months ended June 29, 2008. The decrease was due to lower investment balances and lower interest rates. Interest income, net decreased to $0.5 million for the six months ended June 28, 2009 as compared to $1.2 million for the six months ended June 29, 2008. The decrease was due to a realized loss on the sale of an investment, lower balance of cash and investments and a decrease in interest rates.

Provision for Income Taxes

Income taxes are comprised mostly of foreign income taxes and state minimum taxes. The Company maintains a full valuation allowance for its tax assets as a result of recurring losses. The provision for income taxes was immaterial for the three and six month periods ended June 28, 2009 and June 29, 2008, respectively.

Net Loss

As a result of the above factors, we had a net loss of $6.4 million for the three months ended June 28, 2009 compared to a net loss of $4.0 million for the three months ended June 29, 2008. We had a net loss of $12.5 million for the six months ended June 28, 2009 compared to a net loss of $8.8 million for the six months ended June 29, 2008.

Liquidity and Capital Resources

Year-to-date, cash and investments decreased by $3.8 million to $60.6 million as of June 28, 2009 versus $64.4 million as of December 28, 2008.

As of June 28, 2009, we have funded our operations primarily through cash from private and public offerings of our common stock, cash generated from the sale of our products and proceeds from the exercise of stock options and stock purchased under our employee stock purchase plan. Our uses of cash include payroll and payroll-related expenses, manufacturing costs, purchases of equipment, tools and software and operating expenses, such as tape outs, marketing

programs, travel, professional services and facilities and related costs. We have used, and intend to continue to use, the net proceeds for working capital and general corporate purposes, which may include the acquisition of businesses, products, product rights or technologies, strategic investments or purchases of common stock.

Conditioned on the closing of the Broadband Access Product Line purchase, Tallwood Venture Capital has agreed to purchase 24.0 million shares of the Company's common stock at $1.75 per share for a total of $42.0 million. Tallwood will also receive warrants to purchase an additional 7.8 million shares of common stock at $1.75 per share. The purchase price of the Broadband Access Product Line is $54.0 million including product related intellectual property, patents, fixed assets and inventory as well as the assumption of approximately $2.0 million in employee related liabilities.

The following table summarizes our statement of cash flows for the six months ended June 28, 2009 and June 29, 2008 (in millions):