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. From time to time we utilize sales representatives to market and distribute our products. 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 $72.5 million in the first nine months 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.

On August 24, 2009, we acquired the Broadband Access product line (the "BBA") of Conexant Systems, Inc. ("Conexant"), which includes the product-related intellectual property, patents, fixed assets and inventory of the product line for a total purchase price of $53.1 million in cash and the assumption of approximately $6.4 million in employee and lease related liabilities. Adding the Broadband Access products and engineers to Ikanos' existing portfolio of VDSL solutions has doubled our size, expanded our reach into new geographic and product markets and added new research and development capabilities to the existing engineering team. The addition of the BBA is expected to allow us to develop semiconductor and software products for new markets within the digital home in addition to serving our Broadband DSL and Communications Processors businesses and to reduce costs through economies of scale.

In connection with the BBA acquisition, we negotiated a $42.0 million cash investment by Tallwood III, L.P. Tallwood III Annex, L.P. and certain of their affiliates (collectively, the "Tallwood Investors") pursuant to which the Company sold to the Tallwood Investors (i) 24 million shares of Ikanos common stock, par value $0.001 per share (the "Common Stock"), and (ii) warrants to purchase up to 7.8 million shares of Common Stock (the "Warrants"). The net proceeds for the Tallwood Investment were $38.8 million after capitalizing transaction-related costs of $3.2 million. Assuming full exercise of the Warrants, as of September 27, 2009 Tallwood Investors own approximately 52% of the outstanding shares of Ikanos Common Stock.

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 September 27, 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. Revenue from product sales to distributors is recognized when the distributor has sold through to the end customer. 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 affected 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.

Revenue increased by $5.2 million, or 21%, to $29.3 million in the three months ended September 27, 2009 from $24.2 million in the three months ended September 28, 2008. The increase was directly attributable to the BBA revenue of $5.2 million. Excluding BBA revenue, our revenue for the third quarter of 2009 remained flat versus the 2008 third quarter sales results. Revenue in Japan has increased substantially from the second quarter of 2009, but still lags the third quarter of 2008. Korean sales are marginally better than the second quarter of 2009, but are considerably ahead of the third quarter of 2008. Increased sales to China and Europe in the third quarter of 2009 offset the effects of Japan and Korea.

Revenue for the nine months ending September 27, 2009 was $72.5 million, a reduction of $11.2 million or 13%, from $83.7 million for the nine months ended September 28, 2008. Excluding BBA revenue, our sales declined by $16.4 million or 20% for the nine month period. The majority of the Ikanos core business decrease for the nine months ended September 27, 2009 as compared to the same period in the prior year relates to a decrease in units shipped. 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                   Nine Months Ended
                                                              September 27,     September 28,     September 27,     September 28,
Our Direct Customer            OEM Customer                       2009              2008              2009              2008
Paltek Corporation             Sumitomo Electric Industries              19 %              28 %              15 %              25 %
Sagem                          Sagem                                     17                21                25                18
NEC Corporation of America     NEC Corporation (Magnus)                  13                29                16                24
Alcatel-Lucent and its CMs     Alcatel-Lucent                             *                 *                 *                12

* Less than 10%

Revenue by Region as a Percentage of Total Revenue



                         Three Months Ended                   Nine Months Ended
                   September 27,     September 28,     September 27,     September 28,
                       2009              2008              2009              2008
   Asia                       65 %              64 %              52 %              62 %
   Europe                     27                23                38                31
   North America               8                13                10                 7

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 for both the three and nine months ended September 27, 2009 and decreased as a percentage of total revenue for the nine months ended September 27, 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 three and nine months ended September 27, 2009 as compared to the prior year as sales declines in Europe were not as great as declines in Asia. Revenue in Asia increased due to higher sales to Greater China offsetting declines in Japan.

Revenue by Product Family as a Percentage of Total Revenue



                                          Three Months Ended                           Nine Months Ended
                                  September 27,         September 28,         September 27,         September 28,
                                      2099                  2008                  2009                  2008
Broadband DSL                                71 %                  85 %                  72 %                  86 %
Communications Processors                    24                    15                    26                    14
Other                                         5                    -                      2                    -

We divide our products into the following markets: Broadband DSL, Communications Processors and Other. Broadband DSL consists of our central office products, DSL modem-only customer premise equipment products and the DSL value of our integrated devices. Communications Processors includes our stand alone processors and the processor-only value of our integrated devices. Other includes products that do not fall into the other two segments. The change in mix is primarily attributable to decreased revenue of our Broadband DSL products in Japan and Korea while Communication Processor improvement as a percentage of revenue reflects greater European sales.

Cost and Operating Expenses



                                                  Three Months Ended                                Nine Months Ended
                                      September 27,      September 28,       %          September 27,      September 28,       %
                                          2009               2008          Change           2009               2008          Change
Cost of revenue                      $        19,036    $        14,212        34 %    $        44,429    $        48,265        (8 )%
Research and development                      13,290             10,282        29               31,744             33,516        (5 )
Sales, general and administrative              9,615              8,142        18               21,295             20,282         5
Operating asset impairments                    2,460             12,496        nm                2,460             12,496        nm
Restructuring charges                            502                 -         nm                1,048                 -         nm

nm-Not meaningful

Cost and Operating Expenses as a Percentage of Total Revenue:

                                               Three Months Ended                      Nine Months Ended
                                       September 27,        September 28,        June 28,        September 28,
                                           2009                 2008               2009              2008
Cost of revenue                                   65 %                 59 %            61 %                 58 %
Research and development                          45                   43              44                   40
Sales, general and administrative                 33                   34              29                   24
Operating asset impairments                        8                   52               3                   15
Restructuring charges                              2                   -                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.

For the three months ended September 27, 2009, cost of revenue, including BBA costs of $3.2 million, were $19.0 million, an increase of $4.8 million, or 33%, compared to $14.2 million for the three months ended September 28, 2008. Excluding BBA costs of $3.2 million, Ikanos core costs were $15.9 million, an increase of $1.7 million, or 12%, over the third quarter of 2008. The increase is attributable to higher amortization of intangibles of $0.3 million and the amortization of the adjustment of the fair value of inventory acquired of $1.1 million in the third quarter of 2009 versus the comparable 2008 period.

Cost of revenue decreased $3.8 million, or 8%, to $44.4 million for the nine months ended September 27, 2009 compared to $48.3 million for the nine months ended September 28, 2008. Excluding BBA costs of $3.2 million, cost of revenue declined $7.0 million, or 15%, from the comparable 2008 nine months. The lower cost of revenue for the nine month period ended September 27, 2009 compared to the same period last year is attributable to our reduced sales volume in 2009.

Our gross margins were 35% for the three months ended September 27, 2009 as compared to 41% for the year ago period. Our gross margins were 39% for the nine months ended September 27, 2009 as compared to 42% for the year ago period. For both the three and nine months ended September 27, 2009, the decrease in gross margins was mainly attributable to the amortization of the fair value adjustment related to the inventory acquired in the BBA acquisition.

Research and Development Expenses

All research and development (R&D) expenses are expensed as incurred and generally consist of compensation and associated expenses of employees engaged in research and development; contractors; tape-out expenses; 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 expenses. These tape-out expenses may cause our research and development expenses to fluctuate because they are not incurred uniformly throughout the year.

For the three months ended September 27, 2009, R&D expenses were $13.3 million, an increase of $3.0 million, or 29%, from $10.3 million for the comparable 2008 period. The increase is directly attributable to $4.0 million of BBA, predominantly payroll and employee-related expenses. Excluding the BBA expenses of $4.0 million, R&D expenses decreased $1.0 million, or

10%, to $9.3 million for the three months ended September 27, 2009 as compared to $10.3 million for the three months ended September 28, 2008. The change was primarily attributed to a decrease in personnel expenses of $0.6 million, a decrease in stock based compensation of $0.3 million, a decline in depreciation and intangible amortization of $0.4 million and other general reductions. These were partially offset by software and license expenses of $0.8 million.

For the nine months ended September 27, 2009, R&D expenses were $31.7 million, a decrease of $1.8 million or 5%, from $33.5 million for the comparable 2008 period. Excluding the BBA expenses of $4.0 million, R&D expenses decreased $5.8 million, or 17%, to $27.7 million for the nine months ended September 27, 2009 as compared to $33.5 million for the nine months ended September 28, 2008. The change was primarily attributed to a decrease in personnel expenses of $1.8 million, a decrease in stock based compensation $1.9 million, a reduction in depreciation and intangible amortization expenses of $1.1 million and other general cost reductions. These were partially offset by higher design and tapeout expenses of $0.5 million.

Our R&D personnel are located in the United States, India, China and France. As of September 27, 2009, we had 507 people engaged in R&D of which 215 were located in India, 220 were located in the United States and 50 were located in China. Approximately 330 persons were added as a result of the BBA acquisition. As of September 28, 2008, we had 207 people engaged in research and development of whom 103 were located in India and 90 were located in the United States.

Selling, General and Administrative Expenses

Selling, general and administrative (SG&A) expenses generally consist of compensation and related expenses for personnel; public company expenses; legal, recruiting and auditing fees; and deprecation. For the three months ended September 27, 2009 SG&A expenses were $9.6 million, an increase of $1.5 million, or 18%, from $8.1 million for the comparable 2008 period. BBA expenses in the third quarter of 2009 were $0.9 million, predominantly payroll and employee related. Excluding BBA expenses, SG&A expenses increased by $0.6 million for the three months ended September 27, 2009, or 6%, to $8.7 million compared to $8.1 million for the three months ended September 28, 2008. Lower stock based compensation of $1.4 million, lower severance expenses of $0.6 million and lower personnel expenses of $0.5 million were offset by BBA transaction-related expenses of $2.6 million and other general expenses.

For the nine months ended September 27, 2009 SG&A expenses were $21.3 million, an increase of $1.0 million, or 5%, from $20.3 million for the comparable 2008 period. Excluding BBA expenses of $0.9 million, SG&A expenses were essentially flat at $20.3 million for the nine months ended September 27, 2009 and September 28, 2008. Lower stock-based compensation of $2.3 million, depreciation and amortization of $0.6 million and salaries of $0.6 million and severance expenses of $0.6 million were offset by transaction-related expenses of $4.0 million and higher intangible expenses of $0.3 million. As of September 27, 2009, SG&A headcount was 127 compared to 95 at September 28, 2008. Approximately 50 people were added as a result of the BBA acquisition.

Operating Asset Impairments

When we acquired the Conexant BBA product line in August 2009, we assigned a value of $4.9 million to in-process research and development. IPR&D comprised mainly of two projects in process as of the acquisition date. The two projects were next generation VDSL solutions, one for the access line of business and the other for the gateway line. After reviewing the two projects, it was determined that further development of the access project was not required and was abandoned. Accordingly, the Company recorded an operating asset impairment charge of $2.5 million.

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 first quarter of 2009, we implemented a restructuring plan to combine . . .