The following Management's Discussion and Analysis of Financial Condition and Results of Operations, which should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto contained in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and the notes there to contained in the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2009.

This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is subject to the safe harbor created by that section. The words "believe," "expect," "will," "anticipate," "estimate," "project," "plan," and similar expressions identify forward-looking statements. Such statements may also include, but are not limited to, statements regarding the impact of recent accounting announcements; our expectation that net flows from Helix projects will commence in 2009; plans for future financings or lines of credit; our expectations regarding the amount of cash necessary to fund future operations; estimates regarding the amount of periodic pension costs in 2009; our expectation that development, sales and other operating expenses will increase in the future as we expand our business; our expectation that we will not generate the cash needed to finance our anticipated operations for the foreseeable future; our continued dependence on third parties to manufacture, assemble or package our products; our intention not to purchase key person life insurance in the foreseeable future; our intention to compete for government contracts and our expectation that the contracts will account for a large percentage of our revenue for the foreseeable future; our intentions regarding the payment of dividends and the retention of available funds and future earnings; our expectation that domestic and international competition will increase in our industry; our intention to grow through strategic operations; our expectations of projected expense reductions; our ability to integrate the ChipX team; and our expectations with respect to sources of revenues. Our expectations, beliefs, anticipations, objectives, intentions, plans and strategies regarding the future are not guarantees of future performance and are subject risks and uncertainties that could cause actual results to differ materially from those projected or implied. Factors that could cause results to differ materially from those projected or implied in the forward-looking statements include, but are not limited to trends and fluctuations in our industry; changes in demand and purchasing volume of our customers; advances in technology; unpredictability of suppliers; increased production or labor costs; our ability to attract and retain qualified personnel; pricing pressures and other competitive factors; and our ability to establish and protect our intellectual property; competition; litigation; financial community perceptions of the company; changes in laws and regulations, including increased taxes; economic, credit and capital market conditions; and the effects of war, terrorist or similar activity. The forward-looking statements in this Quarterly Report on Form 10-Q are subject to additional risks and uncertainties, including those set forth in Part II, Item 1A under the caption "Risk Factors" and as disclosed in other current and periodic reports filed or furnished from time to time with the SEC. The forward-looking statements are made as of the date hereof, and we undertake no obligation to update or revise any of them, except as required by law.

Overview

GigOptix, Inc. ("GigOptix" or the "Company") is a leading provider of electronic engines for the optically connected digital world and other advanced RF applications. GigOptix was formed in March 2008 as a wholly-owned subsidiary of Lumera to facilitate a combination between GigOptix LLC and Lumera. Before the combination, which was affected by two mergers collectively referred to as the "merger", GigOptix had no operations or material assets. As a result of the transaction set forth in the Agreement and Plan of Merger, dated as of March 27, 2008, among Lumera, GigOptix LLC, Galileo Merger Sub G, LLC and Galileo Merger Sub L, Inc., on December 9, 2008, the merger was completed and Lumera and GigOptix LLC became wholly owned subsidiaries of GigOptix, GigOptix is the successor public registrant to Lumera. GigOptix focuses on the specification, design, development and sale of analog semiconductor integrated circuits, or ICs, multi-chip module solutions, or MCMs, and polymer modulators. GigOptix believes it is an industry leader in the fast growing market for electronic solutions that enable high-bandwidth optical connections found in telecommunications (telecom) systems, data communications (datacom) and storage systems, and, increasingly, in consumer electronics and computing systems.

GigOptix's products fall into the following main categories:

• Laser and modulator Driver ICs and MCMs;

• Transimpedance and Limiting Amplifier ICs;

• Optical Modulators; and

• Broadband RF Amplifiers.

These products are capable of performing in various applications demanding a wide range of data processing speeds, from consumer electronics which perform at data processing speeds of 3Gbps to 10Gbps to sophisticated ultra-long haul submarine telecommunications systems which require performance at data processing speeds from 10Gbps and 40Gbps to 100Gbps.

Prior to the merger, GigOptix LLC was an Idaho limited liability company, headquartered in Palo Alto, California. GigOptix LLC was the successor company of iTerra Communications LLC, ("iTerra"), which was founded in 2000. In July 2007, as part of a reorganization plan, iTerra formed GigOptix LLC, a wholly-owned subsidiary. All of the assets and liabilities of iTerra, with the exception of the $45.8 million of debt and accrued interest due to iTerra's primary member, were transferred to GigOptix LLC along with all of iTerra's operations and intellectual property.

In August 2007, GigOptix LLC implemented a restructuring plan to consolidate the research and development operations of its wholly-owned subsidiary, iTerra Communications SRL, based in Rome, Italy to its corporate headquarters in Palo Alto, California. In January 2008, GigOptix LLC acquired Helix Semiconductor AG ("Helix"), a company based in Switzerland, which designed and sold optical receiver transmitter array products consisting of driver and receiver arrays for 4-channel and 12-channel modules running at 3Gbps to 10Gbps per channel. GigOptix LLC's acquisition of Helix enabled GigOptix LLC to expand its product offering into short reach devices and systems.

We have incurred negative cash flows from operations since inception. For the nine months ended October 4, 2009 and September 26, 2008 we incurred net losses of $2.8 million and $5.3 million respectively, and cash outflows from operations of $3.2 million and $6.9 million respectively. As of October 4, 2009 and December 31, 2008, we had an accumulated deficit of $61.8 million and $59.0 million, respectively. There can be no assurance that in the event we require additional financing, such financing will be available at all or on terms which are favorable to us. Failure to generate sufficient cash flows from operations, raise additional capital or reduce certain discretionary spending could have a material adverse effect on our ability to achieve its intended business objectives.

Our fiscal year ends on December 31. For quarterly reporting, we employ a four-week, four-week, five-week reporting period. The current three-month period ended on Sunday, October 4, 2009. The third quarter of fiscal 2008 ended on September 26, 2008. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Our consolidated financial statements for the periods prior to December 9, 2008, presented in our Annual Report on Form 10-K, are the historical financial statements of GigOptix LLC, as GigOptix LLC was determined to be the accounting acquirer in the merger with Lumera.

On November 9, 2009, we completed the acquisition of ChipX, Inc., a manufacturer of high speed analog semiconductors.

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to product returns, customer incentives, bad debts, inventories, asset impairments, deferred tax assets, warranty reserves, contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements. GigOptix also has other key accounting policies that are less subjective, and therefore, their application would not have a material impact on GigOptix reported results of operations. There have been no significant changes to our critical accounting policies which were disclosed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation" of our Annual Report on Form 10-K filed with the SEC on March 31, 2009.

Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board ("FASB") issued the FASB Accounting Standards Codification (the "Codification"), the authoritative guidance for GAAP. The Codification, which changes the referencing of financial standards, became effective for interim and annual periods ending on or after September 15, 2009. The Codification is now the single official

source of authoritative U.S. GAAP (other than guidance issued by the SEC), superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force ("EITF"), and related literature. Only one level of authoritative U.S. GAAP now exists. All other literature is considered non-authoritative. The Codification does not change U.S. GAAP. We adopted the Codification during the quarter ended October 4, 2009. The adoption of the Codification did not have any substantive impact on our condensed consolidated financial statements or related footnotes.

In May 2009, the FASB issued authoritative guidance for subsequent events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The guidance sets forth the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements. The guidance also requires the disclosure of the date through which an entity has evaluated subsequent events and whether that date represents the date the financial statements were issued or were available to be issued. During the quarter ended July 5, 2009, we adopted the guidance. The adoption of the guidance did not have a significant impact on our condensed consolidated financial statements or related footnotes. See Note 14 - Subsequent Events to our condensed consolidated financial statements.

In April 2009, the FASB issued guidance on determining fair value when the volume and level of activity for an asset or liability has significantly decreased, and in identifying transactions that are not orderly. Based on the guidance, if an entity determines that the level of activity for an asset or liability has significantly decreased and that a transaction is not orderly, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transaction or quoted prices may be necessary to estimate fair value. The guidance was effective on a prospective basis for interim and annual periods ending after June 15, 2009. We adopted this guidance in the quarter ended July 5, 2009, and there was no material impact on our condensed consolidated financial statements. See Note 12 - Fair Value Measurements to our condensed consolidated financial statements.

In April 2009, the FASB issued guidance on the recognition and presentation of other-than-temporary impairments on investments in debt securities. If an entity's management asserts that it does not have the intent to sell a debt security and it is more likely than not that it will not have to sell the security before recovery of its cost basis, then an entity may separate other-than-temporary impairments into two components: 1) the amount related to credit losses (recorded in earnings) and 2) all other amounts (recorded in other comprehensive income). This guidance was effective on a prospective basis for interim and annual periods ending after June 15, 2009. We adopted this guidance for the quarter ended July 5, 2009, and there was no material impact on our condensed consolidated financial statements.

Results of Operations

Revenue

Revenue for the periods reported was as follows (in thousands, except
percentages):



                                               Three months ended                        Nine months ended
                                       October 4,            September 26,       October 4,           September 26,
                                          2009                   2008               2009                  2008
Product                               $       2,142         $         2,460     $       7,582        $         6,389
Government contract                           1,005                      -              4,108                     -

Total revenue                         $       3,147         $         2,460     $      11,690        $         6,389
Increase period over period           $         687                             $       5,301
Percentage increase, period over
period                                           28 %                                      83 %

Revenue for the three months ended October 4, 2009 was $3.1 million, an increase of $0.7 million or 28% compared to $2.5 million for the three months ended September 26, 2008. The increase in revenue is primarily the result of our merger with Lumera Corporation in December 2008, which accounted for approximately $1.0 million of revenue increase, a large majority of which came from an increase in government contract revenue, which was offset by a decrease of $0.3 million in various product revenues. The decrease in revenue of $0.3 million during the third quarter is a result of a dip in sales of HX products for datacom systems as a consequence of the slower than forecast transition from 3Gb/s to 10Gb/s products. The 3Gb/s HX2 series was discontinued at the end of 2008 and replacement revenues from the new 10Gb/s HX4 series were delayed. This was mainly due to the market slow down which delayed acceptance of the new 10G standard as well as the lengthy customer qualification process. In addition, sales of the 12-channel 5Gb/s parts were strong in the three months ended September 26, 2008 due to a large order, which was not replicated in the three months ended October 4, 2009.

Revenue for the nine months ended October 4, 2009 was $11.7 million, an increase of $5.3 million or 83% compared to $6.4 million for the nine months ended September 26, 2008. The increase in revenue is primarily the result of our merger with Lumera Corporation in December 2008, which accounted for approximately $4.5 million of the increase, of which $0.4 million came from

modulator and polymer product sales with the remainder from an increase in government contract revenue. An additional increase in revenue of $0.8 million is a result of organic growth in our telecom and broadband businesses which have more than offset the reduction in HX line revenues from the datacom market as mentioned above. Design-wins captured in 2008 contributed to new business in the GX6 series of drivers for long haul and metro networks with the majority of growth coming from new customers in Asia. A portion of the additional revenue was related to various product solutions having transitioned from the research and development stage to the commercialization stage. These included drivers for shorter reach applications and the new GX3 series of receiver products which started to contribute revenues in the third quarter of 2009. We experienced major growth in our revenue from product sales to Asia which more than doubled over the period led by customers in Japan and China.

Gross Profit

Gross profit consists of revenue, less cost of revenue, which includes amortization of certain identified intangible assets. Cost of revenue related to product revenue consists primarily of the manufacture of saleable chips multi-chip modules and modulators, including outsourced wafer fabrication and testing. Amortization expense of identified intangible assets, namely existing technology, is presented within product cost of revenue, as the intangible assets were determined to be directly attributable to product revenue generating activities. Cost of revenue related to government contracts consists primarily of labor, materials, chemicals, and outside services.

Cost of revenue and gross profit for the periods presented was as follows (in thousands, except percentages):

Cost of Revenue



                                            Three months ended                           Nine months ended
                                    October 4,            September 26,          October 4,           September 26,
                                       2009                   2008                  2009                  2008
Product                            $         964         $           533        $       3,100        $         2,522
Government contract                          367                      -                 1,765                     -

Total cost of revenue              $       1,331         $           533        $       4,865        $         2,522
Percentage of revenue                         42 %                    22 %                 42 %                   39 %
Increase period over period        $         798                                $       2,343
Percentage increase, period
over period                                  150 %                                         93 %

Gross Profit

                                            Three months ended                           Nine months ended
                                    October 4,            September 26,          October 4,           September 26,
                                       2009                   2008                  2009                  2008
Product                            $       1,178         $         1,927        $       4,482        $         3,867
Government contract                          638                      -                 2,343                     -

Total gross profit                 $       1,816         $         1,927        $       6,825        $         3,867
Gross margin                                  58 %                    78 %                 58 %                   61 %
Increase (decrease), period
over period                        $        (111 )                              $       2,958
Percentage increase
(decrease), period over period                -6 %                                         76 %

Gross profit for the three months ended October 4, 2009 was $1.8 million, or 58% of revenue, a decrease of $0.1 million or 6% as compared to a gross profit of $1.9 million, or 78% of revenue, for the three months ended September 26, 2008. The lower gross profit compared to the prior period is primarily attributable to lower utilization of manufacturing capacity as a result of decreased revenue in the three months ended October 4, 2009. The lower gross profit compared to the prior period is primarily attributable to lower utilization of manufacturing capacity as a result of decreased revenue in the three months ended October 4, 2009 in addition to unusually high sales of previously reserved inventory in the three months ended September 26, 2008. Our internal operations have significant fixed costs that cannot be reduced as quickly as our shipment levels. Our internal operations have significant fixed costs that cannot be reduced as quickly as our shipment levels.

Gross profit for the nine months ended October 4, 2009 was $6.8 million, or 58% of revenue, an increase of $3.0 million or 76% as compared to a gross profit of $3.9 million, or 61% of revenue, for the nine months ended September 26, 2008. The reduction in gross margin percentage compared to the prior period is attributable to the impact of lower gross margin associated with our government contract revenue and lower utilization of manufacturing capacity as a result of decreased revenue in the nine months ended October 4, 2009.

Our gross margin as a percentage of revenues fluctuates, depending on product mix, utilization of manufacturing capacity, and average selling prices, among other factors.

Research and Development Expense

Research and development ("R&D") costs are expensed as incurred. R&D expense consists primarily of consulting and engineering design, non-capitalized tools and equipment, equipment depreciation and employee compensation.

R&D expense for the periods presented was as follows (in thousands, except percentages):

                                            Three months ended                           Nine months ended
                                    October 4,            September 26,          October 4,           September 26,
                                       2009                   2008                  2009                  2008
Research and development
expense                            $       1,255         $         1,109        $       3,919        $         3,019
Percentage of revenue                         40 %                    45 %                 34 %                   47 %
Increase, period over period       $         146                                $         900
Percentage increase period
over period                                   13 %                                         30 %

R&D expense for the three months ended October 4, 2009 was $1.3 million compared to $1.1 million for the three months ended September 26, 2008, an increase of $0.1 million or 13%. R&D expense for the nine months ended October 4, 2009 was $3.9 million compared to $3.0 million for the nine months ended September 26, 2008, an increase of $0.9 million or 30%. The increase in R&D expense primarily resulted from increased headcount and the associated compensation costs related to the merger with Lumera in December 2008. We anticipate increased investment in research and development in the near future to remain competitive. As a result, we expect research and development costs to increase in absolute dollars, but to decline as a percentage of revenues.

Selling, General and Administrative Expense

Selling, general and administrative ("SG&A") expense consists primarily of salaries and benefits for management, marketing and administration personnel, as well as fees for consultants.

SG&A expense for the periods presented was as follows (in thousands, except percentages):

                                            Three months ended                           Nine months ended
                                    October 4,            September 26,          October 4,           September 26,
                                       2009                   2008                  2009                  2008
Selling, general and
administrative expense             $       1,744         $         2,553        $       6,170        $         5,662
Percentage of revenue                         55 %                   104 %                 53 %                   89 %
Increase (decrease) period
over period                        $        (809 )                              $         508
Percentage increase
(decrease), period over period               -32 %                                          9 %

SG&A expense for the three months ended October 4, 2009 was $1.7 million compared to $2.6 million for the three months ended September 26, 2008, a decrease of $0.8 million or 32%. SG&A expense for the nine months ended October 4, 2009 was $6.2 million compared to $5.7 million for the nine months ended September 26, 2008, an increase of $0.5 million or 9%. The decrease for the three months ended October 4, 2009 compared to the three months ended September 26, 2008 was attributable primarily due to lower spending for professional fees; 2008 professional fees were concentrated in the three months ended September 26, 2008 due to the Lumera merger which occurred in the fourth quarter of 2008. The increase for the nine months ended October 4, 2009 compared to the nine months ended September 26, 2008 was primarily due to increased spending for professional fees, including legal, accounting and auditing services, associated with being a public company and the merger with Lumera.

Acquired In-Process Research and Development

Acquired in-process research and development expense for the periods presented
was as follows (in thousands, except percentages):



                                             Three months ended                     Nine months ended
                                       October 4,       September 26,       October 4,        September 26,
                                          2009              2008               2009                2008
Acquired in-process research and
development                           $         -      $            -      $         -      $              319

In connection with the acquisition of Helix in January 2008, we allocated approximately $319,000 of the purchase price to acquired in-process research and development expense ("IPR&D"). The amount allocated to IPR&D was immediately . . .