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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549





FORM 10-Q





(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 28, 2008

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the Transition Period from  to

Commission File Number:
0-51532





IKANOS COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 73-1721486                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

47669 Fremont Boulevard

Fremont, CA 94538

(Address of principal executive office and zip code)

(510) 979-0400

(Registrants telephone number including area code)





Indicate by check mark whether registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) had been subject to such filing requirements for the past 90 days.    Yes  x     No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition
of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act (check one):



|                           |  |                      |  |                                              |  |                             
|-------------------------- |  | -------------------- |  | -------------------------------------------- |  | ----------------------------
|Large accelerated filer   ̈ |  | Accelerated filer  x |  | Non-accelerated filer   ̈                     |  | Smaller reporting company   ̈
|                           |  |                      |  | (Do not check if a smallerreporting company) |  |                             

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes   ̈     No  x

The number of shares outstanding of the Registrants Common Stock, $ 0.001 par value, was 28,830,035 as of October 22, 2008.









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IKANOS COMMUNICATIONS, INC.

FORM 10-Q

TABLE OF CONTENTS



|         |  |                                                                                                                               |  |         
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------- |  | --------
|         |  |                                                                                                                               |  | Page No.
|PART I:  |  | FINANCIAL INFORMATION                                                                                                         |  |         
|         |  |                                                                                                                              
|Item 1.  |  | Financial Statements (unaudited)                                                                                              |  | 2       
|         |  |                                                                                                                              
|         |  | Condensed Consolidated Balance Sheets as of September 28, 2008 and December 30, 2007                                          |  | 2       
|         |  |                                                                                                                              
|         |  | Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 28, 2008 and September 30, 2007 |  | 3       
|         |  |                                                                                                                              
|         |  | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 28, 2008 and September 30, 2007           |  | 4       
|         |  |                                                                                                                              
|         |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                                |  | 5       
|         |  |                                                                                                                              
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                         |  | 15      
|         |  |                                                                                                                              
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                                    |  | 21      
|         |  |                                                                                                                              
|Item 4.  |  | Controls and Procedures                                                                                                       |  | 22      
|         |  |                                                                                                                              
|PART II: |  | OTHER INFORMATION                                                                                                             |  |         
|         |  |                                                                                                                              
|Item 1.  |  | Legal Proceedings                                                                                                             |  | 23      
|         |  |                                                                                                                              
|Item 1A. |  | Risk Factors                                                                                                                  |  | 23      
|         |  |                                                                                                                              
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                   |  | 36      
|         |  |                                                                                                                              
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                                           |  | 36      
|         |  |                                                                                                                              
|Item 6.  |  | Exhibits                                                                                                                      |  | 36      
|         |  |                                                                                                                              
|         |  | Signatures                                                                                                                    |  | 36      



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##### Table of Contents

PART I: FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

IKANOS COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands and unaudited)



|                                                                   |  |                   |         |                  |   |        
|------------------------------------------------------------------ |  | ----------------- | ------- | ---------------- | - | -------
|                                                                   |  | September 28,2008 |         | December 30,2007
|Assets                                                             |  |                   |         |                  |   |        
|Current assets:                                                    |  |                   |         |                  |   |        
|Cash and cash equivalents                                          |  | $                 | 39,159  |                  | $ | 65,126 
|Short-term investments                                             |  |                   | 27,038  |                  |   | 18,846 
|Accounts receivable, net of allowances of $1 and $64, respectively |  |                   | 13,756  |                  |   | 17,081 
|Inventory                                                          |  |                   | 16,476  |                  |   | 13,025 
|Prepaid expenses and other current assets                          |  |                   | 1,662   |                  |   | 3,192  
|                                                                   |  |                   |         |                  |   |        
|Total current assets                                               |  |                   | 98,091  |                  |   | 117,270
|Long-term investments                                              |  |                   | 1,034   |                  |   | 7,001  
|Property and equipment, net                                        |  |                   | 10,625  |                  |   | 13,916 
|Intangible assets, net                                             |  |                   | 7,425   |                  |   | 6,564  
|Goodwill                                                           |  |                   |        |                  |   | 6,247  
|Other assets                                                       |  |                   | 620     |                  |   | 2,158  
|                                                                   |  |                   |         |                  |   |        
|                                                                   |  | $                 | 117,795 |                  | $ | 153,156
|                                                                   |  |                   |         |                  |   |        
|Liabilities and Stockholders Equity                               |  |                   |         |                  |   |        
|Current liabilities:                                               |  |                   |         |                  |   |        
|Accounts payable                                                   |  | $                 | 12,870  |                  | $ | 12,852 
|Accrued liabilities                                                |  |                   | 12,163  |                  |   | 15,371 
|                                                                   |  |                   |         |                  |   |        
|Total current liabilities                                          |  |                   | 25,033  |                  |   | 28,223 
|Commitments and contingencies (Note 9)                             |  |                   |         |                  |   |        
|Stockholders equity                                               |  |                   | 92,762  |                  |   | 124,933
|                                                                   |  |                   |         |                  |   |        
|                                                                   |  | $                 | 117,795 |                  | $ | 153,156
|                                                                   |  |                   |         |                  |   |        

The accompanying notes are an integral part of these unaudited condensed consolidated
financial statements.



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IKANOS COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In
thousands, except per share data, and unaudited)



|                                                      |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|----------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | ----------------- |  | - | ----------------- | - |  | - | ------- | -
|                                                      |  | Three Months Ended |         |   | Nine Months Ended |  
|                                                      |  | September 28,2008  |         |   | September 30,2007 |   |         | September 28,2008 |  |   | September 30,2007 |  
|Revenue                                               |  | $                  | 24,178  |   |                   | $ | 27,275  |                   |  | $ | 83,730            |   |  | $ | 77,601  |  
|Cost of revenue (1)                                   |  |                    | 14,212  |   |                   |   | 17,190  |                   |  |   | 48,265            |   |  |   | 47,060  |  
|                                                      |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Gross margin                                          |  |                    | 9,966   |   |                   |   | 10,085  |                   |  |   | 35,465            |   |  |   | 30,541  |  
|Operating expenses:                                   |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Research and development (2)                          |  |                    | 10,282  |   |                   |   | 13,908  |                   |  |   | 33,516            |   |  |   | 38,940  |  
|Selling, general and administrative (3)               |  |                    | 8,142   |   |                   |   | 6,832   |                   |  |   | 20,282            |   |  |   | 20,973  |  
|Operating asset impairments                           |  |                    | 12,496  |   |                   |   |        |                   |  |   | 12,496            |   |  |   |        |  
|Restructuring                                         |  |                    |        |   |                   |   | 3,468   |                   |  |   |                  |   |  |   | 3,468   |  
|                                                      |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Total operating expenses                              |  |                    | 30,920  |   |                   |   | 24,208  |                   |  |   | 66,294            |   |  |   | 63,381  |  
|                                                      |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Loss from operations                                  |  |                    | (20,954 | ) |                   |   | (14,123 | )                 |  |   | (30,829           | ) |  |   | (32,840 | )
|Investment impairment                                 |  |                    | (6,166  | ) |                   |   |        |                   |  |   | (6,166            | ) |  |   |        |  
|Interest income, net                                  |  |                    | 427     |   |                   |   | 1,226   |                   |  |   | 1,669             |   |  |   | 3,851   |  
|                                                      |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Loss before provision for income taxes                |  |                    | (26,693 | ) |                   |   | (12,897 | )                 |  |   | (35,326           | ) |  |   | (28,989 | )
|Provision for (benefit from) income taxes             |  |                    | (27     | ) |                   |   | 70      |                   |  |   | 97                |   |  |   | 224     |  
|                                                      |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Net loss                                              |  | $                  | (26,666 | ) |                   | $ | (12,967 | )                 |  | $ | (35,423           | ) |  | $ | (29,213 | )
|                                                      |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Basic and diluted net loss per share:                 |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Net loss per share                                    |  | $                  | (0.93   | ) |                   | $ | (0.45   | )                 |  | $ | (1.22             | ) |  | $ | (1.03   | )
|                                                      |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Weighted average number of shares, basic and diluted  |  |                    | 28,565  |   |                   |   | 28,711  |                   |  |   | 29,139            |   |  |   | 28,377  |  
|                                                      |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Includes stock-based compensation expense as follows: |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|(1) Cost of revenue                                   |  | $                  | (7      | ) |                   | $ | 38      |                   |  | $ | 230               |   |  | $ | 125     |  
|(2) Research and development                          |  |                    | 1,185   |   |                   |   | 2,067   |                   |  |   | 4,227             |   |  |   | 5,814   |  
|(3) Selling, general and administrative               |  |                    | 2,035   |   |                   |   | 1,459   |                   |  |   | 4,189             |   |  |   | 4,446   |  

The accompanying notes are an integral part of these unaudited condensed consolidated
financial statements.



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IKANOS COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In
thousands and unaudited)



|                                                                            |  |                   |          |   |                   |   |         |  
|--------------------------------------------------------------------------- |  | ----------------- | -------- | - | ----------------- | - | ------- | -
|                                                                            |  | Nine Months Ended |         
|                                                                            |  | September 28,2008 |          |   | September 30,2007 |  
|Cash flows from operating activities:                                       |  |                   |          |   |                   |   |         |  
|Net loss                                                                    |  | $                 | (35,423  | ) |                   | $ | (29,213 | )
|Adjustments to reconcile net loss to net cash used by operating activities: |  |                   |          |   |                   |   |         |  
|Depreciation and amortization                                               |  |                   | 4,996    |   |                   |   | 5,565   |  
|Stock-based compensation expense                                            |  |                   | 8,646    |   |                   |   | 10,385  |  
|Operating asset impairments                                                 |  |                   | 12,496   |   |                   |   |        |  
|Investment impairment                                                       |  |                   | 6,166    |   |                   |   |        |  
|Amortization of intangible assets and acquired technology                   |  |                   | 5,018    |   |                   |   | 3,006   |  
|Purchased in-process research and development                               |  |                   | 310      |   |                   |   |        |  
|Loss on disposal of property and equipment                                  |  |                   |         |   |                   |   | 1,384   |  
|Changes in assets and liabilities, net of effect of acquisitions:           |  |                   |          |   |                   |   |         |  
|Accounts receivable                                                         |  |                   | 3,325    |   |                   |   | 2,522   |  
|Inventory                                                                   |  |                   | (600     | ) |                   |   | (235    | )
|Prepaid expenses and other assets                                           |  |                   | 78       |   |                   |   | (1,353  |  
|Accounts payable and accrued liabilities                                    |  |                   | (5,192   | ) |                   |   | 548     |  
|                                                                            |  |                   |          |   |                   |   |         |  
|Net cash used by operating activities                                       |  |                   | (180     | ) |                   |   | (7,391  | )
|                                                                            |  |                   |          |   |                   |   |         |  
|Cash flows from investing activities:                                       |  |                   |          |   |                   |   |         |  
|Purchases of property and equipment                                         |  |                   | (913     | ) |                   |   | (3,758  | )
|Purchases of investments                                                    |  |                   | (321,862 | ) |                   |   | (35,036 | )
|Maturities and sales of investments                                         |  |                   | 313,398  |   |                   |   | 56,000  |  
|Acquisition                                                                 |  |                   | (11,918  | ) |                   |   |        |  
|                                                                            |  |                   |          |   |                   |   |         |  
|Net cash provided (used) by investing activities                            |  |                   | (21,295  | ) |                   |   | 17,206  |  
|                                                                            |  |                   |          |   |                   |   |         |  
|Cash flows from financing activities:                                       |  |                   |          |   |                   |   |         |  
|Repurchases of common stock                                                 |  |                   | (5,205   | ) |                   |   |        |  
|Net proceeds from issuances of common stock and exercise of stock options   |  |                   | 713      |   |                   |   | 1,436   |  
|Payments of obligations under capital lease                                 |  |                   |         |   |                   |   | (617    | )
|Collection of notes receivable from stockholder                             |  |                   |         |   |                   |   | 19      |  
|                                                                            |  |                   |          |   |                   |   |         |  
|Net cash provided (used) by financing activities                            |  |                   | (4,492   | ) |                   |   | 838     |  
|                                                                            |  |                   |          |   |                   |   |         |  
|Net increase (decrease) in cash and cash equivalents                        |  |                   | (25,967  | ) |                   |   | 10,653  |  
|Cash and cash equivalents at beginning of period                            |  |                   | 65,126   |   |                   |   | 49,329  |  
|                                                                            |  |                   |          |   |                   |   |         |  
|Cash and cash equivalents at end of period                                  |  | $                 | 39,159   |   |                   | $ | 59,982  |  
|                                                                            |  |                   |          |   |                   |   |         |  

The accompanying notes are an integral part of these unaudited condensed consolidated
financial statements.



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IKANOS COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1  Ikanos and
Summary of Significant Accounting Policies

The Company

Ikanos Communications, Inc. (Ikanos or the Company) was incorporated in the State of California in April 1999 and reincorporated in the State of Delaware in September 2005. The Company is a provider of
silicon and software for interactive triple-play broadband. The Company develops and markets 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.
The Company has developed programmable, scalable chip architectures, which form the foundation for deploying and delivering triple play services. Flexible network processor architecture with wire-speed packet processing capabilities enables
high-performance residential gateways for distributing advanced services in the home. These products thus support carriers triple play deployment plans to the digital home while keeping their capital and operating expenditures low and have
been deployed by carriers in Asia, Europe and North America.

The Companys fiscal year ends on the Sunday closest to
December 31. The Companys fiscal quarters end on the Sunday closest to the end of the applicable calendar quarter, except in a 53-week fiscal year, in which case the additional week falls into the fourth quarter of that fiscal year.

Basis of Presentation

The
accompanying unaudited condensed consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared without audit in accordance with the rules and regulations
of the Securities and Exchange Commission (the SEC). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed
or omitted in accordance with these rules and regulations. The information in this report should be read in conjunction with our audited financial statements and notes thereto included in our Annual Report on Form 10-K filed with the SEC
on February 22, 2008.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect
all adjustments (consisting only of normal recurring adjustments) necessary to state fairly our financial position, results of operations and cash flows for the interim periods presented. The operating results for the three and six month periods
ended September 28, 2008 are not necessarily indicative of the results that may be expected for the year ending December 28, 2008 or for any other future period.

Use of Estimates

The preparation of the Companys consolidated financial statements in
conformity with GAAP requires management to make certain estimates, judgments and assumptions. The Company believes that the estimates, judgments and assumptions upon which it relies are reasonable based upon information available to it at the time
that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenue and
expenses during the periods presented. To the extent there are material differences between these estimates and actual results, the Companys financial statements would have been affected. In many cases, the accounting treatment of a particular
transaction is specifically dictated by GAAP and does not require managements judgment in its application. There are also areas in which managements judgment in selecting any available alternative would not produce a materially different
result.

Summary of Significant Accounting Policies

Our significant accounting policies were described in Note 1 to our audited Consolidated Financial Statements for the fiscal year ended December 30, 2007, included in our Annual Report on Form 10-K. These
accounting policies have not significantly changed with the exception of those discussed below.

Recent Accounting Pronouncements

In September 2006, Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. (SFAS) 157, Fair Value
Measurements, which defines fair value, provides a framework for measuring fair value, and expands the disclosures required for fair value measurements. SFAS 157 applies to other accounting pronouncements that require fair value measurements; it
does not require any new fair value measurements. The Company was required to apply the provisions of SFAS 157 beginning in 2008. In February 2008, the FASB released a FASB Staff Position (FSP FAS 157-2 Effective Date of FASB Statement
No. 157) which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008. The partial adoption of SFAS 157 for financial assets and liabilities did not have a material impact on the Companys condensed consolidated financial position, results of operations or
cash flows. See Note 5. Investments and Fair Value Measurements.



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In February 2007, the FASB issued SFAS 159, the Fair Value Option for Financial Assets and Financial
Liabilities, which expands the standards under SFAS 157 to provide the one-time election (Fair Value Option) to measure financial instruments and certain other items at fair value and also includes an amendment of SFAS 115, Accounting for
Certain Investments in Debt and Equity Securities. SFAS 159 became effective for the Company beginning in 2008. The Company currently does not have any instruments eligible for election of the fair value option. Therefore, the adoption of SFAS
159 in the first quarter of fiscal 2008 did not impact the Companys consolidated financial position, results of operations or cash flows.

In June 2007, the FASB ratified Emerging Issues Task Force (EITF) 07-3,Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities. This issue provides that
nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. Such amounts should be recognized as an expense as the related goods are delivered
or the related services are performed. EITF 07-3 was effective for the Company beginning in 2008. The adoption of this EITF did not have a material impact on the Companys consolidated financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations, which establishes principles and requirements for
how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree in a business combination. SFAS 141R also establishes principles around
how goodwill acquired in a business combination or a gain from a bargain purchase should be recognized and measured, as well as provides guidelines on the disclosure requirements on the nature and financial impact of the business combination. SFAS
141R will be effective for the Company beginning in 2009. The adoption of SFAS 141R is not expected to have a material effect on the Companys consolidated statements of financial position, operations or cash flows.

In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51.
This statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the consolidated financial statements. It requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the
noncontrolling interest. This statement establishes a single method of accounting for changes in a parents ownership interest in a subsidiary that do not result in deconsolidation. SFAS 160 will be effective for the Company beginning in 2009.
The adoption of SFAS 160 is not expected to have a material effect on the Companys consolidated statements of financial position, operations or cash flows.

In April 2008, the FASB adopted FASB Staff Position SFAS 142-3, Determination of the Useful Life of Intangible Assets, amending the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, Goodwill and Other Intangible Assets. This FASB Staff Position is effective for intangible assets acquired on or after July 1, 2009. The
adoption of SFAS 142-3 is not expected to have a material effect on the Companys consolidated statements of financial position, operations or cash flows.

In May 2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted Accounting Principles. This statement identifies the sources of accounting principles and the framework for selecting the principles to
be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP in the United States. The adoption of SFAS 162 is not expected to have a material effect on the Companys
consolidated statements of financial position, operations or cash flows.

In October 2008, the FASB issued FASB Staff Position SFAS 157-3,
Determining the Fair Value of a Financial Asset When The Market For That Asset Is Not Active, to clarify the application of the provisions of SFAS 157 in an active market and how an entity would determine fair value in an inactive
market. The FASB Staff Position is effective immediately and applies to the Companys September 28, 2008 financial statements. The application of the provisions of SFAS 157-3 did not materially affect its results of operations or financial
condition as of and for the periods ended September 28, 2008.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash, cash equivalents, investments and
accounts receivable. Cash and cash equivalents are held with a limited number of financial institutions. Deposits held with these financial institutions may exceed the amount of insurance provided on such deposits. Management believes that the
financial institutions that hold the Companys investments are credit worthy and, accordingly, minimal credit risk exists with respect to those investments. Short-term investments include a diversified portfolio of commercial paper and
government agency bonds. Long-term investments are comprised of auction rate securities. All investments are classified as available-for-sale. The Company does not hold or issue financial instruments for trading purposes.

Credit risk with respect to accounts receivable is concentrated due to the number of large orders recorded in any particular reporting period. Three
customers represented 34%, 31%, and 11% of accounts receivable at September 28, 2008. Three customers represented 28%, 18% and 14% of accounts receivable at December 30, 2007. Three customers accounted for 29%, 28%, and 21% of revenue for
the three months ended September 28, 2008. Four customers accounted for 25%, 24%, 18% and 12% of revenue for the nine months ended September 28, 2008. Four customers accounted for 31%, 22%, 20% and 12% of revenue for the three months ended
September 30, 2007. Four customers accounted for 30%, 21%, 17% and 12% of revenue for the nine months ended September 30, 2007.



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Concentration of Suppliers

The Company subcontracts all of the manufacture, assembly and tests of its products to third-parties located primarily in Asia. As a result of this geographic concentration, a disruption in the manufacturing process
resulting from a natural disaster or other unforeseen event could have a material adverse effect on the Companys financial position and results of operations. Additionally, a small number of sources manufacture, assemble and test the
Companys products, with which the Company has no long-term contracts. Also, each product generally has only one foundry and one assembly and test provider. An inability to obtain these products and services in the amounts needed and on a
timely basis or at commercially reasonable prices could results in delays in product introductions, interruptions in product shipments or increases in product costs, which could have a material adverse effect on the Companys financial position
and result of operations.

Concentration of Other Risk

The semiconductor industry is characterized by rapid technological change, competitive pricing pressures and cyclical market patterns. The Companys results of operations are affected by a wide variety of
factors, including general economic conditions; economic conditions specific to the semiconductor industry; demand for the Companys products; the timely introduction of new products; implementation of new manufacturing technologies;
manufacturing capacity; the availability of materials and supplies; competition; the ability to safeguard patents and intellectual property in a rapidly evolving market; and reliance on assembly and wafer fabrication subcontractors and on
independent distributors and sales representatives. As a result, the Company may experience substantial period-to-period fluctuations in future periods due to the factors mentioned above, factors described in the section titled Item 1A.
Risk Factors or other factors.

Comprehensive Loss

Comprehensive loss is defined as the change in equity of a business during a period from transactions and other events and circumstances from non-owner sources. The components of comprehensive loss are as follows (in
thousands):



|                                                                    |  |                   |         |   |                   |   |         |  
|------------------------------------------------------------------- |  | ----------------- | ------- | - | ----------------- | - | ------- | -
|                                                                    |  | Nine Months Ended |        
|                                                                    |  | September 28,2008 |         |   | September 30,2007 |  
|Net loss                                                            |  | $                 | (35,423 | ) |                   | $ | (29,213 | )
|Other comprehensive incomeunrealized loss on marketable securities |  |                   | (73     | ) |                   |   | 22      |  
|                                                                    |  |                   |         |   |                   |   |         |  
|Comprehensive loss                                                  |  | $                 | (35,496 | ) |                   | $ | (29,191 | )
|                                                                    |  |                   |         |   |                   |   |         |  

Net Loss per Share

Under the provisions of SFAS 128, Earnings per Share, basic net loss per share is computed using the weighted-average number of common shares outstanding during the period. Potentially dilutive securities have
been excluded from the computation of diluted net loss per share if their inclusion is anti-dilutive. The calculation of basic and diluted net loss per share is as follows (in thousands, except per share amounts):



|                                     |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|------------------------------------ |  | ------------------ | ------- | - | ----------------- | - | ------- | ----------------- |  | - | ----------------- | - |  | - | ------- | -
|                                     |  | Three Months Ended |         |   | Nine Months Ended |  
|                                     |  | September 28,2008  |         |   | September 30,2007 |   |         | September 28,2008 |  |   | September 30,2007 |  
|Net loss                             |  | $                  | (26,666 | ) |                   | $ | (12,967 | )                 |  | $ | (35,423           | ) |  | $ | (29,213 | )
|                                     |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Weighted average shares outstanding  |  |                    | 28,565  |   |                   |   | 28,711  |                   |  |   | 29,139            |   |  |   | 28,377  |  
|Basic and diluted net loss per share |  | $                  | (0.93   | ) |                   | $ | (0.45   | )                 |  | $ | (1.22             | ) |  | $ | (1.03   | )
|                                     |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  



7



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##### Table of Contents

The following potential common shares have been excluded from the calculation of diluted net loss per
share as their effect would have been anti-dilutive (in thousands):



|                                                  |  |                    |  |                   |  |                   |  |                  
|------------------------------------------------- |  | ------------------ |  | ----------------- |  | ----------------- |  | -----------------
|                                                  |  | Three Months Ended |  | Nine Months Ended
|                                                  |  | September 28,2008  |  | September 30,2007 |  | September 28,2008 |  | September 30,2007
|Anti-dilutive securities:                         |  |                    |  |                   |  |                   |  |                  
|Weighted average restricted stock units           |  | 1,585              |  | 1,425             |  | 1,594             |  | 1,293            
|Weighted-average options to purchase common stock |  | 2,542              |  | 3,108             |  | 2,244             |  | 3,043            
|                                                  |  |                    |  |                   |  |                   |  |                  
|                                                  |  | 4,127              |  | 4,533             |  | 3,838             |  | 4,336            
|                                                  |  |                    |  |                   |  |                   |  |                  

Note 2  Business Combination: Centillium DSL Assets

In February 2008, the Company purchased certain DSL technology and related assets from Centillium Communications, Inc. for $11.9 million in cash,
including $0.1 million in transaction costs and the assumption of liabilities of $0.2 million. The results of operations from the assets acquired in the Centillium DSL acquisition have been included in the Companys consolidated statement of
operations from the date of the acquisition.

The acquisition was accounted for as a purchase business combination. Under the purchase
method of accounting, the total estimated purchase price as shown in the table has been allocated to the net tangible and intangible assets acquired based on their estimated fair values as of the date of the acquisition. Subsequent to the
acquisition, certain adjustments were made to the carrying value of certain tangible and intangible assets. Specifically, acquired inventory was reduced in value with a corresponding increase in goodwill and subsequently our goodwill was impaired as
described in Note 3, Asset Impairments. The allocation of the purchase price for this acquisition as of the date of closing was as follows (in thousands):



|                                                      |  |                          |        |   |             |   |      |              |  |   |        |  
|----------------------------------------------------- |  | ------------------------ | ------ | - | ----------- | - | ---- | ------------ |  | - | ------ | -
|                                                      |  | As of Date ofAcquisition |        |   | Adjustments |   |      | June 29,2008 | 
|Acquired intangible assets:                           |  |                          |        |   |             |   |      |              |  |   |        |  
|Existing technology                                   |  | $                        | 3,650  |   |             | $ |     |              |  | $ | 3,650  |  
|Customer relationships                                |  |                          | 2,660  |   |             |   |     |              |  |   | 2,660  |  
|Order backlog                                         |  |                          | 710    |   |             |   |     |              |  |   | 710    |  
|Goodwill                                              |  |                          | 273    |   |             |   | 877  |              |  |   | 1,150  |  
|Purchased in-process research and development (IPR&D) |  |                          | 310    |   |             |   |     |              |  |   | 310    |  
|                                                      |  |                          |        |   |             |   |      |              |  |   |        |  
|Total acquired intangible assets                      |  |                          | 7,603  |   |             |   | 877  |              |  |   | 8,480  |  
|Tangible assets acquired                              |  |                          | 4,520  |   |             |   | (877 | )            |  |   | 3,643  |  
|Assumed liabilities                                   |  |                          | (205   | ) |             |   |     |              |  |   | (205   | )
|                                                      |  |                          |        |   |             |   |      |              |  |   |        |  
|                                                      |  | $                        | 11,918 |   |             | $ |     |              |  | $ | 11,918 |  
|                                                      |  |                          |        |   |             |   |      |              |  |   |        |  

Tangible assets acquired of $3.6 million consisted primarily of inventory and fixed assets
and were assigned a fair value as of the date of acquisition based on the expected selling price and replacement value, respectively. As discussed further below, the identified intangible assets acquired were assigned fair values in accordance with
the guidelines established in SFAS 141, Business Combinations, FASB Interpretation (FIN) 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method and other relevant guidance.
The Company believes that these identified intangible assets have no residual value.

Acquired Intangible Assets

Existing technology: Existing technology comprises products that have reached technological feasibility. The Company valued the existing
technology using the income approach and a discounted cash flow (DCF) model, which uses forecasts of future revenue and expense related to the intangible asset. The Company utilized a discount rate of 28% for existing technology and is amortizing
the intangible assets on a straight-line basis over its estimated useful life of two years.

Customer Relationships: The customer
relationships asset relates to the ability to sell existing and future versions of products to existing customers and has been estimated using the income method. The Company valued customer relationships utilizing a DCF model and a discount rate of
30% and is amortizing this intangible asset on a straight-line basis over its estimated useful life of three years.

Order Backlog:
The order backlog asset represents the value of the sales and marketing costs required to establish the order backlog and was valued using the income approach and a DCF model with a discount rate of 26%. The order backlog has an estimated useful
life of six months.



8



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##### Table of Contents

Purchased IPR&D: IPR&D of $0.3 million was recorded as research and development expense
for the three months ended March 30, 2008, in accordance with FIN 4. Projects that qualify as IPR&D represent those that have not yet reached technological feasibility and which have no alternative future use. There was one IPR&D
project as of the acquisition date and it was discontinued as of March 30, 2008. The Company valued the IPR&D using the income approach and a DCF model with a discount rate of 32%.

Pro forma Financial Information

The following unaudited pro forma financial information presents the combined results of operations of the Company and the stand alone DSL business of Centillium had the acquisition occurred as of the beginning of fiscal 2007, after giving
effect to certain adjustments, including amortization of Centillium DSL acquisition-related intangibles. The operating results for the period from January 1, 2008 to February 13, 2008 (date of close) related to the Centillium DSL business
were not readily available and were not considered practical to obtain. The unaudited pro forma financial information does not necessarily reflect the results of operations that would have occurred had the combined businesses constituted a single
entity during such period, and is not necessarily indicative of results which may be obtained in the future (in thousands, except per share amounts):



|                                                    |  |                             |         |  
|--------------------------------------------------- |  | --------------------------- | ------- | -
|                                                    |  | Year EndedDecember 30, 2007 |        
|Pro forma total revenue                             |  | $                           | 131,467 |  
|Pro forma net loss                                  |  | $                           | (39,464 | )
|Pro forma net loss per share  basic and diluted    |  | $                           | (1.38   | )
|Pro forma weighted average basic and diluted shares |  |                             | 28,626  |  

Note 3  Asset Impairments

During the three months ended September 28, 2008, the Company continued its review and assessment of its business, including goodwill, intangible
assets and certain prepaid license fees. Based on that review, the Company recorded impairment charges totaling $12.5 million of which $7.4 million related to goodwill, $1.1 million related to intangibles and $4.0 million related to prepaid license
fees. The Company also determined that its investment in auction rate securities was impaired (see Note 5), resulting in an additional charge of $6.2 million in the third quarter of 2008.

In September 2008, due to lower market capitalization, the Company performed a goodwill impairment test in accordance with SFAS 142. This test resulted
in an impairment charge of $7.4 million, because the Companys market capitalization, as determined based on its quoted stock price on the NASDAQ stock exchange, was significantly lower than the carrying value of its assets for an extended
period. The changes in the carrying value of goodwill were as follows (in thousands):



|                                  |  |   |        |  
|--------------------------------- |  | - | ------ | -
|Goodwill as of December 30, 2007  |  | $ | 6,247  |  
|Additions in 2008                 |  |   | 1,150  |  
|Impairment                        |  |   | (7,397 | )
|                                  |  |   |        |  
|Goodwill as of September 28, 2008 |  | $ |       |  
|                                  |  |   |        |  

The intangible asset impairment of $1.1 million related to trademarks and patents from the
Companys 2006 acquisition of the network processing and ADSL assets from Analog Devices, Inc. (ADI) and the 2008 purchase of the DSL technology and related assets from Centillium Communications, Inc. Based on a review of intangible assets, the
Company concluded that these intangible assets had no future economic benefit.

The prepaid license fees of $4.0 million related to a
vendor, which 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 tape-outs at this foundry were
completed. Based on the Companys planned tape-out decisions for 2009 and the foreseeable future, it was concluded that there was no future economic benefit to the intellectual property, and the related prepaid asset was expensed.

Note 4  Intangible Assets

The carrying
amount of intangible assets as of December 30, 2007 is as follows (in thousands):



|                                 |  |                      |        |                         |   |        |           |  |                                   |       |  |  
|-------------------------------- |  | -------------------- | ------ | ----------------------- | - | ------ | --------- |  | --------------------------------- | ----- |  | -
|                                 |  | Gross CarryingAmount |        | AccumulatedAmortization |   |        | NetAmount |  | Weightedaverageuseful life(Years)
|Existing technology              |  | $                    | 6,145  |                         | $ | (3,156 | )         |  | $                                 | 2,989 |  | 4
|Patents/core technology          |  |                      | 2,000  |                         |   | (938   | )         |  |                                   | 1,062 |  | 4
|Trademarks                       |  |                      | 1,000  |                         |   | (400   | )         |  |                                   | 600   |  | 5
|Customer relationships           |  |                      | 3,070  |                         |   | (1,195 | )         |  |                                   | 1,875 |  | 5
|Non-competition agreement        |  |                      | 100    |                         |   | (62    | )         |  |                                   | 38    |  | 3
|                                 |  |                      |        |                         |   |        |           |  |                                   |       |  |  
|Total acquired intangible assets |  | $                    | 12,315 |                         | $ | (5,751 | )         |  | $                                 | 6,564 |  |  
|                                 |  |                      |        |                         |   |        |           |  |                                   |       |  |  



9



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##### Table of Contents

As discussed in Note 2 and 3 above, the Company added to its intangible assets through its acquisition of
certain DSL assets in the first quarter and impaired patents/core technology, trademarks and non-competition agreement during the third quarter. The remaining carrying value of its intangible assets as of September 28, 2008 is as follows (in
thousands):



|                                 |  |                      |        |                         |   |        |           |  |                                   |       |  |  
|-------------------------------- |  | -------------------- | ------ | ----------------------- | - | ------ | --------- |  | --------------------------------- | ----- |  | -
|                                 |  | Gross CarryingAmount |        | AccumulatedAmortization |   |        | NetAmount |  | Weightedaverageuseful life(Years)
|Existing technology              |  | $                    | 9,795  |                         | $ | (5,901 | )         |  | $                                 | 3,894 |  | 3
|Customer relationships           |  |                      | 5,730  |                         |   | (2,199 | )         |  |                                   | 3,531 |  | 4
|                                 |  |                      |        |                         |   |        |           |  |                                   |       |  |  
|Total acquired intangible assets |  | $                    | 15,525 |                         | $ | (8,100 | )         |  | $                                 | 7,425 |  |  
|                                 |  |                      |        |                         |   |        |           |  |                                   |       |  |  

For the three months ended September 28, 2008 and September 30, 2007, the amortization
of intangible assets was $1.5 million and $1.0 million, respectively. For the nine months ended September 28, 2008 and September 30, 2007, the amortization of intangible assets was $5.0 million and $3.0 million, respectively. The estimated
future amortization of purchased intangible assets as of September 28, 2008 is as follows (in thousands):



|               |  |   |      
|-------------- |  | - | -----
|Remaining 2008 |  | $ | 1,134
|2009           |  |   | 4,274
|2010           |  |   | 1,830
|2011           |  |   | 187  
|               |  |   |      
|               |  | $ | 7,425
|               |  |   |      

Note 5  Investments and Fair Value Measurements

The following is a summary of short-term investments (in thousands):



|                                                |  |                    |        |                          |   |        |                            |  |   |                    |   |  |   |       
|----------------------------------------------- |  | ------------------ | ------ | ------------------------ | - | ------ | -------------------------- |  | - | ------------------ | - |  | - | ------
|                                                |  | September 28, 2008
|                                                |  | Cost               |        | GrossRealizedGain/(Loss) |   |        | GrossUnrealizedGain/(Loss) |  |   | EstimatedFairValue
|U.S. government agencies                        |  | $                  | 9,862  |                          | $ |        |                            |  | $ | (27                | ) |  | $ | 9,835 
|Corporate bonds and notes                       |  |                    | 17,340 |                          |   |       |                            |  |   | (137               | ) |  |   | 17,203
|                                                |  |                    |        |                          |   |        |                            |  |   |                    |   |  |   |       
|Total short-term investments                    |  | $                  | 27,202 |                          | $ |       |                            |  | $ | (164               | ) |  | $ | 27,038
|                                                |  |                    |        |                          |   |        |                            |  |   |                    |   |  |   |       
|Long-term investments - auction rate securities |  | $                  | 7,200  |                          | $ | (6,166 | )                          |  | $ |                   |   |  | $ | 1,034 
|                                                |  |                    |        |                          |   |        |                            |  |   |                    |   |  |   |       
|                                                | 
|                                                |  | December 30, 2008 
|                                                |  | Cost               |        | GrossRealizedGain/(Loss) |   |        | GrossUnrealizedGain/(Loss) |  |   | EstimatedFairValue
|U.S. government agencies                        |  | $                  | 8,496  |                          | $ | 14     |                            |  | $ |                   |   |  | $ | 8,510 
|Corporate bonds and notes                       |  |                    | 10,269 |                          |   | 67     |                            |  |   |                   |   |  |   | 10,336
|                                                |  |                    |        |                          |   |        |                            |  |   |                    |   |  |   |       
|Total short-term investments                    |  | $                  | 18,765 |                          | $ | 81     |                            |  | $ |                   |   |  | $ | 18,846
|                                                |  |                    |        |                          |   |        |                            |  |   |                    |   |  |   |       
|Long-term investments - auction rate securities |  | $                  | 7,200  |                          | $ |       |                            |  | $ | (199               | ) |  | $ | 7,001 
|                                                |  |                    |        |                          |   |        |                            |  |   |                    |   |  |   |       



10



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Marketable securities are classified as available-for-sale as of the balance sheet date and are reported
at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income (loss) in stockholders equity, net of tax. Realized gains and losses and permanent declines in value, if any, on
available-for-sale securities are reported in other income or expense as incurred. Estimated fair values were determined for each individual security in the investment portfolio. The declines in value of these investments are primarily related to
changes in interest rates and are considered to be temporary in nature.

A portion of the Companys available-for-sale U.S. government
agencies and corporate bonds and notes have maturity dates greater than one year from the date of purchase. Even though the stated maturity dates of these investments may be one year or more beyond the balance sheet dates, the Company has
classified these securities as short-term investments. In accordance with Accounting Research Bulletin No. 43, Chapter 3A, Working Capital- Current Assets and Current Liabilities, the Company views its available-for-sale portfolio as
available for use in its current operations. Based upon historical experience in the financial markets as well as the Companys specific experience with these investments, the Company believes there is a reasonable expectation that the
investments will be realized in cash or sold during the next year.

Auction rate securities with a face value of $7.2 million are included
in the Companys available-for-sale portfolio. Beginning in the third quarter of 2007, these securities failed to sell at auction. Since the Company cannot determine whether a successful auction will occur in the next twelve months, these
investments were classified as long-term investments. The funds related to these securities will not be available until a successful auction occurs, a buyer is found outside of the auction process or the underlying securities mature (beginning in
2025). In prior quarters, the Company recorded an unrealized holding loss within accumulated other comprehensive loss as a separate component of stockholders equity. In the third quarter of 2008, upon determining that the decline in market
value was other-than-temporary, the Company wrote down the investments to their estimated realizable fair value of $1.0 million and recorded an investment impairment charge of $6.2 million.

Fair Value Measurements

SFAS 157 clarifies that fair
value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be
determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, SFAS 157 establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring
fair value as follows: observable inputs such as quoted prices in active markets (Level 1); inputs other than the quoted prices in active markets that are observable either directly or indirectly (Level 2); and unobservable inputs in which there is
little or no market data, which require the Company to develop its own assumptions (Level 3). This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair
value. On a recurring basis, the Company measures certain financial assets, mainly comprised of marketable securities, at fair value.

The
Companys cash and investment instruments are classified within all three levels of the fair value hierarchy. The types of Level 1 instruments, valued based on quoted market prices in active markets, include money market securities. Level 2
types of instruments, valued based on other observable inputs, include investment-grade U.S. government agencies, commercial paper and corporate bonds and notes. Level 3 types of instruments, valued based on unobservable inputs in which there is
little or no market data, which require the Company to develop its own assumptions, include auction rate securities. The fair value hierarchy of our marketable securities as of September 28, 2008 is (in thousands):



|                             |  |                                                 |       |         |   |         |  |       |       |  |   |       
|---------------------------- |  | ----------------------------------------------- | ----- | ------- | - | ------- |  | ----- | ----- |  | - | ------
|                             |  | Fair Value Measurements at Reporting Date Using
|                             |  | Level 1                                         |       | Level 2 |   | Level 3 |  | Total
|Money market funds (1)       |  | $                                               | 2,520 |         | $ |        |  | $     |      |  | $ | 2,520 
|Commercial paper (1)         |  |                                                 |      |         |   | 33,900  |  |       |      |  |   | 33,900
|U.S. government agencies (2) |  |                                                 |      |         |   | 12,821  |  |       |      |  |   | 12,821
|Corporate bonds and notes    |  |                                                 |      |         |   | 14,230  |  |       |      |  |   | 14,230
|Auction rate securities      |  |                                                 |      |         |   |        |  |       | 1,034 |  |   | 1,034 
|                             |  |                                                 |       |         |   |         |  |       |       |  |   |       
|                             |  | $                                               | 2,520 |         | $ | 60,951  |  | $     | 1,034 |  | $ | 64,505
|                             |  |                                                 |       |         |   |         |  |       |       |  |   |       



|(1) | Commercial paper is classified as cash equivalents except for $3.0 million classified as short-term investments.
|--- | ----------------------------------------------------------------------------------------------------------------



|(2) | U.S. government agencies include $3.0 million in marketable securities classified as cash equivalents.
|--- | ------------------------------------------------------------------------------------------------------



11



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The Company valued the auction rate securities using a discounted cash flow model. Assumptions used in
valuing each of the auction rate securities include the stated maturity dates between the years 2025 and 2050, the stated coupon rate and an estimated discount rate. The discount rate is an estimate of what the Company believes the security must be
discounted to in order to sell today. It is based on a number of factors, including the credit rating of the issuer and the insurance provider for the security. During the three months ended September 28, 2008 the Company recorded an
other-than-temporary charge of $6.2 million as a result of the discounted flow analysis. Changes in our Level 3 securities for the nine months ended September 28, 2008 are as follows (in thousands):



|                                       |  |                                    |        |   |                                   |   |        |  
|-------------------------------------- |  | ---------------------------------- | ------ | - | --------------------------------- | - | ------ | -
|                                       |  | Three MonthsEndedSeptember 28,2008 |        |   | Nine MonthsEndedSeptember 28,2008 |  
|Beginning balance                      |  | $                                  | 6,468  |   |                                   | $ | 7,001  |  
|Included in earnings                   |  |                                    | (6,166 | ) |                                   |   | (6,166 | )
|Included in other comprehensive income |  |                                    | 732    |   |                                   |   | 199    |  
|Purchases, issuances, and settlements  |  |                                    |       |   |                                   |   |       |  
|Transfers in and/or out of Level 3     |  |                                    |       |   |                                   |   |       |  
|                                       |  |                                    |        |   |                                   |   |        |  
|Balance at September 28, 2008          |  | $                                  | 1,034  |   |                                   | $ | 1,034  |  
|                                       |  |                                    |        |   |                                   |   |        |  

Note 6  Inventory

Inventory consisted of the following (in thousands):



|                                  |  |                   |        |                  |   |       
|--------------------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                                  |  | September 28,2008 |        | December 30,2007
|Finished goods                    |  | $                 | 5,235  |                  | $ | 3,966 
|Work-in-process                   |  |                   | 10,100 |                  |   | 8,734 
|Purchased parts and raw materials |  |                   | 1,141  |                  |   | 325   
|                                  |  |                   |        |                  |   |       
|                                  |  | $                 | 16,476 |                  | $ | 13,025
|                                  |  |                   |        |                  |   |       

Note 7  Property and Equipment

Property and equipment consisted of the following (in thousands):



|                                                |  |                   |         |   |                  |   |         |  
|----------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                |  | September 28,2008 |         |   | December 30,2007 |  
|Machinery and equipment                         |  | $                 | 19,161  |   |                  | $ | 18,081  |  
|Software                                        |  |                   | 12,696  |   |                  |   | 12,400  |  
|Computer equipment                              |  |                   | 4,642   |   |                  |   | 4,289   |  
|Furniture and fixtures                          |  |                   | 880     |   |                  |   | 865     |  
|Leasehold improvements                          |  |                   | 816     |   |                  |   | 795     |  
|Not placed in service                           |  |                   | 37      |   |                  |   | 268     |  
|                                                |  |                   |         |   |                  |   |         |  
|                                                |  |                   | 38,232  |   |                  |   | 36,698  |  
|Less: Accumulated depreciation and amortization |  |                   | (27,607 | ) |                  |   | (22,782 | )
|                                                |  |                   |         |   |                  |   |         |  
|                                                |  | $                 | 10,625  |   |                  | $ | 13,916  |  
|                                                |  |                   |         |   |                  |   |         |  

Depreciation and amortization expense for property and equipment was $1.6 million and $1.9 million
for the three months ended September 28, 2008 and September 30, 2007, respectively. Depreciation and amortization expense for property and equipment was $5.0 million and $5.6 million for the nine months ended September 28, 2008 and
September 30, 2007, respectively. Included in property and equipment are assets acquired under capital lease obligations, mostly software and machinery and equipment, with an original cost of $3.8 million as of September 28, 2008 and
December 30, 2007. Related accumulated depreciation and amortization of these assets was $3.7 million and $3.5 million as of September 28, 2008 and December 30, 2007, respectively.

Note 8  Accrued Liabilities

Accrued
liabilities consisted of the following (in thousands):



|                                          |  |                   |        |                  |   |       
|----------------------------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                                          |  | September 28,2008 |        | December 30,2007
|Accrued compensation and related benefits |  | $                 | 3,866  |                  | $ | 4,089 
|Accrued rebates                           |  |                   | 2,698  |                  |   | 3,876 
|Accrued professional fees                 |  |                   | 1,406  |                  |   | 1,590 
|Warranty accrual                          |  |                   | 905    |                  |   | 1,055 
|Restructuring                             |  |                   | 395    |                  |   | 1,660 
|Other accrued liabilities                 |  |                   | 2,893  |                  |   | 3,101 
|                                          |  |                   |        |                  |   |       
|                                          |  | $                 | 12,163 |                  | $ | 15,371
|                                          |  |                   |        |                  |   |       



12



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The following table summarizes the activity related to the warranty accrual (in thousands):



|                                         |  |                   |       |   |                   |   |        |  
|---------------------------------------- |  | ----------------- | ----- | - | ----------------- | - | ------ | -
|                                         |  | Nine Months Ended |      
|                                         |  | September 28,2008 |       |   | September 30,2007 |  
|Balance, beginning of period             |  | $                 | 1,055 |   |                   | $ | 2,774  |  
|Accrual for warranties during the period |  |                   | 609   |   |                   |   | 691    |  
|Usage during the period                  |  |                   | (759  | ) |                   |   | (2,359 | )
|                                         |  |                   |       |   |                   |   |        |  
|Balance, end of period                   |  | $                 | 905   |   |                   | $ | 1,106  |  
|                                         |  |                   |       |   |                   |   |        |  

During the third quarter of 2007, the Company implemented a restructuring program. The
restructuring plan involved outsourcing the back-end physical semiconductor design process and terminating approximately 15 employees, including four members of senior management. The Company expects the remaining software tool costs to be paid in
2009. A summary of the restructuring activity is as follows (in thousands):



|                                 |  |                      |      |   |               |   |        |  
|-------------------------------- |  | -------------------- | ---- | - | ------------- | - | ------ | -
|                                 |  | Severanceandbenefits |      |   | Softwaretools |  
|Balance as of December 30, 2007  |  | $                    | 132  |   |               | $ | 1,528  |  
|Cash payments                    |  |                      | (132 | ) |               |   | (1,133 | )
|                                 |  |                      |      |   |               |   |        |  
|Balance as of September 28, 2008 |  | $                    |     |   |               | $ | 395    |  
|                                 |  |                      |      |   |               |   |        |  

Note 9  Commitments and Contingencies

Lease Obligations

The Company leases office facilities, equipment and software under non-cancelable
operating leases with various expiration dates through 2011. Rent expense for the three months ended September 28, 2008 and September 30, 2007 was $0.3 million and $0.3 million, respectively. Rent expense for the nine months ended
September 28, 2008 and September 30, 2007 was $1.0 million and $0.9 million, respectively. The terms of the facility leases provide for rental payments on a graduated scale. The Company recognizes rent expense on a straight-line basis over
the lease period and has accrued for rent expense incurred but not paid.

Future minimum lease payments as of September 28, 2008 under
non-cancelable leases with original terms in excess of one year are $0.6 million for the remainder of 2008, $1.4 million in 2009, $0.7 million in 2010 and $0.2 million in 2011.

Purchase Commitments

In June and October 2007, the Company entered into three software development
agreements and agreed to pay $0.4 million for the remainder of 2008. In July 2007, the Company entered into a technology access agreement and agreed to pay $1.0 million in 2009. As of September 28, 2008, the Company had $1.6 million of
inventory purchase obligations with various suppliers.

Indemnities, Commitments and Guarantees

During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments
in relation to certain transactions. These indemnities include intellectual property indemnities to the Companys customers in connection with the sales of its products, indemnities for liabilities associated with the infringement of other
parties technology based upon the Companys products, and indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease. The duration of these indemnities, commitments and
guarantees varies, and in certain cases, is indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments that the Company could be obligated to make. The Company
believes its internal development processes and other policies and practices limit its exposure related to the indemnification provisions of the various agreements that include indemnity provisions. In addition, the Company requires its employees to
sign a proprietary information and inventions agreement, which assigns the rights to its employees development work to the Company. The Company has not recorded any liability for these indemnities, commitments and guarantees in the
accompanying consolidated balance sheets. The Company does, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable and the amount of the loss can
be reasonably estimated, in accordance with SFAS 5, Accounting for Contingencies.



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In addition, the Company indemnifies its officers and directors under the terms of indemnity agreements
entered into with them, as well as pursuant to its certificate of incorporation, bylaws and applicable Delaware law. To date, the Company has not incurred any costs related to these indemnifications.

Litigation

In November 2006, three putative class
action lawsuits were filed in the United States District Court for the Southern District of New York against the Company, its directors and two former executive officers, as well as the lead underwriters for its initial and secondary public
offerings. The lawsuits were consolidated and an amended complaint was filed on April 24, 2007. The amended complaint alleges certain material misrepresentations and omissions by the Company in connection with its initial public
offering in September 2005 and the follow-on offering in March 2006 concerning its business and prospects, and seeks unspecified damages. On June 25, 2007, the Company filed motions to dismiss the amended complaint; plaintiffs opposed its
motions, and a hearing on its motions was heard on January 16, 2008. On March 10, 2008, the Court ordered the case dismissed with prejudice. On March 25, 2008, plaintiffs filed a motion requesting that the Court reconsider its order
dismissing the case and permit plaintiffs to file a second amended complaint. Defendants have opposed plaintiffs motion to reconsider. The court denied plaintiffs motion to reconsider, and on July 9, 2008 plaintiffs appealed the
Courts order dismissing with prejudice. Plaintiffs appeal is currently pending the U.S. Court of Appeals for the Second Circuit. The Company cannot predict the likely outcome of the appeal, and an adverse result in the litigation could
have a material effect on its financial statements.

Additionally, from time to time, the Company is a party to various legal proceedings
and claims arising from the normal course of business activities. Based on current available information, the Company does not expect that the ultimate outcome of any currently pending unresolved matters, individually or in the aggregate, will have
a material adverse effect on its results of operations, cash flows or financial position.

Note 10  Significant Customer Information and Segment
Reporting

SFAS 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for the manner in
which public companies report information about operating segments in annual and interim financial statements. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The method for
determining the information to report is based on the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance.

The Companys chief operating decision-maker is considered to be the Chief Executive Officer. The Chief Executive Officer reviews financial
information presented on a consolidated basis, accompanied by disaggregated information about revenue by geographic region for purposes of making operating decisions and assessing financial performance. On this basis, the Company is organized and
operates in a single segment: the design, development, marketing and sale of semiconductors.

The following table summarizes revenue by
geographic region, based on the country in which the customers headquarters office is located (in thousands):



|              |  |                    |        |                   |   |                   |  |                   |        |  |   |       
|------------- |  | ------------------ | ------ | ----------------- | - | ----------------- |  | ----------------- | ------ |  | - | ------
|              |  | Three Months Ended |        | Nine Months Ended
|              |  | September 28,2008  |        | September 30,2007 |   | September 28,2008 |  | September 30,2007
|Asia          |  | $                  | 15,393 |                   | $ | 20,136            |  | $                 | 51,528 |  | $ | 52,440
|Europe        |  |                    | 5,703  |                   |   | 6,548             |  |                   | 26,317 |  |   | 20,232
|North America |  |                    | 3,082  |                   |   | 591               |  |                   | 5,885  |  |   | 4,929 
|              |  |                    |        |                   |   |                   |  |                   |        |  |   |       
|              |  | $                  | 24,178 |                   | $ | 27,275            |  | $                 | 83,730 |  | $ | 77,601
|              |  |                    |        |                   |   |                   |  |                   |        |  |   |       

The Company divides its products into two product families: Access and Gateway. Access includes
products that carriers deploy in the central office or remote terminal while Gateway includes products that are deployed into the residence. Revenue by product family is as follows (in thousands):



|        |  |                    |        |                   |   |                   |  |                   |        |  |   |       
|------- |  | ------------------ | ------ | ----------------- | - | ----------------- |  | ----------------- | ------ |  | - | ------
|        |  | Three Months Ended |        | Nine Months Ended
|        |  | September 28,2008  |        | September 30,2007 |   | September 28,2008 |  | September 30,2007
|Access  |  | $                  | 10,720 |                   | $ | 15,143            |  | $                 | 43,775 |  | $ | 41,693
|Gateway |  |                    | 13,458 |                   |   | 12,132            |  |                   | 39,955 |  |   | 35,908
|        |  |                    |        |                   |   |                   |  |                   |        |  |   |       
|        |  | $                  | 24,178 |                   | $ | 27,275            |  | $                 | 83,730 |  | $ | 77,601
|        |  |                    |        |                   |   |                   |  |                   |        |  |   |       



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The distribution of long-lived assets (excluding goodwill, intangible assets and other assets) is as
follows (in thousands):



|              |  |                   |        |                  |   |       
|------------- |  | ----------------- | ------ | ---------------- | - | ------
|              |  | September 28,2008 |        | December 30,2007
|United States |  | $                 | 6,353  |                  | $ | 8,708 
|Asia          |  |                   | 3,633  |                  |   | 4,598 
|Other         |  |                   | 639    |                  |   | 610   
|              |  |                   |        |                  |   |       
|              |  | $                 | 10,625 |                  | $ | 13,916
|              |  |                   |        |                  |   |       



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

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.



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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.



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|                           |  |                              |  |                    |   |  |                   |   |  |                   |   |  |                   |  
|-------------------------- |  | ---------------------------- |  | ------------------ | - |  | ----------------- | - |  | ----------------- | - |  | ----------------- | -
|                           |  |                              |  | Three Months Ended |   |  | Nine Months Ended |  
|Our Direct Customer        |  | OEM Customer                 |  | September 28,2008  |   |  | September 30,2007 |   |  | September 28,2008 |   |  | September 30,2007 |  
|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 28,2008  |   |  | September 30,2007 |   |  | September 28,2008 |   |  | September 28,2007 |  
|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 28,2008  |   |  | September 30,2007 |   |  | September 28,2008 |   |  | September 30,2007 |  
|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 28,2008  |        | September 30,2007 |                   | %Change |  |     | September 28,2008 |  | September 30,2007 |        | %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 28,2008  |   |  | September 30,2007 |   |  | September 28,2008 |   |  | September 30,2007 |  
|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                 |  



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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.



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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 additional $5.2 million in cash for the purchase of Ikanos stock under a share buy-back program. We also wrote-down our auction rate
securities by $6.2 million.

As of September 28, 2008, 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 believe there will be additional working capital
requirements to fund and operate our business. We expect to finance our operations primarily through operating cash flows and existing cash and investment balances.



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The following table summarizes our statement of cash flows for the nine months ended September 28,
2008 and September 30, 2007:



|                                                 |  |                   |       |   |                   |   |      |  
|------------------------------------------------ |  | ----------------- | ----- | - | ----------------- | - | ---- | -
|                                                 |  | September 28,2008 |       |   | September 30,2007 |  
|                                                 |  | (In millions)     |      
|Statements of Cash Flows Data:                   |  |                   |       |   |                   |   |      |  
|Cash and cash equivalents - beginning of period  |  | $                 | 65.1  |   |                   | $ | 49.3 |  
|Net cash used by operating activities            |  |                   | (0.2  | ) |                   |   | (7.3 | )
|Net cash provided (used) by investing activities |  |                   | (21.3 | ) |                   |   | 17.2 |  
|Net cash provided (used) by financing activities |  |                   | (4.5  | ) |                   |   | 0.8  |  
|                                                 |  |                   |       |   |                   |   |      |  
|Cash and cash equivalents - end of period        |  | $                 | 39.1  |   |                   | $ | 60.0 |  
|                                                 |  |                   |       |   |                   |   |      |  

Operating Activities

For the nine months ended September 28, 2008, we used $0.2 million of net cash in operating activities, while incurring a net loss of $35.4 million. Included in the net loss was approximately $37.6 million in
various non-cash expenses and charges consisting of depreciation and amortization, stock based compensation expense, asset and investment impairments, amortization of intangible assets and acquired technology and purchased in-process research and
development. Operating cash flows also benefited from a decrease in accounts receivable of $3.3 million and a decrease in prepaid expenses of $0.1 million. The decrease in accounts receivable was primarily due to decreased sales volume during this
past quarter as compared to the three months ended December 30, 2008. These sources of operating cash flows were offset primarily by a decrease in accounts payable and accrued liabilities of $5.2 million and an increase in inventory of $0.6
million. The decrease in accounts payable and accrued liabilities was primarily due a decrease in our volume of inventory purchases at the end of the quarter as well as various other payments in the ordinary course of business.

For the nine months ended September 30, 2007, we used $7.3 million in net cash from operating activities, while incurring a net loss of $29.2
million. Included in the net loss was approximately $20.4 million in various non-cash expenses and charges consisting of depreciation and amortization, loss on disposal of property and equipment, stock based compensation expense and amortization of
intangible assets and acquired technology. Operating cash flows also benefited from a decrease in accounts receivable of $2.5 million and an increase in accounts payable and accrued liabilities of $0.5 million. The decrease in accounts receivable
was primarily due to more linearity of sales during the period. The increase in accounts payable and accrued liabilities is primary related to the timing of purchases and payments. These sources of operating cash flows were offset by an increase in
prepaid expenses and other assets of $1.4 million. The increase in prepaid expenses and other assets was primarily due to prepaid rental fees.

Investing Activities

We used net cash in investing activities of $21.3 million for the nine months ended
September 28, 2008, primarily consisting of $11.9 million used in the Centillium DSL acquisition, $8.5 million in net purchases of short-term investments and $0.9 million in purchases of property and equipment. We generated cash from investing
activities of $17.2 million for the nine months ended September 30, 2007, primarily from the net sale of short-term investments totaling $21.0 million, offset by $3.8 million in purchases of property and equipment.

Beginning in the third quarter of 2007, $7.2 million of our auction rate securities failed to sell at auction. As the auctions have continued to fail for
over one year and given the worsening financial condition of the underlying issuers, the related insurance agencies and the global credit markets, we concluded that the decrease in value of these securities was other-than-temporary and recorded an
impairment charge of $6.2 million during the third quarter of 2008.

We have classified our investment portfolio as available for
sale, and our investment objectives are to preserve principal and provide liquidity, while maximizing yields without significantly increasing risk. We may sell an investment at any time if the quality rating of the investment declines; the
yield on the investment is no longer attractive; or we are in need of cash. We have used cash to acquire businesses and technologies that enhance and expand our product offering and, we anticipate that we will continue to do so in the future. The
nature of these transactions makes it difficult to predict the amount and timing of such cash requirements. We anticipate that we will continue to purchase necessary property and equipment in the normal course of our business. The amount and timing
of these purchases and the related cash outflows in future periods depend on a number of factors, including the hiring of employees, the rate of change of computer hardware and software used in our business and our business outlook.

Financing Activities

We used net cash in
financing activities totaling $4.5 million for the nine months ended September 28, 2008. We purchased approximately 1.6 million shares of our Company stock for $5.2 million, retiring 1.0 million shares and holding 0.6 million
shares as treasury stock. These purchases were offset by $0.7 million in cash provided from employees exercising stock options.



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Our financing activities provided $0.8 million for the nine months ended September 30, 2007,
resulting from proceeds of the exercises of employee stock options as well as payments made on capital lease obligations.

We have used,
and continue to intend 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.

We believe that our existing cash, cash equivalents and cash flows expected to be generated from future operations, if any, will be
sufficient to meet our anticipated cash needs for at least the next twelve months. Our future capital requirements will depend on many factors including our rate of revenue growth, our ability to develop future revenue streams, the timing and
extent of spending to support development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, the costs to ensure access to adequate manufacturing capacity and
the continuing market acceptance of our products. Additionally in the future, we may become party to agreements with respect to potential investments in, or acquisitions of, complementary businesses, products or technologies, which could also
require us to seek additional equity or debt financing. The sale of additional equity securities or convertible debt securities would result in additional dilution to our stockholders. Additional debt would result in increased interest expenses and
could result in covenants that would restrict our operations. We have not made arrangements to obtain additional financing, and there is no assurance that such financing, if required, will be available in amounts or on terms acceptable to us, if at
all.

Contractual Commitments and Off-Balance Sheet Arrangements

We do not use off balance sheet arrangements with unconsolidated entities or related parties, nor do we use other forms of off balance sheet arrangements
such as special purpose entities and research and development arrangements. Accordingly, our liquidity and capital resources are not subject to off balance sheet risks from unconsolidated entities.

We lease certain office facilities, equipment and software under non-cancelable operating leases. The following table summarizes our contractual
obligations as of September 28, 2008, and the effect those obligations are expected to have on our liquidity and cash flow in future periods (in millions):



|                                |  |                       |     |                  |   |              |  |                    |     |  |   |    
|------------------------------- |  | --------------------- | --- | ---------------- | - | ------------ |  | ------------------ | --- |  | - | ---
|                                |  | Payment due by period
|                                |  | Total                 |     | Remainderof 2008 |   | 2009 and2010 |  | 2011 andThereafter
|Operating lease payments        |  | $                     | 2.9 |                  | $ | 0.6          |  | $                  | 2.1 |  | $ | 0.2
|Inventory purchase obligations  |  |                       | 1.6 |                  |   | 1.6          |  |                    |    |  |   |   
|Software development agreements |  |                       | 0.2 |                  |   | 0.2          |  |                    |    |  |   |   
|                                |  |                       |     |                  |   |              |  |                    |     |  |   |    
|                                |  | $                     | 4.7 |                  | $ | 2.4          |  | $                  | 2.1 |  | $ | 0.2
|                                |  |                       |     |                  |   |              |  |                    |     |  |   |    

For the purpose of this table, purchase obligations for the purchase of goods or services are
defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the
transaction. Our purchase orders are based on our current manufacturing needs and are fulfilled by our vendors within short time horizons. In addition, we have purchase orders that represent authorizations to purchase rather than binding agreements.
We do not have significant agreements for the purchase of raw materials or other goods specifying minimum quantities or set prices that exceed our expected requirements.

In the normal course of business, we provide indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of our products.
Historically, costs related to these indemnification provisions have not been significant, and we are unable to estimate the maximum potential impact of these indemnification provisions on our future consolidated results of operations.

Recent Accounting Pronouncements

Recent
accounting pronouncements are detailed in Note 1 to our Condensed Consolidated Financial Statements.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

All market risk sensitive instruments were entered into for non-trading purposes. We do not use derivative financial instruments for speculative trading purposes. As of September 28, 2008, we did not hold derivative financial
instruments.

Interest Rate Risk

Our
exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. The primary objective of our investment activities is to preserve
principal and meet liquidity needs, while maximizing yields and without significantly increasing risk. Our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure to any single issue, issuer,
or type of investment. Our investments consist primarily of U.S. government notes and bonds, auction rate securities and commercial paper. All investments are carried at market value.



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As of September 28, 2008, we had cash, cash equivalents and investments totaling $67.2 million.
These amounts were invested primarily in money market funds and short-term investments that are held for working capital purposes. We do not enter into investments for trading or speculative purposes. If the return on our cash equivalents and
investments were to change by one hundred basis points, the effect would be to increase/decrease investment income by $0.2 million.

Investment Risk

Our marketable securities portfolio as of September 28, 2008 was $64.5 million and approximately 1.6% of the portfolio are auction
rate securities. Auction rate securities are securities that are structured with short-term interest rate reset dates of generally less than ninety days but with contractual maturities that can be well in excess of ten years. At the end of each
reset period, which occurs every seven to thirty-five days, investors can sell or continue to hold the securities at par. These securities are subject to fluctuations in fair value depending on the supply and demand at each auction. The portfolio
includes $7.2 million (at cost) invested in auction rate securities all of which are currently associated with failed auctions and have been in a loss position for approximately 12 months. Based on an analysis of impairment factors, we
have recorded an other-than-temporary impairment loss of approximately $6.2 million during the three months ended September 28, 2008 related to these auction rate securities. The funds associated with the securities for which auctions have
failed will not be accessible until a successful auction occurs, a buyer is found outside of the auction process or the underlying securities have matured.

We have classified the auction rate securities as Level 3 under Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. (SFAS) 157, Fair Value Measurements. We valued the
auction rate securities using a discounted cash flow model. Assumptions used in valuing each of the auction rate securities include the stated coupon rate and maturity date on the note and one unobservable input; an estimated discount rate. The
discount rate is an estimate of what we believe the security must be discounted to in order to sell today. It is based on a number of factors, including the credit rating of the issuer and the insurance provider for the security.

Foreign Currency Risk

Our revenue and cost,
including subcontractor manufacturing expenses, are predominately denominated in U.S. dollars. An increase of the U.S. dollar relative to the currencies of the countries in which our customers operate would make our products more expensive to them
and increase pricing pressure or reduce demand for our products. We also incur a portion of our expenses in currencies other than the U.S. dollar, including the Euro, the Japanese yen, Korean won, Indian rupee, Singapore dollar and the Taiwanese
dollar. We do not currently enter into forward exchange contracts to hedge exposure denominated in foreign currencies or any other derivative financial instruments for trading or speculative purposes. We expect that our foreign currency exposure
will increase as our operations in India and other countries expand.



|Item 4. | Controls and Procedures
|------- | -----------------------

Evaluation of disclosure controls and
procedures.

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer (collectively, our certifying officers), of the effectiveness of the design and operation of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as required by Rules 13a-15(b) or 15d-15(b) of the Securities Exchange Act of 1934, as amended. Based on their evaluation, our certifying officers
concluded that these disclosure controls and procedures were effective.

We believe that a system of internal controls, no matter how well
designed and operated, is based in part upon certain assumptions about the likelihood of future events, and can be affected by limitations inherent in all internal controls systems including the realities that human judgment in decision-making can
be faulty, that persons responsible for establishing controls need to consider their relative costs and benefits, that breakdowns can occur because of human failures such as simple error or mistake, and that controls can be circumvented by collusion
of two or more people. Accordingly, we believe that our system of internal controls, while effective, can only provide reasonable, not absolute, assurance that the objectives of the controls system are met, and no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. There was no change in our internal control over financial reporting during the quarter ended September 28, 2008 that our
certifying officers concluded materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II: OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

In November 2006, three putative
class action lawsuits were filed in the United States District Court for the Southern District of New York against the Company, its directors and two former executive officers, as well as the lead underwriters for its initial and secondary public
offerings. The lawsuits were consolidated and an amended complaint was filed on April 24, 2007. The amended complaint alleges certain material misrepresentations and omissions by the Company in connection with its initial public
offering in September 2005 and the follow-on offering in March 2006 concerning its business and prospects, and seeks unspecified damages. On June 25, 2007, the Company filed motions to dismiss the amended complaint; plaintiffs opposed its
motions, and a hearing on its motions was heard on January 16, 2008. On March 10, 2008, the Court ordered the case dismissed with prejudice. On March 25, 2008, plaintiffs filed a motion requesting that the Court reconsider its order
dismissing the case and permit plaintiffs to file a second amended complaint. Defendants have opposed plaintiffs motion to reconsider. The court denied plaintiffs motion to reconsider, and on July 9, 2008 plaintiffs appealed the
Courts order dismissing with prejudice. Plaintiffs appeal is currently pending the U.S. Court of Appeals for the Second Circuit. The Company cannot predict the likely outcome of the appeal, and an adverse result in the litigation could
have a material effect on its financial statements.

Additionally, from time to time, the Company is a party to various legal proceedings
and claims arising from the normal course of business activities. Based on current available information, the Company does not expect that the ultimate outcome of any currently pending unresolved matters, individually or in the aggregate, will have
a material adverse effect on its results of operations, cash flows or financial position.



|Item 1A. | Risk Factors
|-------- | ------------

Investing in our common stock
involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this quarterly report on Form 10-Q, and in our other filings with the SEC, before deciding whether to invest in shares of
our common stock. Additional risks and uncertainties not presently known to us may also affect our business. If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on us, our business, financial
condition and results of operations could be seriously harmed. In that event, the market price for our common stock will likely decline and you may lose all or part of your investment.

Risks Related to Our Business

Our quarterly operating
results, including revenue and expense levels, have fluctuated significantly over time and are likely to continue to do so, principally due to the nature of telecommunication carriers capital spending cycles, the design win process as
well as other factors. As a result, we may fail to meet or exceed our forecasts or the expectations of securities analysts or investors, which could cause our stock price to decline.

The telecommunications semiconductor industry is highly cyclical and subject to rapid change and, from time to time, has experienced significant
downturns. As was widely reported in the first half of this decade, the telecommunications industry experienced, and may again experience, a pronounced downturn. These downturns are characterized by decreases in product demand and excess
inventories held by our customers, OEMs, and their customers, the telecommunications service providers (also called carriers). To respond to these downturns, many carriers slow their capital expenditures, cancel or delay new
developments, reduce their workforces and inventories and take a cautious approach to acquiring new equipment and technologies from OEMs, usually with very little notice.

Quarterly fluctuations in revenue are characteristic of our industry. And given the concentration of our revenue among a few significant customers and given their buying patterns, we have experienced, and are likely
to experience again, significant quarterly fluctuations of revenue. In the first quarter of 2005 and fourth quarter of 2006, we experienced quarter-over-quarter revenue declines of 33% and 43%, respectively, over the prior quarters. After three
quarters of relatively flat revenue results, our revenue for the current quarter is $5.7 million lower than revenue for the prior quarter; thus, our historical experience of quarterly fluctuations continues.

We win supply relationships by working with OEMs and service providers to have our semiconductors designed into systems that will be deployed by carriers
over multiples quarters. At any given time, as is currently the case, we are competing for one or more of these design wins. If we are not successful in obtaining these design wins, our revenue results would be negatively affected. Even when we are
designed into OEMs equipment, carrier deployments can be affected by various factors, including but not limited to demand for DSL-based broadband services, government regulatory actions and competitors efforts to protect or gain market
share. We are aware of such deployment delays currently occurring with a carrier in Japan.

The semiconductor industry also periodically
experiences increased demand and production capacity constraints, which may affect our ability to ship products. Accordingly, our operating results may vary significantly as a result of the general conditions in the semiconductor or
broadband communications industry, which could cause our stock price to decline.

In addition, our expenses are also subject to quarterly
fluctuations resulting from factors including the costs related to new product releases. If our operating results do not meet the expectations of securities analysts or investors for any quarter or other reporting period, the market price of our
common stock may decline. Fluctuations in our operating results may be due to a number of factors, including, but not limited to, changes in the mix of products we develop, acquire and sell as well as those identified throughout this
Risk Factors section. As a result, you should not rely on quarter to quarter comparisons of our operating results as an indicator of future performance.



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The current worldwide financial situation could dampen demand for services based upon our products.

Our business is not directly tied to the reported causes of the current downturn in the financial markets. However we believe that consumer-targeted
broadband services, which are deployed using our technology, are part of most households discretionary spending. If individual consumers decide not to install  or decide to discontinue purchasing  broadband services in their homes
in order to save money an in uncertain economic situation, the resulting drop in demand could cause telecommunications carriers to reduce or stop placing orders for OEM equipment containing our products. Accordingly, the OEMs demand for our
products could drop, potentially having a materially negative effect on our revenue.

We recently retained investment bankers to advise senior
management and the Board of Directors regarding the Companys strategic options; if the Board of Directors decides to pursue any options, that decision could significantly affect the Companys stock price.

We recently decided to retain Barclays Capital (formerly Lehman Brothers) to provide financial advice regarding potential strategic options for the
Company. Such options include, without limitation, financing transactions, acquisitions, strategic partnerships, corporate restructuring and other activities. There can be no assurance that the evaluation of our options will result in the
identification, announcement or consummation of any transaction. If the Board of Directors does decide to authorize a transaction, that decision could cause significant volatility in the price of the Companys outstanding common stock.
Moreover, any transactions we do sign may not be acceptable to our stockholders. In addition, our investigation of strategic options may result in added costs, potential loss of customers and key employees as well as managements distraction
from ordinary-course business operations.

We have a history of losses, and future losses may cause the market price of our common stock to
decline. We may not be able to reduce our expenses or generate sufficient revenue in the future to achieve or sustain profitability.

Since our inception, we have only been profitable on a GAAP basis in the third and fourth quarter of 2005. Prior to the third quarter of 2005, we incurred significant net losses, and we incurred losses in the past nine quarters. Beginning
in 2006, accounting rules required us to report stock-based compensation as an expense, which has comprised a substantial portion of our quarterly and annual losses, as reported on a GAAP basis. In addition, we had sequential decreases in revenue in
the third and fourth quarters of 2006, and we incurred a net loss of $35.4 million for the nine months ended September 28, 2008 and have an accumulated deficit of $178.0 million as of September 28, 2008. To achieve profitability again, we
will need to generate and sustain higher revenue, while maintaining cost and expense levels appropriate and necessary for our business. Because many of our expenses are fixed in the short term, or are incurred in advance of anticipated sales, we
may not be able to continue to hold down our costs and expenses in a timely manner to offset any lower-than-forecasted revenue shortfall as we experienced in the fourth quarter of 2006. We may not be able to achieve profitability again
and, even if we were able to attain profitability again, we may not be able to sustain profitability on a quarterly or an annual basis in the future.

The general tightening of the credit market could potentially limit our access to financial resources.

If the company
continues to operate at a loss and the cash on our balance sheet continues to decline, there is a possibility we could have to seek out and evaluate alternative sources of financing in order to fund operations. Historically we have not had to use
debt financing to operate the business. If that situation were to change, we believe it would be very difficult to borrow funds on terms favorable to us, if at all, due to the extremely limited availability of credit in the current economic
environment. The unavailability of credit along with limits on other financing alternatives could thus negatively impact our business. Even if we were able to secure debt financing, the terms could be unfavorable to us, and we may be subject to
various restrictive covenants, which could limit our ability to operate our business.

Our success is dependent upon achieving design wins into
commercially successful OEM and ODM systems.

Our products are generally incorporated into our OEM and Original Design Manufacturer
(ODM) customers systems at the design stage. As a result, we rely on OEMs to select our products to be designed into their systems, which we refer to as a design win. We often incur significant expenditures over
multiple fiscal quarters in attempting to obtain a design win without any assurance that an OEM will select our product for design into its own system. Additionally, in some instances, we are dependent on third parties to obtain or provide
information that we need to achieve a design win. Some of these third parties may not supply this information to us on a timely basis, if at all. Furthermore, even if an OEM designs one of our products into its system offering, we cannot be
assured that its equipment will be commercially successful or that we will receive any orders and, accordingly, revenue as a result of that design win. Our OEM customers are typically not obligated to purchase our products and can choose at any time
to stop using them if their own systems are not commercially successful, if they decide to pursue other systems strategies, or for any other reason. If we are unable to achieve design wins or if our OEM customers systems incorporating our
products are not commercially successful, our revenue would suffer.

If demand for our semiconductor products declines or does not grow, we will be
unable to increase or sustain our revenue; and our operating results will be harmed.

We currently expect the semiconductor products we
have already announced to account for substantially all of our revenue for the foreseeable future. If we are unable to develop new products or to successfully integrate acquired products and technology to meet our customers



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demand in a timely manner, if demand for our semiconductors declines or fails to grow, or if the xDSL, GPON or network processor markets do not materialize
as expected, it would harm our business. The markets for our products are characterized by frequent introduction of new semiconductors, short product life cycles and significant price competition. If we or our OEM customers are unable to manage
product transitions in a timely and cost-effective manner, our revenue would suffer. In addition, frequent technology changes and introduction of next generation products may result in inventory obsolescence, which would increase our cost of
revenue and adversely affect our operating performance.

The average selling prices and gross margins of certain of our products are subject to
declines, which may harm our revenue and profitability.

Our products are subject to rapid declines in average selling prices due
to competitive pressures, including lowering average selling prices in order to increase market share. We have lowered our prices significantly at times to gain or maintain market share, and we expect that we will reduce prices again in the future.
Offering reduced prices to one customer could likely impact our average selling prices to all customers. In addition, we have not been able to reduce our costs of goods sold as rapidly as our prices have declined. Our financial results will suffer
if we are unable to maintain or increase pricing, or are unable to offset any future reductions in our average selling prices by increasing our sales volumes, by reducing our manufacturing costs or by developing new or enhanced products that command
higher prices or better gross margins on a timely basis.

Our products typically have lengthy sales cycles, which may cause our operating results
to fluctuate and result in volatility in the price of our common stock. An OEM customer or a carrier may decide to cancel, delay or change its product plans, which could cause us to lose or delay anticipated sales.

After we have delivered a product to an OEM customer, the OEM will usually test and evaluate our product with its carrier customer prior to the OEM
completing the design of its own equipment that will incorporate our product. Our OEM customers and the carriers may take several months to test, evaluate and adopt our product and several additional months to begin volume production of
equipment that incorporates our product. This entire process can take from six months to over a year to complete. Due to this lengthy sales cycle, we may experience significant delays from the time we increase our operating expenses and make
investments in inventory until the time that we generate revenue from these products. It is possible that we may never generate any revenue from these products after incurring these expenditures and investments. Even if an OEM customer selects
our product to incorporate into its equipment, we have no assurances that the customer will ultimately market and sell its equipment or that such efforts by our customer will be successful. The delays inherent in our lengthy sales cycle increases
the risk that an OEM customer or carrier will decide to cancel or change its product plans. From time to time, we have experienced changes and cancellations in the purchase plans of our OEM customers. A cancellation or change in plans by an OEM
customer or carrier could cause us to not achieve anticipated revenue and result in volatility of the price of our common stock. In addition, our anticipated sales could be lost or substantially reduced if a significant OEM customer or carrier
reduces or delays orders during our sales cycle or chooses not to release equipment that contains our products.

Our product sales mix is subject to
frequent and unexpected changes, which may impact our revenue and margin.

Our product margins vary widely by product. As a result, a
change in the sales mix of our products could have an impact on the forecasted revenue and margins for the quarter. Our modem only products within the Gateway product family generally have lower margins as compared to our Access product family.
Furthermore, the product margins within our Access product line can vary based on the type and performance of deployment being used as customers typically pay higher selling prices for higher performance. While we make estimates of what we believe
the product mix will be in a given quarter, actual results can be materially different than our estimates.

Because we depend on a few significant
customers for a substantial portion of our revenue, the loss of any of our key customers, our inability to continue to sell existing and new products to our key customers in significant quantities or our failure to attract new significant customers
could adversely impact our revenue and harm our business.

We derive a substantial portion of our revenue from sales to a relatively
small number of customers. As a result, the loss of any significant customer or a decline in business with any significant customer would materially and adversely affect our financial condition and results of operations. The following customers
accounted for more than 10% of our revenue for any one of the periods indicated. We have indicated the OEM customer based on information that we receive at the time of ordering.



|                                                 |  |                              |  |                             |   |  |                             |   |  |                                     |  
|------------------------------------------------ |  | ---------------------------- |  | --------------------------- | - |  | --------------------------- | - |  | ----------------------------------- | -
|Our Direct Customer                              |  | OEM Customer                 |  | Year EndedDecember 31, 2006 |   |  | Year EndedDecember 30, 2007 |   |  | Nine Months EndedSeptember 28, 2008 |  
|Paltek Corporation                               |  | Sumitomo Electric Industries |  | *                           | % |  | *                           | % |  | 25                                  | %
|NEC Corporation of America                       |  | NEC Corporation (Magnus)     |  | 23                          |   |  | 29                          |   |  | 24                                  |  
|Sagem                                            |  | Sagem                        |  | 23                          |   |  | 20                          |   |  | 18                                  |  
|Alcatel-Lucent and its contract manufacturers(a) |  | Alcatel-Lucent               |  | *                           |   |  | *                           |   |  | 12                                  |  
|Altima Corporation                               |  | Sumitomo Electric Industries |  | 19                          |   |  | 12                          |   |  | *                                   |  
|Uniquest                                         |  | Various                      |  | 22                          |   |  | 11                          |   |  | *                                   |  



|* | Less than 10%
|- | -------------



|(a) | Alcatel and Lucent Technologies, prior to and subsequent to their 2007 merger, accounted for a combined 3% and 10% of our revenue in 2006 and 2007, respectively.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



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A small group of OEM customers historically has accounted for a substantial portion of our revenue; the
composition of this group has varied, and we expect will continue to vary, over time. Further, we expect that this small group of customers will continue to account for a substantial portion of our revenue for the foreseeable future. Accordingly,
our future operating results will continue to depend on the success of our largest OEM customers and on our ability to sell existing and new products to these customers in significant quantities. Demand for our semiconductor products is based on
carrier demand for our OEM customers systems products. Accordingly, a reduction in growth of carrier deployment of product that use our semiconductors would adversely affect our product sales and business.

In addition, our relationships with some of our larger OEM customers may also deter other potential customers who compete with these customers from
buying our products. To attract new customers or retain existing OEM customers, we have offered and may continue to offer certain customers favorable prices on our products. If these prices are lower than the prices paid by other existing OEM
customers, we may have to offer the same lower prices to certain of these customers. In that event, our average selling prices would decline. The loss of a key customer, a reduction in sales to any major customer, or our inability to attract
new significant customers in the absence of any offsetting sales would harm our business.

We have historically derived a substantial amount of our
revenue from Japan and Korea, and a majority of our network processing revenue comes from a single customer in Europe. If we fail to further diversify the geographic sources and customer base of our revenue in the future, our operating results could
be harmed.

A substantial portion of our revenue is derived from sales into Japan, Korea and France; and our revenue has been heavily
dependent on market growth in these countries. As a result, our sales are subject to economic downturns, decrease in demand and overall negative market conditions in a very few number of specific economies. For instance, a slow down in growth of
fiber extension over copper and broadband over copper subscribers in Asia has caused our revenue in that market to decline, and may prevent that revenue stream from returning to historical levels. While part of our strategy is to continue
to diversify the geographic sources and customer base of our revenue, our failure to successfully penetrate markets other than those served by our existing customers, and diversify our customer base could harm our business and operating results.

In the past year, we have experienced a turnover in several senior management positions, and we may be unable to attract, retain and motivate key
senior management and technical personnel, which could harm our development of technology and ability to be competitive.

Our Chief
Executive Officer, Michael Gulett, who has been a member of our board of director for five years, assumed his current role with the company in July 2008. In January 2008, our Vice President and General Manager of Gateway Products Group resigned; and
the Vice President of Marketing for our Access Products Group resigned in March 2008. In April 2008, we hired a General Manager and in July 2008, we hired a Vice President of Corporate Marketing. We also recently hired a new Vice President of
Software Engineering. Further, as required, we seek out highly-qualified candidates to fill positions throughout our business. We will continue to examine ways to improve the Companys processes, productivity and results.

Our future success depends to a significant extent upon the continued service of our senior executives and key technical personnel as well as the
integration of new senior executives. We do not have employment agreements with any of these executives or any other key employees that govern the length of their service. Changes in the services of senior management or technical personnel could
impact our customer relationships, employee morale, our ability to operate in compliance with existing internal controls and regulations and harm our business.

Furthermore, our future success depends on our ability to continue to attract, retain and motivate other senior management and qualified technical personnel, particularly software engineers, digital circuit designers,
mixed-signal circuit designers and systems and algorithms engineers. Competition for these employees is intense. Restricted stock units and stock options generally comprise a significant portion of our compensation packages for all employees, and as
long as the price of our common stock remains depressed may make it more difficult for us to attract and retain key employees, which could harm our ability to provide technologically competitive products. Additionally, a reduction in staff could
negatively affect employee morale. For example, in November 2006, we reduced the number of employees and contractors in our workforce by approximately 30 people. Additionally, in September 2007, we decided to reduce the number of employees by
approximately 15 people, including several senior executives. These reductions were principally in our engineering departments and have resulted in reallocations of employee duties. Workforce reductions and job reassignments could negatively affect
employee morale and make it difficult to motivate and retain the remaining employees and contractors, which would affect our ability to deliver our products in a timely fashion and otherwise negatively affect our business.



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Because of the rapid technological development in our industry and the intense competition we face, our products tend
to become outmoded or obsolete in a relatively short period of time, which requires us to provide frequent updates and/or replacements to existing products. If we do not successfully manage the transition process to next generation semiconductor
products, our operating results may be harmed.

Our industry is characterized by rapid technological innovation and intense
competition. Accordingly, our success depends in part on our ability to develop next generation semiconductor products in a timely and cost-effective manner. The development of new semiconductor products is expensive, complex and time
consuming. If we do not rapidly develop our next generation semiconductor products ahead of our competitors, we may lose both existing and potential customers to our competitors. Further, if a competitor develops a new, less expensive product
using a different technological approach to delivering broadband services over existing networks, our products would no longer be competitive. Conversely, even if we are successful in rapidly developing new semiconductor products ahead of our
competitors and we do not cost-effectively manage our inventory levels of existing products when making the transition to the new semiconductor products, our financial results could be negatively affected by high levels of obsolete inventory.
If any of the foregoing were to occur, then our operating results would be harmed.

We rely on third-party technologies for the development of our
products; and our inability to use such technologies in the future would harm our ability to remain competitive.

We rely on third
parties for technologies that are integrated into some of our products, including our memory cells, input/output cells and core processor logic. If we are unable to continue to use or license these technologies on reasonable terms, or if these
technologies fail to operate properly, we may not be able to secure alternatives in a timely manner and our ability to remain competitive would be harmed. For instance, we have experienced on-going issues with the intellectual property
(IP) acquired from one of our vendors for our Vx160 product. While we have not experienced material damages in any period as a result of the issues related to this IP, there can be no assurance that we will not in the future experience
material damages from this or other licensed IP. Failure to use the technologies we have purchased could also result in unfavorable impairment costs. In addition, if we are unable to successfully license technology from third parties to develop
future products, we may not be able to develop such products in a timely manner or at all.

We are a fabless semiconductor company and may rely on
one wafer foundry and one assembly and test subcontractor to manufacture, package and test each of our products, and our failure to secure and maintain sufficient capacity with these subcontractors, or if a subcontractor ceases operations, such
developments could impair our relationships with customers and decrease sales, which would negatively impact our market share and operating results.

We are a fabless semiconductor company in that we do not own or operate a fabrication or manufacturing facility. Currently, seven wafer foundries and three outside factory subcontractors, located in Austria, China,
Israel, Korea, Malaysia, Singapore, Taiwan, and the United States manufacture, assemble and test all of our semiconductor devices in current production. While we work with multiple suppliers, only one foundry and one assembly and test subcontractor
may be used for a single product. Accordingly, we are greatly dependent on a limited number of suppliers to deliver quality products on time.

In past periods of high demand in the semiconductor market, we have experienced delays in meeting our capacity demand and as a result were unable to deliver products to our customers on a timely basis. In addition, we have experienced
similar delays due to technical and quality control problems. Furthermore, our costs for manufacturing services or components have increased from time to time without significant notice.

Recently, we received notice that late next year one of our subcontractors will close a fabrication facility where two of our products are made, unless a
third party buys the facility and keeps it open. We believe there is a possibility that the facility will be sold and kept open, but there is no guarantee that the facility will be sold. Accordingly, we have begun making arrangements for a last-time
buy for the two products fabricated at this facility, and have begun looking for alternative fabrication facilities for these products. Alternative manufacturers may be more expensive or not available at all.

In the future, if any of these events occur, or if the facilities of any of our subcontractors suffer any damage, power outages, financial difficulties
or any other disruption due to natural disasters, terrorist acts or otherwise, we may be unable to meet our customer demand on a timely basis, or at all; and we may be required to incur additional costs and may need to successfully qualify
an alternative facility in order to not disrupt our business. We typically require several months or more to qualify a new facility or process before we can begin shipping products. If we cannot accomplish this qualification in a timely manner, we
would experience a significant interruption in supply of the affected products which could in turn cause our costs of revenue to increase and our overall revenue to decrease. If we are unable to secure sufficient capacity at our subcontractors
existing facilities, or in the event of a closure or significant delay at any of these facilities, our relationships with our customers would be harmed and our market share and operating results would suffer as a result. In addition, we do not have
formal pricing agreements with our subcontractors regarding the pricing for the products and services that they provide us. If their pricing for the products and services they provide increases and we are unable to pass along such increases to our
OEM customers, our operating results would be adversely affected.

In the event we seek to use new wafer foundries to manufacture a portion of our
semiconductor products, we may not be able to bring the new foundries on-line rapidly enough and may not achieve anticipated cost reductions.

As indicated above, our use of seven independent wafer foundries to manufacture all of our semiconductor products exposes us to risks of delay, increased costs and customer dissatisfaction in the event that any of
these foundries were unable to provide us with our semiconductor requirements. Particularly during times when semiconductor manufacturing capacity is limited, we may seek to qualify additional wafer foundries to meet our requirements. In
order to bring these new foundries on-line, our customers may need to qualify product from the new facility, which could take several months or more. Once qualified, these new foundries would then require an additional number of months to actually
begin producing semiconductors to meet our needs, by which time the temporary requirement for additional capacity may have passed or



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the opportunities we previously identified may have been lost to our competitors. Furthermore, even if these new foundries offer better pricing than our
existing manufacturers, if they prove to be less reliable than our existing manufacturers, we would not achieve some or all of our anticipated cost reductions.

When demand for manufacturing capacity is high, we may take various actions to try to secure sufficient capacity, which may be costly and negatively impact our operating results.

The ability of each of our subcontractors manufacturing facilities to provide us with semiconductors is limited by its available capacity and
existing obligations. Although we have purchase order commitments to supply specified levels of products to our OEM customers, we do not have a guaranteed level of production capacity from any of our subcontractors facilities that we depend on
to produce our semiconductors. Facility capacity may not be available when we need it or at reasonable prices. We place our orders on the basis of our OEM customers purchase orders or our forecast of customer demand, and our
subcontractors may not be able to meet our requirements in a timely manner. For example, in the second half of 2005 and in the first half of 2006, general market conditions in the semiconductor industry resulted in a significant increase in
demand at these facilities. The demand for some of our OEM customers products increased significantly, and we were asked to produce significantly higher quantities than in the past and to deliver on short notice. In addition, our
subcontractors have also allocated capacity to the production of other companies products and reduced deliveries to us on short notice. It is possible that our subcontractors other customers that are larger and better financed than we
are, or that have long-term agreements with our subcontractors, may have induced our subcontractors to reallocate capacity to them. If this reallocation were to occur again, it would impair our ability to deliver products on a timely basis.

In order to secure sufficient manufacturing facility capacity when demand is high and mitigate the risks described in the foregoing
paragraphs, we may enter into various arrangements with subcontractors that could be costly and harm our operating results, including:



| |  |  | option payments or other prepayments to a subcontractor;
| | - |  | --------------------------------------------------------



| |  |  | nonrefundable deposits with or loans to subcontractors in exchange for capacity commitments;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | contracts that commit us to purchase specified quantities of components over extended periods;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | purchase of testing equipment for specific use at our subcontractors facilities;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | issuance of our equity securities to a subcontractor; and
| | - |  | ---------------------------------------------------------



| |  |  | other contractual relationships with subcontractors.
| | - |  | ----------------------------------------------------

We may not be able to make any such arrangements in a timely fashion or at all, and any arrangements may be costly, reduce our financial flexibility and not be on terms favorable to us. Moreover, if we are
able to secure facility capacity, we may be obligated to use all of that capacity or incur penalties. These penalties and obligations may be expensive and require significant capital and could harm our business.

If our subcontractors manufacturing facilities do not achieve satisfactory quality or yields, our relationships with our customers and our reputation will be
harmed, our revenue, gross margin and operating results could decline.

Defects in our products may not be always detected by the
testing process performed by our subcontractors or by our own staff. Those defects can result from a variety of causes, including but not limited to manufacturing problems or intellectual property licensed from third parties. If defects are
discovered after we have shipped our products, we have and could continue to experience warranty and consequential damages claims from our customers.

In January 2007, a significant customer notified us that they were experiencing a high defect rate on a certain product that was manufactured and shipped in the last month of 2006. In February 2007, we entered
into a settlement agreement releasing us of all liabilities associated with this claim in exchange for a payment and providing replacement parts. The settlement was recorded as an offset to revenue and as accrued rebates within accrued liabilities
in the fourth quarter of 2006. Such claims as this one or others may have a significant adverse impact on our revenue and operating results.

We incorporate third party intellectual property into our products. That intellectual property consists of elements of the semiconductor, such as the processor core, standard external interfaces, as well as applications that run on our
products. From time to time, our customers have discovered errors or defects arising from these third party intellectual property designs. We and our contract manufacturers attempt to catch these defects in the testing process, but are not always
successful. If we are unable to deliver quality products, our reputation would be harmed, which could result in the loss of, future orders and business with our customers. If any of these adverse risks are realized and we are not able to offset
the lost opportunities, our revenue, margins and operating results would decline.

The fabrication of semiconductors is a complex and
technically demanding process. Minor deviations in the manufacturing process can cause substantial decreases in yields; and in some cases, cause production to be stopped or suspended. We have experienced difficulties in achieving acceptable yields
on some of our products, particularly with new products, which frequently involve newer manufacturing processes and smaller geometry features than previous generations. Maintaining high numbers of shippable die per wafer is critical to our operating
results, as decreased yields can result in higher per unit cost, shipment delays and increased expenses associated with resolving yield problems. Although we work closely with our subcontractors to minimize the likelihood of reduced manufacturing
yields, their facilities have from time to time experienced lower than anticipated manufacturing yields that have resulted in our inability to meet our customer demand. For instance, in the third quarter of 2006, we were unable to fulfill a certain
amount of our customers orders due to difficulties in attaining acceptable yields on one of our products. While we solved the manufacturing process issue in the fourth quarter of 2006, we cannot assure you that we will be successful in
improving yields on any future product or in correcting manufacturing problems with our subcontractors.



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It is common for yields in semiconductor fabrication facilities to decrease in times of high demand or
due to poor workmanship or operational problems at these facilities. When these events occur, especially simultaneously, as happens from time to time, we may be unable to supply our customers demand. Many of these problems are difficult
to detect at an early stage of the manufacturing process and, regardless of when the problems are detected, they may be time consuming and expensive to correct. In addition, because we purchase wafers, our exposure to low wafer yields from our
subcontractors wafer foundries are increased. Poor yields from the wafer foundries or defects, integration issues or other performance problems in our products could cause us significant customer relations and business reputation problems, or
force us to sell our products at lower gross margins and therefore harm our financial results. Conversely, unexpected yield improvements could result in us holding excess inventory that would also increase our product cost and negatively impact our
profitability.

We base orders for inventory on our forecasts of our OEM customers demand and if our forecasts are inaccurate, our financial
condition and liquidity would suffer.

We place orders with our suppliers based on our forecasts of our OEM customers demand. Our
forecasts are based on multiple assumptions, each of which may introduce errors into our estimates. In the past, when the demand for our OEM customers products increased significantly, we were not able to meet demand on a timely basis,
and we expended a significant amount of time working with our customers to allocate limited supply and maintain positive customer relations. If we underestimate customer demand, we may forego revenue opportunities, lose market share and damage
our customer relationships. Conversely, if we overestimate customer demand, we may allocate resources to manufacturing products that we may not be able to sell. As a result, we would have excess or obsolete inventory, resulting in a
decline in the value of our inventory, which would increase our cost of revenue and create a drain on our liquidity. Our failure to accurately manage inventory against demand would adversely affect our financial results.

To remain competitive, we need to continue to reduce the cost of our semiconductor chips, which includes migrating to smaller geometrical process, and our failure to
do so may harm our business.

We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller
geometrical processes, which are measured in microns or nanometers. We have designed our products to be manufactured in 0.8 micron, 0.25 micron, 0.18 micron, 0.13 micron, 0.09 micron (or 90 nanometer) and 0.065 micron (or 65 nanometer) geometrical
processes. We may migrate some of our current products to smaller geometrical process technologies, and over time, we are likely to migrate to even smaller geometries. The smaller geometry generally reduces our production and packaging costs,
which may enable us to be competitive in our pricing. The transition to smaller geometries requires us to work with our subcontractors to modify the manufacturing processes for our products, to develop new and more complex quality assurance tests
and to redesign some products. In the past, we have experienced some difficulties in shifting to smaller geometry process technologies or new manufacturing processes, which resulted in reduced manufacturing yields, delays in product deliveries and
increased product costs and expenses. We may face similar difficulties, delays and expenses as we continue to transition our products to smaller geometry processes, all of which could harm our relationships with our customers, and our failure
to do so would impact our ability to provide competitive prices to our customers, which would have a negative impact on our sales. Additionally, upfront expenses associated with smaller geometry process technologies such as for masks and tooling can
be significantly higher than those for the processes that we currently use, and our migration to these newer process technologies can result in significantly higher research and development expenses.

The complexity of our products could result in unforeseen delays or expenses and in undetected defects or bugs, which could damage our reputation with current or
prospective customers and adversely affect the market acceptance of new products.

Highly complex products such as those that we offer
frequently contain defects (commonly referred to as bugs), particularly when they are first introduced or as new versions are released. In the past, we have experienced, and may in the future experience, defects or bugs in our
products. These defects or bugs may originate in third party intellectual property incorporated into our products as well as in technology or software designed by Ikanos engineers. If any of our products contains defects or bugs, or have
reliability, quality or compatibility problems, our reputation may be damaged; and our OEM customers may be reluctant to buy our products, which could harm our ability to retain existing customers and attract new customers. In addition,
these defects or bugs could interrupt or delay sales or shipment of our products to our customers.

We recently completed the purchase of certain DSL
assets from Centillium Communications, and if we are not successful in integrating the technology and employees from the acquisition into our existing business, then our operating results may be harmed.

In February 2008, we completed the acquisition of DSL assets from Centillium Communications, Inc. Through this acquisition, we added approximately 30
employees, acquired Centilliums DSL business, including nearly 60 patents and patent applications, and assumed responsibility for filling orders and supporting installed products with customers principally in Japan and Europe. This
acquisition, and the associated integration of people, technology and customers, has taken some of managements time and may require further effort. The revenue of the acquired business has been highly concentrated among a limited number of
customers, some of which were Ikanos customers prior to the acquisition. If our efforts to integrate people and technology are unsuccessful, if we are unable to retain the newly acquired customers, or if this acquisition negatively impacts our
relationship with our current customers, our financial results could be adversely affected.



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Acquisitions, strategic alliances, joint ventures or investments may impair our capital and equity resources,
divert our managements attention or otherwise negatively impact our operating results.

We intend to continue to pursue
acquisitions, strategic alliances and other transactions that we believe may allow us to complement our growth strategy, increase market share in our current markets and expand into adjacent markets, broaden our technology and intellectual
property and strengthen our relationships with carriers and OEMs. For example, in 2006, we completed the NPA acquisition. This transaction consumed significant management attention, added to our expenses and used $32.7 million in cash. In
February 2008, we purchased certain DSL assets from Centillium for approximately $11.9 million in cash. As noted above, we recently retained investment bankers to advise senior management and the Board of Directors regarding this type of strategic
activity going forward. Any future acquisition, partnership, joint venture or investment may require that we pay significant cash, issue stock, thereby diluting existing stockholders, or incur debt, if such debt is available on terms acceptable
to our board of directors. Acquisitions, partnerships or joint ventures may also require significant managerial attention, which may divert our focus. These capital, equity and managerial commitments may impair the operation of our
business. Furthermore, acquired businesses may not be effectively integrated, may be unable to maintain key pre-acquisition business relationships, may result in the loss of key personnel, may contribute to increased fixed costs and
may expose us to unanticipated liabilities and otherwise harm our operating results.

We face intense competition in the semiconductor industry and
the broadband communications markets, which could reduce our market share and negatively impact our revenue.

The semiconductor
industry and the broadband communications markets are intensely competitive. In the VDSLx or VDSL-like technology, PON and network processing markets, we currently compete or expect to compete with, among others, Broadcom Corporation, Broadlight,
Cavium Networks, Conexant Systems, Inc., Freescale Semiconductor, Inc., Infineon Technologies A.G., Intel Corporation, Marvell Technology Group Ltd., PMC-Sierra, Inc., Realtek Semiconductor Corp, Teknovus, Thomson S.A., and
TrendChip Technologies Corp. We expect competition to continue to increase. Competition has resulted and may continue to result in declining average selling prices for our products and market share.

We consider other companies that have access to DMT technology as potential competitors in the future, and we also may face competition from newly
established competitors, suppliers of products based on new or emerging technologies and customers who choose to develop their own semiconductors. To remain competitive, we need to provide products that are designed to meet our customers
needs. Our products must:



| |  |  | achieve optimal product performance;
| | - |  | ------------------------------------



| |  |  | comply with industry standards;
| | - |  | -------------------------------



| |  |  | be cost-effective for our customers use in their systems;
| | - |  | ----------------------------------------------------------



| |  |  | meet functional specifications;
| | - |  | -------------------------------



| |  |  | be introduced timely to the market; and
| | - |  | ---------------------------------------



| |  |  | be supported by a high-level of customer service and support.
| | - |  | -------------------------------------------------------------

Many of our competitors operate their own fabrication facilities or have stronger manufacturing subcontractor relationships than we have. In addition, many of our competitors have extensive technology libraries that
could enable them to incorporate fiber-fast broadband or network processing technologies into a more attractive product line than ours. Many of them also have longer operating histories, greater name recognition, larger customer bases, and
significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than we do. These competitors may be able to adapt more quickly to new or emerging technologies and changes in customer
requirements. In addition, current and potential competitors have established or may establish financial or strategic relationships among themselves or with existing or potential customers, resellers or other third parties. Accordingly, new
competitors or alliances among competitors could emerge and rapidly acquire significant market share. Existing or new competitors may also develop alternative technologies that more effectively address our markets with products that offer
enhanced features and functionality, lower power requirements, greater levels of semiconductor integration or lower cost. We cannot assure you that we will be able to compete successfully against current or new competitors, in which case we
may lose market share in our existing markets and our revenue may fail to increase or may decline.

Other data transmission technologies
and network processing technologies may compete effectively with the carrier services addressed by our products, which could adversely affect our revenue and business.

Our revenue currently is dependent upon the increase in demand for carrier services that use xDSL broadband technology and integrated residential
gateways. Besides VDSLx and other DMT-based technologies, carriers can decide to deploy PON or fiber. In this case, fiber is used to connect directly to the residence instead of using the existing copper phone line. As such, if a carrier decides to
deploy fiber-to-the-home, our VDSL products are not required. For example, a major carrier in Korea announced its intention to use more fiber-to-the-home deployments in the future. Such deployments of fiber may be in lieu of VDSLx products. If more
carriers decide to use fiber-to-the-home deployments, it could harm our business. Furthermore, residential gateways compete against a variety of different data distribution technologies, including Ethernet routers, set-top boxes provided by cable
and satellite providers, wireless (WiFi and WiMax) and emerging power line and multimedia over coax alliance technologies. If any of these competing technologies proves to be more reliable, faster or less expensive than, or has any other advantages
over the Fiber Fast broadband technologies we provide, the demand for our products may decrease and our business would be harmed.



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If we are unable to develop, introduce or to achieve market acceptance of our new semiconductor products, our
operating results would be adversely affected.

Our future success depends on our ability to develop new semiconductor products and
transition to new products, introduce these products in a cost-effective and timely manner and convince OEMs to select our products for design into their new systems. Our historical quarterly results have been, and we expect that our future results
will continue to be, dependent on the introduction of a relatively small number of new products and the timely completion and delivery of those products to customers. The development of new semiconductor products is complex, and from time to time we
have experienced delays in completing the development and introduction of new products. We have in the past invested substantial resources in emerging technologies that did not achieve the market acceptance that we had expected. Our ability to
develop and deliver new semiconductor products successfully will depend on various factors, including our ability to:



| |  |  | successfully integrate certain technologies acquired in acquisitions into our product lines;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | accurately predict market requirements and evolving industry standards;
| | - |  | -----------------------------------------------------------------------



| |  |  | accurately define new semiconductor products;
| | - |  | ---------------------------------------------



| |  |  | timely complete and introduce new product designs or features;
| | - |  | --------------------------------------------------------------



| |  |  | timely qualify and obtain industry interoperability certification of our products and the equipment into which our products will be incorporated;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ensure that our subcontractors have sufficient foundry capacity and packaging materials and achieve acceptable manufacturing yields;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | shift our products to smaller geometry process technologies to achieve lower cost and higher levels of design integration; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | gain market acceptance of our products and our OEM customers products.
| | - |  | -----------------------------------------------------------------------

If we are unable to develop and introduce new semiconductor products successfully and in a cost-effective and timely manner, we will not be able to
attract new customers or retain our existing customers, which would harm our business.

Our efforts to identify technologies and develop products
designed to deliver broadband services inside the home may not ultimately be successful; if this is the case, our current long-term strategy would not result in the growth in our revenue we intend to generate, and we could experience a material
negative effect on our business and equity value.

We have focused our long-term technology strategy on identifying technologies that
would be used to deliver services such as high-definition television over various broadband wireline and wireless media within the home. This so-called Digital Home has received attention from leaders in semiconductors and systems. For
instance, an industry organization named the Home Grid Forum was formed recently by Intel, Texas Instruments, Infineon and Panasonic in order to define the industry standards applicable to Digital Home technologies. We and several other
smaller companies also are founding participants. If we are unable to develop products that comply with the standards set by the Home Grid Forum or other industry organizations, and our investments in Digital Home technologies do not result in any
commercially viable products, we would not realize revenue growth based upon such technologies, and our business and equity value could suffer as a result.

Our products include a significant amount of firmware. If we are unable to deliver the firmware in a timely manner, we may have to delay revenue recognition at the end of a quarter, which could lead to significant unplanned fluctuations
in our quarterly revenue. As a result, we may fail to meet or exceed our forecasts or the expectations of securities analysts or investors, which could cause our stock price to decline.

In connection with new product introductions in a given market, we release production quality code to our OEM customers. This firmware is required for
our products to function as intended. If the production-ready firmware is not released in a timely manner, we may have to defer all revenue related to the semiconductors that we may have already shipped during the quarter, and therefore, cause us to
miss our revenue guidance. In addition, a customer may demand a specific future software feature as part of its order. As such, we may have to delay recognition on some or all of our revenue related to that customers order until the future
software feature is delivered. Such delays or deferrals in revenue recognition could lead to significant fluctuations in our quarterly revenue and operating results and cause us to fail to meet or exceed our quarterly revenue guidance.

Rapidly changing standards and regulations could make our products obsolete, which would cause our revenue and operating results to suffer.

We design our products to conform to regulations established by governments and to standards set by industry standards bodies worldwide such as the
Committee T1E1.4 (now known as NIPP-NAI) of the Alliance for Telecommunications Industry Solutions (ATIS is accredited by the American National Standards Institute (ANSI)), and worldwide by both the Institute of Electrical and Electronics Engineers
(IEEE) and the International Telecommunications Union (ITU-T). Because our products are designed to conform to current specific industry standards, if competing standards emerge that are preferred by our customers, we would have to make
significant expenditures to develop new products. If our customers adopt new or competing industry standards with which our products are not compatible, or the industry groups adopt standards or governments issue regulations with which our products
are not compatible, our existing products would become less desirable to our customers, and our revenue and operating results would suffer.



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If we fail to secure or protect our intellectual property rights, competitors may be able to use our
technologies, which could weaken our competitive position, reduce our revenue or increase our cost.

Our success will depend, in part,
on our ability to protect our intellectual property. We rely on a combination of patent, copyright, trademark and trade secret laws, confidentiality procedures and licensing arrangements to establish and protect our proprietary rights. Our pending
patent applications may not result in issued patents, and our existing and future patents may not be sufficiently broad to protect our proprietary technologies or may be held invalid or unenforceable in court. While we are not
currently aware of misappropriation of our existing technology, policing unauthorized use of our technology is difficult and we cannot be certain that the steps we have taken will prevent the misappropriation or unauthorized use of our technologies,
particularly in foreign countries where we have not applied for patent protections and, even if such protections were available, the laws may not protect our proprietary rights as fully as United States law. The patents we have obtained or
licensed, or may obtain or license in the future, may not be adequate to protect our proprietary rights. Our competitors may independently develop or may have already developed technology similar to ours, duplicate our products
or design around any patents issued to us or our other intellectual property. In addition, we have been, and may be, required to license our patents as a result of our participation in various standards organizations. If competitors appropriate
our technology and we are not adequately protected, our competitive position would be harmed, our legal costs would increase and our revenue would be harmed.

Third-party claims of infringement or other claims against us could adversely affect our ability to market our products, require us to redesign our products or seek licenses from third parties, and harm our business. In addition, any
litigation required to defend such claims could result in significant expenses and diversion of our resources.

Companies in the
semiconductor industry often aggressively protect and pursue their intellectual property rights. From time to time, we receive, and are likely to continue to receive in the future, notices that claim our products infringe upon other
parties proprietary rights. While we do not believe that we are currently infringing on the proprietary rights of third parties, we may in the future be engaged in litigation with parties who claim that we have infringed their patents or
misappropriated or misused their trade secrets or who may seek to invalidate one or more of our patents, and it is possible that we would not prevail in any future lawsuits. An adverse determination in any of these types of claims could
prevent us from manufacturing or selling some of our products could increase our costs of products and could expose us to significant liability. Any of these claims could harm our business. For example, in a patent or trade secret action, a
court could issue a preliminary or permanent injunction that would require us to withdraw or recall certain products from the market or redesign certain products offered for sale or that are under development. In addition, we may be liable for
damages for past infringement and royalties for future use of the technology and we may be liable for treble damages if infringement is found to have been willful. Even if claims against us are not valid or successfully asserted, these claims
could result in significant costs and a diversion of management and personnel resources to defend.

Any potential dispute involving our patents or other
intellectual property could also include our manufacturing subcontractors and OEM customers and/or carriers using our products, which could trigger our indemnification obligations to one or more of them and result in substantial expense to us.

In any potential dispute involving our patents or other intellectual property, our manufacturing subcontractors and OEM customers could
also become the target of litigation. Because we often indemnify our customers for intellectual property claims made against them for products incorporating our technology, any litigation could trigger technical support and indemnification
obligations in some of our license agreements, which could result in substantial expenses such as increased legal expenses, damages for past infringement or royalties for future use. From time to time, we receive notices that customers have received
potential infringement notices from third parties. While we have not incurred any indemnification expenses as a result of notices received to date, any future indemnity claim could adversely affect our relationships with our OEM customers and result
in substantial costs to us.

Changes in current or future laws or regulations or the imposition of new laws or regulations by federal or state agencies
or foreign governments could impede the sale of our products or otherwise harm our business.

The effects of regulation on our
customers or the industries in which they operate may materially and adversely impact our business. For example, the Ministry of Internal Affairs and Communications in Japan, the Ministry of Communications and Information in Korea, various national
regulatory agencies in Europe, as well as the European Commission in the European Union, along with the U.S. Federal Communications Commission have broad jurisdiction over our target markets. Although the laws and regulations of these and other
federal or state agencies may not be directly applicable to our products, they do apply to much of the equipment into which our products are incorporated. Governmental regulatory agencies worldwide may affect the ability of telephone companies to
offer certain services to their customers or other aspects of their business, which may in turn impede sales of our products.

Compliance with the
requirements imposed by Section 404 of the Sarbanes-Oxley Act could harm our operating results, our ability to operate our business and our investors view of us.

If we do not maintain the adequacy of our internal controls, as standards are modified, supplemented or amended from time to time, we may not be
able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of Sarbanes-Oxley. There is a risk that neither we, nor our independent registered public
accounting firm, will be able to



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conclude that our internal control over financial reporting is effective as required by Section 404 of Sarbanes-Oxley. In addition, during the course of
our testing we may identify deficiencies that we may not be able to remediate in time to meet the deadline imposed by Sarbanes-Oxley for compliance with the requirements of Section 404. Effective internal controls, particularly those
related to revenue recognition, valuation of inventory and warranty provisions, are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or
prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop significantly.

We are highly dependent on manufacturing, development and sales activities outside of the United States; and as our international manufacturing, development and sales
operations expand, we will be increasingly exposed to various legal, business, political and economic risks associated with our international operations.

We currently obtain substantially all of our manufacturing, assembly and testing services from suppliers and subcontractors located outside the United States, and have a significant portion of our research and
development team located in Bangalore and Hyderabad, India. In addition, 93% of our revenue for the nine months ended September 28, 2008 and 94% of our revenue for the year ended December 30, 2007 was derived from sales to customers
outside the United States. We have expanded our international business activities and may open other design and operational centers abroad. International operations are subject to many other inherent risks, including but not limited to:



| |  |  | political, social and economic instability, including war and terrorist acts;
| | - |  | -----------------------------------------------------------------------------



| |  |  | exposure to different legal standards, particularly with respect to intellectual property;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | natural disasters and public health emergencies;
| | - |  | ------------------------------------------------



| |  |  | trade and travel restrictions;
| | - |  | ------------------------------



| |  |  | the imposition of governmental controls and restrictions or unexpected changes in regulatory requirements;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | burdens of complying with a variety of foreign laws;
| | - |  | ----------------------------------------------------



| |  |  | import and export license requirements and restrictions of the United States and each other country in which we operate;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | foreign technical standards;
| | - |  | ----------------------------



| |  |  | changes in tariffs;
| | - |  | -------------------



| |  |  | difficulties in staffing and managing international operations;
| | - |  | ---------------------------------------------------------------



| |  |  | foreign currency exposure and fluctuations in currency exchange rates;
| | - |  | ----------------------------------------------------------------------



| |  |  | difficulties in collecting receivables from foreign entities or delayed revenue recognition; and
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | potentially adverse tax consequences.
| | - |  | -------------------------------------

Because we are currently substantially dependent on our foreign sales, research and development and operations, any of the factors described above could significantly harm our ability to produce quality products in a timely and cost
effective manner, and increase or maintain our foreign sales.

Fluctuations in exchange rates between and among the Euro, the Indian rupee, the Japanese
yen, the Korean won, the Singapore dollar and the U.S. dollar, and, as well as other currencies in which we do business, may adversely affect our operating results.

We maintain extensive operations internationally. We have large offices in Bangalore and Hyderabad, India and other offices in France, Japan, Korea,
Singapore and Taiwan. We incur a portion of our expenses in currencies other than the U.S. dollar, including the Euro, the Indian rupee, the Korean won, the Japanese yen, Singapore dollar and the Taiwanese dollar. As a result, we may experience
foreign exchange gains or losses due to the volatility of these currencies compared to the U.S. dollar. Because we report our results in U.S. dollars, the difference in exchange rates in one period compared to another directly impacts period to
period comparisons of our operating results. In addition, our sales have been historically denominated in U.S. dollars; if recent trends were to change, an increase in the U.S. dollar relative to the currencies of the countries that our customers
operate in could materially affect our Asian and European customers demand for our products, thereby forcing them to reduce their orders, which would adversely affect our business. Furthermore, currency exchange rates have been especially
volatile in the recent past and these currency fluctuations may make it difficult for us to predict and/or provide guidance on our results. Currently, we have not implemented any strategies to mitigate risks related to the impact of
fluctuations in currency exchange rates and we cannot predict future currency exchange rate changes.

Several of the facilities that manufacture our
products, most of our OEM customers and the carriers they serve, and our California facility are located in regions that are subject to earthquakes and other natural disasters.

Several of our subcontractors facilities that manufacture, assemble and test our products, and four of our subcontractors wafer foundries,
are located in Malaysia, Singapore and Taiwan. Our customers are currently primarily located in Japan and Korea. The Asia-Pacific region has experienced significant earthquakes and other natural disasters in the past and could be subject to
additional seismic activities. Any earthquake or other natural disaster in these areas could significantly disrupt these manufacturing facilities production capabilities and could result in our



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experiencing a significant delay in delivery, or substantial shortage, of wafers in particular, and possibly in higher wafer prices, and our products in
general. Our headquarters in California are also located near major earthquake fault lines. If there is a major earthquake or any other natural disaster in a region where one of our facilities is located, it could significantly disrupt our
operations.

Our investments in marketable securities may experience further decline in value, which would require us to recognize a charge and
adversely affect our operating results.

Our marketable securities portfolio, which totals $64.5 million at September 28,
2008, includes auction rate securities of $1.0 million ($7.2 million at cost). Auction rate securities are securities that are structured with short-term interest rate reset dates of generally less than ninety days, but with contractual maturities
that can be well in excess of ten years. At the end of each interest reset period, which occurs every seven to thirty-five days, investors can sell or continue to hold the securities at par. In the third quarter of 2007, certain auction rate
securities with a cost value of $7.2 million failed auction and did not sell. We recorded an other-than-temporary impairment of approximately $6.2 million during the three months ended September 28, 2008 related to these auction rate
securities. Although we believe that $1.0 million is the current fair value of the securities, there is a risk that the value of the securities may decline in value further, which would result in additional loss being recognized in our statement of
operations.

Changes in our tax rates could affect our future results.

Our future effective tax rates could be favorably or unfavorably affected by the absolute amount and future geographic distribution of our pre-tax
income, our ability to successfully shift our operating activities to our foreign operations and the amount and timing of inter-company payments from our foreign operations subject to U.S. income taxes related to the transfer of certain rights and
functions.

Risks Related to Our Common Stock

Our stock price has been and may continue to be volatile, and you may not be able to resell shares of our common stock at or above the price you paid, or at all.

The market price of our common stock has fluctuated substantially since our initial public offering and is likely to continue to be highly volatile and
subject to wide fluctuations. Fluctuations have occurred and may continue to occur in response to various factors, many of which we cannot control, including:



| |  |  | quarter-to-quarter variations in our operating results;
| | - |  | -------------------------------------------------------



| |  |  | announcements of changes in our senior management;
| | - |  | --------------------------------------------------



| |  |  | the gain or loss of one or more significant customers or suppliers;
| | - |  | -------------------------------------------------------------------



| |  |  | announcements of technological innovations or new products by our competitors, customers or us;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | the gain or loss of market share in any of our markets;
| | - |  | -------------------------------------------------------



| |  |  | general economic and political conditions and specific conditions in the semiconductor industry and broadband technology markets, including seasonality in
sales of consumer products into which our products are incorporated;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | continuing international conflicts and acts of terrorism;
| | - |  | ---------------------------------------------------------



| |  |  | changes in earnings estimates or investment recommendations by analysts;
| | - |  | ------------------------------------------------------------------------



| |  |  | changes in investor perceptions;
| | - |  | --------------------------------



| |  |  | changes in product mix; or
| | - |  | --------------------------



| |  |  | changes in expectations relating to our products, plans and strategic position or those of our competitors or customers.
| | - |  | ------------------------------------------------------------------------------------------------------------------------

The closing sale price of our common stock on the NASDAQ Global Market for the period of December 31, 2006 to September 28, 2008 ranged from a
low of $1.90 to a high of $9.34.

In addition, the market prices of securities of semiconductor and other technology companies have been
volatile, particularly companies, like ours, with low trading volumes. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to the operating performance of the
specific companies. Accordingly, you may not be able to resell your shares of common stock at or above the price you paid.

The pending
class action litigation could cause us to incur substantial costs and divert our managements attention and resources.

In
November 2006, three putative class action lawsuits were filed in the United States District Court for the Southern District of New York against the Company, our directors and two former executive officers, as well as the lead underwriters for our
initial and secondary public offerings. The lawsuits were consolidated and an amended complaint was filed on April 24, 2007. The amended complaint alleges certain material misrepresentations and omissions by us in connection with
our initial public offering in September 2005 and the follow-on offering in March 2006 concerning our business and prospects, and seek unspecified damages. On June 25, 2007, we filed motions to dismiss the amended complaint; plaintiffs opposed
our motions, and a hearing on our motions were heard on January 16, 2008. The Court dismissed the case



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with prejudice on March 10, 2008. On March 25, 2008, plaintiffs filed a motion requesting that the Court reconsider its order dismissing the case
and permit plaintiffs to file a second amended complaint. Defendants have opposed plaintiffs motion to reconsider. The Court denied plaintiffs motion to reconsider, and on July 9, 2008, plaintiffs appealed the Courts order
dismissing the case with prejudice. Plaintiffs appeal is currently pending the U.S. Court of Appeals for the Second Circuit. The Company cannot predict the likely outcome of the appeal. If we are not successful in our defense of the
lawsuits, we could be forced to make significant payments to class members and their lawyers, and such payments could have a material adverse effect on our business, financial condition, cash flows and results of operations, if not covered
by our insurance carriers. Even if such claims are not successful, the litigation could result in substantial expenses and the diversion of managements attention, which could have an adverse effect on our business.

If securities or industry analysts do not continue to publish research or reports about our business, or if they issue an adverse opinion regarding our stock, our
stock price and trading volume could decline.

The trading market for our common stock is influenced by the research and reports that
industry or securities analysts publish about us or our business. If one or more of the analysts who cover us issue an adverse opinion regarding our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our
company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

Continuing to repurchase the Companys common stock may not be positively received by investors or may not occur at all.

In April 2008 our Board of Directors authorized a program to repurchase shares of our outstanding common stock having an aggregate value of up to $10 million, as opportunities arise and depending upon market
conditions and other factors. To date, we have purchased $5.2 million of our common stock under this program. The timing, amount and nature of the remaining $4.8 million of stock repurchases will be at the discretion of management. Our Board of
Directors authorized the repurchase program based upon the belief that it is an appropriate use of the Companys cash, and a benefit to stockholders. The program, as authorized by the Board does not obligate us to acquire any particular amount
of common stock, and may be modified, suspended or discontinued at any time at managements sole discretion. Repurchases under the program may be made in open market or privately negotiated transactions in compliance with applicable legal
requirements. Certain factors, including a substantial increase in the stock price or an unexpected competing cash requirement may prevent us from executing the remainder, or some portion of the remainder, of this repurchase program.

Substantial future sales of our common stock in the public market could cause our stock price to fall.

As of October 22, 2008, we had approximately 28.8 million shares of common stock outstanding. Of these shares, 6.4 million were sold in
our initial public offering in September 2005 and an additional 2.5 million were sold in a follow-on public offering in March 2006. All of these shares are freely tradable under federal and state securities laws without
further registration under the Securities Act, except that any shares held by our affiliates (as that term is defined under Rule 144 of the Securities Act) may be sold only in compliance with the limitations under
Rule 144. The remaining outstanding shares are restricted securities and generally are available for sale in the public market at various times upon qualification for exemption pursuant to Rules 144 and/or
701 of the Securities Act.

In the future, we intend to issue additional shares to our employees, directors or consultants, and may issue
shares in connection with corporate acquisitions, as well as in follow-on offerings to raise additional capital. Due to these factors, sales of a substantial number of shares of our common stock in the public market could occur at any time.
These sales could reduce the market price of our common stock.

Delaware law and our corporate charter and bylaws contain anti-takeover provisions that
could delay or discourage takeover attempts that stockholders may consider favorable.

Provisions in our certificate of
incorporation may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:



| |  |  | the right of the board of directors to elect a director to fill a vacancy created by the expansion of the board of directors;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | the establishment of a classified board of directors requiring that not all members of the board be elected at one time;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | the prohibition of cumulative voting in the election of directors which would otherwise allow less than a majority of stockholders to elect director candidates;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the requirement for advance notice for nominations for election to the board of directors or for proposing matters that can be acted upon at a stockholders
meeting;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the ability of the board of directors to alter our bylaws without obtaining stockholder approval;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | the ability of the board of directors to issue, without stockholder approval, up to 5,000,000 shares of preferred stock with terms set by the board of directors,
which rights could be senior to those of common stock;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the required approval of holders of at least two-thirds of the shares entitled to vote at an election of directors to adopt, amend or repeal our bylaws or amend or
repeal the provisions of our certificate of incorporation regarding the election and removal of directors and the ability of stockholders to take action;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | the required approval of holders of a majority of the shares entitled to vote at an election of directors to remove directors for cause; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the elimination of the right of stockholders to call a special meeting of stockholders and to take action by written consent.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------

We are also subject to provisions of the Delaware General Corporation Law that, in general, prohibit any business combination with a beneficial owner of
15% or more of our common stock for three years after the point in time that such stockholder acquired shares constituting 15% or more of our shares, unless the holders acquisition of our stock was approved in advance by our board of
directors.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------



|                                |  |                                  |  |                               |      |                                                                             |           |                                                                                          |   |           
|------------------------------- |  | -------------------------------- |  | ----------------------------- | ---- | --------------------------------------------------------------------------- | --------- | ---------------------------------------------------------------------------------------- | - | ----------
|Period                          |  | (a)TotalNumber ofSharesPurchased |  | (b)AveragePrice Paidper Share |      | (c)TotalNumber ofSharesPurchasedas Part ofPubliclyAnnouncedPlans orPrograms |           | (d)ApproximateDollar Valueof Shares thatMay Yet BePurchasedUnder thePlans orPrograms
(1)
|March 31, 2008  April 27, 2008 |  |                                 |  | $                             |     |                                                                             |          |                                                                                          | $ | 10,000,000
|April 28, 2008  May 25, 2008   |  | 1,123,570                        |  | $                             | 3.19 |                                                                             | 1,123,570 |                                                                                          | $ | 6,413,238 
|May 26, 2008  June 29, 2008    |  | 449,194                          |  | $                             | 3.60 |                                                                             | 449,194   |                                                                                          | $ | 4,795,096 
|                                |  |                                  |  |                               |      |                                                                             |           |                                                                                          |   |           
|Total                           |  | 1,572,764                        |  | $                             | 3.31 |                                                                             | 1,572,764 |                                                                                          | $ | 4,795,096 
|                                |  |                                  |  |                               |      |                                                                             |           |                                                                                          |   |           



|(1) | The plan, as approved by the Companys board of directors, is to repurchase up to $10 million of the Companys common stock and was publicly announced on April 24,
2008. There is no expiration date for the plan.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

Incorporated by reference to Exhibit 22.1 of the Registrants Quarterly Report on Form 10-Q filed with the SEC on August 8, 2008 (File No. 000-51532).



|Item 6. | Exhibits
|------- | --------

An Exhibit Index has been attached
as part of this Quarterly Report on Form 10-Q and is incorporated herein by reference.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.



|                        |  |  |  |                             |  |                      |  |                                             
|----------------------- |  |  |  | --------------------------- |  | -------------------- |  | --------------------------------------------
|                        |  |  |  | IKANOS COMMUNICATIONS, INC.
|                        |  |  | 
|Dated: November 6, 2008 |  |  |  | By:                         |  | /s/ Michael Gulett  
|                        |  |  |  |                             |  |                      |  | Michael Gulett                              
|                        |  |  |  |                             |  |                      |  | President and Chief Executive Officer       
|                        |  |  |  |                             |  |                      |  | (Principal Executive Officer)               
|                        |  |  | 
|Dated: November 6, 2008 |  |  |  | By:                         |  | /s/ Cory J. Sindelar
|                        |  |  |  |                             |  |                      |  | Cory J. Sindelar                            
|                        |  |  |  |                             |  |                      |  | Vice President and Chief Financial Officer  
|                        |  |  |  |                             |  |                      |  | (Principal Financial and Accounting Officer)



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IKANOS COMMUNICATIONS, INC.

EXHIBITS TO FORM 10-Q QUARTERLY REPORT

For the Quarter Ended
September 28, 2008



|               |  |                                                                                                                                                                                                                               
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                   
|               | 
|10.1           |  | Summary of Registrants 2008 Executive Bonus Program. Incorporated by reference to the Registrants Current Report on Form 8-K filed with the SEC on April 25, 2008 (File No.
000-51532).                                     
|               | 
|10.2           |  | 2008 Sales Compensation Plan for the Vice President of Worldwide Sales. Incorporated by reference to the Registrants Form 10-Q filed with the SEC on May 7, 2008 (File No. 000-51532).                                       
|               | 
|10.3           |  | Letter of agreement with Michael Gulett dated as of July 27, 2008. Incorporated by reference to the Registrants Current Report on Form 8-K/A filed with the SEC on July 30, 2008
(File No. 000-51532).                       
|               | 
|10.4           |  | Separation agreement and mutual releases with Michael A. Ricci dated as of August 1, 2008. Incorporated by reference to the Registrants Current Report on Form 8-K filed with the SEC
on August 7, 2008 (File No. 000-51532).
|               | 
|10.5*          |  | 2004 Employee Stock Purchase Plan as amended dated as of October 22, 2008 (File No. 000-51532).                                                                                                                               
|               | 
|22.1           |  | Certificate and Report of Inspector of Election. Incorporated by reference to Exhibit 22.1 of the Registrants Quarterly Report on Form 10-Q with the SEC on August 8, 2008 (File No.
000-51532)                               
|               | 
|31.1*          |  | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                             
|               | 
|31.2*          |  | Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                             
|               | 
|32.1*          |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                                



|* | Filed Herewith.
|- | ---------------



37