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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 October 3, 2010

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    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         |  |  ̈
|                        |  |                                                  | 
|Non-accelerated filer   |  | x  (Do not check if a smaller reporting company) |  | Smaller reporting 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 55,293,373 as of November 5, 2010.









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IKANOS COMMUNICATIONS, INC.

FORM 10-Q

TABLE OF CONTENTS



|         |  |                                                                                                                            |  |          |    | 
|-------- |  | -------------------------------------------------------------------------------------------------------------------------- |  | -------- | -- | 
|         |  |                                                                                                                            |  | Page No. |   
|PART I:  |  | FINANCIAL INFORMATION                                                                                                      |  |          |    | 
|         |  |                                                                                                                           
|Item 1.  |  | Financial Statements (unaudited)                                                                                           |  |          | 3  | 
|         |  |                                                                                                                           
|         |  | Condensed Consolidated Balance Sheets as of October 3, 2010 and January 3, 2010                                            |  |          | 3  | 
|         |  |                                                                                                                           
|         |  | Condensed Consolidated Statements of Operations for the Three and Nine Months Ended October 3, 2010 and September 27, 2009 |  |          | 4  | 
|         |  |                                                                                                                           
|         |  | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 3, 2010 and September 27, 2009           |  |          | 5  | 
|         |  |                                                                                                                           
|         |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                             |  |          | 6  | 
|         |  |                                                                                                                           
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                      |  |          | 16 | 
|         |  |                                                                                                                           
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                                 |  |          | 25 | 
|         |  |                                                                                                                           
|Item 4.  |  | Controls and Procedures                                                                                                    |  |          | 26 | 
|         |  |                                                                                                                           
|PART II: |  | OTHER INFORMATION                                                                                                          |  |          |    | 
|         |  |                                                                                                                           
|Item 1.  |  | Legal Proceedings                                                                                                          |  |          | 26 | 
|         |  |                                                                                                                           
|Item 1A. |  | Risk Factors                                                                                                               |  |          | 26 | 
|         |  |                                                                                                                           
|Item 6.  |  | Exhibits                                                                                                                   |  |          | 41 | 
|         |  |                                                                                                                           
|         |  | Signatures                                                                                                                 |  |          | 42 | 



2



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PART I:
FINANCIAL INFORMATION



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

IKANOS COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands and unaudited)



|                                          |  |                |        |  |                |   |         | 
|----------------------------------------- |  | -------------- | ------ |  | -------------- | - | ------- | 
|                                          |  | October 3,2010 |        |  | January 3,2010 |  
|Assets                                    |  |                |        |  |                |   |         | 
|                                          |  |               
|Current assets:                           |  |                |        |  |                |   |         | 
|Cash and cash equivalents                 |  | $              | 14,571 |  |                | $ | 13,317  | 
|Short-term investments                    |  |                |       |  |                |   | 14,223  | 
|Accounts receivable, net                  |  |                | 30,040 |  |                |   | 34,995  | 
|Inventory                                 |  |                | 22,350 |  |                |   | 35,050  | 
|Prepaid expenses and other current assets |  |                | 2,309  |  |                |   | 2,155   | 
|                                          |  |                |        |  |                |   |         | 
|Total current assets                      |  |                | 69,270 |  |                |   | 99,740  | 
|Property and equipment, net               |  |                | 6,623  |  |                |   | 7,502   | 
|Intangible assets, net                    |  |                | 6,727  |  |                |   | 25,359  | 
|Goodwill                                  |  |                |       |  |                |   | 8,633   | 
|Other assets                              |  |                | 3,099  |  |                |   | 1,766   | 
|                                          |  |                |        |  |                |   |         | 
|                                          |  | $              | 85,719 |  |                | $ | 143,000 | 
|                                          |  |                |        |  |                |   |         | 
|                                          |  |               
|Liabilities and Stockholders Equity      |  |                |        |  |                |   |         | 
|                                          |  |               
|Current liabilities:                      |  |                |        |  |                |   |         | 
|Accounts payable                          |  | $              | 15,319 |  |                | $ | 26,641  | 
|Accrued liabilities                       |  |                | 18,112 |  |                |   | 17,050  | 
|                                          |  |                |        |  |                |   |         | 
|Total current liabilities                 |  |                | 33,431 |  |                |   | 43,691  | 
|Long-term liabilities                     |  |                |       |  |                |   | 2,193   | 
|                                          |  |                |        |  |                |   |         | 
|Total liabilities                         |  |                | 33,431 |  |                |   | 45,884  | 
|Commitments and contingencies (Note 9)    |  |                |        |  |                |   |         | 
|Stockholders equity                      |  |                | 52,288 |  |                |   | 97,116  | 
|                                          |  |                |        |  |                |   |         | 
|                                          |  | $              | 85,719 |  |                | $ | 143,000 | 
|                                          |  |                |        |  |                |   |         | 

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



3



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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 |  
|                                                      |  | October 3,2010     |         |   | September 27,2009 |   |         | October 3,2010 |  |   | September 27,2009 |  
|Revenue                                               |  | $                  | 41,536  |   |                   | $ | 29,334  |                |  | $ | 154,534           |   |  | $ | 72,497  |  
|Cost of revenue (1)                                   |  |                    | 28,575  |   |                   |   | 19,036  |                |  |   | 106,469           |   |  |   | 44,429  |  
|                                                      |  |                    |         |   |                   |   |         |                |  |   |                   |   |  |   |         |  
|Gross profit                                          |  |                    | 12,961  |   |                   |   | 10,298  |                |  |   | 48,065            |   |  |   | 28,068  |  
|                                                      |  |                    |         |   |                   |   |         |                |  |   |                   |   |  |   |         |  
|Operating expenses:                                   |  |                    |         |   |                   |   |         |                |  |   |                   |   |  |   |         |  
|Research and development (2)                          |  |                    | 14,757  |   |                   |   | 13,290  |                |  |   | 47,973            |   |  |   | 31,744  |  
|Selling, general and administrative (3)               |  |                    | 6,467   |   |                   |   | 9,615   |                |  |   | 21,945            |   |  |   | 21,295  |  
|Operating asset impairments                           |  |                    | 21,378  |   |                   |   | 2,460   |                |  |   | 21,378            |   |  |   | 2,460   |  
|Restructuring charges (4)                             |  |                    | 3,757   |   |                   |   | 502     |                |  |   | 5,240             |   |  |   | 1,048   |  
|                                                      |  |                    |         |   |                   |   |         |                |  |   |                   |   |  |   |         |  
|Total operating expenses                              |  |                    | 46,359  |   |                   |   | 25,867  |                |  |   | 96,536            |   |  |   | 56,547  |  
|                                                      |  |                    |         |   |                   |   |         |                |  |   |                   |   |  |   |         |  
|Loss from operations                                  |  |                    | (33,398 | ) |                   |   | (15,569 | )              |  |   | (48,471           | ) |  |   | (28,479 | )
|Interest income and other, net                        |  |                    | 8       |   |                   |   | 146     |                |  |   | 63                |   |  |   | 603     |  
|                                                      |  |                    |         |   |                   |   |         |                |  |   |                   |   |  |   |         |  
|Loss before provision for income taxes                |  |                    | (33,390 | ) |                   |   | (15,423 | )              |  |   | (48,408           | ) |  |   | (27,876 | )
|Provision for (benefit from) income taxes             |  |                    | (129    | ) |                   |   | 31      |                |  |   | (19               | ) |  |   | 111     |  
|                                                      |  |                    |         |   |                   |   |         |                |  |   |                   |   |  |   |         |  
|Net loss                                              |  | $                  | (33,261 | ) |                   | $ | (15,454 | )              |  | $ | (48,389           | ) |  | $ | (27,987 | )
|                                                      |  |                    |         |   |                   |   |         |                |  |   |                   |   |  |   |         |  
|Basic and diluted net loss per share                  |  | $                  | (0.61   | ) |                   | $ | (0.40   | )              |  | $ | (0.89             | ) |  | $ | (0.86   | )
|                                                      |  |                    |         |   |                   |   |         |                |  |   |                   |   |  |   |         |  
|Weighted average number of shares (basic and diluted) |  |                    | 54,904  |   |                   |   | 38,802  |                |  |   | 54,493            |   |  |   | 32,466  |  
|                                                      |  |                    |         |   |                   |   |         |                |  |   |                   |   |  |   |         |  
|                                                      |  |                    |         |  
|Includes stock-based compensation expense as follows: |  |                    |         |   |                   |   |         |                |  |   |                   |   |  |   |         |  
|(1) Cost of revenue                                   |  | $                  | 24      |   |                   | $ | 60      |                |  | $ | 86                |   |  | $ | 209     |  
|(2) Research and development                          |  |                    | 273     |   |                   |   | 895     |                |  |   | 1,399             |   |  |   | 2,314   |  
|(3) Selling, general and administrative               |  |                    | 168     |   |                   |   | 612     |                |  |   | 1,245             |   |  |   | 1,897   |  
|(4) Restructuring charges                             |  |                    | 111     |   |                   |   |        |                |  |   | 111               |   |  |   |        |  

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 |        
|                                                                            |  | October 3,2010    |         |   | September 27,2009 |  
|Cash flows from operating activities:                                       |  |                   |         |   |                   |   |         |  
|Net loss                                                                    |  | $                 | (48,389 | ) |                   | $ | (27,987 | )
|Adjustments to reconcile net loss to net cash used by operating activities: |  |                   |         |   |                   |   |         |  
|Depreciation and amortization                                               |  |                   | 3,029   |   |                   |   | 3,956   |  
|Loss on property and equipment included in restructuring charges            |  |                   | 314     |   |                   |   |        |  
|Stock-based compensation expense                                            |  |                   | 2,730   |   |                   |   | 4,420   |  
|Operating asset impairments                                                 |  |                   | 21,378  |   |                   |   | 2,460   |  
|Amortization of intangible assets and acquired technology                   |  |                   | 5,887   |   |                   |   | 4,099   |  
|Changes in assets and liabilities:                                          |  |                   |         |   |                   |   |         |  
|Accounts receivable, net                                                    |  |                   | 4,955   |   |                   |   | (5,528  | )
|Inventory                                                                   |  |                   | 12,700  |   |                   |   | (1,498  | )
|Prepaid expenses and other assets                                           |  |                   | (1,487  | ) |                   |   | (1,376  | )
|Accounts payable and accrued liabilities                                    |  |                   | (12,591 | ) |                   |   | 12,150  |  
|                                                                            |  |                   |         |   |                   |   |         |  
|Net cash used by operating activities                                       |  |                   | (11,474 | ) |                   |   | (9,304  | )
|                                                                            |  |                   |         |   |                   |   |         |  
|Cash flows from investing activities:                                       |  |                   |         |   |                   |   |         |  
|Purchases of property and equipment                                         |  |                   | (2,353  | ) |                   |   | (411    | )
|Purchases of investments                                                    |  |                   |        |   |                   |   | (6,610  | )
|Maturities and sales of investments                                         |  |                   | 14,139  |   |                   |   | 22,672  |  
|Acquisitions                                                                |  |                   |        |   |                   |   | (54,440 | )
|                                                                            |  |                   |         |   |                   |   |         |  
|Net cash provided (used) by investing activities                            |  |                   | 11,786  |   |                   |   | (38,789 | )
|                                                                            |  |                   |         |   |                   |   |         |  
|Cash flows from financing activities:                                       |  |                   |         |   |                   |   |         |  
|Net proceeds from private stock offerings                                   |  |                   |        |   |                   |   | 38,782  |  
|Net proceeds from issuances of common stock and exercise of stock options   |  |                   | 942     |   |                   |   |        |  
|                                                                            |  |                   |         |   |                   |   |         |  
|Net cash provided by financing activities                                   |  |                   | 942     |   |                   |   | 38,782  |  
|                                                                            |  |                   |         |   |                   |   |         |  
|                                                                            |  |                  
|Net increase (decrease) in cash and cash equivalents                        |  |                   | 1,254   |   |                   |   | (9,311  | )
|Cash and cash equivalents at beginning of period                            |  |                   | 13,317  |   |                   |   | 27,219  |  
|                                                                            |  |                   |         |   |                   |   |         |  
|Cash and cash equivalents at end of period                                  |  | $                 | 14,571  |   |                   | $ | 17,908  |  
|                                                                            |  |                   |         |   |                   |   |         |  

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. Ikanos is a leading provider of advanced broadband semiconductor and software products for the digital home. The Company
has developed programmable, scalable chip architectures, which form the foundation for deploying and delivering multi-play services. Expertise in the creation and integration of unique digital signal processor (DSP) algorithms with advanced digital,
analog and mixed signal semiconductors is important to offering high performance, high-density and low-power asymmetric DSL (ADSL) and very-high-bit rate DSL (VDSL) products. In addition, flexible communications processor architectures with wire
speed packet processing capabilities enable high-performance end-user devices for distributing advanced services in the home. These products thus support service providers multi-play deployment plans to the digital home while keeping their
capital and operating expenditures low.

Since its inception, the Company has only been profitable in the third and fourth
quarters of 2005. The Company incurred net losses of $33.3 million and $48.4 million for the three and nine months ended October 3, 2010 and had an accumulated deficit of $269.3 million as of October 3, 2010. To achieve consistent
profitability, the Company will need to generate and sustain higher revenue, while maintaining cost and expense levels appropriate and necessary for its business.

Future capital requirements will depend upon many factors including its rate of revenue growth, its 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 its
products. While the Company believes that it has the cash necessary to fund its operations for the next twelve months, as noted in Note 12  Subsequent Event, the Company may seek additional financing as deemed appropriate to support future
Company needs and investments. Additionally in the future, the Company may become party to agreements with respect to potential investments in, or acquisitions of, other complementary businesses, products or technologies, which could also require it
to seek additional equity or debt financing. The sale of additional equity securities or convertible debt securities would result in additional dilution to its stockholders. Additional debt would result in increased interest expenses and could
result in covenants that would restrict its operations. The Company has not made arrangements to obtain debt financing, and there is no assurance that such financing, if required, will be available in amounts or on acceptable terms, if at all.

If there continue to be further declines in demand for certain products, including ADSL products, or if the Companys
results fall short of its projected revenue, operating income and cash flow forecasts for the remainder of 2010 or if the Company is unable to meet future expectations or rebuild its technology and product leadership while driving new product future
revenue growth, its remaining intangible assets and other long lived assets may be impaired. If the Company were to record an impairment, the charges might be material to its results of operations and financial position.

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 its 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 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. References in this Report
on Form 10-Q to authoritative guidance are to the Accounting Standards Codification (ASC) issued by the Financial Accounting Standards Board (FASB) in June 2009. The information in this report should be read in conjunction with the
Companys audited financial statements and notes thereto included in its Annual Report on Form 10-K filed with the SEC on March 18, 2010.



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In the opinion of
management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to a fair statement of its financial position, results of operations and cash
flows for the interim periods presented. The operating results for the three and nine-month periods ended October 3, 2010 are not necessarily indicative of the results that may be expected for the year ending January 2, 2011 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 that there are material differences between these estimates and actual
results, the Companys financial statements may be 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

The Companys significant accounting policies are described in Note 1 to its
audited Consolidated Financial Statements for the fiscal year ended January 3, 2010, included in its Annual Report on Form 10-K. There have not been any significant changes to the accounting policies.

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. The Company currently has no short-term investments. Long-term investments, comprised of auction rate securities, are
included in Other assets in the Condensed Consolidated Balance Sheets. 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 placed by a small number of customers
in any particular reporting period. Three customers represented 25%, 21% and 10% of accounts receivable at October 3, 2010. Four customers represented 18%, 15%, 10% and 10% of accounts receivable at January 3, 2010. Three customers
accounted for 20%, 20% and 10% of revenue for the three months ended October 3, 2010. Three customers accounted for 16%, 15% and 10% of revenue for the nine months ended October 3, 2010. Three customers accounted for 19%, 17% and 13% of
revenue for the three months ended September 27, 2009. Three customers accounted for 25%, 16%, and 15% of revenue for the nine months ended September 27, 2009.

Concentration of Suppliers

The Company subcontracts the manufacture,
assembly and test 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. The Company does not have 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 result in delays in product introductions,
interruptions in product shipments or increases in product costs and, therefore, could have a material adverse effect on the Companys financial position and results of operations.



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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):



|                                                                  |  |                    |         |   |                   |   |         |                |  |   |                   |   |  |   |         |  
|----------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -------------- |  | - | ----------------- | - |  | - | ------- | -
|                                                                  |  | Three Months Ended |         |   | Nine Months Ended |  
|                                                                  |  | October 3,2010     |         |   | September 27,2009 |   |         | October 3,2010 |  |   | September 27,2009 |  
|Net loss                                                          |  | $                  | (33,261 | ) |                   | $ | (15,454 | )              |  | $ | (48,389           | ) |  | $ | (27,987 | )
|Other comprehensive lossunrealized loss on marketable securities |  |                    | (2      | ) |                   |   | (66     | )              |  |   | (84               | ) |  |   | (133    | )
|                                                                  |  |                    |         |   |                   |   |         |                |  |   |                   |   |  |   |         |  
|Comprehensive loss                                                |  | $                  | (33,263 | ) |                   | $ | (15,520 | )              |  | $ | (48,473           | ) |  | $ | (28,120 | )
|                                                                  |  |                    |         |   |                   |   |         |                |  |   |                   |   |  |   |         |  

Net Loss per Share

Under the provisions of ASC 260-10, 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 |  
|                                                                 |  | October 3,2010     |         |   | September 27,2009 |   |         | October 3,2010 |  |   | September 27,2009 |  
|Net loss                                                         |  | $                  | (33,261 | ) |                   | $ | (15,454 | )              |  | $ | (48,389           | ) |  | $ | (27,987 | )
|                                                                 |  |                    |         |   |                   |   |         |                |  |   |                   |   |  |   |         |  
|Weighted average number of shares, basic and diluted outstanding |  |                    | 54,904  |   |                   |   | 38,802  |                |  |   | 54,493            |   |  |   | 32,466  |  
|                                                                 |  |                    |         |   |                   |   |         |                |  |   |                   |   |  |   |         |  
|Basic and diluted net loss per share                             |  | $                  | (0.61   | ) |                   | $ | (0.40   | )              |  | $ | (0.89             | ) |  | $ | (0.86   | )
|                                                                 |  |                    |         |   |                   |   |         |                |  |   |                   |   |  |   |         |  

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 | 
|                                                  |  | October 3,2010     |       |  | September 27,2009 |  |       | October 3,2010 |  |  | September 27,2009 | 
|Anti-dilutive securities:                         |  |                    |       |  |                   |  |       |                |  |  |                   |  |  |  |       | 
|Warrants to purchase common stock                 |  |                    |      |  |                   |  |      |                |  |  | 1,109             |  |  |  |      | 
|Weighted average restricted stock units           |  |                    | 964   |  |                   |  | 2,549 |                |  |  | 1,133             |  |  |  | 2,289 | 
|Weighted-average options to purchase common stock |  |                    | 7,794 |  |                   |  | 2,532 |                |  |  | 8,227             |  |  |  | 2,174 | 
|                                                  |  |                    |       |  |                   |  |       |                |  |  |                   |  |  |  |       | 
|                                                  |  |                    | 8,758 |  |                   |  | 5,081 |                |  |  | 10,469            |  |  |  | 4,463 | 
|                                                  |  |                    |       |  |                   |  |       |                |  |  |                   |  |  |  |       | 



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Recent Accounting Pronouncements

In January 2010, the FASB issued updated guidance related to fair value measurements and disclosures that requires a
reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. In addition, in the reconciliation for fair value measurements
using significant unobservable inputs, or Level 3, a reporting entity should disclose separately information about purchases, sales, issuances and settlements (that is, on a gross basis rather than one net number). The updated guidance also requires
that an entity provide fair value measurement disclosures for each class of assets and liabilities and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements for
Level 2 and Level 3 fair value measurements. The updated guidance is effective for interim and annual financial reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in
the roll forward activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The implementation of this guidance had no impact and is not
expected to have any impact on the Companys consolidated financial position, results of operations or cash flows.

Note 2 
Investments

The following is a summary of the Companys investments (in thousands):



|                                                |  |                 |        |  |                     |   |    |                    |  |   |        | 
|----------------------------------------------- |  | --------------- | ------ |  | ------------------- | - | -- | ------------------ |  | - | ------ | 
|                                                |  | October 3, 2010 |       
|                                                |  | Cost            |        |  | GrossUnrealizedGain |   |    | EstimatedFairvalue | 
|Long-term investments - auction rate securities |  | $               | 705    |  |                     | $ |   |                    |  | $ | 705    | 
|                                                |  |                 |        |  |                     |   |    |                    |  |   |        | 
|                                                | 
|                                                |  | January 3, 2010 |       
|                                                |  | Cost            |        |  | GrossUnrealizedGain |   |    | EstimatedFairvalue | 
|U.S. government agencies                        |  | $               | 11,988 |  |                     | $ | 82 |                    |  | $ | 12,070 | 
|Corporate bonds and notes                       |  |                 | 2,151  |  |                     |   | 2  |                    |  |   | 2,153  | 
|                                                |  |                 |        |  |                     |   |    |                    |  |   |        | 
|Total short-term investments                    |  | $               | 14,139 |  |                     | $ | 84 |                    |  | $ | 14,223 | 
|                                                |  |                 |        |  |                     |   |    |                    |  |   |        | 
|Long-term investments - auction rate securities |  | $               | 705    |  |                     | $ |   |                    |  | $ | 705    | 
|                                                |  |                 |        |  |                     |   |    |                    |  |   |        | 

The contractual maturities of investments held at October 3, 2010 are greater than one year. In
addition, there was no unrealized loss on investments aggregated by category as of October 3, 2010 and as of January 3, 2010.

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. 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 portfolio is composed of auction rate securities, which were written down to their net
realizable value in 2008. The auction rate securities have a cost value of $0.7 million and a face value of $5.0 million. During 2009, the Company sold auction rate securities with a face value of $2.2 million and with a cost basis of $0.3 million
for $1.5 million, realizing a gain of $1.2 million. The funds related to the remaining auction rate securities will not be available until a successful auction occurs, a buyer is found outside of the auction process or the underlying securities have
matured.

Fair Value Measurements

ASC 820 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, authoritative
guidance 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.



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The Companys
cash and investment instruments have been 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 are valued based on quoted prices of identical or similar instruments in markets that are less than active or for which all inputs are observable. These include investment-grade U.S. government agencies, commercial paper and corporate
bonds and notes. As of October 3, 2010, the Company has no Level 2 type investments. 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 the Companys marketable securities as of October 3, 2010 and January 3, 2010 is as follows (in thousands):



|                          |  |                 |       |  |         |   |        |         |  |   |       |  |  |   |        | 
|------------------------- |  | --------------- | ----- |  | ------- | - | ------ | ------- |  | - | ----- |  |  | - | ------ | 
|                          |  | October 3, 2010 |      
|                          |  | Level 1         |       |  | Level 2 |   |        | Level 3 |  |   | Total | 
|Money market funds (a)    |  | $               | 3,918 |  |         | $ |       |         |  | $ |      |  |  | $ | 3,918  | 
|Auction rate securities   |  |                 |      |  |         |   |       |         |  |   | 705   |  |  |   | 705    | 
|                          |  |                 |       |  |         |   |        |         |  |   |       |  |  |   |        | 
|                          |  | $               | 3,918 |  |         | $ |       |         |  | $ | 705   |  |  | $ | 4,623  | 
|                          |  |                 |       |  |         |   |        |         |  |   |       |  |  |   |        | 
|                          | 
|                          |  | January 3, 2010 |      
|                          |  | Level 1         |       |  | Level 2 |   |        | Level 3 |  |   | Total | 
|Money market funds (a)    |  | $               | 43    |  |         | $ |       |         |  | $ |      |  |  | $ | 43     | 
|U.S. government agencies  |  |                 |      |  |         |   | 12,070 |         |  |   |      |  |  |   | 12,070 | 
|Corporate bonds and notes |  |                 |      |  |         |   | 2,153  |         |  |   |      |  |  |   | 2,153  | 
|Auction rate securities   |  |                 |      |  |         |   |       |         |  |   | 705   |  |  |   | 705    | 
|                          |  |                 |       |  |         |   |        |         |  |   |       |  |  |   |        | 
|                          |  | $               | 43    |  |         | $ | 14,223 |         |  | $ | 705   |  |  | $ | 14,971 | 
|                          |  |                 |       |  |         |   |        |         |  |   |       |  |  |   |        | 



|(a) | Money market funds are classified as Cash equivalents.
|--- | ------------------------------------------------------

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.

There have been no changes in Level 3 securities for the three
months ended October 3, 2010.

Note 3  Operating Asset Impairments

For the quarter ended October 3, 2010, the Company recorded impairment charges totaling $21.4 million of which $8.6 million related
to goodwill and $12.8 million related to other intangible assets.

The Company tests goodwill for impairment on an annual
basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the Companys single reporting unit below its carrying value. The Company issued financial guidance for
the third quarter 2010 period and announced a company-wide restructuring to better align the Companys overhead structure with lower expected revenues and subsequently experienced a sustained decline during the quarter ended
October 3, 2010 in market capitalization. Based on these indicators of potential impairment, the Company completed an impairment analysis of its goodwill as of October 3, 2010.

The Company performed the first step of the two-step impairment test and compared the fair value of the Company as a single reporting
unit to its carrying value. Consistent with the Companys approach in its annual impairment testing, in assessing the fair value of the reporting unit, the Company considered both the market approach and income approach. Under the market
approach, the fair value of the reporting unit is based on quoted stock price on the NASDAQ, the number of shares outstanding for the Companys common stock and an estimated control premium. Under the income approach, the fair value of the
reporting unit is based on the present value of estimated future cash flows. The income approach is dependent on a number of significant management assumptions including estimates of revenue and operating expenses, product penetration, growth and
discount rates. Due to current market conditions and the number of significant assumptions required, the Company used the market approach. The market approach was lower, but both valuation approaches determined that the fair value was less than the
carrying value of the net assets and, therefore, the Company performed step two of the impairment test.



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In step two of the
impairment test, the Company determined the implied fair value of the goodwill and compared it to the carrying value of the goodwill. The Company allocated the fair value of the reporting unit to all of its assets and liabilities as if the reporting
unit had been acquired in a business combination and the fair value of the mainline reporting unit was the price paid to acquire the reporting unit. The Company determined fair value of the single reporting unit using discounted cash flows. The
weighted average cost of capital used in the impairment was 25.4% with perpetual growth rate of 3%. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. The
Companys step two analysis resulted in no implied fair value of goodwill, and therefore, the Company recognized an impairment charge of $8.6 million, representing a write off of the entire amount of the Companys previously recorded
goodwill.



|                               |  |   |        |  
|------------------------------ |  | - | ------ | -
|Goodwill as of January 3, 2010 |  | $ | 8,633  |  
|Impairment                     |  |   | (8,633 | )
|                               |  |   |        |  
|Goodwill as of October 3, 2010 |  | $ |       |  
|                               |  |   |        |  

In addition, as part of and in conjunction with the impairment test, the Company determined that the
carrying values of certain intangible assets were less than their fair values. Accordingly, the Company recorded a non-cash intangible asset impairment charge of $12.8 million as of October 3, 2010. The fair value calculation that leads to the
impairment of the existing technology and customer relationship intangibles of $10.3 million was determined using the discounted cash flows method. The weighted average cost of capital used in the impairment was 25.4% with no perpetual growth rate.
The Company also impaired the remaining $2.5 million of IPR&D related to the gateway line of business under the Conexant BBA product line that was acquired in August 2009, since it was determined to have no alternative use and was therefore
abandoned.

Information regarding the nonrecurring fair value measurements completed during the quarter ended October 3,
2010 was (in thousands):



|                                    |  |                                 |       |  |                               |   |   |         |  |   |         |  |  |                  |       |  |  |   |        | 
|----------------------------------- |  | ------------------------------- | ----- |  | ----------------------------- | - | - | ------- |  | - | ------- |  |  | ---------------- | ----- |  |  | - | ------ | 
|                                    |  |                                 |       |  | Fair Value Measurement Using* |   |   |         | 
|                                    |  | Fair Value as ofMeasurementDate |       |  | Level 1                       |   |   | Level 2 |  |   | Level 3 |  |  | ImpairmentCharge |      
|Goodwill                            |  | $                               |      |  |                               | $ |  |         |  | $ |        |  |  | $                |      |  |  | $ | 8,633  | 
|                                    |  |                                 |       |  |                               |   |   |         |  |   |         |  |  |                  |       |  |  |   |        | 
|                                    |  |                                 |       |  |                              
|Existing technology                 |  | $                               | 3,834 |  |                               | $ |  |         |  | $ |        |  |  | $                | 3,834 |  |  | $ | 4,927  | 
|Customer relationships              |  |                                 | 1,458 |  |                               |   |  |         |  |   |        |  |  |                  | 1,458 |  |  |   | 5,343  | 
|In-process research and development |  |                                 | 1,435 |  |                               |   |  |         |  |   |        |  |  |                  | 1,435 |  |  |   | 2,475  | 
|                                    |  |                                 |       |  |                               |   |   |         |  |   |         |  |  |                  |       |  |  |   |        | 
|                                    |  | $                               | 6,727 |  |                               | $ |  |         |  | $ |        |  |  | $                | 6,727 |  |  | $ | 12,745 | 
|                                    |  |                                 |       |  |                               |   |   |         |  |   |         |  |  |                  |       |  |  |   |        | 



|* | Note 2  See Investments and Fair Value Measurements for explanation of Levels 1, 2, and 3.
|- | -------------------------------------------------------------------------------------------

Note 4  Inventory

Inventory consisted of the following (in
thousands):



|                                  |  |                 |        |  |                 |   |        | 
|--------------------------------- |  | --------------- | ------ |  | --------------- | - | ------ | 
|                                  |  | October 3, 2010 |        |  | January 3, 2010 |  
|Finished goods                    |  | $               | 9,015  |  |                 | $ | 11,015 | 
|Work-in-process                   |  |                 | 12,883 |  |                 |   | 22,470 | 
|Purchased parts and raw materials |  |                 | 452    |  |                 |   | 1,565  | 
|                                  |  |                 |        |  |                 |   |        | 
|                                  |  | $               | 22,350 |  |                 | $ | 35,050 | 
|                                  |  |                 |        |  |                 |   |        | 

As a result of a reduction in the Companys revenue forecast, the Company wrote down inventory by $5.2
million and $16.4 million during the three and nine month periods ended October 3, 2010.



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Note 5  Property and
Equipment

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



|                                                |  |                 |         |   |                 |   |         |  
|----------------------------------------------- |  | --------------- | ------- | - | --------------- | - | ------- | -
|                                                |  | October 3, 2010 |         |   | January 3, 2010 |  
|Machinery and equipment                         |  | $               | 18,116  |   |                 | $ | 19,386  |  
|Software                                        |  |                 | 4,848   |   |                 |   | 4,161   |  
|Computer equipment                              |  |                 | 4,771   |   |                 |   | 4,483   |  
|Furniture and fixtures                          |  |                 | 872     |   |                 |   | 888     |  
|Leasehold improvements                          |  |                 | 883     |   |                 |   | 677     |  
|Construction in progress                        |  |                 | 524     |   |                 |   | 137     |  
|                                                |  |                 |         |   |                 |   |         |  
|                                                |  |                 | 30,014  |   |                 |   | 29,732  |  
|Less: Accumulated depreciation and amortization |  |                 | (23,391 | ) |                 |   | (22,230 | )
|                                                |  |                 |         |   |                 |   |         |  
|                                                |  | $               | 6,623   |   |                 | $ | 7,502   |  
|                                                |  |                 |         |   |                 |   |         |  

Depreciation and amortization expense for property and equipment was $1.1 million and $1.2 million for the
three months ended October 3, 2010 and September 27, 2009, respectively. Depreciation and amortization expense for property and equipment was $3.0 million and $4.0 million for the nine months ended October 3, 2010 and
September 27, 2009, respectively.

Note 6  Intangible Assets

The carrying value of intangible assets is as follows (in thousands):



|                                    |  |                      |        |  |              |   |         |                               |  |   |                         |  |  |           |         |   |                    |   |       |  |  |  |   | 
|----------------------------------- |  | -------------------- | ------ |  | ------------ | - | ------- | ----------------------------- |  | - | ----------------------- |  |  | --------- | ------- | - | ------------------ | - | ----- |  |  |  | - | 
|                                    |  | October 3, 2010      |       
|                                    |  | GrossCarrying Amount |        |  | Impairment** |   |         | Adjusted GrossCarrying Amount |  |   | AccumulatedAmortization |  |  | NetAmount |         |   | UsefulLife (years) |  
|Existing technology                 |  | $                    | 23,184 |  |              | $ | (4,927  | )                             |  | $ | 18,257                  |  |  | $         | (14,423 | ) |                    | $ | 3,834 |  |  |  | 3 | 
|Customer relationships              |  |                      | 13,946 |  |              |   | (5,343  | )                             |  |   | 8,603                   |  |  |           | (7,145  | ) |                    |   | 1,458 |  |  |  | 4 | 
|In-process research and development |  |                      | 3,910  |  |              |   | (2,475  | )                             |  |   | 1,435                   |  |  |           |        |   |                    |   | 1,435 |  |  |  | * | 
|                                    |  |                      |        |  |              |   |         |                               |  |   |                         |  |  |           |         |   |                    |   |       |  |  |  |   | 
|                                    |  | $                    | 41,040 |  |              | $ | (12,745 | )                             |  | $ | 28,295                  |  |  | $         | (21,568 | ) |                    | $ | 6,727 |  |  |  |   | 
|                                    |  |                      |        |  |              |   |         |                               |  |   |                         |  |  |           |         |   |                    |   |       |  |  |  |   | 



|                                            |  |                       |        |  |                         |   |         |           |  |   |                    |  |  |  |   | 
|------------------------------------------- |  | --------------------- | ------ |  | ----------------------- | - | ------- | --------- |  | - | ------------------ |  |  |  | - | 
|                                            |  | January 3, 2010       |       
|                                            |  | GrossCarrying 
Amount |        |  | AccumulatedAmortization |   |         | NetAmount |  |   | Usefullife (Years) | 
|Existing technology                         |  | $                     | 23,184 |  |                         | $ | (10,938 | )         |  | $ | 12,246             |  |  |  | 3 | 
|Customer relationships                      |  |                       | 13,946 |  |                         |   | (4,743  | )         |  |   | 9,203              |  |  |  | 4 | 
|In-process research and development (IPR&D) |  |                       | 3,910  |  |                         |   |        |           |  |   | 3,910              |  |  |  | * | 
|                                            |  |                       |        |  |                         |   |         |           |  |   |                    |  |  |  |   | 
|                                            |  | $                     | 41,040 |  |                         | $ | (15,681 | )         |  | $ | 25,359             |  |  |  |   | 
|                                            |  |                       |        |  |                         |   |         |           |  |   |                    |  |  |  |   | 



|* | Technical feasibility of IPR&D has not been reached and, therefore, a useful life has not been determined.
|- | ----------------------------------------------------------------------------------------------------------

|** | See Note 3  Operating Asset Impairments
|-- | ----------------------------------------

For the three months ended October 3, 2010 and September 27, 2009, the amortization of intangible assets was $1.5 million and $1.9 million, respectively. For the nine months ended
October 3, 2010 and September 27, 2009, the amortization of intangible assets was $5.9 million and $4.1 million, respectively. The estimated future amortization of purchased intangible assets as of October 3, 2010 is $0.6 million for
the remainder of 2010, $2.5 million in 2011, $1.8 million in 2012 and $0.4 million in 2013.



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Note 7  Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):



|                                          |  |                 |        |  |                 |   |        | 
|----------------------------------------- |  | --------------- | ------ |  | --------------- | - | ------ | 
|                                          |  | October 3, 2010 |        |  | January 3, 2010 |  
|Accrued compensation and related benefits |  | $               | 5,131  |  |                 | $ | 6,344  | 
|Accrued rebates                           |  |                 | 2,172  |  |                 |   | 1,983  | 
|Royalties                                 |  |                 | 2,074  |  |                 |   | 1,200  | 
|Excess lease liability                    |  |                 | 1,247  |  |                 |   | 1,496  | 
|Warranty accrual                          |  |                 | 1,018  |  |                 |   | 660    | 
|Restructuring                             |  |                 | 2,054  |  |                 |   | 298    | 
|Other accrued liabilities                 |  |                 | 4,416  |  |                 |   | 5,069  | 
|                                          |  |                 |        |  |                 |   |        | 
|                                          |  | $               | 18,112 |  |                 | $ | 17,050 | 
|                                          |  |                 |        |  |                 |   |        | 

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



|                             |  |                   |       |   |                    |   |      |  
|---------------------------- |  | ----------------- | ----- | - | ------------------ | - | ---- | -
|                             |  | Nine Months Ended |      
|                             |  | October 3, 2010   |       |   | September 27, 2009 |  
|Balance, beginning of period |  | $                 | 660   |   |                    | $ | 745  |  
|Provision                    |  |                   | 419   |   |                    |   | 182  |  
|Usage                        |  |                   | (61   | ) |                    |   | (447 | )
|                             |  |                   |       |   |                    |   |      |  
|Balance, end of period       |  | $                 | 1,018 |   |                    | $ | 480  |  
|                             |  |                   |       |   |                    |   |      |  

Note 8  Restructuring Charges

During the third quarter of 2010, the Company implemented a restructuring plan in order to better align its operating expenses with its revised revenue forecast and to reallocate sufficient engineering
resources to the continued development of its broadband technology and products. In addition the Company closed three overseas offices. Total restructuring costs in the third quarter amounted to $3.8 million of which $2.8 million related to
severance costs, $0.3 million to facilities and $0.7 million to the write-off of certain assets. The Company expects to incur additional cost of $0.5 million predominantly in the fourth quarter of 2010.

During the first quarter of 2010, the Company implemented a plan to restructure its work force and reduce its cost structure subsequent
to its 2009 acquisition of the Conexant Broadband Access product line. Restructuring charges, consisting of severance and benefits costs, were $1.5 million for the nine months ended October 3, 2010. The Company expects the remaining severance
and benefit costs to be paid in 2010.

A summary of the restructuring activity for the year follows (in thousands):



|                              |  |                       |        |   |                  |   |      |               |  |   |       |   |  |   |        |  
|----------------------------- |  | --------------------- | ------ | - | ---------------- | - | ---- | ------------- |  | - | ----- | - |  | - | ------ | -
|                              |  | Severance andBenefits |        |   | ExcessFacilities |   |      | SoftwareTools |  |   | Total |  
|Balance as of January 3, 2010 |  | $                     | 298    |   |                  | $ |     |               |  | $ |      |   |  | $ | 298    |  
|Restructuring charges         |  |                       | 4,288  |   |                  |   | 259  |               |  |   | 693   |   |  |   | 5,240  |  
|Cash payments                 |  |                       | (2,858 | ) |                  |   | (56  | )             |  |   | (256  | ) |  |   | (3,170 | )
|Other non-cash adjustments    |  |                       | (111   | ) |                  |   | (203 | )             |  |   |      |   |  |   | (314   | )
|                              |  |                       |        |   |                  |   |      |               |  |   |       |   |  |   |        |  
|Balance as of October 3, 2010 |  | $                     | 1,617  |   |                  | $ |     |               |  | $ | 437   |   |  | $ | 2,054  |  
|                              |  |                       |        |   |                  |   |      |               |  |   |       |   |  |   |        |  

Note 9  Commitments and Contingencies

Lease Obligations

The Company leases office facilities under
non-cancelable operating leases with various expiration dates through 2014. Rent expense for the three months ended October 3, 2010 and September 27, 2009 was $0.8 million and $0.5 million, respectively. Rent expense for the nine months
ended October 3, 2010 and September 27, 2009 was $2.3 million and $1.0 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 October 3, 2010 under non-cancelable leases with original terms in excess of one year are $1.0 million for the remainder of 2010,
$2.6 million in 2011, $1.0 million in 2012, $0.8 million in 2013 and $0.5 million 2014.



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Purchase Commitments

As of October 3, 2010, the Company had $4.1 million of inventory purchase obligations with various suppliers that are
expected to be paid by the end of 2010.

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 minimize the occurrence of events that may trigger potential future payments under such indemnities, commitments and guarantees. 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
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 indemnity agreements.

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 sought unspecified damages for certain alleged material misrepresentations and omissions made by the Company in connection with both its initial public offering in September 2005 and its follow-on offering in March 2006.
On June 25, 2007, Ikanos

filed motions to dismiss the amended complaint, and on March 10, 2008, the Court dismissed the case with
prejudice. On March 25, 2008, plaintiffs filed a motion for reconsideration, and on June 12, 2008, the District Court denied the motion for reconsideration. On October 15, 2008, plaintiffs appealed the District Courts dismissal
of the amended complaint and denial of its motion for reconsideration to the United States Court of Appeals for the Second Circuit. On September 17, 2009, the Court of Appeals affirmed the District Courts dismissal of the amended
complaint, but vacated its judgment on the motion for reconsideration and remanded the case to the District Court for further proceedings. On May 13, 2010, the District Court granted plaintiffs leave to file a motion to amend the pleadings.
Plaintiffs filed a motion for leave to amend the complaint on June 11, 2010. The Company filed an opposition to the motion on July 11, 2010, and plaintiffs filed a reply in support of the motion on August 10, 2010. Oral argument on
the motion for leave to amend has not yet been scheduled. The Company cannot predict the likely outcome of the motion for leave to amend, and an adverse result in the litigation could have a material effect on its financial statements.



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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, other than set forth above, 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

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  | 
|              |  | October 3, 2010    |        |  | September 27, 2009 |  |     | October 3, 2010 |  |   | September 27, 2009 | 
|Asia          |  | $                  | 22,174 |  |                    |  | 53  | %               |  | $ | 19,003             |  |  |  | 65  | % |  | $ | 96,549  |  |  |  | 62  | % |  | $ | 37,910 |  |  |  | 52  | %
|Europe        |  |                    | 18,080 |  |                    |  | 44  |                 |  |   | 7,884              |  |  |  | 27  |   |  |   | 53,512  |  |  |  | 35  |   |  |   | 27,469 |  |  |  | 38  |  
|North America |  |                    | 1,282  |  |                    |  | 3   |                 |  |   | 2,447              |  |  |  | 8   |   |  |   | 4,473   |  |  |  | 3   |   |  |   | 7,118  |  |  |  | 10  |  
|              |  |                    |        |  |                    |  |     |                 |  |   |                    |  |  |  |     |   |  |   |         |  |  |  |     |   |  |   |        |  |  |  |     |  
|              |  | $                  | 41,536 |  |                    |  | 100 | %               |  | $ | 29,334             |  |  |  | 100 | % |  | $ | 154,534 |  |  |  | 100 | % |  | $ | 72,497 |  |  |  | 100 | %
|              |  |                    |        |  |                    |  |     |                 |  |   |                    |  |  |  |     |   |  |   |         |  |  |  |     |   |  |   |        |  |  |  |     |  

The Company divides its products into three product families: Broadband DSL, Communications Processors and
Other. Broadband DSL consists of the Companys central office products, DSL modem-only customer premise equipment products and the DSL value of the Companys integrated devices. Communications Processors includes the Companys stand
alone processors and the processor-only value of the Companys integrated devices. Other includes products that do not fall into the other two product families. Revenue by product family is as follows (in thousands):



|                          |  |                    |        |  |                    |  |     |                 |  |   |                    |  |  |  |     |   |  |   |         |  |  |  |     |   |  |   |        |  |  |  |     |  
|------------------------- |  | ------------------ | ------ |  | ------------------ |  | --- | --------------- |  | - | ------------------ |  |  |  | --- | - |  | - | ------- |  |  |  | --- | - |  | - | ------ |  |  |  | --- | -
|                          |  | Three Months Ended |        |  | Nine Months Ended  | 
|                          |  | October 3, 2010    |        |  | September 27, 2009 |  |     | October 3, 2010 |  |   | September 27, 2009 | 
|Broadband DSL             |  | $                  | 24,588 |  |                    |  | 59  | %               |  | $ | 20,809             |  |  |  | 71  | % |  | $ | 93,528  |  |  |  | 61  | % |  | $ | 52,347 |  |  |  | 72  | %
|Communications Processors |  |                    | 9,230  |  |                    |  | 22  |                 |  |   | 7,108              |  |  |  | 24  |   |  |   | 35,425  |  |  |  | 23  |   |  |   | 18,733 |  |  |  | 26  |  
|Other                     |  |                    | 7,718  |  |                    |  | 19  |                 |  |   | 1,417              |  |  |  | 5   |   |  |   | 25,581  |  |  |  | 16  |   |  |   | 1,417  |  |  |  | 2   |  
|                          |  |                    |        |  |                    |  |     |                 |  |   |                    |  |  |  |     |   |  |   |         |  |  |  |     |   |  |   |        |  |  |  |     |  
|                          |  | $                  | 41,536 |  |                    |  | 100 | %               |  | $ | 29,334             |  |  |  | 100 | % |  | $ | 154,534 |  |  |  | 100 | % |  | $ | 72,497 |  |  |  | 100 | %
|                          |  |                    |        |  |                    |  |     |                 |  |   |                    |  |  |  |     |   |  |   |         |  |  |  |     |   |  |   |        |  |  |  |     |  

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



|              |  |                |       |  |                |   |       | 
|------------- |  | -------------- | ----- |  | -------------- | - | ----- | 
|              |  | October 3,2010 |       |  | January 3,2010 |  
|United States |  | $              | 4,279 |  |                | $ | 4,881 | 
|Asia          |  |                | 2,259 |  |                |   | 2,531 | 
|Other         |  |                | 85    |  |                |   | 90    | 
|              |  |                |       |  |                |   |       | 
|              |  | $              | 6,623 |  |                | $ | 7,502 | 
|              |  |                |       |  |                |   |       | 



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Note 11  Related Party
Transaction and Technology License Agreement

On May 7, 2010, the Company entered into a technology license agreement
with Sandbridge Technologies, Inc. (Sandbridge), a related party. Tallwood Venture Capital is an investor with board of director representation in both Sandbridge and Ikanos. Pursuant to the technology license agreement, the Company agreed to
pay Sandbridge $1.0 million for a perpetual license to use the Sandbridge 2.0 core processor. The Company paid Sandbridge $0.3 million and $0.7 million for the three months and nine months ended October 3, 2010, respectively. The Company will
pay the remaining balance during the fourth quarter. The Company will also pay royalties to Sandbridge based on unit sales of future products that embed this technology.

Note 12  Subsequent EventRegistration Statement on Form S-3

On October 25, 2010, the Company filed a shelf registration statement on Form S-3 with the SEC, which was declared
effective by the SEC on November 1, 2010. The Company may offer and sell from time to time in the future in one or more public offerings up to $30.0 million of common stock and warrants or any combination thereof. Unless
otherwise stated in a prospectus supplement filed at the time of the offering, the proceeds from the sales of the securities would be used for general corporate purposes, which may include additional working capital, financing of capital
expenditures and future acquisitions and strategic investment opportunities.



|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. These forward-looking statements may be identified by terms such as anticipate,
expect, intend, believe, will, plan, may, can, allow and the negative of these terms, and similar expressions. These forward-looking statements include,
without limitation, statements regarding: our expectation that a small number of customers will continue to account for a substantial portion of our revenue; the deployment of broadband solutions and Gateway products, future revenue growth and
fluctuations in our operating results; our average selling prices and gross margins; our ability to compete; anticipated features and benefits of our technology and products; benefits of our outsourced manufacturing model; anticipated benefits of
our acquisitions such as our purchases of DSL technology and broadband access product line; our existing and expected cash, potential uses of cash and timing with respect to any such use, the sufficiency of our cash equivalents and cash flows 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; legal proceedings; our expectation regarding our foreign currency exposure; future costs and expenses and financing requirements; and the timing and anticipated impact of our restructuring plan. 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 January 3, 2010 contained in our Annual Report on Form 10-K filed on March 18, 2010.

Overview

Ikanos
Communications, Inc. (Ikanos) is a leading provider of advanced broadband semiconductor and software products for the digital home. Our broadband DSL, communications processors and other offerings power access infrastructure and customer premises
equipment (CPE) for many of the worlds leading network equipment manufacturers and telecommunications service providers. Our products are at the core of digital subscriber line access multiplexers (DSLAMs), optical network terminals (ONTs),
concentrators, modems, voice over Internet Protocol (VoIP) terminal adapters, integrated access devices (IADs) and residential gateways (RGs). Our products have been deployed by service providers 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 multi-play services. Expertise in the creation and integration of digital signal processor (DSP) algorithms with advanced digital, analog and mixed
signal semiconductors enables us to offer high performance, high-density and low-power asymmetric DSL (ADSL) and very-high-bitrate DSL (VDSL) products. In addition, flexible communications processor architectures with wirespeed packet processing
capabilities enable high-performance end-user devices for distributing advanced services in the home. These products thus support service providers multi-play deployment plans to the digital home while keeping their capital and operating
expenditures low.



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We outsource all of
our semiconductor fabrication, assembly and test functions, which allows us to focus on the design, development, sales and marketing of our products and reduces the level of our capital investment. Our customers consist primarily of original design
manufacturers (ODMs), contract manufacturers (CMs), network equipment manufacturers (NEMs) and original equipment manufacturers (OEMs), who in turn sell our semiconductors as part of their product-solutions to the service provider market.

Since our inception, we have only been profitable in the third and fourth quarters of 2005. We incurred net losses of $33.3
million and $48.4 million for the three and nine months ended October 3, 2010 and had an accumulated deficit of $269.3 million as of October 3, 2010. To achieve consistent profitability, we will need to generate and sustain higher revenue,
while maintaining cost and expense levels appropriate and necessary for its business. While we believe that we have the cash necessary to fund our operations for the next twelve months, we may seek additional financing as deemed appropriate to
support future company needs and investments. We filed a shelf registration statement on Form S-3 with the SEC on October 25, 2010, which was declared effective on November 1, 2010. Pursuant to this registration statement we may offer
and sell up to $30.0 million of common stock and warrants.

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 $107.5 million in 2007, $106.5 million in 2008
and $130.7 million in 2009.

Quarterly revenue fluctuations are characteristic of our industry and affect our business,
especially due to the concentration of our revenue among a few customers. These quarterly fluctuations can result from a mismatch of supply and demand. Specifically, service providers purchase equipment based on planned deployment. However, service
providers 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, service providers will reduce orders with OEMs for new equipment, and OEMs in turn will reduce orders for our products, which will adversely impact the quarterly demand for our products, even when deployment rates may be increasing.

Furthermore, our future revenue growth depends upon new service providers 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 service providers 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 service providers do not always share all of the information available to them regarding qualification and deployment decisions. The team of engineers, DSL products, technology, patents and other
intellectual property allow us to extend our market leadership as well as accelerate our digital home initiatives and next generation VDSL2 development.

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

On April 27, 2010, Michael Gulett resigned as our Chief Executive Officer and President and as a member of our
Board of Directors. Diosdado P. Banatao, the chairman of our Board of Directors, was appointed executive chairman and assumed the role of interim President and Chief Executive Officer while we began our search for a new Chief Executive Officer and
President. On June 14, 2010, Cory Sindelar resigned as Chief Financial Officer. Dennis Bencala has been appointed Chief Financial Officer. On June 30, 2010, Paul Hansen resigned from our Board of Directors. James Smaha, a current director,
replaced Mr. Hansen on the Audit Committee of our Board of Directors and Fred Lax, also a current director, was appointed chairman of the Audit Committee. On August 3, 2010, Mr. Banatao resigned as our interim President and Chief
Executive Officer. Mr. Banatao will continue to serve as chairman of our Board of Directors. On August 3, 2010, our Board of Directors appointed John Quigley, our Sr. Vice President, Global Engineering, as our Chief Executive Officer and
President effective August 3, 2010 and also elected him to the Board of Directors.



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Critical Accounting Policies and
Estimates

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

The critical accounting policies, are described in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K
for the year ended January 3, 2010, and have not changed materially as of October 3, 2010.

Subsequent EventRegistration
Statement on Form S-3

On October 25, 2010, we filed a shelf registration statement on Form S-3 with
the SEC, which was declared effective by the SEC on November 1, 2010. We may offer and sell from time to time in the future in one or more public offerings up to $30.0 million of common stock and warrants or any combination
thereof. Unless otherwise stated in a prospectus supplement filed at the time of an offering, the proceeds from the sales of the securities would be used for general corporate purposes, which may include additions working
capital, financing of capital expenditures and future acquisitions and strategic investment opportunities.

Results of
Operations

Revenue

Our revenue is derived from sales of our semiconductor products. Revenue from product sales is generally recognized upon shipment, net of sales returns, rebates and allowances. Revenue from product sales
to distributors is recognized when the distributor has sold through to the end customer. As is typical in our industry, the selling prices of our products generally decline over time. Therefore, our ability to increase revenue is dependent upon our
ability to increase unit sales volumes of existing products and to introduce and sell new products in greater quantities. Our ability to increase unit sales volume is dependent primarily upon our ability to increase and fulfill current customer
demand and obtain new customers. The continuing effects of the worldwide recession have adversely affected the businesses of service providers around the world, causing them to re-evaluate how they employ capital. Consequently the rate at which
broadband infrastructure is upgraded may slow or delay new broadband programs.

Revenue increased by $12.2 million, or 42%, to
$41.5 million in the three months ended October 3, 2010 from $29.3 million in the three months ended September 27, 2009. Revenue increased by $82.0 million, or 113%, to $154.5 million in the nine months ended October 3, 2010 from
$72.5 million in the nine months ended September 27, 2009. The increase in revenue is primarily related to our August 2009 acquisition of the BBA product line from Conexant Systems, Inc.



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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. We expect that significant customer
concentration will continue for the foreseeable future, but it may diversify across more carrier customers as we expect more service providers world-wide to begin deployments of broadband solutions and Gateway products. The following direct
customers each accounted for more than 10% of our revenue for the years indicated. Sales made to OEMs are based on information that we receive at the time of ordering.



|                           |  |                 |  |                    |    |   |                   |  |    |                |  |  |                   |   |  |  |    |  
|-------------------------- |  | --------------- |  | ------------------ | -- | - | ----------------- |  | -- | -------------- |  |  | ----------------- | - |  |  | -- | -
|                           |  |                 |  | Three Months Ended |    |   | Nine Months Ended | 
|Our Direct Customer        |  | OEM Customer    |  | October 3,2010     |    |   | September 27,2009 |  |    | October 3,2010 |  |  | September 27,2009 |  
|Sagemcom                   |  | Sagemcom        |  |                    | 20 | % |                   |  | 17 | %              |  |  | 15                | % |  |  | 25 | %
|Alcatel-Lucent and its CMs |  | Alcatel-Lucent  |  |                    | 20 |   |                   |  | *  |                |  |  | 16                |   |  |  | *  |  
|Flextronics                |  | 2Wire           |  |                    | 10 |   |                   |  | *  |                |  |  | 10                |   |  |  | *  |  
|Paltek                     |  | Sumitomo        |  |                    | *  |   |                   |  | 19 |                |  |  | *                 |   |  |  | 15 |  
|NEC Corporation            |  | NEC Corporation |  |                    | *  |   |                   |  | 13 |                |  |  | *                 |   |  |  | 16 |  



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

Revenue by Region as a
Percentage of Total Revenue



|              |  |                    |    |   |                    |  |    |                |  |  |                   |   |  |  |    |  
|------------- |  | ------------------ | -- | - | ------------------ |  | -- | -------------- |  |  | ----------------- | - |  |  | -- | -
|              |  | Three Months Ended |    |   | Three Months Ended | 
|              |  | October 3,2010     |    |   | September 27,2009  |  |    | October 3,2010 |  |  | September 27,2009 |  
|Asia          |  |                    | 53 | % |                    |  | 65 | %              |  |  | 62                | % |  |  | 52 | %
|Europe        |  |                    | 44 |   |                    |  | 27 |                |  |  | 35                |   |  |  | 38 |  
|North America |  |                    | 3  |   |                    |  | 8  |                |  |  | 3                 |   |  |  | 10 |  

The table above
reflects sales to our direct customers based on where they are headquartered. It does not necessarily reflect carrier deployment of our products as we do not sell directly to them. Our Asian revenue increased slightly in the third quarter of 2010
versus the same period in 2009 as increases in Chinese revenue were substantially offset by declines in our Japanese and Korean sectors. For the nine months revenue in China was up sharply, but Japanese revenue was marginally improved while Korean
revenue declined slightly. Revenue from European sales improved in both the third quarter and the first nine months of 2010 versus the same periods in 2009, but was lower as a percentage of total revenue for the nine months.

Revenue by Product Family as a Percentage of Total Revenue

We divide our products into three product families: Broadband DSL, Communications Processors and Other. Broadband DSL consists of our central office products, DSL modem-only customer premise equipment
products and the DSL value of our integrated devices. Communications Processors includes our stand alone processors and the processor-only value of our integrated devices. Other includes products that do not fall into the other two product families.
Revenue by product family is as follows (in thousands):



|                          |  |                    |    |   |                    |  |    |                |  |  |                   |   |  |  |    |  
|------------------------- |  | ------------------ | -- | - | ------------------ |  | -- | -------------- |  |  | ----------------- | - |  |  | -- | -
|                          |  | Three Months Ended |    |   | Three Months Ended | 
|                          |  | October 3,2010     |    |   | September 27,2009  |  |    | October 3,2010 |  |  | September 27,2009 |  
|Broadband DSL             |  |                    | 59 | % |                    |  | 71 | %              |  |  | 61                | % |  |  | 72 | %
|Communications Processors |  |                    | 22 |   |                    |  | 24 |                |  |  | 23                |   |  |  | 26 |  
|Other                     |  |                    | 19 |   |                    |  | 5  |                |  |  | 16                |   |  |  | 2  |  



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Cost and Operating Expenses



|                                  |  |                    |        |  |                   |   |        |         |  |  |                |   |  |                   |         |  |         |   |        |  |  |  |     | 
|--------------------------------- |  | ------------------ | ------ |  | ----------------- | - | ------ | ------- |  |  | -------------- | - |  | ----------------- | ------- |  | ------- | - | ------ |  |  |  | --- | 
|                                  |  | Three Months Ended |        |  | Nine Months Ended |  
|                                  |  | October 3,2010     |        |  | September 27,2009 |   |        | %Change |  |  | October 3,2010 |   |  | September 27,2009 |         |  | %Change |  
|Cost of revenue                   |  | $                  | 28,575 |  |                   | $ | 19,036 |         |  |  | 50             |   |  | $                 | 106,469 |  |         | $ | 44,429 |  |  |  | 139 | 
|Research and development          |  |                    | 14,757 |  |                   |   | 13,290 |         |  |  | 11             |   |  |                   | 47,973  |  |         |   | 31,744 |  |  |  | 51  | 
|Sales, general and administrative |  |                    | 6,467  |  |                   |   | 9,615  |         |  |  | (33            | ) |  |                   | 21,945  |  |         |   | 21,295 |  |  |  | 3   | 
|Operating asset impairments       |  |                    | 21,378 |  |                   |   | 2,460  |         |  |  | nm             |   |  |                   | 21,378  |  |         |   | 2,460  |  |  |  | nm  | 
|Restructuring charges             |  |                    | 3,757  |  |                   |   | 502    |         |  |  | nm             |   |  |                   | 5,240   |  |         |   | 1,048  |  |  |  | nm  | 

nm
 not meaningful

Cost and Operating Expenses as a Percentage of Total Revenue:



|                                  |  |                    |    |   |                   |  |    |                |  |  |                   |   |  |  |    |  
|--------------------------------- |  | ------------------ | -- | - | ----------------- |  | -- | -------------- |  |  | ----------------- | - |  |  | -- | -
|                                  |  | Three Months Ended |    |   | Nine Months Ended | 
|                                  |  | October 3,2010     |    |   | September 27,2009 |  |    | October 3,2010 |  |  | September 27,2009 |  
|Cost of revenue                   |  |                    | 69 | % |                   |  | 65 | %              |  |  | 69                | % |  |  | 61 | %
|Research and development          |  |                    | 36 |   |                   |  | 45 |                |  |  | 31                |   |  |  | 44 |  
|Sales, general and administrative |  |                    | 16 |   |                   |  | 33 |                |  |  | 15                |   |  |  | 29 |  
|Operating asset impairments       |  |                    | 51 |   |                   |  | 8  |                |  |  | 14                |   |  |  | 3  |  
|Restructuring charges             |  |                    | 9  |   |                   |  | 2  |                |  |  | 3                 |   |  |  | 1  |  

Cost of Revenue

Our cost of revenue consists primarily of the cost of silicon wafers purchased from third-party foundries and third-party costs associated
with assembling, testing and shipping of our semiconductors. Because we do not have formal, long-term pricing agreements with our outsourcing partners, our wafer costs and services are subject to price fluctuations based on the cyclical demand for
semiconductors among other factors. In addition, after we purchase wafers from foundries, we also incur yield loss related to manufacturing these wafers into usable die. Manufacturing yield is the percentage of acceptable product resulting from the
manufacturing process, as identified when the product is tested. When our manufacturing yields decrease, our cost per unit increases. All of these potential issues in our manufacturing process 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 increased
to $28.6 million for the three months ended October 3, 2010 compared to $19.0 million for the three months ended September 27, 2009. Cost of revenue increased to $106.5 million for the nine months ended October 3, 2010 compared to
$44.4 million for the nine months ended September 27, 2009. The increase in cost of revenue for both the three and nine month periods ended October 3, 2010 compared to the same period last year is directly attributable to our increased
sales volume, which was primarily due to our acquisition of the BBA product line.

Our gross margin was 31% for the three
months ended October 3, 2010 compared to 35% for the year ago period. Third quarter 2010 cost of revenue was adversely affected by write downs of inventory and a prepaid asset amounting to $5.8 million. This charge reduced gross margin by 14%.
Our gross margin was 31% for the nine months ended October 3, 2010 compared to 39% for the year ago period. This margin decline was primarily due to our charges totaling $16.4 million related to write downs of inventory in the second and third
quarters and the write down of a prepaid asset in the third quarter. The charges resulted from changes in our revenue forecast due to a sustained decline in the market for ADSL products and adversely affected gross margin by 11%, for the nine months
ended October 3, 2010. Margins were also adversely affected by product mix as sales to China and Europe, whose margins are lower, increased while sales to Japan, whose margins are generally higher, declined as a percent of total sales.



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Research and development expenses

All research and development (R&D) costs 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
increased $1.5 million, or 11%, to $14.8 million for the three months ended October 3, 2010 compared to $13.3 million for the three months ended September 27, 2009. The increase in R&D costs is related to our acquisition of the BBA
product line. Major cost changes included: (1) higher personnel costs of $2.2 million, (2) higher supplies and materials costs of $0.4 million and (3) higher back end costs of $0.5 million. These were partially offset by lower outside
service costs of $0.6 million and lower stock compensation costs of $0.6 million.

R&D expenses increased $16.3 million,
or 51%, to $48.0 million for the nine months ended October 3, 2010 compared to $31.7 million for the nine months ended September 27, 2009. The increase in R&D costs is directly related to our acquisition of the BBA product line. Major
cost increases included: (1) higher personnel costs of $12.3 million, (2) higher back end costs of $2.4 million, (3) fabrication and testing costs of $1.7 million and (4) supplies and materials of $1.1 million. Stock compensation
costs were lower by $0.9 million.

The majority of our R&D personnel are located in the United States or India. As of
October 3, 2010, we had 278 people engaged in research and development of which 98 were located in India, 158 were located in the United States, 13 were located in China and 9 were located in other facilities. As of September 27, 2009, we
had 507 people engaged in research and development of whom 215 were located in India, 220 were located in the United States, 50 were located in China and 22 in other facilities. The decrease in R&D personnel was directly related to our
restructuring activities in the first and third quarters of 2010.

Selling, general and administrative expenses

Selling, general and administrative (SG&A) expenses generally consist of compensation and related expenses for personnel; public
company costs; legal, recruiting and auditing fees; and deprecation. SG&A expenses declined by $3.1 million for the three months ended October 3, 2010, or 33%, to $6.5 million compared to $9.6 million for the three months ended
September 27, 2009. The decrease in SG&A costs is directly attributable to business development and acquisition costs related to the BBA product line acquisition costs incurred in the third quarter of 2009 but not in 2010. We had lower
business development costs of $2.1 million, lower outside service, accounting and auditing costs of $0.2 million and lower stock compensation costs of $0.4 million.

SG&A expenses were relatively flat, increasing by $0.6 million for the nine months ended October 3, 2010, or 3%, to $21.9 million compared to $21.3 million for the nine months ended
September 27, 2009. Certain higher 2010 costs resulting from the BBA product line acquisition included higher personnel costs, $2.5 million, facilities costs, $1.1 million, and the amortization of intangibles, $ 0.8 million. These increases
were partially offset by acquisition related costs that were incurred in 2009 but not in 2010. These included business development costs of $2.4 million and outside services, including accounting and legal, of $1.4 million. Stock compensation costs
were lower by $0.7 million in 2010 compared 2009. As of October 3, 2010, SG&A headcount was 81 compared to 127 at September 27, 2009.

Operating Asset Impairment

For the quarter ended October 3,
2010, we recorded impairment charges totaling $21.4 million of which $8.6 million related to goodwill, $12.8 million related to intangibles.

We test goodwill for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of our single reporting unit
below its carrying value. We issued financial guidance for the third quarter 2010 period and announced a company-wide restructuring to better align our overhead structure with lower expected revenues and subsequently experienced
a sustained decline during the quarter ended October 3, 2010 in market capitalization. Based on these indicators of potential impairment, we completed an impairment analysis of our goodwill as of October 3, 2010.



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We performed the first
step of the two-step impairment test and compared the fair value of the Company as a single reporting unit to its carrying value. Consistent with our approach in our annual impairment testing, in assessing the fair value of the reporting unit, we
considered both the market approach and income approach. Under the market approach, the fair value of the reporting unit is based on quoted stock price on the NASDAQ, the number of shares outstanding for our common stock and an estimated control
premium. Under the income approach, the fair value of the reporting unit is based on the present value of estimated future cash flows. The income approach is dependent on a number of significant management assumptions including estimates of revenue
and operating expenses, product penetration, growth and discount rates. Due to current market conditions and the number of significant assumptions required, we used the market approach. The market approach was lower, but both valuation approaches
determined that the fair value was less than the carrying value of the net assets and, therefore, we performed step two of the impairment test.

In step two of the impairment test, we determined the implied fair value of the goodwill and compared it to the carrying value of the goodwill. We allocated the fair value of the reporting unit to all of
its assets and liabilities as if the reporting unit had been acquired in a business combination and the fair value of the mainline reporting unit was the price paid to acquire the reporting unit. We determined fair value of the single reporting unit
using discounted cash flows. The weighted average cost of capital used in the impairment was 25.4% with perpetual growth rate of 3%. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the
implied fair value of goodwill. The step two analysis resulted in no implied fair value of goodwill, and therefore, we recognized an impairment charge of $8.6 million, representing a write off of the entire amount of our previously recorded
goodwill.



|                               |  |   |        |  
|------------------------------ |  | - | ------ | -
|Goodwill as of January 3, 2010 |  | $ | 8,633  |  
|Impairment                     |  |   | (8,633 | )
|                               |  |   |        |  
|Goodwill as of October 3, 2010 |  | $ |       |  
|                               |  |   |        |  

In addition, as part of and in conjunction with the impairment test, we determined that the carrying values
of certain intangible assets were less than their fair values. Accordingly, we recorded a non-cash intangible asset impairment charge of $12.8 million as of October 3, 2010. The fair value calculation that lead to the impairment of the existing
technology and customer relationship intangibles of $10.3 million was determined using the discounted cash flows method. The weighted average cost of capital used in the impairment was 25.4% with no perpetual growth rate. We also impaired the
remaining $2.5 million of IPR&D related to the gateway line of business under the Conexant BBA product line that was acquired in August 2009, since it was determined to have no alternative use and was therefore abandoned.

In the third quarter of 2009 when we acquired the BBA product line, we assigned a value of $4.9 million to in-process research and
development. In process research and development comprised mainly of two projects in process as of the acquisition date. After reviewing the two projects, it was determined that further development of the access project was not required and was
abandoned. Accordingly, we recorded an operating asset impairment charge of $2.5 million during the third quarter of 2009.

Restructuring

During the third quarter of 2010, we implemented a restructuring plan in order to better align our operating expenses with our revised
revenue forecast and to reallocate sufficient engineering resources to the continued development of our broadband technology and products. In addition, we closed three overseas offices. Total restructuring costs in the third quarter amounted to $3.8
million of which $2.8 million related to severance costs, $0.3 million to facilities and $0.7 million to software tools. We expect to incur additional cost of approximately $0.5 million predominantly in the fourth quarter of 2010. In the third
quarter of 2009, we incurred restructuring charges of $0.5 million related to the realignment of design centers.

Total
restructuring charges for the nine months ended October 3, 2010 amounted to $5.2 million and includes the $3.8 million restructuring charges discussed above and $1.5 million, consisting of severance and benefits, incurred in the first quarter.
In the first quarter of 2010 we implemented a plan to restructure our work force and reduce our cost structure subsequent to our acquisition of the BBA product line. During the first nine months of 2009 we incurred restructuring costs of $1.0
million related to our implementing a plan to combine design centers in India and to reduce our cost structure in the United States.



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Interest Income and Other, Net

Interest income and other, net consists primarily of interest income earned on our cash, cash equivalents and
investments, as well as other non-operating expenses including gains and losses on foreign exchange and the sales of fixed assets. Interest income and other was insignificant for the three months ended October 3, 2010. We recognized interest
and income of $0.1 million for the three months ended September 27, 2009. The decrease was due to lower investment balances and lower interest rates. Interest and other income decreased to $0.1 million for the nine months ended October 3,
2010 compared to $0.6 million for the nine months ended September 27, 2009. The decrease was due to a lower balance of cash and investments.

Provision for (benefit from) Income Taxes

Income taxes are
comprised mostly of foreign income taxes and state minimum taxes. We maintain a full valuation allowance for its tax assets as a result of recurring losses. The benefit from income taxes was $0.1 million for the three months ended October 3,
2010 but insignificant for the nine-month period. The income tax provision was insignificant for the three months ended September 27, and $0.1 million for the nine months ended September 27, 2009.

Net Loss

As a
result of the above factors, we had a net loss of $33.3 million for the three months ended October 3, 2010 compared to a net loss of $15.5 million for the three months ended September 27, 2009. We had a net loss of $48.4 million for the
nine months ended October 3, 2010 compared to a net loss of $28.0 million for the nine months ended September 27, 2009.

Liquidity and Capital Resources

Year-to-date, cash and investments decreased by $12.9 million to $15.3 million as of October 3, 2010 versus $28.2 million as of January 3, 2010.

Since December 31, 2006, we have had a steady decline in cash and investments as we have experienced operating losses in each year.
In response to market conditions and a decline in demand for certain products, we initiated a worldwide restructuring plan to align our operating expenses with our revised revenue forecast to achieve profitability while reallocating engineering
resources to the continued development of innovative broadband and technology.

If there continue to be further declines in
demand for certain products, including ADSL products, or if our results fall short of our projected revenue, operating income and cash flow forecasts for the remainder of 2010 or if we are unable to meet future expectations or rebuild our technology
and product leadership while driving new product future revenue growth, our remaining intangible assets and other long lived assets may be impaired. If we were to record an impairment, the charges might be material to the results of operations and
our financial position.

As of October 3, 2010, we have funded our operations primarily through cash from private and
public offerings of our common stock, cash generated from the sale of our products and proceeds from the exercise of stock options and stock purchased under our employee stock purchase plan. Our uses of cash include payroll and payroll-related
expenses, manufacturing costs, purchases of equipment, tools and software and operating expenses, such as tape outs, marketing programs, travel, professional services and facilities and related costs. We have used, and intend to continue to use, the
net proceeds for working capital and general corporate purposes.

The following table summarizes our statement of cash flows
for the nine months ended October 3, 2010 and September 27, 2009 (in millions):



|                                                |  |                   |       |   |                    |   |       |  
|----------------------------------------------- |  | ----------------- | ----- | - | ------------------ | - | ----- | -
|                                                |  | Nine Months Ended |      
|                                                |  | October 3, 2010   |       |   | September 27, 2009 |  
|Statements of Cash Flows Data:                  |  |                   |       |   |                    |   |       |  
|Cash and cash equivalents - beginning of period |  | $                 | 13.3  |   |                    | $ | 27.2  |  
|Net cash used by operating activities           |  |                   | (11.5 | ) |                    |   | (9.3  | )
|Net cash provided by investing activities       |  |                   | 11.8  |   |                    |   | (38.8 | )
|Net cash provided by financing activities       |  |                   | 1.0   |   |                    |   | 38.8  |  
|                                                |  |                   |       |   |                    |   |       |  
|Cash and cash equivalents - end of period       |  | $                 | 14.6  |   |                    | $ | 17.9  |  
|                                                |  |                   |       |   |                    |   |       |  



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Operating Activities

For the nine months ended October 3, 2010, we used $11.5 million of net cash in operating activities, while
incurring a net loss of $48.4 million. Included in the net loss was approximately $12.0 million in various non-cash expenses consisting of depreciation and amortization, stock based compensation expense and amortization of intangible assets and
acquired technology. Non-cash impairments of intangible assets, goodwill and in-process research and development costs amounted to $21.4 million. Net inventory and accounts receivable decreased $12.7 million and $5.0 million, respectively. The
decrease in inventory includes a write down of $16.4 million. Cash flow from operating activities was adversely affected by increases in prepaid and other assets of $1.5 million and a decrease in accounts payable and accrued liabilities of $12.6
million.

For the nine months ended September 27, 2009, we used $9.3 million of net cash in operating activities, while
incurring a net loss of $28.0 million. Included in the net loss was approximately $14.9 million in various non-cash expenses consisting of depreciation and amortization, stock-based compensation expense, amortization of intangible assets and
acquired technology and an intangible asset impairment of $2.5 million. Operating cash flows also benefited from higher accounts payable and accrued liabilities of $12.1 million. Operating cash flows decreased as a result of increased accounts
receivable of $5.5 million, increased inventory of $1.5 million (net of inventory acquired in the BBA acquisition) and increased prepaid and other assets of $1.4 million.

Investing Activities

Investing activities provided $11.8 million
for the nine months ended October 3, 2010, primarily consisting of the maturities and sales of short-term investments of $14.1 million offset by capital expenditures of $2.3 million. Investing activities used $38.8 million for the nine months
ended September 27, 2009, primarily consisting of the net purchase of Conexant BBA of $54.4 million and purchases of short term investments amounting to $6.6 million offset by sales of short-term investments of $22.7 million. Purchases of
property, plant and equipment amounted to $0.4 million.

Currently we have no short-term investments. In 2009 we have
classified our investment portfolio as available for sale, and our investment objectives were to preserve principal and provide liquidity, while maximizing yields without significantly increasing risk. 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

Our financing activities provided $0.9 million for the nine months ended October 3, 2010 primarily resulting from the purchase of
stock under our employee stock purchase plan and from the exercise of employee stock options. Our financing activities included $38.8 million for the nine months ended September 27, 2009 as a result of a cash investment by Tallwood Venture
Capital marginally offset by certain restricted stock unit transactions in the first nine months. As described above, on October 25, 2010, we filed a shelf registration statement on Form S-3 with the SEC, which was declared effective
by the SEC on November 1, 2010.

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 upon 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 sell equity securities or become party to agreements with respect to potential investments in, or acquisitions
of, other 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 debt 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 and enter into certain
technology agreements.



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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 October 3, 2010, 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 objectives
of our investment activities are 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.

As of October 3, 2010, we had cash, cash equivalents and investments totaling $15.3 million. These amounts were invested primarily
in money market funds that are held for working capital purposes. Included in the total are auction rate securities with a book value of $0.7 million. (See Note 2 Investments and fair Market Values.) 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 insignificant.

Investment Risk

Our marketable securities portfolio as of October 3,
2010 was $4.6 million, consisting of money market funds of $3.9 million and auction rate securities of $0.7 million. The auction rate securities have a face value of $5.0 million and have failed at auction since the third quarter of 2007. The funds
associated with these securities will not be accessible until a successful auction occurs, a buyer is found outside of the auction process or the underlying securities have matured.

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, Chinese Yuan 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. If exchange rates were to change by ten percent, we do not
expect the effect would be insignificant in 2010.



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

Evaluation of
disclosure controls and procedures.

As of the end of the period covered by this report, based on the evaluation performed
by our principal executive officer and our principal financial officer, regarding 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 (the Exchange Act) as required by Rules 13a-15(b) or 15d-15(b) of the Exchange Act. Based on their evaluation, our certifying officers concluded that these disclosure controls and procedures were effective.

We maintain disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Exchange that are
designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and
that such information is communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls
and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, but not absolute, assurance that the objectives of the disclosure controls and procedures are met.
Our disclosure controls and procedures have been designed to meet the reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily is required to apply its judgment in evaluating the
cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that
any design will succeed in achieving its stated goals under all potential future conditions.

Changes in Internal Control Over Financial
Reporting

There were no changes in internal control over financial reporting during the quarter ended October 3, 2010
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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 us, our 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 sought unspecified damages for certain alleged material misrepresentations and omissions made
by us in connection with both our initial public offering in September 2005 and its follow-on offering in March 2006. On June 25, 2007, We filed motions to dismiss the amended complaint, and on March 10, 2008, the Court dismissed the case
with prejudice. On March 25, 2008, plaintiffs filed a motion for reconsideration, and on June 12, 2008, the District Court denied the motion for reconsideration. On October 15, 2008, plaintiffs appealed the District Courts
dismissal of the amended complaint and denial of its motion for reconsideration to the United States Court of Appeals for the Second Circuit. On September 17, 2009, the Court of Appeals affirmed the District Courts dismissal of the
amended complaint, but vacated its judgment on the motion for reconsideration and remanded the case to the District Court for further proceedings. On May 13, 2010, the District Court granted plaintiffs leave to file a motion to amend the
pleadings. Plaintiffs filed a motion for leave to amend the complaint on June 11, 2010. We filed an opposition to the motion on July 11, 2010, and plaintiffs filed a reply in support of the motion on August 10, 2010. Oral argument on
the motion for leave to amend has not yet been scheduled. We cannot predict the likely outcome of the motion for leave to amend, and an adverse result in the litigation could have a material effect on its financial statements.

Additionally, from time to time, we are a party to various legal proceedings and claims arising from the normal course of business
activities. Based on current available information, other than that set forth above, we do 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
|-------- | ------------

Our
business and operating results are impacted by risks and uncertainties, including 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. 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, it may materially and adversely affect us, our business, financial condition and results of operations and
the market price of our common stock.



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Risks Related to Our Customers
and Markets

Our quarterly operating results have fluctuated significantly over time and are likely to continue to do so, and as a
result, we may fail to meet or exceed our revenue forecasts or the expectations of securities analysts or investors, which could cause the market price of our common stock to decline.

The telecommunications semiconductor industry is highly cyclical and subject to rapid change and, from time to time, has experienced
significant downturns. These downturns are characterized by decreases in product demand and excess inventories held by our customers, OEMs and their customers, and the telecommunications service providers, also referred to as service
providers. To respond to these downturns, many service providers slow their capital expenditures, change their purchasing practices to use refurbished rather than new equipment  thereby reducing the demand for new semiconductors by our
direct customers, 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.

As a result, quarterly fluctuations in revenue are characteristic of our industry. In addition, a relatively small number of significant
customers represent a significant percentage of our revenue and given their buying patterns, we have experienced, and are likely to continue to experience, significant quarterly fluctuations of revenue.

We win our supply relationships by working with OEMs and service providers to have our semiconductors and software designed into systems
that will be deployed by service providers over multiple quarters. At any given time, 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,
in some cases for an extended period of time. Even when we achieve a design win and are designed into OEMs equipment, service provider deployments can be affected by various factors, including but not limited to the OEMs test and
evaluation cycle, demand for DSL-based broadband services, government regulatory actions and competitors efforts to protect or gain market share. These factors may result in deployment delays from nine months to over a year and thereby
contribute fluctuation in revenue from quarter to quarter. We are aware of such deployment delays currently affecting various customers.

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 the market price of our common stock to decline.

Historically, our expenses have fluctuated, and are likely to continue to fluctuate.

Our expenses are subject to quarterly fluctuations resulting from various factors, including, but not limited to, higher expenses associated with new product releases, costs of design tools and large
up-front license fees to third parties for intellectual property integrated into our products, as well as other factors identified throughout these risk factors. Because many of our expenses are relatively fixed in the short term, or are incurred in
advance of anticipated sales, we may not be able to reduce our expenses as a percentage of revenue to mitigate any reductions in gross margins. In addition, the acquisition of other businesses can generate extraordinary expenses, such as our recent
acquisition of the Broadband Access (BBA) product line from Conexant Systems, Inc. last year. As a result, quarter to quarter comparisons of our operating expenses and results should not be relied on as an indicator of future performance. 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.

General macroeconomic conditions could reduce demand for services based upon our products.

Our business is not directly tied to the reported causes of the recession that began in the last half of 2008. 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 in an uncertain economy, the
resulting drop in demand could cause telecommunications service providers to reduce or stop placing orders for OEM equipment containing our products. Accordingly, the OEMs demand for our products could drop further, potentially having a
materially negative effect on our revenue.



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We have had 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 in the third and fourth quarter of 2005. Prior to the third quarter of 2005, we incurred
significant net losses, and we incurred net losses in the past seventeen 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. We have an accumulated deficit of $269.3 million as of October 3, 2010. To achieve profitability again, we will need to generate and sustain higher revenue and to improve our gross margins while maintaining expense levels
appropriate and necessary for our business. Because many of our expenses are relatively fixed in the short term, or are incurred in advance of anticipated sales, we may not be able to continue to reduce our expenses in a timely manner to offset any
lower-than-forecasted revenue shortfall as we experienced in the fourth quarter of 2006 or the third quarter of 2008. We may not be able to achieve profitability again and, even if it were able to attain profitability again, we may not be able to
sustain profitability on an on-going quarterly or an annual basis in the future.

The general tightening of the capital markets could
potentially limit our access to financial resources.

If we continue to operate at a loss and the cash on our balance sheet
continues to decline, we may need alternative sources of financing in order to fund operations. If general economic conditions worsen or do not recover as quickly as anticipated, it may be difficult to borrow additional funds on favorable terms, if
at all, due to the 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
additional 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 new design wins into commercially successful systems sold by our OEM and ODM customers.

Our products are generally incorporated into our OEM and ODM customers systems at the design stage. As a result, we rely on OEMs and
ODMs to select our products to be designed into their systems, which we refer to as a design win. Our customers may only open their systems to new designs on an annual or less-frequent basis. We often incur significant expenditures over
multiple fiscal quarters in attempting to obtain a design win without any assurance that an OEM or ODM will select our product for design into its own system. If we are not included in a new design, the next opportunity to win a design with that
customer may not occur for a year or more. 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 or ODM designs one of our products into its system offering, we cannot be assured that its equipment will be commercially successful or that it will receive any orders and, accordingly, revenue
as a result of that design win. Our OEM and ODM 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 operating results 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 our existing commercially available semiconductor products, including the product
lines that we acquired from Conexant Systems, Inc., to account for substantially all of our revenue for the foreseeable future. If we are unable to design or develop new products or market recently developed products and technology to meet our
customers demand in a timely manner, if demand for our semiconductors declines or fails to grow, or if the broadband, communication processor or other markets addressable by our products do not materialize as expected, it would harm our
business. In addition to being affected by global macroeconomic factors, the markets for our products are characterized by frequent introduction of new features and technologies and by 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 could increase
our cost of revenue and adversely affect our operating performance.



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The average selling prices and
gross margins 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 maintain or 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, in particular (but not limited to) gross margins, 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, reducing our manufacturing costs or developing new or enhanced products that command higher prices or better gross margins on a timely basis.

An OEM customer or a service provider may decide to cancel, delay or change its product plans, which could cause us to lose or delay anticipated sales.

Even if an OEM customer selects one of our products to incorporate into its equipment, we have no assurances that the customer will
ultimately market and sell its equipment or that such efforts by the customer will be successful. The delays inherent in our lengthy sales and product deployment cycles increase the risk that an OEM customer or service provider 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 service provider could cause us to not achieve
anticipated revenue and result in volatility of the market price of our common stock. In addition, our anticipated sales could be lost or substantially reduced if a significant OEM customer or service provider 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. For example, our Broadband DSL product family generally has higher margins as compared to our Communication Processor product family. Furthermore,
the product margins within our Broadband DSL 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 and negatively impact our revenue and margins.

Our focus on moving away from lower-margin products may not yield the intended benefits we seek to achieve.

We believe it is in the best interests of the Company and our investors to concentrate our development and sales and marketing efforts on our next generation central office and customer premise equipment
products and technology. The discontinuation of lower margin products over time is intended to fund development of new generations of communications semiconductors that outperform our competition. However, we may not be able to accomplish the
end-of-life of all our lower margin products in a timely manner, or at all. The failure to do so would negatively affect our operating results, diminish our ability to fund product research and development and otherwise be detrimental to our
business plans.

Because we depend on a relatively small number of 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.



|                           |  |                              |  |                              |    |   |                            |  |    |                                   |  |  |    |  
|-------------------------- |  | ---------------------------- |  | ---------------------------- | -- | - | -------------------------- |  | -- | --------------------------------- |  |  | -- | -
|Direct Customer            |  | OEM Customer                 |  | Year EndedDecember 28, 
2008 |    |   | Year EndedJanuary 3, 
2010 |  |    | Nine Months EndedOctober 
3, 2010 | 
|Alcatel-Lucent and its CMs |  | Alcatel-Lucent               |  |                              | 11 | % |                            |  | *  | %                                 |  |  | 16 | %
|Sagemcom                   |  | Sagemcom                     |  |                              | 21 |   |                            |  | 19 |                                   |  |  | 15 |  
|Flextronics                |  | 2Wire                        |  |                              | *  |   |                            |  | *  |                                   |  |  | 10 |  
|Paltek Corporation         |  | Sumitomo Electric Industries |  |                              | 23 |   |                            |  | 12 |                                   |  |  | *  |  
|NEC Corporation of America |  | NEC Corporation              |  |                              | 25 |   |                            |  | 11 |                                   |  |  | *  |  



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



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A small group of OEM
customers historically has accounted for a substantial portion of our revenue. The composition of these customers has varied, and we expect that it 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 service provider demand for its OEM customers systems products. Accordingly, a reduction in growth of service provider deployment of product that uses
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.

Recent changes in our senior management positions could negatively affect our operations and relationships with our customers and employees.

Since April 2010, a majority of our senior management have resigned or been replaced. In April and June 2010, our President and Chief
Executive Officer and Chief Financial Officer resigned, respectively, and our Chairman of the Board of Directors served as our interim President and Chief Executive Officer while we searched for a permanent replacement. Our Board of Directors
appointed a new Chief Financial Officer in June 2010 and a new President and chief Executive Officer in August 2010. Changes in our senior management or technical personnel could impact our customer relationships, employee morale, and our ability to
operate in compliance with existing internal controls and regulations and harm our business. If the integration of our new members of senior management does not go as smoothly as anticipated, it could negatively affect our business.

Because competition for qualified personnel is intense in our industry, we may not be able to recruit and retain necessary personnel, which could
impact the development or sales or our products.

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. If
we are unable to retain our existing personnel, or attract and train additional qualified personnel, our growth may be limited due to our lack of capacity to develop and market our products. All of our key employees are employed on an at
will basis. The loss of any of these key employees could slow our product development processes and sales efforts or harm investors perception of our business. We may also incur increased operating expenses and be required to divert the
attention of other senior management to recruit replacements for key employees. Also, we may have difficulty attracting personnel as stock options and other forms of incentive equity grants generally comprise a significant portion of our
compensation packages for all employees, and as long as the price of our common stock remains depressed, it may make it more difficult for us to attract and retain key employees, which could harm our ability to provide technologically competitive
products.

In addition, in the third quarter of 2010 we implemented a corporate restructuring plan that included a reduction
in work force of approximately 20% and the closure of three of our overseas offices. The changes in senior management and the multiple restructurings and reductions in force over the past year have had, and may continue to negatively affect employee
morale.

Because of the rapid technological development in our industry and the intense competition it faces, our products tend to become
outmoded or obsolete in a relatively short period of time requiring 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
timely develop our new, well-differentiated 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 timely developing new semiconductor products ahead of 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.



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Risks Related to the Tallwood
Investment

Tallwood Investors may exercise significant influence over us, including through their ability to elect three members of
our Board of Directors.

In April 2009, we sold 24 million shares of our common stock and warrants to purchase up to
an additional 7.8 million shares of our common stock (such common stock and warrants collectively referred to as the Securities) to Tallwood III, L.P., a Delaware limited partnership, Tallwood III Partners, L.P., a Delaware limited partnership,
Tallwood III Associates, L.P., a Delaware limited partnership, and Tallwood III Annex, L.P., a Delaware limited partnership (collectively referred to as the Tallwood Investors). The funds raised for the sale of the Securities funded a portion of our
acquisition of the BBA product line from Conexant Systems, Inc.. The common stock owned by Tallwood Investors represents approximately 43% of the outstanding shares of our common stock (excluding the exercise of warrants). Assuming the full
conversion of the 7.8 million warrants, the common stock owned by the Tallwood Investors will represent 50% of the outstanding shares of our common stock. Until the third anniversary of the closing of the issuance of the securities to the
Tallwood Investors, the Tallwood Investors have agreed to vote all of their shares in excess of the shares constituting 35% of our outstanding common stock in the same proportion as the votes cast by all our other stockholders. We also entered into
a stockholder agreement with the Tallwood Investors, which, among other things, contains certain governance arrangements and various provisions relating to board composition, stock ownership, transfers by the Tallwood Investors and their affiliates,
voting and other matters. Subject to certain exceptions, the Tallwood Investors are permitted under the terms of the stockholder agreement to maintain their ownership interest in our company in subsequent equity offerings. As a result, the Tallwood
Investors may have the ability to significantly influence the outcome of any matter submitted for the vote of our stockholders. The Tallwood Investors may have interests that diverge from, or even conflict with, our interests and those of our other
stockholders. In addition, the Certificate of Designation of the Series A Preferred Stock provides that the Tallwood Investors have the right to designate three directors to our Board of Directors while the Tallwood Investors hold at least 35% of
the outstanding our common stock, and a number of directors to our Board of Directors proportional to the Tallwood Investors ownership position in us after such time as the Tallwood Investors hold less than 35% of the outstanding our common
stock. As a result, the directors elected to our Board of Directors by the Tallwood Investors may exercise significant influence on matters considered by our Board of Directors. The stockholder agreement also includes restraints on the ability of
Tallwood Investors to transfer and vote their shares and to acquire additional shares of our common stock.

The market price of our common
stock may decline as a result of future sales of our common stock by the Tallwood Investors.

We are unable to predict the
potential effects of the Tallwood Investors ownership of 43% of our outstanding common on the trading activity in and market price of our common stock. Pursuant to the stockholder agreement, we have granted the Tallwood Investors and their permitted
transferees registration rights for the resale of the shares of our common stock and shares of our common stock underlying the warrants. Under the terms of the registration rights, we have filed a registration statement that permits the resale of
such securities into the public market, and any such resale would increase the number of shares of our common stock available for public trading. Sales by the Tallwood Investors or their permitted transferees of a substantial number of shares of our
common stock in the public market, or the perception that such sales might occur, could have a material adverse effect on the price of our common stock.

Holders of our common stock will not be entitled to elect a certain number of directors of our company while the Tallwood Investors control a voting share of our Series A Preferred Stock.

As the holder of the Series A Preferred Stock (Voting Share), Tallwood III Partners, L.P., has the right to designate
three members out of seven members to our Board of Directors while the Tallwood Investors hold at least 35% of our outstanding common stock, and a number of directors to our Board of Directors proportional to the Tallwood Investors ownership
position of our common stock after such time as the Tallwood Investors hold less than 35% of our outstanding Common Stock. During the time they control the Voting Share, the Tallwood Investors will be able to exert significant influence, and
potentially control, over us and may have interests that diverge from, or even conflict with, our interests and those of our other stockholders.



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Risks Related to Our Operations
and Technology

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 the memory cells, input/output cells, hardware interfaces 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. While we have not experienced material warranty costs in any period as a result of the issue related to this intellectual
property, there can be no assurance that it will not in the future experience material damages from this or other licensed intellectual property. 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, or other 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 it we do not own or operate a fabrication or
manufacturing facility. Currently, nine wafer foundries and five 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, generally 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.

In 2008, we received notice that one of
our subcontractors would close a fabrication facility where two of our products were made. The fabrication facility has ceased manufacturing products. Accordingly, we made arrangements for our subcontractor to build an adequate supply of the two
products fabricated at this facility sufficient to meet our anticipated demand for the remaining lifetime of these products. Customers will have to migrate to chips manufactured at the new fabrication facility, which could cause delays or loss in
customers.

In the future, if any of these events occur, or if the facilities of any of its 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 it 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 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. 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, we use of a limited number of independent wafer foundries to manufacture all of our semiconductor products exposing us
to risks of delay, increased costs and customer dissatisfaction in the event that any of these foundries were unable to provide it 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 the opportunities previously
identified may have been lost to our competitors. Furthermore, even if these new foundries offer better pricing than existing manufacturers, if they prove to be less reliable than existing manufacturers, we would not achieve some or all of the
anticipated cost reductions.



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When demand for manufacturing
capacity is high, we may take various actions to try to secure sufficient capacity, which could 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 upon to produce 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. 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 the 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 addition, due to the weak global economy, some of our subcontractors laid off employees over the past year
and/or shortened work schedules. These reductions in labor and factory operations have resulted in sporadic capacity constraints that could impair our ability to obtain finished products in time to meet customer demand.

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 negatively affect 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 subcontractors facilities;
| | - |  | -----------------------------------------------------------------------------



| |  |  | issuance of 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 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, and our revenue, gross margin
and operating results could decline.

Defects in our products may not be always detected by the testing processes performed
by our subcontractors or by our 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 our products have
shipped, we have experienced, and could continue to experience, warranty and consequential damages claims from our customers.

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. As a result, we have to work with our customers to resolve the issues that they experience when integrating our products into their systems.
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.



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Although we work
closely with our subcontractors to minimize the likelihood of defects that cause reduced manufacturing yields, the subcontractors facilities have from time to time experienced lower than anticipated manufacturing yields that have, in turn,
resulted in our inability to meet our customer demand. We have been experiencing manufacturing defect rates for one of our products that are higher than the rates it experiences with our other products. We believe that our operations and quality
teams have been able to reduce the defect rate for this product to a normal level. However, if we experience these issues again in the future, our revenues could be materially reduced and our warranty-related costs could be materially higher than
currently anticipated.

It is common for yields in semiconductor fabrication facilities to fluctuate 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 our 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 the 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 the 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. As our network of distributors increases, we increase the possibility that we may
receive orders from these distributors that have a delivery date sooner than our manufacturing subcontractors can build and deliver product to us. In the past, we have experienced situations in which lead times discussed with customers were shorter
than the manufacturing lead times available for the products ordered by those customers. We have had to work with these customers and our manufacturing subcontractors, to better align our ability to deliver products with our customers
expectations.

If we underestimate or are otherwise surprised by increases in customer demand, we may forego revenue
opportunities, lose market share and damage 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, as experienced in the second and
third quarters fiscal 2010, we would have excess or obsolete inventory, resulting in a decline in the value of our inventory, which would increase our cost of revenue, negatively affect gross margins, 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 processes, 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 to 0.065 micron geometry processes. We may migrate some of our current products to smaller geometry process technologies, and over time, we are likely to migrate to even smaller geometries. A smaller geometry generally
reduces our production 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 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.



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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 our engineers. Some customers do not detect defects that are experienced later by other customers due to variations in how each customer integrates our semiconductors
into their equipment. 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.

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 and intellectual property holding companies often aggressively protect and pursue their intellectual property rights. From time to time, we receive, and we are
likely to continue to receive in the future, notices that claim our products infringe upon other parties proprietary rights. We are also aware that one of our customers was recently sued by a patent holder that alleges that certain products
which were acquired as part of the BBA product line acquisition, infringe a patent held by that party. At this time, we have not been named as a party to that litigation. While we do not believe that we are currently infringing the proprietary
rights of the party in the pending litigation, or any other 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 service providers 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.

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 VDSL or VDSL-like technology, PON and communications processing markets, we currently compete or expect to compete with, among others, Broadcom Corporation, BroadLight, Inc., Cavium Networks,
Inc., Freescale Semiconductor, Inc., Lantiq Deutschland GmbH, Marvell Technology Group Ltd., PMC-Sierra, Inc., Realtek Semiconductor Corp 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.



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We consider other
companies that have access to DMT technology as potential competitors, 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 may have stronger manufacturing subcontractor relationships than we have. In addition, many of our competitors
have extensive technology libraries that could enable them to incorporate broadband or communications processing technologies into a system on a chip, creating 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 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 communications processing technologies may compete effectively with the service provider services addressed by our products, which could adversely affect our revenue and business.

Our revenue currently is dependent upon the increase in demand for service provider services that use broadband technology and integrated
residential gateways. Besides xDSL and other DMT-based technologies, service providers 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
service provider decides to deploy FTTH, our xDSL products are not required. For example, a major service provider in Korea announced its intention to use more FTTH deployments in the future. Such deployments of fiber may be in lieu of xDSL
products. If more service providers decide to use FTTH deployments, it could harm our xDSL 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 broadband technologies we provide, the demand for our products may decrease and our business would be harmed.

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 and technologies, 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 over the
next several quarters 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. In addition, we have substantially expanded our product line, and the resulting product
development and support demands on our engineering organization, through our acquisition of the BBA product line from Conexant.



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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.

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 ATIS (accredited by ANSI), and worldwide by both the IEEE and the
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.

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 us, 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 it is not adequately protected, our competitive position would be harmed, our legal costs would increase and our revenue would be harmed.

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, Indias government is currently considering regulation that may limit or prohibit sales of certain telecommunications products manufactured in
China. While the rule-making process is not final, if the rules apply to equipment containing our semiconductor products, such regulation could reduce sales of our products and have a negative effect on our operating results.



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In addition, 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.

In addition to the laws and regulations specific to telecommunications equipment, other laws and regulations affect
our business. For instance, changes in tax, employment and import/export laws and regulations, and changes their enforcement, commonly occur in the various countries in which we operate. If changes in those laws and regulations, or in the
enforcement of those laws and regulations, occur in a manner that we did not anticipate, those changes could cause us to have increased operating costs or to pay higher taxes, and thus have a negative effect on our operating results.

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

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 SOX. There is a risk that neither our management, nor our independent registered public accounting firm, will be able to conclude that our internal control over financial reporting is effective as required by Section 404 of
SOX. 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 SOX 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 in helping to 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 common stock could drop significantly.

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002,
the Investor Protection and Securities Reform Act of 2010, SEC regulations and NASDAQ rules, are creating uncertainty for companies such as ours. These new or changed laws, regulations and standards are subject to varying interpretations in many
cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and
higher costs necessitated by ongoing revisions to disclosure and corporate governance practices. As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased
general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. In particular, our ongoing efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002
and the related regulations regarding our managements required assessment of our internal control over financial reporting and our independent registered public accounting firms attestation of the effectiveness of internal control over
financial reporting have required the commitment of significant financial and managerial resources. We expect these efforts to require the continued commitment of significant resources. If our efforts to comply with new or changed laws, regulations
and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may be harmed.

We are highly dependent upon manufacturing, development and marketing 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 China, India and France. In addition, 97% of our revenue for the nine months ended October 3, 2010 and 92% of our revenue for the year ended January 3, 2010 were 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;
| | - |  | ------------------------------------------------------------------------------------------



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



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| |  |  | 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 U.S. dollar and other currencies in which we do business, may adversely affect our operating results.

We
maintain extensive operations internationally. We have offices in China, India and other offices in France, Germany, Japan, Korea, Singapore and Taiwan. We incur a portion of our expenses in currencies other than the U.S. dollar, including the
Chinese Yuan, 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. 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 service providers 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. Several large customers are located in Japan and Korea. The Asia-Pacific region has experienced significant earthquakes and other
natural disasters in the past, including a recent major earthquake in Taiwan, 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 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.

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 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

The market price of our common stock has been and may continue to be volatile, and holders of our common stock may not be able to resell shares at or
above the price 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;
| | - |  | -------------------------------------------------------



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| |  |  | 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 our company;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | 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 January 1, 2007 to October 3, 2010
ranged from a low of $0.86 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, holders of our common stock may not be able to resell their shares at or above the price paid.

If we fail to continue to meet all applicable NASDAQ Global Market requirements, our stock could be delisted from the NASDAQ Global Market. If delisting occurs, it would adversely affect the
market liquidity of our common stock and harm our business.

Our common stock is currently traded on the NASDAQ Global
Market under the symbol IKAN. If we fail to meet any of the continued listing standards of the NASDAQ Global Market, our common stock could be delisted from the NASDAQ Global Market. These continued listing standards include
specifically enumerated criteria, including a $1.00 minimum closing bid price.

Our common stock has traded below $1.00 per
share in the past. If our common stock trades below $1.00 per share for a period of 30 consecutive business days, there can be no assurance that NASDAQ will not take action to enforce its listing requirements. Any delisting could adversely
affect the market price of and liquidity of the trading market for our common stock, our ability to obtain financing for the continuation of its operations and could result in the loss of confidence by investors, suppliers and employees.

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 us, our 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 sought unspecified damages for certain alleged material misrepresentations and omissions made by us in connection with both our initial public offering in September 2005 and its follow-on offering in March 2006.
On June 25, 2007, we filed motions to dismiss the amended complaint, and on March 10, 2008, the Court dismissed the case with prejudice. On March 25, 2008, plaintiffs filed a motion for reconsideration, and on June 12, 2008, the
District Court denied the motion for reconsideration. On October 15, 2008, plaintiffs appealed the District Courts dismissal of the amended complaint and denial of its motion for reconsideration to the United States Court of Appeals for
the Second Circuit. On September 17, 2009, the Court of Appeals affirmed the District Courts dismissal of the amended complaint, but vacated its judgment on the motion for reconsideration and remanded the case to the District Court for
further proceedings. On May 13, 2010, the District Court granted plaintiffs leave to file a motion to amend the pleadings. Plaintiffs filed a motion for leave to amend the complaint on June 11, 2010. We filed an opposition to the motion on
July 11, 2010, and plaintiffs filed a reply in support of the motion on August 10, 2010. We cannot predict the likely outcome of the motion for leave to amend, and an adverse result in the litigation could have a material effect on its
financial statements. Regardless of the outcome, we could incur substantial costs and divert our managements attention and recourse in defending this action.

Additionally, from time to time, we are a party to various legal proceedings and claims arising from the normal course of business activities. Based on current available information, other than set forth
above, we do not expect that the ultimate outcome of any currently pending unresolved matters, individually or in the aggregate, will have a material adverse effect on our results of operations, cash flows or financial position.



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If the securities analyst who
currently publishes reports on Ikanos does not continue to publish research or reports about our business, or if he issues an adverse opinion regarding our common stock, the market price of our common 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. We have lost all the securities research coverage with the exception of one analyst. If this analyst issues an adverse opinion regarding our common stock, the stock price would likely decline. If the analyst ceases
coverage of our company or fails to regularly publish reports on us, we could lose further visibility to the financial markets, which in turn could cause the market price of our common stock or trading volume to decline.

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 our Board of Directors to elect a director to fill a vacancy created by the expansion of our 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 our Board of Directors to alter our bylaws without obtaining stockholder approval;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | the ability of our Board of Directors to issue, without stockholder approval, up to 1,000,000 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;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 common
stock was approved in advance by our Board of Directors.



|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.



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SIGNATURES

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 9, 2010 |  | By:                         |  | /s/ John H. Quigley                         
|                        |  |                             |  | John H. Quigley                             
|                        |  |                             |  | President and Chief Executive Officer       
|                        |  |                             |  | (Principal Executive Officer)               
|                        |  |                            
|Dated: November 9, 2010 |  | By:                         |  | /s/ Dennis A. Bencala                       
|                        |  |                             |  | Dennis A. Bencala                           
|                        |  |                             |  | 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 October 3, 2010



|               |  |                                                                                                                                                                                  
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
Number |  | Description                                                                                                                                                                      
|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.
|- | ---------------



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