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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 June 30, 2009

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: 001-33844





ENTROPIC COMMUNICATIONS, INC.

(Exact Name of Registrant as Specified in Its Charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 33-0947630                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)

6290 Sequence Drive

San Diego, CA 92121

(Address of Principal Executive Offices, Including Zip
Code)

(858) 768-3600

(Registrants Telephone Number, Including Area Code)

Indicate by check mark whether the 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) has been subject to
such filing requirements for the past 90 days.    x  Yes     ̈  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 the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                           |  |                      |  |                                               |  |                             
|-------------------------- |  | -------------------- |  | --------------------------------------------- |  | ----------------------------
|Large accelerated filer   ̈ |  | Accelerated filer  x |  | Non-accelerated filer   ̈                      |  | Smaller reporting company   ̈
|                           |  |                      |  | (Do not check if a 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    x  No

There were 70,521,482 shares of the registrants common stock, par value $0.001 per
share, issued and outstanding as of the close of business on July 29, 2009, the latest practicable date.









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##### Table of Contents

ENTROPIC COMMUNICATIONS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2009

TABLE OF CONTENTS



|                             |  |                                                                                                                     |  |   
|---------------------------- |  | ------------------------------------------------------------------------------------------------------------------- |  | --
|PART IFINANCIAL INFORMATION |  |                                                                                                                    
|                             |  |                                                                                                                    
|Item 1.                      |  | Financial Statements                                                                                                |  | 1 
|                             |  |                                                                                                                    
|                             |  | Unaudited Condensed Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008                           |  | 1 
|                             |  |                                                                                                                    
|                             |  | Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008 |  | 2 
|                             |  |                                                                                                                    
|                             |  | Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008           |  | 3 
|                             |  |                                                                                                                    
|                             |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                      |  | 4 
|                             |  |                                                                                                                    
|Item 2.                      |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                               |  | 19
|                             |  |                                                                                                                    
|Item 3.                      |  | Quantitative and Qualitative Disclosures About Market Risk                                                          |  | 29
|                             |  |                                                                                                                    
|Item 4.                      |  | Controls and Procedures                                                                                             |  | 30
|                             | 
|PART IIOTHER INFORMATION    |  |                                                                                                                    
|                             |  |                                                                                                                    
|Item 1A.                     |  | Risk Factors                                                                                                        |  | 31
|                             |  |                                                                                                                    
|Item 2.                      |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                         |  | 54
|                             |  |                                                                                                                    
|Item 4.                      |  | Submission of Matters to a Vote of Security Holders                                                                 |  | 55
|                             |  |                                                                                                                    
|Item 6.                      |  | Exhibits                                                                                                            |  | 55
|                             | 
|SIGNATURES                   |  | 56                                                                                                                 



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##### Table of Contents

PART IFINANCIAL INFORMATION



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

Entropic Communications, Inc.

Unaudited Condensed Consolidated Balance Sheets

(in thousands)



|                                           |  |              |          |   |                     |   |          |  
|------------------------------------------ |  | ------------ | -------- | - | ------------------- | - | -------- | -
|                                           |  | June 30,2009 |          |   | December 31,2008(1) |  
|Assets                                     |  |              |          |   |                     |   |          |  
|Current assets:                            |  |              |          |   |                     |   |          |  
|Cash and cash equivalents                  |  | $            | 31,403   |   |                     | $ | 30,071   |  
|Marketable securities                      |  |              | 850      |   |                     |   | 4,339    |  
|Accounts receivable, net                   |  |              | 14,930   |   |                     |   | 13,915   |  
|Inventory                                  |  |              | 13,462   |   |                     |   | 18,693   |  
|Prepaid expenses and other current assets  |  |              | 3,153    |   |                     |   | 2,785    |  
|                                           |  |              |          |   |                     |   |          |  
|Total current assets                       |  |              | 63,798   |   |                     |   | 69,803   |  
|Property and equipment, net                |  |              | 12,154   |   |                     |   | 13,046   |  
|Intangible assets, net                     |  |              | 2,434    |   |                     |   | 3,469    |  
|Other long-term assets                     |  |              | 278      |   |                     |   | 284      |  
|                                           |  |              |          |   |                     |   |          |  
|Total assets                               |  | $            | 78,664   |   |                     | $ | 86,602   |  
|                                           |  |              |          |   |                     |   |          |  
|Liabilities and Stockholders Equity       |  |              |          |   |                     |   |          |  
|Current liabilities:                       |  |              |          |   |                     |   |          |  
|Accounts payable and accrued expenses      |  | $            | 8,311    |   |                     | $ | 7,873    |  
|Accrued payroll and benefits               |  |              | 3,088    |   |                     |   | 3,498    |  
|Deferred revenues                          |  |              | 184      |   |                     |   | 467      |  
|                                           |  |              |          |   |                     |   |          |  
|Total current liabilities                  |  |              | 11,583   |   |                     |   | 11,838   |  
|Stock repurchase liability                 |  |              | 512      |   |                     |   | 784      |  
|Other long-term liabilities                |  |              | 3,059    |   |                     |   | 3,231    |  
|Stockholders equity:                      |  |              |          |   |                     |   |          |  
|Common stock                               |  |              | 70       |   |                     |   | 69       |  
|Additional paid-in capital                 |  |              | 305,113  |   |                     |   | 299,305  |  
|Accumulated deficit                        |  |              | (241,690 | ) |                     |   | (228,667 | )
|Accumulated other comprehensive income     |  |              | 17       |   |                     |   | 42       |  
|                                           |  |              |          |   |                     |   |          |  
|Total stockholders equity                 |  |              | 63,510   |   |                     |   | 70,749   |  
|                                           |  |              |          |   |                     |   |          |  
|Total liabilities and stockholders equity |  | $            | 78,664   |   |                     | $ | 86,602   |  
|                                           |  |              |          |   |                     |   |          |  



|(1) | The condensed consolidated balance sheet at December 31, 2008 has been derived from the audited financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



1



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Entropic Communications, Inc.

Unaudited Condensed Consolidated Statements of Operations

(in thousands, except per share data)



|                                                                                                     |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                     |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                                                                                     |  | 2009                       |        |   | 2008                     |   |        | 2009 |  |   | 2008    |  
|Net revenues                                                                                         |  | $                          | 26,146 |   |                          | $ | 42,836 |      |  | $ | 50,269  |   |  | $ | 84,824  |  
|Cost of net revenues                                                                                 |  |                            | 13,201 |   |                          |   | 23,869 |      |  |   | 25,105  |   |  |   | 46,706  |  
|                                                                                                     |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Gross profit                                                                                         |  |                            | 12,945 |   |                          |   | 18,967 |      |  |   | 25,164  |   |  |   | 38,118  |  
|Operating expenses:                                                                                  |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Research and development                                                                             |  |                            | 10,102 |   |                          |   | 15,678 |      |  |   | 23,425  |   |  |   | 28,990  |  
|Sales and marketing                                                                                  |  |                            | 3,395  |   |                          |   | 4,455  |      |  |   | 7,032   |   |  |   | 8,599   |  
|General and administrative                                                                           |  |                            | 2,712  |   |                          |   | 3,541  |      |  |   | 5,401   |   |  |   | 7,064   |  
|Write off of in-process research and development                                                     |  |                            |       |   |                          |   | 1,300  |      |  |   |        |   |  |   | 1.300   |  
|Amortization of purchased intangibles                                                                |  |                            |       |   |                          |   | 713    |      |  |   | 16      |   |  |   | 1,309   |  
|Restructuring charges (benefit)                                                                      |  |                            | 979    |   |                          |   | (10    | )    |  |   | 2,103   |   |  |   | 1,069   |  
|Impairment of goodwill and intangible assets                                                         |  |                            |       |   |                          |   |       |      |  |   | 208     |   |  |   |        |  
|                                                                                                     |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                                                                             |  |                            | 17,188 |   |                          |   | 25,677 |      |  |   | 38,185  |   |  |   | 48,331  |  
|                                                                                                     |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Loss from operations                                                                                 |  |                            | (4,243 | ) |                          |   | (6,710 | )    |  |   | (13,021 | ) |  |   | (10,213 | )
|Other income (expense), net                                                                          |  |                            | 30     |   |                          |   | 191    |      |  |   | 89      |   |  |   | (7      | )
|                                                                                                     |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Loss before income taxes                                                                             |  |                            | (4,213 | ) |                          |   | (6,519 | )    |  |   | (12,932 | ) |  |   | (10,220 | )
|                                                                                                     |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Income tax provision (benefit)                                                                       |  |                            | 74     |   |                          |   | (72    | )    |  |   | 91      |   |  |   | 82      |  
|                                                                                                     |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Net loss attributable to common stockholders                                                         |  | $                          | (4,287 | ) |                          | $ | (6,447 | )    |  | $ | (13,023 | ) |  | $ | (10,302 | )
|                                                                                                     |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Net loss per share attributable to common stockholders  basic and diluted                           |  | $                          | (0.06  | ) |                          | $ | (0.10  | )    |  | $ | (0.19   | ) |  | $ | (0.15   | )
|                                                                                                     |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Weighted average number of shares used to compute loss per share attributable to common stockholders |  |                            | 69,424 |   |                          |   | 67,215 |      |  |   | 69,113  |   |  |   | 67,023  |  
|                                                                                                     |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  

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



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Entropic Communications, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)



|                                                                            |  |                          |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                                                                            |  | Six Months EndedJune 30, |        
|                                                                            |  | 2009                     |         |   | 2008 |  
|Operating activities:                                                       |  |                          |         |   |      |   |         |  
|Net loss                                                                    |  | $                        | (13,023 | ) |      | $ | (10,302 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                          |         |   |      |   |         |  
|Depreciation and amortization                                               |  |                          | 1,718   |   |      |   | 1,514   |  
|Amortization of intangible assets                                           |  |                          | 827     |   |      |   | 4,139   |  
|Impairment of goodwill and intangible assets                                |  |                          | 208     |   |      |   |        |  
|Stock-based compensation to consultants                                     |  |                          | 9       |   |      |   | 84      |  
|Stock-based compensation to employees                                       |  |                          | 5,019   |   |      |   | 6,912   |  
|Interest expense attributable to amortization of debt issuance costs        |  |                          |        |   |      |   | 476     |  
|In-process research and development                                         |  |                          |        |   |      |   | 1,300   |  
|Impairment of assets related to restructuring charge                        |  |                          | 145     |   |      |   | 259     |  
|Loss on disposal of assets                                                  |  |                          |        |   |      |   | 8       |  
|Changes in operating assets and liabilities:                                |  |                          |         |   |      |   |         |  
|Restricted cash                                                             |  |                          |        |   |      |   | 58      |  
|Accounts receivable                                                         |  |                          | (1,016  | ) |      |   | (11,097 | )
|Inventory                                                                   |  |                          | 5,231   |   |      |   | (5,733  | )
|Prepaid expenses and other current assets                                   |  |                          | (368    | ) |      |   | 313     |  
|Other long-term assets                                                      |  |                          | 6       |   |      |   | 43      |  
|Accounts payable and accrued expenses                                       |  |                          | 438     |   |      |   | 3,050   |  
|Accrued payroll and benefits                                                |  |                          | (435    | ) |      |   | 1,102   |  
|Deferred revenues                                                           |  |                          | (282    | ) |      |   | (116    | )
|Other long-term liabilities                                                 |  |                          | (173    | ) |      |   | 1,258   |  
|                                                                            |  |                          |         |   |      |   |         |  
|Net cash used in operating activities                                       |  |                          | (1,696  | ) |      |   | (6,732  | )
|Investing activities:                                                       |  |                          |         |   |      |   |         |  
|Purchases of property and equipment                                         |  |                          | (971    | ) |      |   | (5,269  | )
|Purchases of marketable securities                                          |  |                          |        |   |      |   | (17,144 | )
|Sales/maturities of marketable securities                                   |  |                          | 3,489   |   |      |   | 8,100   |  
|Net cash used in acquisitions                                               |  |                          |        |   |      |   | (6,113  | )
|                                                                            |  |                          |         |   |      |   |         |  
|Net cash provided by (used in) investing activities                         |  |                          | 2,518   |   |      |   | (20,426 | )
|Financing activities:                                                       |  |                          |         |   |      |   |         |  
|Principal payments on software license and capital lease obligations        |  |                          |        |   |      |   | (9,121  | )
|Net proceeds from the issuance of common stock, net of issuance costs       |  |                          | 510     |   |      |   | 1,831   |  
|                                                                            |  |                          |         |   |      |   |         |  
|Net cash provided by (used in) financing activities                         |  |                          | 510     |   |      |   | (7,290  | )
|                                                                            |  |                          |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                        |  |                          | 1,332   |   |      |   | (34,448 | )
|Cash and cash equivalents at beginning of period                            |  |                          | 30,071  |   |      |   | 51,475  |  
|                                                                            |  |                          |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                  |  | $                        | 31,403  |   |      | $ | 17,027  |  
|                                                                            |  |                          |         |   |      |   |         |  

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



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ENTROPIC COMMUNICATIONS, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2009

1. Organization and Summary of Significant Accounting Policies

Business

Entropic Communications, Inc. (the
Company) was organized under the laws of the state of Delaware on January 31, 2001. The Company is a fabless semiconductor company that designs, develops and markets systems solutions to enable connected home entertainment.

Basis of Presentation

The
accompanying interim unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission (SEC). They do not include all of the information and footnotes required by GAAP for complete financial statements.
These financial statements should be read in conjunction with the Companys audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2008 included in the Companys Annual Report on Form
10-K (Annual Report) filed on February 23, 2009 with the SEC.

The interim condensed consolidated financial statements
included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly the Companys consolidated financial position, results of operations and cash
flows as of and for the interim periods presented. Interim results are not necessarily indicative of the results to be expected for future quarters or the full year.

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated in
consolidation. In preparing the accompanying unaudited condensed consolidated financial statements and in accordance with the recently issued Statement of Financial Accounting Standards (SFAS) No. 165, Subsequent Events
(SFAS 165), the Company evaluated subsequent events after the balance sheet date of June 30, 2009 through August 3, 2009, the date that these financial statements are issued.

Use of Estimates

The preparation of financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Among the significant estimates affecting the
condensed consolidated financial statements are those related to business combinations, revenue recognition, allowance for doubtful accounts, inventory reserves, long-lived assets (including goodwill and intangible assets), warranty reserves,
accrued bonuses, income taxes, valuation of equity securities and stock-based compensation. On an on-going basis, management reviews its estimates based upon currently available information. Actual results could differ materially from those
estimates.

Foreign Currency Translation

The functional currency for the Companys foreign subsidiaries is the local currency. Assets and liabilities denominated in foreign currencies are translated using the exchange rates on the balance sheet dates. Revenues and expenses
are translated using the average exchange rates prevailing during the year. Any translation adjustments resulting from this process are shown separately as a component of accumulated other comprehensive income within stockholders equity in the
consolidated balance sheets. Foreign currency transaction gains and losses are reported in operating expense, net in the consolidated statements of operations.



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Revenue Recognition

The Companys revenues are generated principally by sales of its semiconductor products. During each of the three and six month periods ended June 30, 2009 and 2008, product revenues represented more than
99% of the Companys total net revenues. The Company also generates service revenues from development contracts.

The majority of the
Companys sales occur through the efforts of its direct sales force. The remainder of the Companys sales occurs through distributors. During each of the three and six month periods ended June 30, 2009 and 2008, more than 99% of the
Companys sales occurred through the efforts of its direct sales force.

In accordance with SEC Staff Accounting Bulletin
(SAB) No. 101,Revenue Recognition in Financial Statements, and SAB No. 104,Revenue Recognition, the Company recognizes product revenues when the following fundamental criteria are met: (i) persuasive
evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price to the customer is fixed or determinable and (iv) collection of the resulting receivable is reasonably assured. These
criteria are usually met at the time of product shipment. However, the Company does not recognize revenue until all customer acceptance requirements have been met, when applicable.

A portion of the Companys sales are made through distributors, agents, or customers acting as agents under agreements allowing for pricing credits
and/or rights of return. Product revenues on sales made through these distributors are not recognized until the distributors ship the product to their customers.

The Company records reductions to revenues for estimated product returns and pricing adjustments, such as competitive pricing programs, in the same period that the related revenue is recorded. The amount of these
reductions is based on historical sales returns and other factors known at the time. If actual returns differ significantly from the Companys estimates, such differences would be recorded in the Companys results of operations for the
period in which the actual returns become known. To date, changes in estimated returns have not been material to net revenues in any related period.

The Company also has entered into an inventory hubbing arrangement with a key customer. Pursuant to this arrangement, the Company delivers products to the designated third-party warehouse based upon the
customers projected needs, but does not recognize product revenue unless and until the customer removes the Companys products from the third-party warehouse to incorporate into its own products.

The Company derives revenues from development contracts that involve new and unproven technologies. Revenues under these contracts are deferred until
customer acceptance is obtained, and other contract-specific terms have been completed in accordance with the completed contract method of American Institute of Certified Public Accountants (AICPA) Statement of Position 81-1,Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Provisions for losses related to development contracts, if any, are recognized in the period in which the loss first becomes probable and reasonably
estimable. The costs associated with development contracts are included in cost of service revenue. The Company defers the cost of services provided under its development contracts.

The Company has a development agreement that provides for royalties in exchange for an exclusive right to manufacture and sell certain products. The
Company has determined that it is not able to estimate reliably the royalties earned in the period the sales occur. Thus, the Company records revenues based on cash receipts. The royalty revenues recorded during the three months ended June 30,
2009 and 2008 and the six months ended June 30, 2009 and 2008 were $611,000, $797,000, $1,170,000 and $1,763,000, respectively.

The
Company has also entered into arrangements to license its hardware and software, also referred to as the nodes, with certain members of the Multimedia over Coax Alliance (MoCA) for a period of three years and provide upgrades
when and if they become available. The agreements limit the rights to use the nodes to test compliance of the members own product to the MoCA specification. For these arrangements, the Company follows AICPA Statement of Position 97-2,
Software Revenue Recognition. The Company defers all of the license revenues when the nodes are delivered and recognizes the revenues on a straight-line basis over the three-year term.



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Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents, marketable securities, accounts receivable, leases payable and lines of
credit. The Companys policy is to place its cash and cash equivalents with high quality financial institutions in order to limit its credit exposure. Credit is extended based on an evaluation of the customers financial condition and a
cash deposit is generally not required. The Company estimates potential losses on trade receivables on an ongoing basis.

The Company
invests cash in deposits and money market funds with major financial institutions, U.S. government obligations and debt securities of corporations with investment grade credit ratings in a variety of industries. It is the Companys policy
to invest in instruments that have a final maturity of no longer than two years, with a portfolio weighted average maturity of no longer than 12 months.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market. Lower of cost or market
adjustments reduce the carrying value of the related inventory and take into consideration reductions in sales prices, excess inventory levels and obsolete inventory. These adjustments are done on a part-by-part basis. Once established, these
adjustments are considered permanent and are not reversed until the related inventory is sold or disposed.

Goodwill and Intangible Assets

The Company records goodwill and other intangible assets in accordance with SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS 142). The acquisition method of accounting requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired. The Company
uses the discounted cash flow method to estimate the value of intangible assets acquired. The estimates used to value and amortize intangible assets are consistent with the plans and estimates that the Company uses to manage its business and are
based on available historical information and industry estimates and averages.

SFAS 142 requires that goodwill and certain intangible
assets be assessed for impairment on an annual basis, or more frequently if indicators of impairment exist, using fair value measurement techniques. SFAS 142 requires an interim goodwill impairment test if it is more likely than not that the fair
value of a reporting unit is less than the carrying amount. The Company operates within one reporting unit. The goodwill impairment test compares the implied fair value of the reporting units goodwill with the carrying amount of that goodwill
to measure the amount of the impairment loss, if any. The implied fair value of goodwill is determined in the same manner as in a business combination. Determining the fair value of the implied goodwill is judgmental in nature and often involves the
use of significant estimates and assumptions. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the magnitude of any such charge. Estimates of fair value are primarily
determined using discounted cash flows and market comparisons. These approaches use significant estimates and assumptions, including the size and timing of deployments by the Companys customers and related projections and timing of future cash
flows, discount rates reflecting the risk inherent in future cash flows, perpetual growth rates, stage of products in development, determination of appropriate market comparables, and determination of whether a premium or discount should be applied
to comparables.

During the three months ended March 31, 2009, the Company implemented a restructuring plan. See Note 2 regarding the
Companys March 2009 restructuring plan. As part of the restructuring plan, the Company closed its Kfar Saba, Israel office and terminated all of the employees at that location. As a result of this location closure, the Company reassessed the
intangible assets associated with the Kfar Saba, Israel office and, in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets(SFAS 144), recorded an impairment charge for the remaining
$208,000 of developed technology intangible assets associated with the Companys 2007 acquisition of Arabella Software, Ltd. (Arabella).

Guarantees and Indemnifications

In the ordinary course of business, the Company has entered into agreements with customers
that include indemnity provisions. To date, there have been no known events or circumstances that have resulted in any significant costs related to these indemnification provisions, and as a result, no liabilities have been recorded in the
accompanying interim unaudited financial statements.



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##### Table of Contents

Rebates

The Company accounts for rebates in accordance with Emerging Issues Task Force (EITF) Issue No. 01-9,Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors Products),
and, accordingly, at the time of the sale, the Company accrues 100% of the potential rebate as a reduction to revenue and does not apply a breakage factor. The amount of these reductions is based upon the terms included in various rebate agreements.
The Company reverses the accrual for unclaimed rebate amounts as specific rebate programs contractually end or when the Company believes unclaimed rebates are no longer subject to payment and will not be paid. For the three months ended
June 30, 2009 and 2008 and the six months ended June 30, 2009 and 2008, the Company reduced net revenues by $2,000, $86,000, $229,000, and $350,000, respectively, in connection with its rebate programs.

Warranty Accrual

The Company generally provides a
warranty on its products for a period of one year; however, it may be longer for certain customers. Accordingly, the Company establishes provisions for estimated product warranty costs at the time revenue is recognized as cost of net revenues. The
warranty accrual is based on managements best estimate of expected costs associated with product failure and historical product failures. When the actual product failure rates, cost of replacements and rework costs differ from the
Companys estimates, revisions to the estimated warranty accrual are made. Actual claims are charged against the warranty reserve.

Research and
Development Costs

Research and development costs are expensed as incurred and primarily include costs related to personnel, outside
services, which consist primarily of contract labor services, fabrication masks, architecture licenses, engineering design development software and hardware tools, allocated facilities expenses and depreciation of equipment used in research and
development.

Income Taxes

The Company
utilizes the liability method of accounting for income taxes as set forth in SFAS No. 109, Accounting for Income Taxes (SFAS 109). Under the liability method, deferred taxes are determined based on the temporary differences
between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is more likely than not that some of
the deferred tax assets will not be realized.

The Company also follows Financial Accounting Standards Board (FASB)
Interpretation No. 48,Accounting for Uncertainty in Income TaxesAn Interpretation of FASB Statement No. 109 (FIN 48), which provides detailed guidance for the financial statement recognition, measurement and
disclosure of uncertain tax positions recognized in an enterprises financial statements in accordance with SFAS 109. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the
adoption of FIN 48 and in subsequent periods. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits within operations as income tax expense.



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##### Table of Contents

Stock-Based Compensation

The Company has stock incentive plans under which incentive stock options have been granted to employees and restricted stock units and non-qualified stock options have been granted to employees and non-employees. The
Company also has an employee stock purchase plan for all eligible employees.

The Company follows the provisions of SFAS No. 123
(revised 2004),Share-Based Payment (SFAS 123R), including the provisions of SAB No. 107 (SAB 107) and SAB No. 110 (SAB 110) for stock-based compensation. Under SFAS 123R, stock-based compensation
cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employees requisite service period. The Company has no stock-based compensation awards with market or performance
conditions. The stock-based compensation expense attributable to awards under the Companys 2007 Employee Stock Purchase Plan (the ESPP) was determined using the Black-Scholes option pricing model and the provisions of FASB
Technical Bulletin No. 97-1, Accounting under Statement 123 for Certain Employee Stock Purchase Plans with a Look-Back Option, as amended by SFAS 123R.

The Company accounts for stock-based compensation awards granted to non-employees in accordance with EITF Issue No. 96-18,Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services (EITF 96-18). Under EITF 96-18, the Company determines the fair value of the stock-based compensation awards granted as either the fair value of the consideration received
or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either
(1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterpartys performance is complete.

The Company recognizes excess tax benefits associated with stock-based compensation to stockholders equity only when realized. When assessing
whether excess tax benefits relating to stock-based compensation have been realized, the Company follows the with and without approach excluding any indirect effects to be realized until after the utilization of all other tax benefits
available to the Company.

Segment Reporting

SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information (SFAS 131), establishes standards for the way public business enterprises report information about operating segments in annual
consolidated financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS 131 also establishes standards for related disclosures about products and services,
geographic areas and major customers.

Operating segments are defined as components of an enterprise for which separate financial
information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company is organized as, and operates in, one reportable
segment: the design, development and sale of silicon integrated circuits. Products within this segment are embedded in electronic devices used to enable the delivery of multiple streams of high definition video and other multimedia content for
entertainment purposes into and throughout the home. The Companys chief operating decision maker is its Chief Executive Officer (CEO). The CEO reviews financial information presented on a consolidated basis evaluating financial
performance and allocating resources. There are no segment managers who are held accountable for operations below the consolidated financial statement level. The Companys assets are primarily located in the United States of America and not
allocated to any specific region. Therefore, geographic information is presented only for total revenue.



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##### Table of Contents

Recently Issued Accounting Standards

In December 2007, the FASB issued SFAS No. 141R,Business Combinations (SFAS 141R). SFAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures
in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for financial statements issued for fiscal years
beginning after December 15, 2008. The impact of adoption of the Companys consolidated financial statements will ultimately depend on the terms of any future business transactions.

On February 6, 2008, the FASB issued a final FASB Staff Position (FSP) on SFAS 157-b, Effective Date of FASB Statement
No. 157 (SFAS 157). This FSP delays the effective date of SFAS 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. The
effective date of SFAS 157 for non-financial assets and liabilities has been delayed by one year to years beginning after November 15, 2008. The Company does not believe the adoption of this statement will have any material impact on the
Companys future consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities-an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 requires enhanced disclosure related to derivatives and hedging activities and thereby seeks to improve the transparency of financial
reporting. Under SFAS 161, entities are required to provide enhanced disclosures relating to: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedge items are accounted for under SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133) and its related interpretations; and (c) how derivative instruments and related hedged items affect an entitys financial position,
financial performance, and cash flows. SFAS 161 must be applied prospectively to all derivative instruments and non-derivative instruments that are designated and qualify as hedging instruments and related hedged items accounted for under SFAS 133
for all financial statements issued for fiscal years and interim periods beginning after November 15, 2008. At this time, the Company does not invest in derivative instruments or hedging activities, and accordingly, the adoption of SFAS 161
will have no impact on the Companys future consolidated financial statements unless the Company invests in derivative instruments or engages in hedging activities in the future, if ever.

In June 2008, the FASB reached a consensus on EITF Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entitys Own Stock, (EITF 07-5). EITF 07-5 is effective for fiscal years beginning after December 15, 2008. The adoption of EITF 07-05 did not have a material impact on the Companys consolidated financial statements.

In November 2008, FASB ratified EITF Issue No. 08-7, Accounting for Defensive Intangible Assets, (EITF 08-7). EITF
08-7 applies to defensive intangible assets, which are acquired intangible assets that the acquirer does not intend to actively use but intends to hold to prevent its competitors from obtaining access to them. As these assets are separately
identifiable, EITF 08-7 requires an acquiring entity to account for defensive intangible assets as a separate unit of accounting which should be amortized to expense over the period the asset diminished in value. Defensive intangible assets must be
recognized at fair value in accordance with SFAS 141R and SFAS 157. EITF 08-7 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company adopted EITF 08-7 on January 1, 2009. In the six
months of 2009, the Company did not acquire any intangible assets and the adoption of EITF Issue 08-7 did not have a material impact on the Companys future consolidated financial statements.



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In April 2009, the FASB issued FSP No. FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies (FSP 141(R)-1) to amend SFAS 141R. FSP 141(R)-1 addresses the initial recognition, measurement and subsequent accounting for assets and liabilities
arising from contingencies in a business combination, and requires that such assets acquired or liabilities assumed be initially recognized at fair value at the acquisition date if fair value can be determined during the measurement period. If the
acquisition-date fair value cannot be determined, the asset acquired or liability assumed arising from a contingency is recognized only if certain criteria are met. This FSP also requires that a systematic and rational basis for subsequently
measuring and accounting for the assets or liabilities be developed depending on their nature. This FSP is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is during or after
2010. The Company does not anticipate the adoption of this statement will have a material impact on its future consolidated financial statements, absent any material business combinations.

Also in April 2009, the FASB issued FSP FAS 107-1, Interim Disclosures about Fair Value of Financial Instruments (FSP 107-1), and FSP
FAS 115-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP 115-2), which the Company adopted on a prospective basis beginning April 1, 2009. These positions extend the disclosure requirements of SFAS
No. 107, Disclosures about Fair Value of Financial Instruments (SFAS 107) and SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115) to interim financial statements
of publicly traded companies. The application of FSP 107-1 and FSP 115-2 did not have an impact on the Companys consolidated financial statements.

In May 2009, the FASB issued SFAS 165 which we adopted on a prospective basis beginning April 1, 2009. SFAS 165 is intended to establish general standards of accounting and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for selecting that date. The application of
SFAS 165 did not have an impact on the Companys consolidated financial statements.

2. Supplemental Financial Information

Fair Value of Financial Instruments

The Company holds
certain financial assets, including cash equivalents and marketable securities that are required to be measured at fair value on a recurring basis. Cash equivalents include commercial paper and corporate bonds of high credit quality. Marketable
securities are carried at amortized cost which approximates fair value. SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable
inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data
exists, therefore requiring an entity to develop its own assumptions.

The fair value of the Companys financial assets subject to the
disclosure requirements of SFAS 157 was determined using the following levels of inputs as of June 30, 2009 (in thousands):



|                      |  |                                             |        |         |   |         |  |         |   |  |   |  
|--------------------- |  | ------------------------------------------- | ------ | ------- | - | ------- |  | ------- | - |  | - | -
|                      |  | Fair Value Measurements as of June 30, 2009
|                      |  | Total                                       |        | Level 1 |   | Level 2 |  | Level 3
|Assets:               |  |                                             |        |         |   |         |  |         |   |  |   |  
|Cash equivalents      |  | $                                           | 23,283 |         | $ | 23,283  |  | $       |  |  | $ | 
|Marketable securities |  |                                             | 850    |         |   | 850     |  |         |  |  |   | 
|                      |  |                                             |        |         |   |         |  |         |   |  |   |  
|Total                 |  | $                                           | 24,133 |         | $ | 24,133  |  | $       |  |  | $ | 
|                      |  |                                             |        |         |   |         |  |         |   |  |   |  

During the six months ended June 30, 2009, no transfers were made into or out of the Level 3
category.



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##### Table of Contents

Inventory

The components of the Companys inventory were as follows (in thousands):



|                |  |                       |        |                       |   |       
|--------------- |  | --------------------- | ------ | --------------------- | - | ------
|                |  | As of    June 30,2009 |        | As ofDecember 31,2008
|Work-in-process |  | $                     | 5,940  |                       | $ | 7,561 
|Finished goods  |  |                       | 7,522  |                       |   | 11,132
|                |  |                       |        |                       |   |       
|Total inventory |  | $                     | 13,462 |                       | $ | 18,693
|                |  |                       |        |                       |   |       

Property and Equipment

Property and equipment consisted of the following (in thousands, except for years):



|                                |  |                        |  |                   |        |   |                       |   |        |  
|------------------------------- |  | ---------------------- |  | ----------------- | ------ | - | --------------------- | - | ------ | -
|                                |  | Useful Lives(in years) |  | As ofJune 30,2009 |        |   | As ofDecember 31,2008 |  
|Office and laboratory equipment |  | 5                      |  | $                 | 8,708  |   |                       | $ | 8,148  |  
|Computer equipment              |  | 3-5                    |  |                   | 2,138  |   |                       |   | 2,111  |  
|Furniture and fixtures          |  | 6-7                    |  |                   | 1,540  |   |                       |   | 1,579  |  
|Leasehold improvements          |  | Lease term             |  |                   | 5,029  |   |                       |   | 4,938  |  
|Licensed software               |  | 1-3                    |  |                   | 1,214  |   |                       |   | 1,235  |  
|Construction in progress        |  |                        |  |                   | 190    |   |                       |   | 125    |  
|                                |  |                        |  |                   |        |   |                       |   |        |  
|                                |  |                        |  |                   | 18,819 |   |                       |   | 18,136 |  
|Accumulated depreciation        |  |                        |  |                   | (6,665 | ) |                       |   | (5,090 | )
|                                |  |                        |  |                   |        |   |                       |   |        |  
|Property and equipment, net     |  |                        |  | $                 | 12,154 |   |                       | $ | 13,046 |  
|                                |  |                        |  |                   |        |   |                       |   |        |  

Depreciation and amortization expense for the three months ended June 30, 2009 and 2008 and
the six months ended June 30, 2009 and 2008 was $870,000, $855,000, $1,718,000 and $1,514,000, respectively.

Intangible Assets

Intangible assets consisted of the following (in thousands):



|                     |  |                     |        |                          |   |        |            |  |   |         |   |  |   |      
|-------------------- |  | ------------------- | ------ | ------------------------ | - | ------ | ---------- |  | - | ------- | - |  | - | -----
|                     |  | As of June 30, 2009
|                     |  | Gross               |        | Accumulated Amortization |   |        | Impairment |  |   | Net    
|Developed technology |  | $                   | 24,800 |                          | $ | (8,251 | )          |  | $ | (14,115 | ) |  | $ | 2,434
|                     |  |                     |        |                          |   |        |            |  |   |         |   |  |   |      

As of June 30, 2009, the estimated future amortization expenses of intangible assets expected
to be charged to cost of net revenues for the remainder of the fiscal year ending December 31, 2009, and periods thereafter, are as follows (in thousands):



|                          |  |                     |      
|------------------------- |  | ------------------- | -----
|Years Ending December 31, |  | Cost of NetRevenues
|Remainder of 2009         |  | $                   | 811  
|2010                      |  |                     | 1,623
|                          |  |                     |      
|Total                     |  | $                   | 2,434
|                          |  |                     |      



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Accrued Warranty

The following table presents a rollforward of the Companys product warranty liability, which is included within accounts payable and accrued expenses in the unaudited condensed consolidated balance sheets (in
thousands):



|                                                                         |  |                    |      |  
|------------------------------------------------------------------------ |  | ------------------ | ---- | -
|                                                                         |  | As ofJune 30, 2009 |     
|Liability as of December 31, 2008                                        |  | $                  | 348  |  
|Expirations                                                              |  |                    | (284 | )
|Accruals for warranties issued during the six months ended June 30, 2009 |  |                    | 229  |  
|Settlements made during the six months ended June 30, 2009               |  |                    | (52  | )
|                                                                         |  |                    |      |  
|Liability as of June 30, 2009                                            |  | $                  | 241  |  
|                                                                         |  |                    |      |  

Accrued Management Bonuses

The Company maintains a discretionary management bonus plan. The potential bonus payments made under the plan are based significantly on the achievement of operational, financial and business development objectives
for the calendar year. As of June 30, 2009, the Company believed the achievement of certain performance targets for the management bonuses is probable. As of June 30, 2009, the Company accrued $348,000 for these bonuses.

Restructuring Activity

In accordance with SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal Activities, (SFAS 146), as of June 30, 2009 the Company has accrued for termination benefits in association with a reduction-in-force in March 2009.
Worldwide, 55 employees were impacted, and as of June 30, 2009, all of the impacted US employees have been terminated and received severance payments upon the signing of a separation agreement. The Israeli and French employees were required by
contract or law to receive notice period payments in addition to severance payments. During the three month period ended June 30, 2009, the Company finalized certain severance agreements with its employees in France and Israel resulting in
additional severance expense. Consistent with SFAS 146, the Company believes that the statutory notice periods given to the Israeli and French employees represent a one-time termination benefit since the employees will receive the notice period
payment regardless of whether they work because the Company is required by law to pay them as part of their termination.

The
Companys restructuring plan also includes vacating certain facilities and recording restructuring charges for termination of operating leases and other contract costs as restructuring costs in the period when the Company ceases to use rights
conveyed by the contract. Additionally, costs such as attorney fees incurred as a result of this activity will be charged as restructuring costs as they are incurred.

The intangible assets associated with the acquisition of Arabella were determined to be fully impaired as of March 31, 2009, as the core technology acquired will no longer be used in the on-going business
operations and the future cash flows associated with this technology are zero. The Company made a decision on March 22, 2009 to cease use of the technology and does not have any plans to use it in future operations.

As a result of the restructuring plan, the Company recorded restructuring charges of $979,000 and $2,103,000 during the three months and six months ended
June 30, 2009, respectively. The restructuring plan is on-going and the Company anticipates recording approximately an additional $100,000 of restructuring charges during the three months ending September 30, 2009 as these plans are
finalized.



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##### Table of Contents

The following table presents the Companys restructuring liability in the interim condensed
consolidated balance sheets (in thousands):



|                                  |  |                            |    |   |                                     |   |      |                                    |  |   |                                     |   |  |       |        |   |  |   |        |  
|--------------------------------- |  | -------------------------- | -- | - | ----------------------------------- | - | ---- | ---------------------------------- |  | - | ----------------------------------- | - |  | ----- | ------ | - |  | - | ------ | -
|                                  |  | Operating leasecommitments |    |   | Impairment of property andequipment |   |      | Impairment ofother long-termassets |  |   | Employee    separation     expenses |   |  | Total |       
|Liability as of December 31, 2008 |  | $                          |   |   |                                     | $ |     |                                    |  | $ |                                    |   |  | $     |       |   |  | $ |       |  
|Additions                         |  |                            | 6  |   |                                     |   | 156  |                                    |  |   | 2                                   |   |  |       | 1,939  |   |  |   | 2,103  |  
|Non-cash items                    |  |                            | (6 | ) |                                     |   | (145 | )                                  |  |   | (2                                  | ) |  |       |       |   |  |   | (153   | )
|Cash items                        |  |                            |   |   |                                     |   | (11  | )                                  |  |   |                                    |   |  |       | (1,520 | ) |  |   | (1,531 | )
|                                  |  |                            |    |   |                                     |   |      |                                    |  |   |                                     |   |  |       |        |   |  |   |        |  
|Liability at June 30, 2009        |  | $                          |   |   |                                     | $ |     |                                    |  | $ |                                    |   |  | $     | 419    |   |  | $ | 419    |  
|                                  |  |                            |    |   |                                     |   |      |                                    |  |   |                                     |   |  |       |        |   |  |   |        |  

Debt

On April 3, 2009, Silicon Valley Bank (SVB) extended the termination date of the Companys existing $10,000,000 revolving credit line from April 6, 2009 to April 24, 2009.

On April 22, 2009, the Company entered into an Amendment to Loan and Security Agreement (Amendment) with SVB to extend further the term
of the credit line to April 21, 2010. The Amendment eliminated the Companys prior option to increase the maximum amount of credit available under the credit line from $10,000,000 to $15,000,000 and restricts the Companys ability to
transfer assets or collateral to, or make investments in, certain of its subsidiaries in an amount that exceeds $400,000 per month in the aggregate. In addition, under the Amendment, the Company is required to pay SVB a fee equal to 0.25% per
annum (the Unused Revolving Line Fee Percentage) of the average unused portion of the credit line on a monthly basis, in arrears, and the interest rate applicable to amounts outstanding under the credit line is at prime rate plus 0.5%.
However, if the liquidity ratio is less than 1.75 to 1, then the Unused Revolving Line Fee Percentage will be increased to 0.5% per annum and the interest rate will be prime rate plus 2.0%. The amount available under the credit line cannot
exceed 80% of the value of the Companys eligible accounts receivable and may be decreased by certain commitments, such as the $1,160,000 and $35,000 standby letters of credit that secure the Companys performance under its headquarters
facility lease and its San Jose facility lease, respectively. As of June 30, 2009, there were no other amounts outstanding under the credit line and $8.8 million was available under the credit line.

Deferred Rent

The Company recognized rent expense on
a straight-line basis over the lease term as defined in SFAS No. 13,Accounting for Leasesand FASB Technical Bulletin No. 85-3, Accounting for Operating Leases with Scheduled Rent Increases. In addition, the Company
recorded landlord allowances for tenant improvements as deferred rent, in accordance with FASB Technical Bulletin No. 88-1,Issues Related to Accounting for Leases. The deferred rent is amortized over the lease term as a reduction of
rent expense. As of June 30, 2009 and December 31, 2008, there was $2,405,000 and $2,524,000, respectively, of unamortized deferred rent recorded as a component of other long-term liabilities.

Purchase Commitments

The Company had firm purchase
order commitments for the acquisition of inventory as of June 30, 2009 and December 31, 2008 of $6,205,000 and $4,303,000, respectively.

Stock-Based Compensation

The Company has in effect equity incentive plans under which incentive stock options and
non-qualified stock options have been granted to employees, directors and consultants to purchase shares of the Companys common stock at a price not less than the fair market value of the stock at the date of grant, except for certain options
assumed in connection with a business combination. These equity plans include the 2007 Non-Employee Directors Stock Option Plan, under which the Company continues to grant non-qualified stock options, and the 2007 Equity Incentive Plan, under
which the Company continues to grant non-qualified stock options and restricted stock units. These plans are described in the Annual Report.



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The Company also grants stock awards under its ESPP. Under the terms of the ESPP, eligible employees may
purchase shares of the Companys common stock at the lesser of 85% of the fair market value of the Companys common stock on the offering date or the purchase date.

Stock-based compensation expense recognized in the Companys statement of operations for the three and six months ended June 30, 2009 and 2008,
included compensation expense for stock-based options and awards granted subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with SFAS 123R. For options and awards granted during the three and six months
ended June 30, 2009 and 2008, expenses are amortized under the straight-line method. Stock-based compensation expense recognized in the statement of operations for the three and six months ended June 30, 2009 and 2008 have been reduced for
estimated forfeitures of options that are subject to vesting. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The fair value of options granted after January 1, 2006 and awards under the ESPP are estimated on the grant date using the Black-Scholes option
valuation model. This valuation model requires the Company to make assumptions and judgments about the variables used in the fair value calculation, including the expected life of the option or award, the volatility of the price of Companys
common stock, the expected risk-free interest rate and the expected dividend yield. The expected life for stock options reflects the application of the simplified method set out in SAB 107, as renewed by SAB 110. The expected life of an award
granted under the ESPP is based upon the length of the applicable offering periods. The risk-free interest rate is based on zero coupon U.S. Treasury instruments with maturities similar to those of the expected term of the award being valued. The
simplified method defines the life as the average of the contractual term of the options and the weighted-average vesting period for all option tranches. The estimated volatility reflects the application of the interpretive guidance provided by SAB
107 and, accordingly, incorporates historical volatility of similar entities whose share prices are publicly available. The expected dividend yield is based on the Companys expectation of not paying dividends on the common stock for the
foreseeable future.

The Company continues to use the simplified method of accounting for stock option expense costs because it is unable
to rely on its historical exercise data to provide a reasonable basis to estimate expected term due to the limited period of time its equity shares have been publicly traded. The Company uses the simplified approach on all of its grants.

The following assumptions are used to value options and awards granted under the Companys equity incentive plans for the three and six months
ended June 30, 2009 and 2008:



|                        |  |                            |  |                              |  |                             |  |                           |  |               |  |             |  |               |  |            
|----------------------- |  | -------------------------- |  | ---------------------------- |  | --------------------------- |  | ------------------------- |  | ------------- |  | ----------- |  | ------------- |  | -----------
|                        |  | Employee stock options     |  | Employee Stock Purchase Plan
|                        |  | Three Months EndedJune 30, |  | Six Months EndedJune 30,     |  | Three Months Ended June 30, |  | Six Months Ended June 30,
|                        |  | 2009                       |  | 2008                         |  | 2009                        |  | 2008                      |  | 2009          |  | 2008        |  | 2009          |  | 2008       
|Expected life (years)   |  | 6.08                       |  | 6.01                         |  | 6.08                        |  | 6.01                      |  | 0.5 - 1.0     |  | 0.01 - 1.01 |  | 0.5 - 1.0     |  | 0.01 - 1.01
|Risk-free interest rate |  | 3.18%                      |  | 3.2%                         |  | 3.18%                       |  | 3.2 - 4.0%                |  | 0.16% - 0.92% |  | 0.8 - 1.98% |  | 0.16% - 0.92% |  | 0.8 - 1.98%
|Expected volatility     |  | 99%                        |  | 68%                          |  | 99%                         |  | 68%                       |  | 180% - 151%   |  | 76%         |  | 180% - 151%   |  | 76%        
|Expected dividend yield |  |                           |  |                             |  |                            |  |                          |  |              |  |            |  |              |  |           



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##### Table of Contents

The following table shows total stock-based compensation expense included in the unaudited condensed
consolidated statements of operations for the three months and six months ended June 30, 2009 and 2008 (in thousands):



|                           |          |                    |          |                  |   |       |  |      |       |  |   |      
|-------------------------- | -------- | ------------------ | -------- | ---------------- | - | ----- |  | ---- | ----- |  | - | -----
|                           |          | Three Months Ended |          | Six Months Ended
|                           | June 30, |                    | June 30,
|                           |          | 2009               |          | 2008             |   | 2009  |  | 2008
|Cost of sales              |          | $                  | 45       |                  | $ | 64    |  | $    | 61    |  | $ | 110  
|Research and development   |          |                    | 996      |                  |   | 1,829 |  |      | 2,518 |  |   | 3,587
|Sales and marketing        |          |                    | 326      |                  |   | 611   |  |      | 694   |  |   | 1,234
|General and administrative |          |                    | 853      |                  |   | 868   |  |      | 1,755 |  |   | 2,065
|                           |          |                    |          |                  |   |       |  |      |       |  |   |      
|                           |          | $                  | 2,220    |                  | $ | 3,372 |  | $    | 5,028 |  | $ | 6,996
|                           |          |                    |          |                  |   |       |  |      |       |  |   |      

For the three and six months ended June 30, 2009 and 2008, the Company recorded stock-based
compensation expense for non-employees of $7,000, $58,000, $9,000 and $84,000, respectively. For the three and six months ended June 30, 2009 and 2008, the Company recorded stock-based compensation expense for the ESPP totaling $56,000,
$44,000, $259,000 and $421,000, respectively.

In January 2008, the President and Chief Operating Officer of the Company resigned. In
connection with his resignation, the Company accelerated vesting of approximately 114,000 shares subject to stock options held by this former employee. The modification resulted in approximately $575,000 of additional stock compensation expense in
the three months ended March 31, 2008.

For the six months ended June 30, 2009 and 2008, the Company estimates there were
$28,200,000 and $34,200,000, respectively, in total unrecognized compensation costs related to unvested employee stock option agreements, which are expected to be recognized over a weighted-average period of 3.1 years. As of June 30, 2009, the
Company estimates there were $129,000 of unrecognized compensation costs related to the shares expected to be purchased through the ESPP, which are expected to be recognized over a weighted-average period of 3 months. In May 2009, the Company
completed an offer to exchange (the Offer to Exchange) certain employee stock options to purchase shares of the Companys common stock that were outstanding under the Companys 2007 Equity Incentive Plan (the 2007
Plan), 2001 Stock Option Plan (the 2001 Plan) and RF Magic Inc. 2001 Incentive Stock Plan (the RF Magic Plan) on a three-for-two basis for replacement options granted under the 2007 Plan at an exercise price of $1.99
per share, which was the closing price of the Companys common stock on May 15, 2009, as reported by The NASDAQ Global Market. At the expiration of the Offer to Exchange, the Company accepted elections to exchange options to purchase
1,600,000 shares of common stock and, as a result, the Company granted replacement options to purchase 1,000,000 shares of common stock. The replacement options have new vesting schedules with vesting dates that are determined by adding an
additional vesting period of 12 months, or a shorter duration upon a change of control, to each vesting date under the existing vesting schedule of the options being replaced. However, no replacement option will vest sooner than 12 months from its
date of grant, unless a change of control occurs. The Company accounted for the Offer to Exchange as a modification of the original option awards as defined by SFAS 123(R). The incremental value attributed to the option awards resulted in a charge
of approximately $60,000, which will be recognized over the vesting period of the new option awards.



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##### Table of Contents

3. Income Taxes

The Company calculates its interim income tax provision in accordance with Accounting Principles Board Opinion No. 28, Interim Financial Reporting, and FASB Interpretation No. 18, Accounting for
Income Taxes in Interim Periods. At the end of each interim period, the Company estimates the annual effective tax rate and applies that rate to its ordinary quarterly earnings. The tax expense or benefit related to significant, unusual or
extraordinary items that will be separately reported or reported net of its related tax effect and is individually computed and recognized in the interim period in which those items occur. In addition, the effect of changes in enacted tax laws,
rates or tax status is recognized in the interim period in which the change occurs.

The computation of the annual estimated effective tax
rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in foreign jurisdictions, permanent
and temporary differences as a result of differences between amounts measured and recognized in accordance with tax laws and financial accounting standards, and the likelihood of recovering deferred tax assets. The accounting estimates used to
compute the provision for income taxes may change as new events occur, additional information is obtained or as the tax environment changes. When the Companys annual estimated income tax rate changes, the year-to-date effect of the
change is recorded in the current period, which can cause fluctuations in effective tax rates in interim periods.

The effective tax
rate for the three months and six months ended June 30, 2009 was (1.8)% and (0.7)%, respectively, compared to 1.1% and (0.8)%, respectively for the three months and six months ended June 30, 2008. The effective tax rates for the three
months ended June 30, 2009 and for the six months ended June 30, 2008, are expressed as negative rates because the Company recorded tax expense while in a loss position for both periods. The tax expense related to foreign taxes during
the three months ended June 30, 2009 and 2008 and six months ended June 30, 2009 and 2008, was $74,000, $38,000, $89,000 and $82,000, respectively. There was no tax benefit recorded for the losses during the periods since the Company has a
full valuation allowance for its deferred tax assets.

On January 1, 2007, the Company adopted the provisions of FIN 48. FIN 48
prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on de-recognition, classification,
accounting in interim periods and disclosure requirements for uncertain tax positions. The unrecognized tax benefit was $7,293,000 as of December 31, 2008. No adjustments have been made during the six months ended June 30, 2009 for any
uncertain tax positions and the Company does not expect its unrecognized tax benefits to change significantly over the next 12 months. There were no accrued interest and penalties associated with uncertain tax positions as of June 30, 2009
or December 31, 2008.

The Company files federal and state income tax returns in the United States and various other income tax
returns in foreign jurisdictions. The Company is not currently under audit and has not been notified of any impending examinations by any tax jurisdiction.



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4. Net Loss Per Share of Common Stock

Under the provisions of SFAS No. 128,Earnings per Share, basic loss per share of common stock is computed by dividing net loss attributable
to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted loss per share is computed using the weighted average number of shares of common stock and dilutive common equivalent shares
outstanding during the year. Common equivalent shares from stock options and other common stock equivalents are excluded from the computation when their effect is anti-dilutive. The Company was in a loss position for all periods presented and,
accordingly, there is no difference between basic loss per share and diluted loss per share.

The following table sets forth the
computation of basic and diluted net loss per share for the periods indicated (in thousands, except per share data):



|                                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|----------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                                                                                |  | 2009                       |        |   | 2008                     |   |        | 2009 |  |   | 2008    |  
|Numerator:                                                                                      |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Net loss attributable to common stockholdersbasic and diluted                                  |  | $                          | (4,287 | ) |                          | $ | (6,447 | )    |  | $ | (13,023 | ) |  | $ | (10,302 | )
|                                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Denominator:                                                                                    |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Weighted average number of common shares outstanding                                            |  |                            | 69,985 |   |                          |   | 68,748 |      |  |   | 69,733  |   |  |   | 68,630  |  
|Less: Restricted stock                                                                          |  |                            | (561   | ) |                          |   | (1,533 | )    |  |   | (620    | ) |  |   | (1,607  | )
|                                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Weighted average number of shares used in computing net loss per common sharebasic and diluted |  |                            | 69,424 |   |                          |   | 67,215 |      |  |   | 69,113  |   |  |   | 67,023  |  
|                                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Net loss per sharebasic and diluted                                                            |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Net loss attributable to common stockholdersbasic and diluted                                  |  | $                          | (0.06  | ) |                          | $ | (0.10  | )    |  | $ | (0.19   | ) |  | $ | (0.15   | )
|                                                                                                |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  

As of June 30, 2009 and 2008, the Company had securities outstanding that could potentially
dilute basic loss per share in the future, but that were excluded from the computation of diluted net loss per share in the periods presented as their effect would have been antidilutive. Potentially dilutive outstanding securities that were not
included in the diluted net loss per share calculation consist of the following (in thousands):



|                                                                 |  |               |  |       
|---------------------------------------------------------------- |  | ------------- |  | ------
|                                                                 |  | As ofJune 30,
|                                                                 |  | 2009          |  | 2008  
|Stock options outstanding                                        |  | 9,169         |  | 9,199 
|Stock reserved for issuance under put and call option agreements |  | 147           |  | 182   
|Restricted stock                                                 |  | 587           |  | 1,322 
|                                                                 |  |               |  |       
|Total                                                            |  | 9,903         |  | 10,703
|                                                                 |  |               |  |       



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##### Table of Contents

5. Supplemental Disclosure of Cash Flow and Non-Cash Activity

Cash Flow

The following table sets forth supplemental
disclosure of cash flow information (in thousands):



|                       |  |                          |   |      |   |    
|---------------------- |  | ------------------------ | - | ---- | - | ---
|                       |  | Six Months EndedJune 30,
|                       |  | 2009                     |   | 2008
|Cash paid for interest |  | $                        |  |      | $ | 217

Non-Cash Activity

The following table sets forth supplemental disclosure of non-cash activity (in thousands):



|                                                                                                      |  |                          |     |      |   |      
|----------------------------------------------------------------------------------------------------- |  | ------------------------ | --- | ---- | - | -----
|                                                                                                      |  | Six Months EndedJune 30,
|                                                                                                      |  | 2009                     |     | 2008
|Currency translation                                                                                  |  | $                        | 25  |      | $ |     
|Vesting of early exercised stock options                                                              |  |                          | 165 |      |   | 557  
|Assets assumed in connection with acquisition of Vativ Technologies, Inc., net of liabilities assumed |  |                          |    |      |   | 4,287

6. Significant Customer and Geographic Information

Customers

Based on direct shipments, customers that
represented 10% or more of total net revenues and accounts receivable were as follows:



|                            |  |                             |  |                            |  |               |  |      |  |      |  |     
|--------------------------- |  | --------------------------- |  | -------------------------- |  | ------------- |  | ---- |  | ---- |  | ----
|                            |  | Net Revenues                |  | Accounts        Receivable
|                            |  | Three Months Ended June 30, |  | Six Months EndedJune 30,   |  | As ofJune 30,
|                            |  | 2009                        |  | 2008                       |  | 2009          |  | 2008 |  | 2009 |  | 2008
|Actiontec Electronics, Inc. |  | 19%                         |  | 20%                        |  | 19%           |  | 23%  |  | 20%  |  | 13% 
|Motorola, Inc.              |  | 37%                         |  | 50%                        |  | 23%           |  | 43%  |  | 35%  |  | 59% 
|Wistron NeWeb Corporation   |  | 17%                         |  | *                          |  | 13%           |  | *    |  | 31%  |  | *   



|* | Customer accounted for less than 10% for the period indicated
|- | -------------------------------------------------------------

Geographic Information

Net revenues are allocated to the geographic region based on the shipping destination of customer
orders. Net revenues as a percentage of total net revenues by geographic region were as follows:



|                         |  |                          |   |  |      |  
|------------------------ |  | ------------------------ | - |  | ---- | -
|                         |  | Six Months EndedJune 30, |  
|                         |  | 2009                     |   |  | 2008 |  
|Asia                     |  | 93%                      |   |  | 96%  |  
|Europe                   |  | 3                        |   |  | 3    |  
|United States of America |  | 3                        |   |  | 1    |  
|Other North America      |  | 1                        |   |  | *    |  
|                         |  |                          |   |  |      |  
|                         |  | 100                      | % |  | 100  | %
|                         |  |                          |   |  |      |  



|* | Region accounted for less than 1% of total net revenues for the period indicated
|- | --------------------------------------------------------------------------------



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##### Table of Contents

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed
consolidated financial statements and the related notes thereto contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, or Quarterly Report, and our consolidated financial statements and related notes as of and for the year ended
December 31, 2008 and the related Managements Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2008, or Annual Report, filed with the
Securities and Exchange Commission, or SEC, on February 23, 2009.

Forward-Looking Statements

The following discussion contains forward-looking statements, which involve risks and uncertainties. These forward-looking statements include, but are
not limited to, statements concerning our strategy, future operations, competitors, future financial position, future revenues, projected costs, prospects and plans and objectives of management. These forward-looking statements are based on our
current expectations, estimates, approximations and projections about our industry and business, managements beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by
words such as anticipates, expects, intends, plans, predicts, believes, seeks, estimates, may, will, should,
would, could, potential, continue, ongoing and similar expressions, and variations or negatives of these words. Forward-looking statements are not guarantees of future performance and are
subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which
are listed under Part II, Item 1A, Risk Factors and elsewhere in this Quarterly Report, and in our other filings with the SEC. We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not
possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any
forward-looking statements in this Quarterly Report or in our other filings with the SEC. Forward-looking statements herein speak only as of the date of this Quarterly Report. Except as required by law, we assume no obligation to update or revise
any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. Thus, you should not assume
that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements.

In
this Quarterly Report, Entropic Communications, Inc., Entropic Communications, Entropic, the Company, we, us and our refer to Entropic Communications, Inc. and its
subsidiaries, taken as a whole, unless otherwise noted.

Overview

Entropic Communications is a leading fabless semiconductor company that designs, develops and markets systems solutions to enable connected home entertainment. Our technologies significantly change the way
high-definition television-quality video, or HD video, and other multimedia content such as movies, music, games and photos are brought into and delivered throughout the home. Our products include home networking chipsets based on the Multimedia
over Coax Alliance, or MoCA, standard, high-speed broadband access chipsets, integrated circuits that simplify and enhance digital broadcast satellite services and silicon tuner integrated circuits. We use our considerable experience with service
provider-based deployments to create solutions that address the complex requirements associated with delivering multiple streams of HD video into and throughout the home, while seamlessly coexisting with video, voice and data services that are using
the same coaxial cable infrastructure.

In December 2004, we introduced and commenced commercial shipments of our home networking products.
In the first quarter of 2006, we began commercially shipping our broadband access solutions. Our largest acquisition to date was completed in June 2007 when we acquired RF Magic Inc., or RF Magic, a provider of digital broadcast satellite, or DBS,
outdoor unit and silicon tuner solutions. Since inception, we have invested heavily in product development and have not yet achieved profitability on a quarterly or annual basis. Our revenues have grown from $41.5 million in 2006 to $122.5 million
in 2007 to $146.0 million in 2008, driven primarily by demand for our home networking products. Our revenues have decreased from $84.8 million during the six months ended June 30, 2008 to $50.3 million during the six months ended June 30,
2009, driven primarily by softness in demand for our home networking products and a significant downturn in the overall economy.



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##### Table of Contents

We generate revenues principally by sales of our semiconductor products. We also generate service
revenues from development contracts. We principally sell our products directly to either original design manufacturers, or ODMs, or original equipment manufacturers, or OEMs. We price our products based on market and competitive conditions and
reduce the price of our products over time, as market and competitive conditions change, and as manufacturing costs are reduced. Our markets are generally characterized by declining average selling prices over the life of a product and, accordingly,
we must reduce costs and successfully introduce new products and enhancements to maintain our gross margins.

We currently rely, and expect
to continue to rely, on a limited number of customers for a significant portion of our revenues. Sales to these customers are in turn driven by service providers that purchase our customers products which incorporate our products.
Substantially all of our revenues are dependent upon three major service providers: Verizon Communications, Inc., or Verizon, through its FiOS deployment, DISH Network Corporation, or DISH, and DIRECTV. In addition, we are dependent on sales outside
of the United States for almost all of our revenues and expect that to continue in the future.

For the six months ended June 30,
2009, 10 customers accounted for 92% of our net revenues, with Motorola, Inc., or Motorola, Actiontec Electronics, Inc., or Actiontec, and Wistron NeWeb Corporation, or Wistron, accounting for 23%, 19% and 13%, respectively. For the six months ended
June 30, 2008, 10 customers accounted for 95% of our net revenues, with Motorola and Actiontec accounting for 43% and 23%, respectively. We expect to continue to have major concentrations of sales to a relatively small number of ODM and OEM
customers.

For the six months ended June 30, 2009, 93% of our net revenues were derived from Asia, 3% were derived from Europe, 3%
were derived from the United States and 1% was derived from other North American countries. For the six months ended June 30, 2008, 96% of our net revenues were derived from Asia, 3% were derived from Europe and 1% was derived from the United
States and other North American countries. Many of our ODM and OEM customers in Asia incorporate our chipsets into products that they sell to U.S.-based service providers.

We use third-party foundries and assembly and test contractors to manufacture, assemble and test our products. This outsourced manufacturing approach
allows us to focus our resources on the design, sale and marketing of our products and avoid the cost associated with owning and operating our own manufacturing facility. A significant portion of our cost of net revenues consists of payments for the
purchase of wafers and for manufacturing, assembly and test services.

We expect research and development expenses to increase in total
dollars as we develop additional products and expand our business, and to fluctuate over the course of the year based on the timing of our fabrication mask costs and purchases of intellectual property licenses. We also anticipate that our sales and
marketing expenses will increase as we expand our domestic and international sales and marketing organization and activities and build brand awareness. Due to the lengthy sales cycles that we face, we may experience significant delays from the time
we incur research and development and sales and marketing expenses until the time, if ever, that we generate sales from the related products.

Since our inception, we have funded our operations using a combination of preferred stock issuances, cash collections from customers, bank credit facilities, cash received from the exercise of stock options and proceeds from our initial
public offering, or IPO. We intend to continue spending substantial amounts in connection with the growth of our business and we may need to obtain additional financing to pursue our business strategy, develop new products, respond to competition
and market opportunities and acquire complementary businesses or technologies.



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##### Table of Contents

Results of Operations

The following table sets forth selected items from our unaudited condensed consolidated statements of operations data as a percentage of total net revenues for each of the periods indicated:



|                                                 |          |                    |    |          |                  |    |  |      |    |  |      |   
|------------------------------------------------ | -------- | ------------------ | -- | -------- | ---------------- | -- |  | ---- | -- |  | ---- | --
|                                                 |          | Three Months Ended |    |          | Six Months Ended |   
|                                                 | June 30, |                    |    | June 30, |                 
|                                                 |          | 2009               |    |          | 2008             |    |  | 2009 |    |  | 2008 |   
|Consolidated Statements of Operations Data:      |          |                    |    |          |                  |    |  |      |    |  |      |   
|Net revenues                                     |          | 100                | %  |          | 100              | %  |  | 100  | %  |  | 100  | % 
|Cost of net revenues                             |          | 50                 |    |          | 56               |    |  | 50   |    |  | 55   |   
|                                                 |          |                    |    |          |                  |    |  |      |    |  |      |   
|Gross profit                                     |          | 50                 |    |          | 44               |    |  | 50   |    |  | 45   |   
|Operating expenses:                              |          |                    |    |          |                  |    |  |      |    |  |      |   
|Research and development                         |          | 39                 |    |          | 37               |    |  | 47   |    |  | 34   |   
|Sales and marketing                              |          | 13                 |    |          | 10               |    |  | 14   |    |  | 10   |   
|General and administrative                       |          | 10                 |    |          | 8                |    |  | 11   |    |  | 8    |   
|Write off of in-process research and development |          |                   |    |          | 3                |    |  |     |    |  | 2    |   
|Amortization of purchased intangible assets      |          |                   |    |          | 2                |    |  |     |    |  | 2    |   
|Restructuring charge                             |          | 4                  |    |          |                 |    |  | 4    |    |  | 1    |   
|                                                 |          |                    |    |          |                  |    |  |      |    |  |      |   
|Total operating expenses                         |          | 66                 |    |          | 60               |    |  | 76   |    |  | 57   |   
|                                                 |          |                    |    |          |                  |    |  |      |    |  |      |   
|Loss from operations                             |          | (16                | )  |          | (16              | )  |  | (26  | )  |  | (12  | ) 
|Benefit for income taxes                         |          |                   |    |          | 1                |    |  |     |    |  |     |   
|                                                 |          |                    |    |          |                  |    |  |      |    |  |      |   
|Net loss                                         |          | (16                | )  |          | (15              | )  |  | (26  | )  |  | (12  | ) 
|                                                 |          |                    |    |          |                  |    |  |      |    |  |      |   
|Net loss attributable to common stockholders     |          | (16                | )% |          | (15              | )% |  | (26  | )% |  | (12  | )%
|                                                 |          |                    |    |          |                  |    |  |      |    |  |      |   

Comparison of Three and Six Months Ended June 30, 2009 and 2008

(Tables presented in thousands, except percentage amounts)

Net Revenues



|             |  |                            |        |      |   |          |                          |     |      |  |      |        |          |   |        |  |     |   
|------------ |  | -------------------------- | ------ | ---- | - | -------- | ------------------------ | --- | ---- |  | ---- | ------ | -------- | - | ------ |  | --- | --
|             |  | Three Months EndedJune 30, |        |      |   |          | Six Months EndedJune 30, |     |      | 
|             |  | 2009                       |        | 2008 |   | % Change |                          |     | 2009 |  | 2008 |        | % Change |  
|Net revenues |  | $                          | 26,146 |      | $ | 42,836   |                          | (39 | )%   |  | $    | 50,269 |          | $ | 84,824 |  | (41 | )%

Net revenues decreased during the three and six months ended June 30, 2009 compared to the
same periods in 2008 driven primarily by softness in demand for our home networking products and a difficult economic environment where our direct OEM customers and end customers continued to maintain tight inventory levels.



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Gross Profit/Gross Margin



|                  |  |                            |        |   |      |   |        |                          |  |     |      |  |   |        |   |  |          |        |   |  |     |   
|----------------- |  | -------------------------- | ------ | - | ---- | - | ------ | ------------------------ |  | --- | ---- |  | - | ------ | - |  | -------- | ------ | - |  | --- | --
|                  |  | Three Months EndedJune 30, |        |   |      |   |        | Six Months EndedJune 30, |  |     |      | 
|                  |  | 2009                       |        |   | 2008 |   |        | % Change                 |  |     | 2009 |  |   | 2008   |   |  | % Change |       
|Gross profit      |  | $                          | 12,945 |   |      | $ | 18,967 |                          |  | (32 | )%   |  | $ | 25,164 |   |  | $        | 38,118 |   |  | (34 | )%
|% of net revenues |  |                            | 50     | % |      |   | 44     | %                        |  |     |      |  |   | 50     | % |  |          | 45     | % |  |     |   

Gross profit decreased during the three and six months ended June 30, 2009 compared to the
same periods in 2008 driven primarily by lower home networking product revenues in 2009.

Gross margin increased during the three and six
months ended June 30, 2009 compared to the same periods in 2008 driven primarily by the product mix shift from our home networking products to higher margin DBS outdoor unit products and from a reduction in intangible asset amortization. Cost
of net revenues included amortization of developed technology in the amounts of $0.4 million and $0.8 million for the three and six months ended June 30, 2009, respectively, and $1.6 million and $2.8 million for the three and six months ended
June 30, 2008, respectively. The reduction in the amortization of developed technology was primarily driven by the impairment of our intangible assets which occurred in December 2008. As a result of the impairment, most intangible assets were
written down to a net value of zero. The reduced carrying amount of our intangible assets resulted in lower amortization in 2009.

Research and Development Expenses



|                       |  |                            |        |   |      |   |        |                          |  |     |      |  |   |        |   |  |          |        |   |  |     |   
|---------------------- |  | -------------------------- | ------ | - | ---- | - | ------ | ------------------------ |  | --- | ---- |  | - | ------ | - |  | -------- | ------ | - |  | --- | --
|                       |  | Three Months EndedJune 30, |        |   |      |   |        | Six Months EndedJune 30, |  |     |      | 
|                       |  | 2009                       |        |   | 2008 |   |        | % Change                 |  |     | 2009 |  |   | 2008   |   |  | % Change |       
|Research & development |  | $                          | 10,102 |   |      | $ | 15,678 |                          |  | (36 | )%   |  | $ | 23,425 |   |  | $        | 28,990 |   |  | (19 | )%
|% of net revenues      |  |                            | 39     | % |      |   | 37     | %                        |  |     |      |  |   | 47     | % |  |          | 34     | % |  |     |   

The decrease in research and development expenses during the three months ended June 30,
2009, compared to the three months ended June 30, 2008, was primarily due to decreased personnel costs of $3.9 million (of which $0.8 million was due to stock-based compensation) primarily related to a 28% decrease in the number of
employees engaged in research and development activities as a result of the implementation of our March 2009 restructuring plan. Other factors contributing to the decrease in research and development expense include a $1.5 million reduction in
development tools and supply costs, which include outside services, masks costs and licenses that fluctuate in timing and amount from period to period, and a $0.2 million reduction in overhead allocations and depreciation, all of which resulted from
a general decrease in research and development activities as a result of the March 2009 restructuring plan, including the suspension of the development of our advanced network processor architecture and an associated product which was being staffed
primarily out of our Kfar Saba, Israel location.

The decrease in research and development expenses during the six months ended
June 30, 2009, compared to the six months ended June 30, 2008, was primarily due to decreased personnel costs of $4.6 million (of which $1.0 million was due to stock-based compensation) primarily related to a 28% decrease in the
number of employees engaged in research and development activities as a result of the implementation of our March 2009 restructuring plan. Other factors contributing to the decrease in research and development expense include a $1.8 million
reduction in development tools and supply costs, which include outside services, masks costs and licenses that fluctuate in timing and amount from period to period, all of which resulted from a general decrease in research and development activities
as a result of the March 2009 restructuring plan, including the suspension of the development of our advanced network processor architecture and an associated product which was being staffed primarily out of our Kfar Saba, Israel location.



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Sales and Marketing Expenses



|                    |  |                            |       |   |      |   |       |                          |  |     |      |  |   |       |   |  |          |       |   |  |     |   
|------------------- |  | -------------------------- | ----- | - | ---- | - | ----- | ------------------------ |  | --- | ---- |  | - | ----- | - |  | -------- | ----- | - |  | --- | --
|                    |  | Three Months EndedJune 30, |       |   |      |   |       | Six Months EndedJune 30, |  |     |      | 
|                    |  | 2009                       |       |   | 2008 |   |       | % Change                 |  |     | 2009 |  |   | 2008  |   |  | % Change |      
|Sales and marketing |  | $                          | 3,395 |   |      | $ | 4,455 |                          |  | (24 | )%   |  | $ | 7,032 |   |  | $        | 8,599 |   |  | (18 | )%
|% of net revenues   |  |                            | 13    | % |      |   | 10    | %                        |  |     |      |  |   | 14    | % |  |          | 10    | % |  |     |   

The decrease in sales and marketing expenses for the three months ended June 30, 2009,
compared to the three months ended June 30, 2008, included decreased personnel costs of $0.8 million (of which $0.3 million was due to stock-based compensation), attributable to a 12% decrease in the number of employees engaged in
sales and marketing activities at the end of the periods. The decrease in sales and marketing personnel resulted primarily from a reduction-in-force in March 2009. The remainder of the decrease in sales and marketing expenses, including decreases in
overhead allocations of $0.1 million, was primarily due to a general decrease in business activities.

The decrease in sales and marketing
expenses for the six months ended June 30, 2009, compared to the six months ended June 30, 2008, included decreased personnel costs of $1.3 million (of which $0.5 million was due to stock-based compensation), attributable to a
12% decrease in the number of employees engaged in sales and marketing activities at the end of the periods. The decrease in sales and marketing personnel resulted primarily from a reduction-in-force in March 2009. The remainder of the decrease in
sales and marketing expenses, including decreases in overhead allocations of $0.2 million, was primarily due to a general decrease in business activities.

General and Administrative Expenses



|                         |  |                            |       |   |      |   |       |                          |  |     |      |  |   |       |   |  |          |       |   |  |     |   
|------------------------ |  | -------------------------- | ----- | - | ---- | - | ----- | ------------------------ |  | --- | ---- |  | - | ----- | - |  | -------- | ----- | - |  | --- | --
|                         |  | Three Months EndedJune 30, |       |   |      |   |       | Six Months EndedJune 30, |  |     |      | 
|                         |  | 2009                       |       |   | 2008 |   |       | % Change                 |  |     | 2009 |  |   | 2008  |   |  | % Change |      
|General & administrative |  | $                          | 2,713 |   |      | $ | 3,541 |                          |  | (23 | )%   |  | $ | 5,401 |   |  | $        | 7,064 |   |  | (24 | )%
|% of net revenues        |  |                            | 10    | % |      |   | 8     | %                        |  |     |      |  |   | 11    | % |  |          | 8     | % |  |     |   

The decrease in general and administrative expenses for the three months ended June 30, 2009,
compared to the three months ended June 30, 2008, was partly due to decreased personnel costs of $0.1 million attributable to a 12% decrease in the number of employees engaged in general and administrative activities at the end of the
periods. The decrease in general and administrative personnel resulted primarily from a reduction-in-force in March 2009. There was a decrease in recruiting fees of $0.2 million due to higher hiring activities during the three months ended
June 30, 2008 as compared to the three months ended June 30, 2009. The remainder of the decrease in general and administrative expenses was primarily driven by outside services of $0.4 million and legal fees of $0.1 million primarily due
to a general decrease in business activities.

The decrease in general and administrative expenses for the six months ended June 30,
2009, compared to the six months ended June 30, 2008, was partly due to decreased personnel costs of $0.5 million (of which $0.3 million was due to stock-based compensation), attributable to a 12% decrease in the number of employees
engaged in general and administrative expenses activities at the end of the periods. The decrease in general and administrative personnel resulted primarily from a reduction-in-force in March 2009. There was a decrease in recruiting fees of $0.2
million due to higher hiring activities during the six months ended June 30, 2008. The remainder of the decrease in general and administrative expenses was primarily driven by outside services of $0.6 million and legal fees of $0.4 million
primarily due to a general decrease in business activities.



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Write Off of In-Process Research and Development



|                                                 |  |                            |   |   |      |   |       |                          |  |      |      |  |   |      |   |  |          |       |   |  |      |   
|------------------------------------------------ |  | -------------------------- | - | - | ---- | - | ----- | ------------------------ |  | ---- | ---- |  | - | ---- | - |  | -------- | ----- | - |  | ---- | --
|                                                 |  | Three Months EndedJune 30, |   |   |      |   |       | Six Months EndedJune 30, |  |      |      | 
|                                                 |  | 2009                       |   |   | 2008 |   |       | % Change                 |  |      | 2009 |  |   | 2008 |   |  | % Change |      
|Write off of in-process research and development |  | $                          | 0 |   |      | $ | 1,300 |                          |  | (100 | )%   |  | $ | 0    |   |  | $        | 1,300 |   |  | (100 | )%
|% of net revenues                                |  |                            |  | % |      |   | 3     | %                        |  |      |      |  |   |     | % |  |          | 2     | % |  |      |   

During the three and six months ended June 30, 2008, as a result of the acquisition of Vativ
Technologies, Inc., or Vativ, in April 2008, we incurred a write off of in-process research and development, or IPR&D, related to Vativs High Definition Multimedia Interface switch product.

The IPR&D was written-off on the acquisition date because the acquired technology had not yet reached technological feasibility and had no
alternative future uses. A discounted cash flow approach was utilized in valuing the IPR&D. The value of the technology was the sum of the present value of projected debt-free net income, in excess of returns on requisite assets, over the
economic life of the IPR&D.

Amortization of Intangible Assets



|                                  |  |                            |   |   |      |   |     |                          |  |      |      |  |   |      |   |  |          |       |   |  |     |   
|--------------------------------- |  | -------------------------- | - | - | ---- | - | --- | ------------------------ |  | ---- | ---- |  | - | ---- | - |  | -------- | ----- | - |  | --- | --
|                                  |  | Three Months EndedJune 30, |   |   |      |   |     | Six Months EndedJune 30, |  |      |      | 
|                                  |  | 2009                       |   |   | 2008 |   |     | % Change                 |  |      | 2009 |  |   | 2008 |   |  | % Change |      
|Amortization of intangible assets |  | $                          | 0 |   |      | $ | 713 |                          |  | (100 | )%   |  | $ | 16   |   |  | $        | 1,309 |   |  | (99 | )%
|% of net revenues                 |  |                            |  | % |      |   | 2   | %                        |  |      |      |  |   |     | % |  |          | 2     | % |  |     |   

Amortization of intangible assets decreased during the three and six months ended June 30,
2009 compared to the same periods in 2008 primarily driven by the impairment of our intangible assets which occurred in the three months ended December 31, 2008. As a result of the impairment, most intangible assets were determined to be
impaired and written down to a net value of zero. The reduced carrying amount of our intangible assets resulted in lower amortization in 2009.



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##### Table of Contents

Restructuring Charges

In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, or SFAS 146, we have accrued for
termination benefits at June 30, 2009, in association with a reduction-in-force in March 2009. Worldwide, 55 employees were impacted. Most of the US employees were terminated immediately and received severance payments upon the signing of a
separation agreement. The Israeli and French employees were required by contract or law to receive notice period payments in addition to severance payments. During the three month period ended June 30, 2009, we finalized certain severance
agreements with our employees in France and Israel resulting in additional severance expense.

Consistent with SFAS 146, we believe that
the statutory notice periods given to employees represent a one-time termination benefit since the employees will receive the notice period payment regardless of whether they work because we are required by law to pay them as part of their
termination. Our plan also includes vacating certain facilities and we will record restructuring charges for termination of operating leases and other contract costs as restructuring costs in the period when we cease to use rights conveyed by the
contract. The restructuring plan is ongoing and will be completed during the three months ended September 30, 2009 when we anticipate recording approximately an additional $0.1 million of restructuring charges.

As a result of our March 2009 restructuring plan, we recorded restructuring charges of $1.0 million and $2.1 million during the three and six months
ended June 30, 2009, respectively.

The intangible assets associated with the acquisition of Arabella were determined to be fully
impaired as of March 31, 2009, as the core technology acquired will no longer be used in the ongoing business operations and the future cash flows associated with this technology are zero. We made a decision on March 22, 2009 to cease use
of the technology and do not have any plans to use it in future operations. As a result an impairment charge of $0.2 million was recorded in the first quarter of 2009.

The following table presents our restructuring liability in the consolidated balance sheets (in thousands):



|                                  |  |                            |    |   |                                    |   |      |                                     |  |   |                            |   |  |       |        |   |  |   |        |  
|--------------------------------- |  | -------------------------- | -- | - | ---------------------------------- | - | ---- | ----------------------------------- |  | - | -------------------------- | - |  | ----- | ------ | - |  | - | ------ | -
|                                  |  | Operating leasecommitments |    |   | Impairment ofproperty andequipment |   |      | Impairment ofother long-term assets |  |   | Employeeseparationexpenses |   |  | Total |       
|Liability as of December 31, 2008 |  | $                          |   |   |                                    | $ |     |                                     |  | $ |                           |   |  | $     |       |   |  | $ |       |  
|Additions                         |  |                            | 6  |   |                                    |   | 156  |                                     |  |   | 2                          |   |  |       | 1,939  |   |  |   | 2,103  |  
|Non-cash charges                  |  |                            | (6 | ) |                                    |   | (145 | )                                   |  |   | (2                         | ) |  |       |       |   |  |   | (153   | )
|Cash payments                     |  |                            |   |   |                                    |   | (11  | )                                   |  |   |                           |   |  |       | (1,520 | ) |  |   | (1,531 | )
|Restructuring charge adjustment   |  |                            |   |   |                                    |   |     |                                     |  |   |                           |   |  |       |       |   |  |   |       |  
|                                  |  |                            |    |   |                                    |   |      |                                     |  |   |                            |   |  |       |        |   |  |   |        |  
|Liability as of June 30, 2009     |  | $                          |   |   |                                    | $ |     |                                     |  | $ |                           |   |  | $     | 419    |   |  | $ | 419    |  
|                                  |  |                            |    |   |                                    |   |      |                                     |  |   |                            |   |  |       |        |   |  |   |        |  

Liquidity and Capital Resources

As of June 30, 2009 and 2008, we had cash and cash equivalents of $31.4 million and $17.0 million, respectively, and marketable securities of $0.8
million and $12.0 million, respectively.

On April 3, 2009, Silicon Valley Bank, or SVB, extended the termination date of our existing
$10,000,000 revolving credit line from April 6, 2009 to April 24, 2009. On April 22, 2009, we entered into an Amendment to Loan and Security Agreement, or the Amendment, with SVB to extend further the term of the credit line to
April 21, 2010. The Amendment eliminated our prior option to increase the maximum amount of credit available under the credit line from $10,000,000 to $15,000,000 and restricts our ability to transfer assets or collateral to, or make
investments in, certain of our subsidiaries in an amount that exceeds $400,000 per month in the aggregate. In addition, under the Amendment, we are required to pay SVB a fee equal to 0.25% per annum, or the Unused Revolving Line Fee Percentage,
of the average unused portion of the credit line on a monthly basis, in arrears, and the interest rate applicable to amounts outstanding under the credit line is at prime rate plus 0.5%. However, if the



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liquidity ratio is less than 1.75 to 1, then the Unused Revolving Line Fee Percentage will be increased to 0.5% per annum and the interest rate will be
prime rate plus 2.0%. The amount available under the credit line cannot exceed 80% of the value of our eligible accounts receivable and may be decreased by certain commitments, such as the $1,160,000 and $35,000 standby letters of credit that secure
our performance under our headquarters facility lease and our San Jose facility lease, respectively. As of June 30, 2009, there were no other amounts outstanding under the credit line and $8.8 million was available under the credit line.

The following table shows our cash flows from operating activities, investing activities and financing activities for the six months ended
June 30, 2009 and 2008 (in thousands):



|                                                       |  |                          |        |   |      |         |  
|------------------------------------------------------ |  | ------------------------ | ------ | - | ---- | ------- | -
|                                                       |  | Six Months EndedJune 30, |       
|                                                       |  | 2009                     |        |   | 2008 |        
|Net cash used in operating activities                  |  | $                        | (1,696 | ) |      | (6,732  | )
|Net cash provided by (used in) investing activities    |  | $                        | 2,518  |   |      | (20,426 | )
|Net cash provided by (used in) financing activities    |  | $                        | 510    |   |      | (7,290  | )
|                                                       |  |                          |        |   |      |         |  
|Total increase (decrease) in cash and cash equivalents |  | $                        | 1,332  |   |      | (34,448 | )
|                                                       |  |                          |        |   |      |         |  

Cash Flows from Operating Activities

Net cash used in operating activities was $1.7 million for the six months ended June 30, 2009, primarily resulting from a net loss of $13.0
million and an increase in accounts receivable of $1.0 million due to a majority of sales occurring later in the second quarter of 2009, offset by $5.0 million in stock compensation expenses, a $5.0 million decrease in inventory primarily due to
lower than anticipated future revenues at June 30, 2009, and $2.5 million in depreciation and amortization expenses including $0.8 million attributable to amortization of developed technology.

Our operating activities used $6.7 million of cash in the six months ended June 30, 2008. Cash flow used in operating activities for the six months
ended June 30, 2008 resulted primarily from a net loss of $10.3 million, an increase in accounts receivable of $11.1 million primarily driven by higher sales with a majority of the sales occurring later in the period, and a $5.7 million
increase in inventory primarily driven by higher sales. These changes were partially offset by stock-based compensation of $7.0 million, depreciation and amortization of $5.7 million primarily due to the RF Magic acquisition, a $3.1 million increase
in accounts payable related to increases in inventory, a $1.3 million increase in other long-term liabilities related to deferred rent for our new leased facilities in San Diego, California, a $1.3 million non-cash IPR&D charge resulting from
the Vativ acquisition, and a $1.1 million increase in accrued payroll and benefits, primarily attributable to the cash retention bonuses to be paid to former Vativ employees who joined us in connection with the Vativ acquisition.

Cash Flows from Investing Activities

Net cash
provided by investing activities was $2.5 million for the six months ended June 30, 2009, primarily due to $3.5 million sales of marketable securities offset by $1.0 million purchases of property and equipment primarily consisting of
operations and research and development equipment.

We used $20.4 million of cash for investing activities during the six months ended
June 30, 2008. Our increase in cash available for investing activities resulted primarily from the net proceeds received from the sale of our common stock upon the completion of our IPO in December 2007. Our investing activities primarily
consisted of the net $9.0 million purchases and maturities of marketable securities, $5.3 million purchases of property and equipment mainly consisting of tenant improvements and equipment for our newly leased facilities in San Diego, California and
$6.1 million used in the acquisition of Vativ in April 2008.

Cash Flows from Financing Activities

Net cash provided by financing activities was $0.5 million for the six months ended June 30, 2009, due primarily to proceeds from the issuance of
common stock in connection with stock option exercises and stock purchases made under our ESPP.



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Our financing activities used cash of $7.3 million in the six months ended June 30, 2008 which was
primarily driven by the payoff of outstanding debt in the amount of $8.9 million. This amount was offset by cash provided by the net proceeds from warrant exercises and purchase of common stock, primarily under our 2007 Employee Stock Purchase Plan.

We expect to experience an increase in our operating expenses in absolute dollars, particularly in research and development expenses, but
also in sales and marketing, and general and administrative expenses, for the foreseeable future in order to execute our business strategy and to support our growth. As a result, we anticipate that operating expenses, as well as planned capital
expenditures, will constitute a material use of our cash resources.

We believe that our cash, cash equivalents and marketable securities
of $32.3 million, together with the $8.8 million available to us under our existing credit line as of June 30, 2009, will be sufficient to fund our projected operating requirements for at least the next 12 months. We intend to continue spending
substantial amounts in connection with the growth of our business and we may need to obtain additional financing to pursue our business strategy, develop new products, respond to competition and market opportunities, and acquire complementary
businesses or technologies. We may not be able to obtain such financing on favorable terms or at all. If we were to raise additional capital through further sales of our equity securities, our stockholders would suffer dilution of their equity
ownership. If we engage in debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness, prohibit us from paying dividends, repurchasing our stock or making investments and force us to maintain
specified liquidity or other ratios, any of which could harm our business, operating results and financial condition.

Indemnities

In the ordinary course of business, we have entered into agreements with customers that include indemnity provisions. Based on historical experience and
information known as of June 30, 2009, we have not recorded any indemnity obligations.

In 2007 and 2008, we were contacted by
Motorola requesting that we indemnify Motorola against claims that third parties might amend ongoing patent infringement actions against Motorola to add allegations that products sold by Motorola which incorporate our products infringe one or more
of the third parties patents. No particular amounts of indemnity have been sought by Motorola. We are in the process of evaluating Motorolas requests for indemnity and the underlying potential third-party claims regarding
Motorolas products that incorporate our products. At the present time, we are unable to predict the ultimate outcome of these matters.

Off-Balance Sheet Arrangements

During the periods presented, we did not have, nor do we currently have, any relationships
with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and the results of operations are based on our financial statements which have been prepared in
accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. We base our
estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies are discussed in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2008 and there have been no material changes.



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Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board, or FASB, issued SFAS No. 141R,Business Combinations, or SFAS 141R. SFAS 141R establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for financial statements
issued for fiscal years beginning after December 15, 2008. We do not believe the adoption of SFAS No. 141R will have any material impact on our future consolidated financial statements.

On February 6, 2008, the FASB issued a final FASB Staff Position, or FSP, on SFAS 157-b, Effective Date of FASB Statement No. 157, or
SFAS 157. This FSP delays the effective date of SFAS 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. The effective date of SFAS 157 for
non-financial assets and liabilities has been delayed by one year to years beginning after November 15, 2008. We do not believe the adoption of this statement will have any material impact on our future consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB
Statement No. 133, or SFAS 161. SFAS 161 requires enhanced disclosure related to derivatives and hedging activities and thereby seeks to improve the transparency of financial reporting. Under SFAS 161, entities are required to provide
enhanced disclosures relating to: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedge items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, or SFAS 133, and its related interpretations; and (c) how derivative instruments and related hedged items affect an entitys financial position, financial performance, and cash flows. SFAS 161 must be applied prospectively
to all derivative instruments and non-derivative instruments that are designated and qualify as hedging instruments and related hedged items accounted for under SFAS 133 for all financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. At this time, we do not invest in derivative instruments or hedging activities, and accordingly, the adoption of SFAS 161 will have no impact of the our future consolidated financial statements unless we
invest in derivative instruments or engage in hedging activities in the future, if ever.

In June 2008, the FASB reached a consensus on
EITF Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entitys Own Stock, or EITF 07-5. EITF 07-5 will be effective for fiscal years beginning after December 15, 2008. We do not
anticipate that the adoption of EITF 07-05 will have a material impact on our future consolidated financial statements.

In November 2008,
FASB ratified EITF Issue No. 08-7, Accounting for Defensive Intangible Assets, or EITF 08-7. EITF 08-7 applies to defensive intangible assets, which are acquired intangible assets that the acquirer does not intend to actively use but
intends to hold to prevent its competitors from obtaining access to them. As these assets are separately identifiable, EITF 08-7 requires an acquiring entity to account for defensive intangible assets as a separate unit of accounting which should be
amortized to expense over the period the asset diminished in value. Defensive intangible assets must be recognized at fair value in accordance with SFAS 141R and SFAS 157. EITF 08-7 is effective for financial statements issued for fiscal years
beginning after December 15, 2008. We adopted EITF 08-7 on January 1, 2009. In the first quarter of 2009, we did not acquire any intangible assets and the adoption of EITF Issue 08-7 did not have a material impact on our future
consolidated financial statements.

In April 2009, the FASB issued FASB Staff Position No. FAS 141(R)-1, Accounting for Assets
Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, or FSP 141(R)-1, to amend SFAS 141R. FSP 141(R)-1 addresses the initial recognition, measurement and subsequent accounting for assets and
liabilities arising from contingencies in a business combination, and requires that such assets acquired or liabilities assumed be initially recognized at fair value at the acquisition date if fair value can be determined during the measurement
period. If the acquisition-date fair value cannot be determined, the asset acquired or liability assumed arising from a contingency is recognized only if certain criteria are met. This FSP also requires that a systematic and rational basis for
subsequently measuring and accounting for the assets or liabilities be developed depending on their nature. This FSP is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is during
or after 2010. We do not anticipate the adoption of this statement will have a material impact on our future consolidated financial statements, absent any material business combinations.



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Also in April 2009, the FASB issued FSP FAS 107-1, Interim Disclosures about Fair Value of Financial
Instruments, or FSP 107-1, and FSP FAS 115-2, Recognition and Presentation of Other-Than-Temporary Impairments, or FSP 115-2, which we adopted on a prospective basis beginning April 1, 2009. These positions extend the disclosure
requirements of SFAS No. 107, Disclosures about Fair Value of Financial Instruments, and SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, to interim financial statements of publicly traded
companies. The application of FSP 107-1 and FSP 115-2 did not have an impact on our consolidated financial statements.

In May 2009, the
FASB issued SFAS No. 165, Subsequent Events, or SFAS 165, which we adopted on a prospective basis beginning April 1, 2009. SFAS 165 is intended to establish general standards of accounting and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for selecting that date. The application of
SFAS 165 did not have an impact on our consolidated financial statements.



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

Foreign Currency Risk

Our sales have been historically denominated in U.S. dollars and an increase
in the value of U.S. dollar relative to the currencies of the countries in which our customers operate could materially affect the demand of our non-U.S. customers for our products, leading to a reduction in orders placed by these customers, which
would adversely affect our business. Our international sales and marketing operations incur expenses that are denominated in foreign currencies. These expenses could be materially affected by currency fluctuations; however, we do not consider this
currency risk to be material as the related costs do not constitute a significant portion of our total spending. We outsource our wafer manufacturing, assembly, testing, warehousing and shipping operations; however all expenses related thereto are
denominated in U.S. dollars. If the value of the U.S. dollar decreases relative to the currencies of the countries in which such contractors operate, the prices we are charged for their services may increase, which would adversely affect our
business. Currently, we have not implemented any hedging strategies to mitigate risks related to the impact of fluctuations in currency exchange rates.

Interest Rate Risk

We maintain an investment portfolio of various holdings, types and maturities. We do not use derivative
financial instruments. We place our cash investments in deposits and money market funds with major financial institutions, U.S. government obligations and debt securities of corporations with strong credit ratings in a variety of industries that
meet high credit quality standards, as specified in our investment policy guidelines. These guidelines also limit the amount of credit exposure to any one issue, issuer or type of instrument.

Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. As of June 30,
2009, the carrying value of our cash and cash equivalents approximated fair value. A change in market interest rates of 1.0% annualized would have impacted our net income from these investments by less than $0.1 million for the three months ended
June 30, 2009.

Marketable Securities Risk

Our marketable securities, consisting of U.S. Treasury and agency obligations, commercial paper, corporate notes and bonds, time deposits, foreign notes and certificates of deposits, are generally classified as held-to-maturity and are
stated at cost, adjusted for amortization of premiums and discounts to maturity. In the past, certain of our short-term marketable securities were classified as available-for-sale and were stated at fair value, which was equal to cost due to the
short-term maturity of these securities. In the event that there were to be a difference between fair value and cost in any of our available-for-sale securities, unrealized gains and losses on these investments would be reported as a separate
component of accumulated other comprehensive income (loss).

Our investment policy for marketable securities requires that all securities
mature in two years or less, with a weighted average maturity of no longer than 12 months. As of June 30, 2009, the carrying value of $0.8 million



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approximated the fair value of these securities. The fair value of our marketable securities fluctuates based on changes in market conditions and interest
rates and is affected by the credit condition of the U.S. financial sector. Absent the unprecedented turmoil and upheaval in the U.S. financial sector, given the short-term maturities of our marketable securities, we do not believe these instruments
to be subject to significant market or interest rate risk. However, the current unstable credit environment of the U.S. financial sector may lead us to incur significant realized, unrealized or impairment losses associated with our investments.

Investments in fixed rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their market
value adversely impacted due to rising interest rates. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates.



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

We
maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports filed with the SEC are recorded, processed, summarized and reported within the time periods specified in the
rules and forms of the SEC and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control
objectives, and no evaluation of controls and procedures can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as
amended, or the Exchange Act, prior to filing this Quarterly Report, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on their evaluation, our
principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report.

An evaluation was also performed under the supervision and with the participation of our management, including our principal executive officer and
principal financial officer, of any change in our internal control over financial reporting that occurred during our fiscal quarter ended June 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting. That evaluation did not identify any change in our internal control over financial reporting that occurred during our fiscal quarter ended June 30, 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.



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PART II: OTHER INFORMATION



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

Investing in
our common stock involves a high degree of risk. Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below in addition to the other cautionary statements and risks described, and the other
information contained, elsewhere in this Quarterly Report, in our Annual Report and in our other filings with the SEC. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known
to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs, our business, financial condition, results of operations and/or liquidity could be seriously harmed. In
that event, the trading price of our common stock could decline, and you could lose some or all of your investment.

The risk
factors set forth below with an asterisk (*) next to the title are new risk factors or risk factors containing changes from the risk factors previously disclosed in our Annual Report.

Risks Related to Our Business

We have a history of losses and
may not achieve or sustain profitability in the future.*

We have never been profitable on any quarterly or annual basis. We
incurred net losses attributable to common stockholders of $136.4 million, $32.1 million and $7.2 million for the years ended December 31, 2008, 2007 and 2006, respectively. For the three and six months ended June 30, 2009, we incurred a
net loss attributable to common stockholders of $4.3 million and $13.0 million, respectively. As of June 30, 2009, we had an accumulated deficit of $241.7 million. Accordingly, there can be no assurance if or when we may achieve profitability.
You should not rely on our operating results for any prior quarterly or annual periods as an indication of our future operating performance. Moreover, we expect to make significant expenditures related to the development of our products and the
expansion of our business, including research and development, sales and marketing, and general and administrative expenses. We also incur significant legal, accounting and other expenses related to our status as a public company. Additionally, we
may encounter unforeseen difficulties, complications, product delays or other unknown factors that may require additional expenditures, or unforeseen difficulties or costs associated with the integration of acquired assets or businesses. As a result
of these expenditures, we may have to generate and sustain substantially increased revenue to achieve profitability. If we are unable to achieve adequate revenue growth, we may not achieve or sustain profitability and our stock price could decline.

We face intense competition and expect competition to increase in the future, with many of our competitors being larger, more established and better
capitalized than we.*

The markets for our products are extremely competitive and have been characterized by rapid technological
change, evolving industry standards, rapid changes in customer requirements, short product life cycles and frequent introduction of next generation and new products. This competition could make it more difficult for us to sell our products, and
result in increased pricing pressure, reduced gross profit as a percentage of revenues or gross margins, increased sales and marketing expenses and failure to increase or the loss of market share or expected market share. Semiconductor products in
particular have a history of declining prices driven by customer insistence on lower prices as the cost of production is reduced and as demand falls when competitive products or newer, more advanced products are introduced. If market prices decrease
faster than product costs, our gross margins and operating margins would be adversely affected. Moreover, we expect increased competition from other established and emerging companies both domestically and internationally. In particular, we expect
to face future competition in the sale of MoCA-compliant chipsets. For example, Broadcom Corporation has announced the availability of engineering samples of two multi-format video decoded system-on-a-chip solutions with integrated MoCA
functionality in January 2009 and announced that its home networking reference design platform achieved MoCA certification from the MoCA certification board in April 2009. Our current and potential competitors may also establish cooperative
relationships among themselves or with third parties. If so, competitors or alliances that include our competitors may emerge that could acquire significant market share. We expect these trends to continue as companies attempt to strengthen or
maintain their market positions in an evolving industry. In addition, our competitors could develop products or technologies that cause our products and technologies to become non-competitive or obsolete, or cause us to reduce substantially our
prices.



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Currently, we face competition from a number of established companies that offer products based on
competing technologies, such as Data over Cable Service Interface Specifications, versions of Digital Subscriber Line, Ethernet, HomePNA, HomePlug AV, Wi-Fi, WiMedia, which is based on ultra-wide band technology, WiMAX, also known as Worldwide
Interoperability for Microwave Access, and remote storage digital-video recorders, or RS-DVRs. Many of our competitors and potential competitors are substantially larger and have longer operating histories, larger customer bases and significantly
greater financial, technical, sales, marketing and other resources than we. Given their capital resources, many of these larger organizations are in a better position to withstand any significant reduction in capital spending by customers or market
downturns in the markets in which we compete. Many of our competitors also have broader product lines and market focus, allowing them to bundle their products and services and effectively use other products to subsidize lower prices for those
products that compete with ours or to provide integrated product solutions that offer cost advantages to customers. In addition, many of our competitors have been in operation much longer than we and therefore have better name recognition and more
long-standing and established relationships with service providers, ODMs and OEMs.

Our ability to compete depends on a number of factors,
including:



| |  |  | the adoption of our products and technologies by service providers, ODMs and OEMs;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | the performance and cost effectiveness of our products relative to our competitors products;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | our ability to deliver high quality and reliable products in large volumes and on a timely basis;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | our ability to build close relationships with service providers, ODMs and OEMs;
| | - |  | -------------------------------------------------------------------------------



| |  |  | our success in developing and utilizing new technologies to offer products and features previously not available in the marketplace that are technologically
superior to those offered by our competitors;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to identify new and emerging markets and market trends;
| | - |  | -------------------------------------------------------------------



| |  |  | our ability to recruit design and application engineers and other technical personnel;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | our ability to protect our intellectual property and obtain licenses to the intellectual property of others on commercially reasonable terms; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | availability of substitute goods offered at a lower price than ours.
| | - |  | --------------------------------------------------------------------

Our inability to effectively address any of these factors, alone or in combination with others, could seriously harm our business, operating results and
financial condition.

In addition, consolidation by industry participants or acquisitions of our competitors by our customers or suppliers
could result in competitors with increased market share, larger customer bases, greater diversified product offerings and greater technological and marketing expertise, which would allow them to compete more effectively against us. Current and
potential competitors may also gain such competitive advantages by establishing financial or strategic relationships with existing or potential customers, suppliers or other third-parties. These new competitors or alliances among competitors could
emerge rapidly and acquire significant market share. In addition, some of our suppliers and customers offer or may offer products that compete with our products. Depending on the participants, industry consolidation or the formation of strategic
relationships could have a material adverse effect on our business and results of operations by reducing our ability to compete successfully in our current markets and the markets we are seeking to serve.

We depend on a limited number of customers, and ultimately service providers, for a substantial portion of our revenues, and the loss of, or a significant
shortfall in, orders from any of these parties could significantly impair our financial condition and results of operations.*

We
derive a substantial portion of our revenues from a limited number of customers. For example, during the six months ended June 30, 2009, 10 customers accounted for 92% of our revenues. During the six months ended June 30, 2009, Motorola,
Actiontec and Wistron accounted for 23%, 19% and 13%, respectively, of our revenues. Our inability to generate anticipated revenues from our key existing or targeted customers, or a significant



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shortfall in sales to these customers would significantly reduce our revenues and adversely affect our operating results. Our operating results in the
foreseeable future will continue to depend on our ability to effect sales to existing and other large customers.

In addition, we depend on
a limited number of service providers that purchase products from our customers. To date, only a limited number of major service providers, such as Verizon, Time Warner Cable Inc., or Time Warner, and Cox Communications, Inc., or Cox, have publicly
announced their intentions to use the MoCA standard for home networking. We also primarily rely on two major service providers, DISH and DIRECTV, to deploy products using our digital broadcast satellite outdoor unit solutions. During the six months
ended June 30, 2009 and the year ended December 31, 2008, products sold to our customers that were incorporated into products purchased by Verizon, DISH and DIRECTV accounted for substantially all of our revenues. If these service
providers, or other service providers that elect to use our products, reduce or eliminate purchases of our customers products which incorporate our products, this would significantly reduce our revenues and adversely affect our operating
results. Due to weakness in the current economic outlook, some service providers may reduce or delay spending or taking delivery of our customers products which incorporate our products to respond to rapidly changing economic conditions. This
may lead to an inventory built up by our customers who may, in turn, reschedule taking delivery of our products or wait to clear their existing inventory before ordering more products from us, which, in turn, may adversely affect our operating
results. Our operating results in the foreseeable future will continue to depend on a limited number of service providers demand for products which incorporate our products.

We may have conflicts with our customers or the service providers that purchase products from our customers that incorporate our products. Any such
conflict could result in events that have a negative impact on our business, including:



| |  |  | reduced purchases of our products or our customers products that incorporate them;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | uncertainty regarding ownership of intellectual property rights;
| | - |  | ----------------------------------------------------------------



| |  |  | litigation or the threat of litigation; or
| | - |  | ------------------------------------------



| |  |  | settlements or other business arrangements imposing obligations on us or restrictions on our business, including obligations to license intellectual property rights
or make cash payments.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If we fail to develop and introduce new or enhanced products on a timely basis, our ability to attract and
retain customers could be impaired, and our competitive position may be harmed.

To compete successfully, we must design, develop,
market and sell new or enhanced products that provide increasingly higher levels of performance and reliability and meet the cost expectations of our customers. The introduction of new products by our competitors, the market acceptance of products
based on new or alternative technologies, or the emergence of new industry standards could render our existing or future products obsolete. Our failure to anticipate or timely develop new or enhanced products or technologies in response to
technological shifts could result in decreased revenues and an increase in design wins by our competitors. In particular, we may experience difficulties with product design, manufacturing, marketing or certification that could delay or prevent our
development, introduction or marketing of new or enhanced products. If we fail to introduce new or enhanced products that meet the needs of our customers or penetrate new markets in a timely fashion, we will lose market share and our operating
results will be adversely affected.

Our results could be adversely affected if our customers or the service providers who purchase their products
are unable to successfully compete in their respective markets.

Our customers and the service providers that purchase products
from our customers face significant competition from their competitors. We rely on these customers and service providers ability to develop products and/or services that meet the needs of their customers in terms of functionality,
performance, availability and price. If these customers and service providers do not successfully compete, they may lose market share, which would negatively impact the demand for our products. For example, for our home networking products, there is
intense competition among service providers to deliver video and other multimedia content into and throughout the home. For the sale of our home networking products, we are currently dependent on Verizons ability to compete in the



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market for the delivery of HD video and other multimedia content. Therefore, factors influencing Verizons ability to compete in this market, such as
laws and regulations regarding local cable franchising, could have an adverse effect on our current ability to sell home networking products. In addition, our digital broadcast satellite outdoor unit products are primarily supplied to digital
broadcast satellite service providers by our ODM and OEM customers. Digital broadcast satellite service providers are facing significant competition from telecommunications carriers and cable multiple service operators as they compete for customers
in terms of video, voice and data services. Moreover, ODMs and OEMs who market satellite set-top boxes using our silicon tuners are competing with a variety of internet protocol-based video delivery solutions, including versions of Digital
Subscriber Line technology and certain fiber optic-based solutions. Many of these technologies compete effectively with satellite set-top boxes and do not require tuners such as the ones we sell. If our customers and the service providers who
purchase products from our customers that incorporate our products do not successfully compete, they may lose market share, which would reduce their demand for our products.

If the market for HD video and other multimedia content delivery solutions based on the MoCA standard does not develop as we anticipate, our revenues may decline or fail to grow, which would adversely affect our
operating results.*

We derive, and expect to continue to derive for the foreseeable future, a significant portion of our revenues
from sales of our home networking products based on the MoCA standard. The market for such multimedia content delivery solutions based on the MoCA standard is relatively new, still evolving and difficult to predict. We believe our primary
competition in this market currently comes from companies that offer products based on non-MoCA home networking solutions, such as Ethernet, HomePNA, Home Plug AV, Wi-Fi, WiMedia and RS-DVRs, but we expect other semiconductor manufacturers to
compete with us in the manufacture and sale of MoCA-compliant chipsets in the future. It is uncertain whether the MoCA standard will achieve and sustain high levels of demand and market acceptance. Moreover, deployment of services or electronic
devices utilizing MoCA-based solutions may be delayed or slower than we anticipate. If the market for MoCA-based solutions does not continue to develop or develops more slowly than we expect, or if we make errors in predicting adoption and
deployment rates for these solutions, our revenues may be significantly adversely affected.

Our success will depend to a substantial
extent on the willingness of service providers, ODMs and OEMs to adopt the MoCA standard for multimedia content delivery. As of June 30, 2009, only a limited number of major service providers, such as Verizon, Time Warner and Cox had publicly
announced their intentions to use the MoCA standard for home networking. Some service providers, ODMs and OEMs have adopted and others may adopt multimedia content delivery solutions that rely on technologies other than the MoCA standard or may
choose to wait for the introduction of products and technologies that serve as a replacement or substitute for, or represent an improvement over, MoCA-based solutions. It is critical to our success that additional service providers, including
telecommunications carriers, digital broadcast satellite service providers and cable operators, adopt the MoCA standard for home networking.

Even if
service providers, ODMs and OEMs adopt multimedia content delivery solutions based on the MoCA standard, we may not compete successfully in the market for MoCA-compliant chipsets.

As a member of MoCA, we are required to license any of our patent claims that are essential to implement the MoCA specifications to other MoCA members on
reasonable and non-discriminatory terms. As a result, we are required to license some of our important intellectual property to other MoCA members, including other semiconductor manufacturers that may compete with us in the sale of MoCA-compliant
chipsets. If we are unable to differentiate our MoCA-compliant chipsets from other MoCA-compliant chipsets by offering superior pricing and features outside MoCA specifications, we may not be able to compete effectively in the market for such
chipsets. Moreover, although we are currently and actively involved in the ongoing development of the MoCA standard, we cannot guarantee that future MoCA specifications will incorporate technologies or product features we are developing or that our
products will be compatible with future MoCA specifications. As additional members, including our competitors, continue to join MoCA, they and existing members may exert greater influence on MoCA and the development of the MoCA standard in a manner
that is adverse to our interests. If our home networking products fail to comply with future MoCA specifications, the demand for these products could be severely reduced.



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The semiconductor and communications industries have historically experienced cyclical behavior and prolonged
downturns, which could impact our operating results, financial condition and cash flows.*

The semiconductor and communications
industries, which have historically exhibited cyclical behavior, are both currently experiencing industry downturns and are likely to experience recessionary periods in the future. The economic turmoil that has arisen in the credit markets has had
an adverse effect on the ability of businesses to obtain short and long term funding for working capital and has caused a rapid deterioration of the global economic conditions. As a result, some service providers, OEMs and ODMs may slow down their
research and development activities, cancel or delay new product development, reduce their inventories and/or take a cautious approach to acquiring products, which may lead to a significant negative impact to our business. Because a significant
portion of our expenses is fixed in the near term or is incurred in advance of anticipated sales, we may not be able to decrease our expenses rapidly enough to offset any unanticipated shortfall in revenues during industry downturns, which could
adversely affect our operating results.

Even during periods of increased demand and industry growth, we may experience production
constraints which could limit our ability to produce sufficient quantities of our products to meet the increased demand. We may also have difficulty in obtaining sufficient manufacturing, assembly and test resources from our manufacturers. Any
factor adversely affecting either the semiconductor or communications industry in general, or the particular segments of any of these industries that our products target, may adversely affect our ability to generate revenue and could negatively
impact our operating results, cash flow and financial condition. In addition, our operating results may also fluctuate significantly from period to period as we adjust our inventory and production requirements to meet the changing demands of our
customers during this period and in the future, which may increase the volatility of the price of our stock.

Our operating results may be harmed if
our restructuring plans do not achieve the anticipated results or cause undesirable consequences.*

In the last 12 months, we have
implemented restructuring plans which resulted in us reducing our workforce by a total of 75 individuals. These restructuring plans may yield unintended consequences, such as attrition beyond our intended reduction in workforce and reduced employee
morale, which may cause our employees who were not affected by the reduction in workforce to seek alternate employment. Additional attrition could impede our ability to meet our operational goals, which could have a material adverse effect on our
financial performance. In addition, as a result of the reductions in our workforce, we face an increased risk of employment litigation. Furthermore, employees whose positions were eliminated in connection with these restructuring plans may seek
future employment with our competitors. Although all our employees are required to sign a confidentiality agreement with us at the time of hire, we cannot assure you that the confidential nature of our proprietary information will be maintained in
the course of such future employment. We cannot assure you that we will not undertake additional restructuring activities, that any of our restructuring efforts will be successful, or that we will be able to realize the cost savings and other
anticipated benefits from our previous or any future restructuring plans. In addition, if we continue to reduce our workforce, it may adversely impact our ability to respond rapidly to any new growth or revenue opportunities.

Our operating results have fluctuated significantly in the past and we expect them to continue to fluctuate in the future, which could lead to volatility in the
price of our common stock.

Our operating results have fluctuated in the past and are likely to continue to fluctuate, on an annual
and a quarterly basis, as a result of a number of factors, many of which are outside of our control. These fluctuations in our operating results may cause our stock price to fluctuate as well. The primary factors that are likely to affect our
quarterly and annual operating results include:



| |  |  | changes in demand for our products or those offered by service providers and our customers;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | the timing and amount of orders, especially from significant service providers and customers;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | the seasonal nature of our sales;
| | - |  | ---------------------------------



| |  |  | the level and timing of capital spending of service providers, both in the United States and in international markets;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | competitive market conditions, including pricing actions by us or our competitors;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | adverse market perception of MoCA-compliant products;
| | - |  | -----------------------------------------------------



| |  |  | our unpredictable and lengthy sales cycles;
| | - |  | -------------------------------------------



| |  |  | the mix of products and product configurations sold;
| | - |  | ----------------------------------------------------



| |  |  | our ability to successfully define, design and release new products on a timely basis that meet customers or service providers needs;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | costs related to acquisitions of complementary products, technologies or businesses;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | new product introductions and enhancements, or the market anticipation of new products and enhancements, by us or our competitors;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | the timing of revenue recognition on sales arrangements, which may include multiple deliverables, and the effect of our use of inventory hubbing
arrangements;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | unexpected changes in our operating expenses;
| | - |  | ---------------------------------------------



| |  |  | general economic conditions (including the current industry and economic downturn) and political conditions in the countries where we operate or our products are
sold or used;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to attain and maintain production volumes and quality levels for our products, including adequate allocation of wafer, assembly and test capacity for
our products by our subcontractors;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our customers ability to obtain other components needed to manufacture their products;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | the cost and availability of components and raw materials used in our products, including, without limitation, increases in the price of gold;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in manufacturing costs, including wafer, test and assembly costs, manufacturing yields and product quality and reliability;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | productivity of our sales and marketing force;
| | - |  | ----------------------------------------------



| |  |  | our inability to reduce operating expenses in a particular quarter if revenues for that quarter fall below expectations;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | future accounting pronouncements and changes in accounting policies;
| | - |  | --------------------------------------------------------------------



| |  |  | costs associated with litigation; and
| | - |  | -------------------------------------



| |  |  | changes in domestic and international regulatory environments.
| | - |  | --------------------------------------------------------------

Unfavorable changes in any of the above factors, many of which are beyond our control, could significantly harm our business and results of operations. You should not rely on the results of prior periods as an
indication of our future performance.

Adverse U.S. and international economic conditions have affected and may continue to adversely affect our
revenues, margins and profitability.*

Since September 2008, the credit markets and the financial services industry have been
experiencing a period of unprecedented turmoil and upheaval characterized by the bankruptcy, failure, collapse or sale of various financial institutions and an unprecedented level of intervention from the United States federal government. These
events, together with the current adverse economic conditions facing the broader economy and, in particular, the semiconductor and communications industries, have, and may continue to adversely affect our business as service providers cut back or
delay deployments that include our products and to the extent that consumers decrease their discretionary spending for enhanced video offerings from service providers, which may in turn lead to cautious or reduced spending by service providers and,
in turn, may lead to a decrease in orders for our products, thereby adversely affecting our operating results.

We may also experience
adverse conditions in our cost base due to changes in foreign currency exchange rates that reduce the purchasing power of the U.S. dollar, increase research and development expenses and other factors.



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These conditions may harm our margins and prevent us from achieving or sustaining profitability if we are unable to increase the selling prices of our
products or reduce our costs sufficiently to offset the effects of effective increases in our costs. Our attempts to offset the effects of cost increase through controlling our expenses, passing cost increases on to our customers or any other method
may not succeed.

The geographic market for our broadband access products is limited and these products may not be widely adopted.

Our broadband access products are designed to meet broadband access requirements in areas characterized by fiber optic network
deployments that terminate within one kilometer of customer premises. We believe the primary geographic markets for our broadband access products are currently in certain Asian countries such as China, Japan and Korea, and parts of Europe where
there are many multi-dwelling units and fiber optic networks that extend to or near a customer premises. We do not expect to generate significant revenues from sales of our broadband access products in North America, which is generally characterized
by low-density housing, or in developing nations which do not generally have extensive fiber optic networks. To the extent our efforts to sell our broadband access products into currently targeted foreign markets are unsuccessful, the demand for
these products may not develop as anticipated or decline, either of which could adversely affect our future revenues. Moreover, these foreign markets have a large number of service providers and varying regulatory standards, both of which may delay
any widespread adoption of our products and increase the time during which competing technologies could be introduced and displace our products.

In addition, if areas characterized by fiber optic networks that terminate within one kilometer of customer premises do not continue to grow, or we are unable to develop broadband access products that are competitive outside of these areas,
the demand for our broadband access products may not grow and our revenues may be limited. Even if the markets in which our broadband access products are targeted continue to grow or we are able to serve additional markets, customers and service
providers may not adopt our technology. There are a growing number of competing technologies for delivering high-speed broadband access from the service providers network to the customers premises. For example, our broadband access
products face competition from products using DOCSIS, versions of DSL, Ethernet and WiMAX-based solutions. Moreover, there are many other access technologies that are currently in development including some low cost proprietary solutions. If service
providers adopt competing products or technologies, the demand for our broadband access products will decline and we may not be able to generate significant revenues from these products.

The success of our digital broadcast satellite outdoor unit products depends on the demand for our products within the satellite digital television market and the growth of this overall market.

In addition to our home networking products, we also derive a significant portion of our revenues from sales of our digital
broadcast satellite outdoor unit products into markets served by digital broadcast satellite providers and their ODM and OEM partners. The digital broadcast satellite market may not grow in the future as anticipated or a significant market slowdown
may occur, which would in turn reduce the demand for applications or devices, such as set-top boxes and low-noise block converters that rely on our digital broadcast satellite outdoor unit products. Because of the intense competition in the
satellite, terrestrial and cable digital television markets, the unproven technology of many products addressing these markets and the short product life cycles of many consumer applications or devices, it is difficult to predict the potential size
and future growth rate of the markets for our digital broadcast satellite outdoor unit products. If the demand for our digital broadcast satellite outdoor unit products is not as great as we expect, or if we are unable to produce competitive
products to meet that demand, our revenues could be adversely affected.

Market-specific risks affecting the digital television, digital television
set-top boxes and digital television peripheral markets could impair our ability to successfully sell our silicon tuners.

The
market for digital television applications in digital televisions, digital television set-top boxes and digital television peripherals is characterized by certain market-specific risks, any of which may adversely affect our ability to sell our
silicon tuners. For example, sellers of module tuners that offer similar or better functionality than our silicon tuner solutions may dramatically lower their prices and become more competitive than we in the tuner market. In addition, our silicon
tuners may not have the feature sets desired by our customers or may not be architecturally compatible with other components in the customers designs. Our efforts to penetrate the digital television market, in particular, will depend on our
ability to overcome these and other challenges. To the extent our efforts are adversely affected by any of these risks or are otherwise unsuccessful, the demand for our silicon tuner products may not develop as anticipated or decline which would
adversely affect our revenues, financial condition and results of operations.



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The success of our silicon tuners is highly dependent on our relationships with demodulator manufacturers.

Our silicon tuners are designed to be interoperable with various specific demodulator integrated circuit products that are designed and
manufactured by other companies. Historically, we have relied on strategic relationships with various demodulator manufacturers to enable both parties to offer an interoperable tuner/demodulator solution to mutual end customers. Although we work in
concert with third party demodulator manufacturers to complete highly functional reference designs, we have no control over their future product plans and product roadmaps and could be effectively designed out of future customer applications by the
refusal of a demodulator manufacturer to continue to support our products. Likewise, our ability to acquire new customers is dependent on the cooperation of third party demodulator manufacturers. If such third party manufacturers decide to partner
with one of our competitors or to provide their own tuner solutions, we would effectively be prevented from selling our products to potential new customers. Furthermore, our dependence on these third party demodulator manufacturers often limits our
strategic direction. If we were to design products that were competitive with any of such demodulator manufacturers, they may choose to stop working with us. Our current principal demodulator relationship is with STMicroelectronics N.V. in the
DVB-T, or digital video broadcasting terrestrial, and DVB-C, or digital video broadcasting cable, markets; Advanced Television Systems Committee, or ATSC; and digital broadcast satellite markets. In the digital broadcast satellite market, our tuners
are currently marketed with a STMicroelectronics demodulator; however, in 2008, STMicroelectronics released its own radio frequency silicon tuner that will replace some of the tuners we sell, and STMicroelectronics may continue to release other
competing tuners in the future or require us to reduce our prices on the tuners we sell with their demodulators.

If any of the current or
prospective demodulator manufacturers with whom we have or intend to have relationships were to stop working with us in favor of other tuner manufacturers or in favor of deploying their own tuner products, we would be effectively designed out of
current and potential customers products and the demand for our silicon tuners would be substantially reduced.

Notwithstanding our recent
reductions-in-force, we continue to intend to expand our operations and increase our expenditures in an effort to grow our business. If we are not able to manage this expansion and growth, or if our business does not grow as we expect, we may not be
able to realize a return on the resources we devote to expansion.*

We have grown significantly in a short period of time, in part,
as a result of our various acquisitions, including our 2007 acquisition of RF Magic. For example, even after taking into account the recent reductions-in-force that we have implemented in the last 12 months, our headcount increased from 83 full-time
employees as of December 31, 2006 to 252 as of June 30, 2009. Notwithstanding our reductions-in-force, we anticipate that we will continue to expand our infrastructure and grow our headcount to accommodate changes in our research and
development strategy and achieve planned expansion of our product offerings, projected increases in our customer base and anticipated growth in the number of our product deployments. The rapid change in the size of our organization has placed, and
will continue to place, a significant strain on our administrative and operational infrastructure. Our success in managing our operations and changes in size will be dependent upon our ability to:



| |  |  | enhance our operational, financial and management controls, human resource policies and reporting systems and procedures;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | expand our facilities and equipment;
| | - |  | ------------------------------------



| |  |  | successfully hire, train, motivate and productively deploy additional employees, including technical personnel; and
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | expand our international resources.
| | - |  | -----------------------------------



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Our inability to effectively address any of these factors, alone or in combination with others, could
seriously harm our ability to execute our business strategy.

Further, we continue to intend to grow our business by entering new markets,
developing new product offerings and pursuing new customers. If we fail to timely or efficiently expand operational and financial systems in connection with such growth or if we fail to implement or maintain effective internal controls and
procedures, resulting operating inefficiencies could increase costs and expenses more than we planned and might cause us to lose the ability to take advantage of market opportunities, enhance existing products, develop new products, satisfy customer
requirements, respond to competitive pressures, control our inventory or otherwise execute our business plan. Failure to implement or maintain such controls and procedures could also impact our ability to produce timely and accurate financial
statements. Additionally, if we increase our operating expenses in anticipation of the growth of our business and such growth does not meet our expectations, our financial results likely would be negatively impacted.

We may not realize the anticipated financial and strategic benefits from the businesses we have acquired or be able to successfully integrate such businesses with
ours.*

We will need to overcome significant challenges in order to realize the benefits or synergies from the acquisitions we have
completed to date. These challenges include the following:



| |  |  | integrating businesses, operations and technologies;
| | - |  | ----------------------------------------------------



| |  |  | retaining and assimilating key personnel;
| | - |  | -----------------------------------------



| |  |  | retaining existing customers and attracting additional customers;
| | - |  | -----------------------------------------------------------------



| |  |  | creating uniform standards, controls, procedures, policies and information systems;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | meeting the challenges inherent in efficiently managing an increased number of employees, including some at geographic locations distant from our headquarters and
senior management; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | implementing appropriate systems, policies, benefits and compliance programs.
| | - |  | -----------------------------------------------------------------------------

Integration in particular may involve considerable risks and may not be successful. These risks include the following:



| |  |  | the potential disruption of our ongoing business and distraction of our management;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | the potential strain on our financial and managerial controls and reporting systems and procedures;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | unanticipated expenses and potential delays related to integration of the operations, technology and other resources of the acquired companies;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the impairment of relationships with employees, suppliers and customers; and
| | - |  | ----------------------------------------------------------------------------



| |  |  | potential unknown or contingent liabilities.
| | - |  | --------------------------------------------

The inability to successfully integrate any businesses we acquire, or any significant delay in achieving integration, could delay introduction of new products and require expenditure of additional resources to achieve integration. For
example, although we recorded significant amounts of goodwill and other intangible assets in connection with the acquisitions we completed in 2007 and 2008, as a result of the recent industry and economic turmoil and its effects on our market value
and business outlook, we had to reduce the carrying amount of all of these long-lived assets and, as of June 30, 2009, we have recorded an aggregate impairment charge of $113.4 million against our goodwill and intangible assets carrying value
related to these acquisitions.

Investors should not rely on attempts to combine our historical financial results with those of any of our
acquired businesses as separate operating entities to predict our future results of operations as a combined entity.



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Any acquisition, strategic relationship, joint venture or investment could disrupt our business and harm our
financial condition.

We intend to continue to actively pursue acquisitions, strategic relationships, joint ventures or investments
that we believe may allow us to complement our growth strategy, increase market share in our current markets or expand into adjacent markets, or broaden our technology and intellectual property. Such transactions may be complex, time consuming and
expensive, and may present numerous challenges and risks including:



| |  |  | difficulties in assimilating any acquired workforce and merging operations;
| | - |  | ---------------------------------------------------------------------------



| |  |  | attrition and the loss of key personnel;
| | - |  | ----------------------------------------



| |  |  | an acquired company, asset or technology, or a strategic collaboration or licensed asset or technology not furthering our business strategy as anticipated;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our overpayment for a company, asset or technology or changes in the economic or market conditions or assumptions underlying our decision to make an acquisition;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | difficulties entering and competing in new product or geographic markets and increased competition, including price competition;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | significant problems or liabilities, including increased intellectual property and employment related litigation exposure, associated with acquired businesses,
assets or technologies;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | in connection with any such transaction, the need to use a significant portion of our available cash, issue additional equity securities that would dilute the
then-current stockholders percentage ownership or incur substantial debt or contingent liabilities; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | requirements to record substantial charges and amortization expense related to certain intangible assets, deferred stock compensation and other items.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

Any one of these challenges or risks could impair our ability to realize any benefit from our acquisitions, strategic
relationships, joint ventures or investments after we have expended resources on them.

In addition, from time to time we may enter into
negotiations for acquisitions, relationships, joint ventures or investments that are not ultimately consummated. These negotiations could result in significant diversion of management time, as well as substantial out-of-pocket costs.

We cannot forecast the number, timing or size of future acquisitions, strategic relationships, joint ventures or investments, or the effect that any such
transactions might have on our operating or financial results. Any such transaction could disrupt our business and harm our operating results and financial condition.

The average selling prices of our products have historically decreased over time and will likely do so in the future, which may reduce our revenues and gross margins.*

Our products and products sold by other companies in our industry have historically experienced a decrease in average selling prices over time. We
anticipate that the average selling prices of our products will continue to decrease in the future in response to competitive pricing pressures, increased sales discounts and new product introductions by our competitors. For example, while we are
currently the only manufacturer of MoCA-compliant chipsets, we expect that other chipset manufacturers who are members of MoCA will produce competing chipsets and create pricing pressure for such products. Our future operating results may be harmed
due to the decrease of our average selling prices. To maintain our current gross margins or increase our gross margins in the future, we must develop and introduce on a timely basis new products and product enhancements, continually reduce our
product costs and manage product transitions in a timely and cost-effective manner. Our failure to do so would likely cause our revenues and gross margins to decline, which could have a material adverse effect on our operating results and cause the
value of our common stock to decline.



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Our product development efforts are time-consuming, require substantial research and development expenditures and
may not generate an acceptable return.*

Our product development efforts require substantial research and development expense. Our
research and development expense was $23.4 million and $29.0 million for the six months ended June 30, 2009 and 2008, respectively. There can be no assurance that we will achieve an acceptable return on our research and development efforts.

The development of our products is also highly complex. Due to the relatively small size of our product design teams, our research and
development efforts in our core technologies may lag behind those of our competitors, some of whom have substantially greater financial and technical resources. We occasionally have experienced delays in completing the development and introduction
of new products and product enhancements, and we could experience delays in the future. Unanticipated problems in developing products could also divert substantial engineering resources, which may impair our ability to develop new products and
enhancements and could substantially increase our costs. Furthermore, we may expend significant amounts on a research and development program that may not ultimately result in a commercially successful product, and we have in the past terminated
ongoing research and development programs before they could be brought to successful conclusions. As a result of these and other factors, we may be unable to develop and introduce new products successfully and in a cost-effective and timely manner,
and any new products we develop and offer may never achieve market acceptance. Any failure to successfully develop future products would have a material adverse effect on our business, financial condition and results of operations.

Our products typically have lengthy sales cycles, which may cause our operating results to fluctuate, and a service provider, ODM or OEM customer may decide to
cancel or change its service or product plans, which could cause us to lose anticipated sales.*

Our products typically have
lengthy sales cycles. A service provider must first evaluate our products. This initial evaluation period can vary considerably based on the service provider and product being evaluated, and could take a significant amount of time to complete.
Products incorporating new technologies generally require longer periods for evaluation. After this initial evaluation period, if a service provider decides to adopt our products, that service provider and the applicable ODM or OEM customers will
need to further test and evaluate our products prior to completing the design of the equipment that will incorporate our products. Additional time is needed to begin volume production of equipment that incorporates our products. Due to these lengthy
sales cycles, we may experience significant delays from the time we incur research and development and sales expenses until the time, if ever, that we generate sales from these products. The delays inherent in these lengthy sales cycles increase the
risk that a customer will decide to cancel or change its product plans. From time to time, we have experienced changes, delays and cancellations in the purchase plans of our customers. A cancellation or change in plans by a service provider, ODM or
OEM customer could prevent us from realizing anticipated sales. In addition, our anticipated sales could be lost or substantially reduced if a significant service provider, ODM or OEM customer reduces or delays orders during our sales cycle or
chooses not to release equipment that contains our products. We may invest significant time and effort in marketing to a particular customer that does not ultimately result in a sale to that customer. As a result of these lengthy and uncertain sales
cycles for our products, it is difficult for us to predict if or when our customers may purchase products in volume from us, and our operating results may vary significantly from quarter to quarter, which may negatively affect our operating results
for any given quarter.

Fluctuations in the mix of products we sell may adversely affect our financial results.

Because of differences in selling prices and manufacturing costs among our products, the mix and types of products sold affect the average selling price
of our products and have a substantial impact on our revenues and profit margins. To the extent our sales mix shifts toward increased sales of our lower-margin products, our overall gross margins will be negatively affected. Fluctuations in the mix
and types of our products sold may also affect the extent to which we are able to recover our costs and expenditures that are associated with a particular product, and as a result can negatively impact our financial results.



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If we do not complete our design-in activities before a customers design window closes, we will lose the
design opportunity, which could adversely affect our future sales and revenues and harm our customer relationships.

The timing of
our design-in activities with key customers and prospective customers may not align with their open design windows, which may or may not be known to us, making design win predictions more difficult. If we miss a particular customers design
window, we may be forced to wait an entire year or even longer for the next opportunity to compete for the customers next design. The loss of a particular design opportunity could eliminate or substantially delay revenues from certain target
customers and markets, which could have a material adverse effect on our results of operations and future prospects as well as our customer relationships.

Our products must interoperate with many software applications and hardware found in service providers networks and other devices in the home, and if they do not interoperate properly, our business would be harmed.

Our products must interoperate with service providers networks and other devices in the home, which often have varied and
complex specifications, utilize multiple protocol standards, software applications and products from multiple vendors, and contain multiple generations of products that have been added over time. As a result, we must continually ensure that our
products interoperate properly with these existing networks. To meet these requirements, we must undertake development efforts that involve significant expense and the dedication of substantial employee resources. We may not accomplish these
development efforts quickly or cost-effectively, if at all. If we fail to maintain compatibility with products, software or equipment found in our customers existing networks, we may face substantially reduced demand for our products, which
would adversely affect our business, operating results and financial condition.

From time to time, we may enter into interoperability
arrangements with equipment and software vendors for the use or integration of their technology with our products. These arrangements would give us access to and enable interoperability with various products in the connected home entertainment
market. If these relationships fail, we would have to devote substantially more resources to the development of alternative products and the support of our products, and our efforts may not be as effective as the combined solutions with our current
customers. In many cases, these parties are either companies that we compete with directly in other areas or companies that have extensive relationships with our existing and potential customers and may have influence over the purchasing decisions
of these customers. A number of our competitors have stronger relationships than we do with some of our existing and potential customers and, as a result, our ability to have successful arrangements with these companies may be harmed. Our failure to
establish or maintain key relationships with third party equipment and software vendors may harm our ability to successfully sell and market our products. We are currently devoting significant resources to the development of these relationships. Our
operating results could be adversely affected if these efforts do not result in the revenues necessary to offset these investments.

In
addition, if we find errors in the software or hardware used in service providers networks or problematic network configurations or settings we may have to modify our products so that they will interoperate with service providers
networks. This could cause longer installation times for our products and order cancellations, either of which would adversely affect our business, operating results and financial condition.



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Our customers may cancel their orders, change production quantities or delay production, and if we fail to forecast
demand for our products accurately, we may incur product shortages, delays in product shipments or excess or insufficient product inventory.

We sell our products to customers who integrate them into their products. We do not obtain firm, long-term purchase commitments from our customers. We have limited visibility as to the volume of our products that our
customers are selling or carrying in their inventory. In addition, our sales have been seasonal in nature. Because production lead times often exceed the amount of time required to fulfill orders, we often must build inventory in advance of orders,
relying on an imperfect demand forecast to project volumes and product mix. Our demand forecast accuracy can be adversely affected by a number of factors, including inaccurate forecasting by our customers, changes in market conditions, adverse
changes in our product order mix and demand for our customers products. We have in the past had customers dramatically decrease and increase their requested production quantities with little or no advance notice. Even after an order is
received, our customers may cancel these orders, postpone taking delivery or request a decrease in production quantities. Any such cancellation, postponement of delivery or decrease in production quantity subjects us to a number of risks, most
notably that our projected sales will not materialize on schedule or at all, leading to unanticipated revenue shortfalls, reduced profit margins and excess or obsolete inventory which we may be unable to sell to other customers or which we must sell
at reduced prices, or that any resulting disputes with our customers may adversely impact our future relationships with those customers. Alternatively, if we are unable to project customer requirements accurately, we may not build enough products,
which could lead to delays in product shipments and lost sales opportunities in the near term, as well as force our customers to identify alternative sources of supply, which could affect our ongoing relationships with these customers and
potentially reduce our market share. If we do not timely fulfill customer demands, our customers may cancel their orders and we may be subject to customer claims for cost of replacement.

Our ability to accurately predict revenues and inventory needs, and to effectively manage inventory levels, may be adversely impacted due to our use of inventory hubbing arrangements.

We have entered into an inventory hubbing arrangement with Motorola and we may enter into similar arrangements with
other customers in the future. Pursuant to these arrangements, we ship our products to a designated third party warehouse, or hub, rather than shipping them directly to the customer. The products generally remain in the hub until the customer
removes them for incorporation into its own products. Prior to the implementation of this hubbing arrangement with Motorola, we recognized revenues on sales of our products to Motorola upon shipment of those products to Motorola or its ODM partners.
Under the hubbing arrangement, however, we maintain ownership of our products in the hub, and therefore do not recognize the related revenue, until the date Motorola removes them from the hub. As a result, our ability to accurately predict future
revenues recognized from sales to Motorola or any other customers with which we implement hubbing arrangements may be impaired, and we may experience significant fluctuations in our quarterly operating results depending on when Motorola or any such
other customers remove our products from the hub, which they may do with little or no lead time. In the short term, we may experience an increase in operating expenses as we build and ship inventory to the hub and may not recognize revenues from
sales of this inventory, if at all, until Motorola or any such other customers remove it from the hub at a later time. Furthermore, because we continue to own but do not maintain control over our products after they are shipped to the hub, our
ability to effectively manage inventory levels may be impaired as our shipments under the hubbing arrangement increase and we may be exposed to additional risk that the inventory in the hub becomes obsolete before sales are recognized.

We extend credit to our customers, sometimes in large amounts, but there is no guarantee every customer will be able to pay our invoices when they become due.

As part of our routine business, we extend credit to customers purchasing our products. While our customers may have the ability
to pay on the date of shipment or on the date credit is granted, their financial condition could change and there is no guarantee that customers will ever pay the invoices. Rapid changes in our customers financial conditions and risks
associated with extending credit to our customers can subject us to a higher financial risk and could have a material adverse effect on our business, financial condition and results of operations.



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We depend on a limited number of third parties to manufacture, assemble and test our products which reduces our
control over key aspects of our products and their availability.

We do not own or operate a manufacturing, assembly or test
facility for our products. Rather, we outsource the manufacture, assembly and testing of our products to third party subcontractors including Taiwan Semiconductor Manufacturing Company, Jazz Technologies, Inc., United Microelectronics Corp., Amkor
Technologies, Inc. and Giga Solution Tech. Co., Ltd. Accordingly, we are greatly dependent on a limited number of suppliers to deliver quality products on time. Our reliance on sole or limited suppliers involves several risks, including
susceptibility to increased manufacturing costs if competition for foundry capacity intensifies and reduced control over the following:



| |  |  | supply of our products available for sale;
| | - |  | ------------------------------------------



| |  |  | pricing, quality and timely delivery of our products;
| | - |  | -----------------------------------------------------



| |  |  | prices and availability of components for our products; and
| | - |  | -----------------------------------------------------------



| |  |  | production capacity for our products.
| | - |  | -------------------------------------

Because we rely on a limited number of third party manufacturers, if we were required to change contract manufacturers or one of our contract manufacturers became unable or unwilling to continue manufacturing our products, we may sustain
lost revenues, increased costs and damage to our customer relationships. In addition, we would need to expend significant time and effort to locate and qualify new third party manufacturers, if available.

Manufacturing defects may not be detected by the testing process performed by our subcontractors. If defects are discovered after we have shipped our
products, we may be exposed to warranty and consequential damages claims from our customers. Such claims may have a significant adverse impact on our revenues and operating results. Furthermore, 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.

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

The ability of each of our subcontractors manufacturing facilities to provide us with chipsets is limited by their available capacity and existing obligations. Although we have purchase order commitments to supply specified levels of
products to our customers, we do not have a guaranteed level of production capacity from any of our subcontractors facilities to produce our products. Facility capacity may not be available when we need it or at reasonable prices. In addition,
our subcontractors may allocate capacity to the production of other companies products and thereby reduce deliveries to us on short notice.

In order to secure sufficient manufacturing facility capacity when demand is high and mitigate the risks associated with an inability to meet our customers demands for our products, we may enter into various arrangements with
subcontractors that could be costly and harm our operating results, including:



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



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



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



| |  |  | purchase of testing equipment for specific use at the facilities of our 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 capacity, we may be obligated to use all of that capacity or incur penalties. These penalties and obligations may be expensive and require significant capital and could harm our
business.



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We believe that transitioning certain of our silicon products to newer or better manufacturing process technologies
will be important to our future competitive position. If we fail to make this transition efficiently, our competitive position could be seriously harmed.

We continually evaluate the benefits, on a product-by-product basis, of migrating to higher performance or lower cost process technologies in order to produce higher performance, more efficient or better integrated
circuits because we believe this migration is required to remain competitive. Other companies in our industry have experienced difficulty in migrating to new process technologies and, consequently, have suffered reduced yields, delays in product
deliveries and increased expense levels. We may experience similar difficulties. Moreover, we are dependent on our relationships with subcontractors to successfully migrate to newer or better process technologies. Our third party manufacturers may
not make newer or better process technologies available to us on a timely or cost-effective basis, if at all. If our third party manufacturers do not make newer or better manufacturing process technologies available to us on a timely or
cost-effective basis, or if we experience difficulties in migrating to these processes, it could have a material adverse effect on our competitive position and business prospects.

We rely on sales representatives to assist in selling our products, and the failure of these representatives to perform as expected could reduce our future sales.

We sell our products to some of our customers through third party sales representatives. Our relationships with some of these third party sales
representatives are relatively new and we are unable to predict the extent to which our third party sales representatives will be successful in marketing and selling our products. Moreover, many of our third party sales representatives also market
and sell competing products. Our third party sales representatives may terminate their relationships with us at any time, or with short notice and may give greater attention to the products sold by our competitors. Our future performance will also
depend, in part, on our ability to attract additional third party sales representatives that will be able to market our products effectively, especially in markets in which we have not previously distributed our products. If we cannot retain our
current third party sales representatives and recruit additional or replacement third party sales representatives, our revenues and operating results could be harmed.

Our products may contain defects or errors which may adversely affect their market acceptance and our reputation and expose us to product liability claims.

Our products are very complex and may contain defects or errors, especially when first introduced or when new versions are released. Despite testing,
errors may occur. Product errors could affect the performance of our products, delay the development or release of new products or new versions of products, adversely affect our reputation and our customers willingness to buy products from us,
and adversely affect market acceptance or perception of our products. Any such errors or delays in releasing new products or new versions of products or allegations of unsatisfactory performance could cause us to lose revenue or market share,
increase our service costs, cause us to incur substantial costs in redesigning our products, subject us to liability for damages and divert our resources from other tasks. Our products must successfully interoperate with products from other vendors.
As a result, when problems occur in a device or application in which our product is used, it may be difficult to identify the sources of these problems. The occurrence of hardware and software errors, whether or not caused by our products, could
result in the delay or loss of market acceptance of our products, and therefore delay our ability to recognize revenue from sales, and any necessary revisions may cause us to incur significant expenses. Moreover, since one of the key benefits of our
home networking products is reduction of the need for service providers to dispatch service vehicles to customer premises, often referred to as truck rolls, problems with our products would likely result in a greater number of truck
rolls and this in turn could adversely affect our sales. The occurrence of any such problems could harm our business, operating results and financial condition.

Any limitation of liability provisions in our standard terms and conditions of sale may not fully or effectively protect us from claims as a result of federal, state or local laws or ordinances or unfavorable judicial
decisions in the United States or other countries. The use of our products also entails the risk of product liability claims. We maintain insurance to protect against certain claims associated with the use of our products, but our insurance coverage
may not adequately cover any claim asserted against us. In addition, even claims that ultimately are unsuccessful could result in our expenditure of funds in litigation and divert managements time and other resources.



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We depend on key personnel to operate our business, and if we are unable to retain our current personnel and hire
additional qualified personnel, our ability to develop and successfully market our products could be harmed.*

We believe our
future success will depend in large part upon our ability to attract and retain highly skilled managerial, engineering and sales and marketing personnel. There is intense competition for qualified personnel in the markets in which we compete.
Moreover, the cost of living in the San Diego, California area, where our corporate headquarters is located, has proved to be an obstacle to attracting new employees in the past, and we expect that this will continue to impact, to some extent, our
ability to attract and retain employees in the future. We may also face challenges in recruiting personnel due to our recent reductions-in-force. The loss of any key employees, including Patrick Henry, our president and chief executive officer,
other members of our senior management or our senior engineering personnel, or an inability to attract additional qualified personnel, including engineers and sales and marketing personnel, could delay the development, introduction and sale of our
products and our ability to execute our business strategy may suffer. We do not currently have any key person life insurance covering any executive officer or employee, nor do we have employment agreements with most of our employees.

If we fail to comply with environmental regulatory requirements, our operating results could be adversely affected.*

We face increasing complexity in our product design and procurement operations as we adjust to requirements relating to the materials composition of many
of our products. The European Union has adopted certain directives to facilitate the recycling of electrical and electronic equipment sold in the European Union, including the Restriction on the Use of Certain Hazardous Substances in Electrical and
Electronic Equipment, or RoHS, directive that restricts the use of lead, mercury and certain other substances in electrical and electronic products placed on the market in the European Union after July 1, 2006, and many other countries,
including China, have also adopted similar directives banning or limiting the use of specified substances in products introduced into its domestic market. We have incurred costs in connection with our compliance with these environmental laws and
regulations, such as costs related to eliminating lead from our semiconductor product packaging. Other environmental regulations may be enacted in the future, including in the United States, that require us to reengineer our products to utilize
components that are compatible with these regulations, and this reengineering and component substitution may result in additional costs to us or disrupt our operations or logistics. If we or the third party manufacturers of our products are unable
to meet future environmental regulations in a timely manner, it could have a material adverse effect on our business, results of operations and financial condition.

Certain of our customers products and service providers services are subject to governmental regulation.

Governmental regulation could place constraints on our customers and service providers services and consequently reduce our customers demand for our products. For example, the Federal Communications
Commission has broad jurisdiction over products that emit radio frequency signals in the United States. Similar governmental agencies regulate these products in other countries. Moreover, laws and regulations regarding local cable franchising could
have an adverse effect on Verizons and other service providers ability to compete in the HD video and multimedia content delivery market. Although most of our products are not directly subject to current regulations of the Federal
Communications Commission or any other federal or state communications regulatory agency, much of the equipment into which these products are incorporated is subject to direct governmental regulation. Accordingly, the effects of regulation on our
customers or the industries in which they operate may, in turn, impede sales of our products. For example, demand for these products will decrease if equipment into which they are incorporated fails to comply with the specifications of the Federal
Communications Commission.

Our failure to raise additional capital or generate the significant capital necessary to expand our operations and invest
in new products could reduce our ability to compete and could harm our business.*

We intend to continue spending substantial
amounts in connection with our expansion in order to grow our business. We may need to obtain additional financing to pursue our business strategy, develop new products, respond to competition and market opportunities and acquire complementary
businesses or technologies. We may not be able to obtain such financing on favorable terms or at all. Although we currently have access to a $10.0 million line of credit under the terms of our existing Loan and Security Agreement, as amended, with
SVB, of which $8.8 million was available at June 30, 2009, the current turmoil in the credit markets may affect Silicon Valley



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Banks willingness or ability to provide us with full access to our line of credit when needed or renew the term of the credit line when it expires in
April 2010.

If we were to raise additional capital through further sales of our equity securities, our stockholders would suffer dilution
of their equity ownership. If we engage in debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness, prohibit us from paying dividends, repurchasing our stock or making investments, and force us
to maintain specified liquidity or other ratios, any of which could harm our business, operating results and financial condition. If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:



| |  |  | develop or enhance our products;
| | - |  | --------------------------------



| |  |  | continue to expand our product development and sales and marketing organizations;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | acquire complementary technologies, products or businesses;
| | - |  | -----------------------------------------------------------



| |  |  | expand operations, in the United States or internationally;
| | - |  | -----------------------------------------------------------



| |  |  | hire, train and retain employees; or
| | - |  | ------------------------------------



| |  |  | respond to competitive pressures or unanticipated working capital requirements.
| | - |  | -------------------------------------------------------------------------------

Our failure to do any of these things could seriously harm our ability to execute our business strategy and may force us to curtail our research and
development plans or existing operations.

Our costs have increased significantly as a result of operating as a public company, and our management is
required to devote substantial time to comply with public company regulations.

As a public company, we incur significant legal,
accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as new rules subsequently implemented by the SEC and The NASDAQ Stock Market, or NASDAQ, have
imposed various requirements on public companies, including changes in corporate governance practices that did not previously exist. The Sarbanes-Oxley Act requires us to maintain effective disclosure controls and procedures and internal controls
for financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal controls over financial reporting, significant resources and management oversight are required. Our management and
other personnel now devote a substantial amount of time to these new requirements. Moreover, these rules and regulations increase our legal and financial compliance costs and make some activities more time-consuming and costly.

For example, as required by the Sarbanes-Oxley Act, commencing in year 2008, we must now perform system and process evaluation and testing of our
internal controls over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act. Our compliance with Section 404 requires that we incur substantial expense and expend significant management efforts. If we identify deficiencies in our internal controls over financial reporting that are deemed to be
material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the NASDAQ, SEC or other regulatory authorities.

Our effective tax rate may increase or fluctuate, and we may not derive the anticipated tax benefits from the planned expansion of our international operations.

Our effective tax rate could be adversely affected by various factors, many of which are outside of our control. Our effective tax rate is directly
affected by the relative proportions of revenue and income before taxes in the various domestic and international jurisdictions in which we operate. We are also subject to changing tax laws, regulations, and interpretations in multiple jurisdictions
in which we operate as well as the requirements of certain tax rulings. Changes in applicable tax laws may cause fluctuations between reporting periods in which the changes take place. We are in the process of expanding our international operations
and staff to better support our expansion into international markets. We anticipate that this expansion will include the implementation of an international organizational structure. As a result of this anticipated change and an expanding
international customer base, we



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expect that an increasing percentage of our consolidated pre-tax income will be derived from, and reinvested in, our international operations. Moreover, we
anticipate that this pre-tax income will be subject to foreign tax at relatively lower tax rates when compared to the U.S. federal statutory tax rate and as a consequence, our future effective income tax rate is expected to be lower than the
U.S. federal statutory rate. There can be no assurance that significant pre-tax income will be derived from or reinvested in our international operations, or that our international operations and sales will result in a lower effective income
tax rate. In addition, our future effective income tax rate could be adversely affected if tax authorities challenge our international tax structure or if the relative mix of U.S. and international income changes for any reason. Accordingly, there
can be no assurance that our effective income tax rate will be less than the U.S. federal statutory rate.

If we fail to manage our exposure to
global financial and securities market risk successfully, our operating results could be adversely impacted.

We are exposed to
financial market risks, including changes in interest rates, foreign currency exchange rates, credit markets and prices of marketable equity and fixed-income securities. We do not use derivative financial instruments for speculative or trading
purposes.

The primary objective of most of our investment activities is to preserve principal while at the same time maximizing yields
without significantly increasing risk. To achieve this objective, a majority of our marketable investments are investment grade, liquid, fixed-income securities and money market instruments denominated in U.S. dollars. If the carrying value of our
investments exceeds the fair value, and the decline in fair value is deemed to be other-than-temporary, we will be required to further write down the value of our investments, which could materially harm our results of operations and financial
condition. Moreover, the performance of certain securities in our investment portfolio is affected by the credit condition of the U.S. financial sector. With the current unstable credit environment of the U.S. financial sector, we might incur
significant realized, unrealized or impairment losses associated with these investments.

Risks Related to Our Intellectual Property

Our ability to compete and our business could be jeopardized if we are unable to secure or 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. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. Our patent applications may not issue as patents at all or
they may not issue as patents in a form that will be advantageous to us. Our issued patents and those that may issue in the future may be challenged, invalidated or circumvented, which could limit our ability to stop competitors from marketing
related products. Although we have taken steps to protect our intellectual property and proprietary technology, there is no assurance that third parties will not be able to invalidate or design around our patents. Furthermore, although we have
entered into confidentiality agreements and intellectual property assignment agreements with our employees, consultants and advisors, such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other
proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements. Moreover, we are required to license any of our patent claims that are essential to implement MoCA specifications to other MoCA members, who
could potentially include our competitors, on reasonable and non-discriminatory terms. In addition, in connection with commercial arrangements with our customers and the service providers who deploy equipment containing our products, we may be
required to license our intellectual property to third parties, including competitors or potential competitors.

Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our technology is difficult and we cannot be certain that the steps we have taken to
prevent such unauthorized use will be successful, particularly in foreign countries where the laws may not protect our proprietary rights as comprehensively as in the United States. In addition, if we become aware of a third partys
unauthorized use or misappropriation of our technology, it may not be practicable, effective or cost-efficient for us to enforce our intellectual property and contractual rights, particularly where the initiation of a claim might harm our business
relationships or risk a costly and protracted lawsuit, including a potential countersuit by a competitor with patents that may implicate our products. If



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competitors engage in unauthorized use or misappropriation of our technology, our ability to compete effectively could be harmed.

Our participation in patent pools and standards setting organizations, or other business arrangements, may require us to license our patents to
competitors and other third parties and limit our ability to enforce or collect royalties for our patents.

In addition to our
existing obligations to license our patent claims that are essential to implement the MoCA specifications to other MoCA members, in the course of participating in patent pools and other standards setting organizations or pursuant to other business
arrangements, we may agree to license certain of our technologies on a reasonable and non-discriminatory basis and, as a result, our control over the license of such technologies may be limited. We may also be unable to limit to whom we license some
of our technologies, and may be unable to restrict many terms of the license. Consequently, our competitors may obtain the right to use our technology. In addition, our control over the application and quality control of our technologies that are
included in patent pools or otherwise necessary for implementing industry standards may be limited.

Any dispute with a MoCA member regarding what
patent claims are necessary to implement MoCA specifications could result in litigation which could have an adverse effect on our business.

We are required to grant to other MoCA members a non-exclusive and world-wide license on reasonable and non-discriminatory terms to any of our patent claims that are essential to implement MoCA specifications. If we had a disagreement with
a MoCA member regarding which of our patent claims are necessary to implement MoCA specifications, this could result in a lawsuit. Any such lawsuit, regardless of its merits, could be time-consuming, expensive to resolve, divert our
managements time and attention and harm our reputation. In addition, any such litigation could result in us being required to license on reasonable and non-discriminatory terms certain of our patent claims which we previously believed did not
need to be licensed under our MoCA agreement. This could have an adverse effect on our business and harm our competitive position.

Possible third
party claims of infringement of proprietary rights against us, our customers or the service providers that purchase products from our customers, or other intellectual property claims or disputes, could have a material adverse effect on our business,
results of operation or financial condition.

The semiconductor industry is characterized by a relatively high level of litigation
based on allegations of infringement of proprietary rights. Numerous U.S. and foreign issued patents and pending patent applications owned by third parties exist in the fields in which we are selling and developing products. Because patent
applications take many years to issue, currently pending applications, known or unknown to us, may later result in issued patents that we infringe. In addition, third parties continue to actively seek new patents in our field. It is difficult or
impossible to keep fully abreast of these developments, and therefore, as we develop new and enhanced products, we may sell or distribute products that inadvertently infringe patents held by third parties.

We have in the past received and we, our customers or the service providers that purchase products from our customers may in the future receive inquiries
from other patent holders and may become subject to claims that we infringe their intellectual property rights. Any intellectual property claim or dispute, regardless of its merits, could force us, our customers or the service providers that
purchase our products from our customers to license the third partys patents for substantial royalty payments or cease the sale of the alleged infringing products or use of the alleged infringing technologies, or force us to defend ourselves
and possibly our customers or contract manufacturers in litigation. Any cessation of product sales by us, our customers or the service providers that purchase products from our customers could have a substantial negative impact on our revenues. Any
litigation, regardless of its outcome, could result in substantial expense and significant diversion of our managements time and other resources. Moreover, any such litigation could subject us, our customers or the service providers that
purchase our products from our customers to significant liability for damages (including treble damages), temporary or permanent injunctions, or the invalidation of proprietary rights or require us, our customers or the service providers that
purchase products from our customers to license the third party patents for substantial royalty or other payments.

In addition, we may
also be required to indemnify our customers and contract manufacturers for damages they suffer as a result of such infringement or litigation.



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Our use of open source and third party software could impose limitations on our ability to commercialize our
products.

We incorporate open source software into our products, including certain open source code which is governed by the GNU
General Public License, Lesser GNU General Public License and Common Development and Distribution License. The terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that these licenses could be construed in
a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products. In such event, we could be required to seek licenses from third parties in order to continue offering our products, make our
proprietary code generally available in source code form (for example, proprietary code that links in particular ways to certain open source modules), which would result in our trade secrets being disclosed to the public and the potential loss of
intellectual property rights in our software, re-engineer our products, discontinue the sale of our products if re-engineering cannot be accomplished on a cost-effective and timely basis, or become subject to other consequences, any of which could
adversely affect our business, operating results and financial condition.

In addition to technologies we have already licensed, we may
find that we need to incorporate certain proprietary third party technologies, including software programs, into our products in the future. However, licenses to relevant third party technologies may not be available to us on commercially reasonable
terms, if at all. Therefore, we could face delays in product releases until alternative technology can be identified, licensed or developed, and integrated into our current products. Such alternative technology may not be available to us on
reasonable terms, if at all, and may ultimately not be as effective as the preferred technology. Any such delays or failures to obtain licenses, if they occur, could materially adversely affect our business, operating results and financial
condition.

Because we license some of our software source code directly to customers, we face increased risks that our trade secrets will be exposed
through inadvertent or intentional disclosure, which could harm our competitive position or increase our costs.

We license some of
our software source code to our customers, which increases the number of people who have access to some of our trade secrets and other proprietary rights. Contractual obligations of our licensees not to disclose or misuse our source code may not be
sufficient to prevent such disclosure or misuse. The costs of enforcing contractual rights could substantially increase our operating costs and may not be cost-effective, reasonable under the circumstances or ultimately succeed in protecting our
proprietary rights. If our competitors access our source code, they may gain further insight into the technology and design of our products, which would harm our competitive position.

Risks Related to International Operations

We expect a significant portion of our future revenues to come from
our international customers, and, as a result, our business may be harmed by political and economic conditions in foreign markets and the challenges associated with operating internationally.*

We have derived, and expect to continue to derive, a significant portion of our revenues from international markets. Revenues outside of the United
States comprised 97% and 99% of our total revenues for the six months ended June 30, 2009 and 2008, respectively. International business activities involve certain risks, including:



| |  |  | difficulties involved in the staffing and management of geographically dispersed operations;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | longer sales cycles in certain countries, especially on initial entry into a new geographical market;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | greater difficulty evaluating a customers ability to pay, longer accounts receivable payment cycles and greater difficulty in the collection of past-due
accounts;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | general economic conditions in each country;
| | - |  | --------------------------------------------



| |  |  | challenges associated with operating in diverse cultural and legal environments;
| | - |  | --------------------------------------------------------------------------------



| |  |  | seasonal reductions in business activity specific to certain markets;
| | - |  | ---------------------------------------------------------------------



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| |  |  | loss of revenue, property and equipment from expropriation, nationalization, war, insurrection, terrorism and other political risks;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | foreign taxes and the overlap of different tax structures, including modifications to the United States tax code as a result of international trade regulations;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | changes in currency exchange rates; and
| | - |  | ---------------------------------------



| |  |  | import and export licensing requirements, tariffs, and other trade and travel restrictions.
| | - |  | -------------------------------------------------------------------------------------------

To the extent our international sales are adversely affected by any of these risks or are otherwise unsuccessful, we could experience a reduction in
revenue and our operating results could suffer.

In addition, certain foreign countries where we sell our products, such as China and
Korea, have historically limited recognition and enforcement of contractual and intellectual property rights. In particular, we may have difficulty preventing ODMs and OEMs in these countries from incorporating our technologies, copyrights or
trademarks into their products without our authorization or without paying us licensing fees. We may also experience difficulty enforcing our intellectual property rights in these countries, where intellectual property rights are not as respected as
they are in the United States, Japan and Europe. Unauthorized use of our technologies and intellectual property rights may dilute or undermine the strength of our brand. Further, if we are not able to adequately monitor the use of our technologies
by foreign-based ODMs and OEMs, or enforce our intellectual property rights in foreign countries, our revenue potential could be adversely affected.

Our products are subject to export and import controls that could subject us to liability or impair our ability to compete in international markets.

Our products are subject to U.S. export controls and may be exported outside the United States only with the required level of export license or through
an export license exception, in most cases because we incorporate encryption technology into our products. In addition, various countries regulate the import of certain encryption technology and have enacted laws that could limit our ability to
distribute our products or could limit our customers ability to implement our products in those countries. Changes in our products or changes in export and import regulations may create delays in the introduction of our products in
international markets, prevent our customers with international operations from deploying our products throughout their global systems or, in some cases, prevent the export or import of our products to certain countries altogether. Any change in
export or import regulations or related legislation, or change in the countries, persons or technologies targeted by such regulations or legislation, could result in decreased use of our products by, or in our decreased ability to export or sell our
products to, existing or potential customers internationally.

In addition, we may be subject to customs duties and export quotas, which
could have a significant impact on our revenue and profitability. The future imposition of significant increases in the level of customs duties or export quotas could have a material adverse effect on our business.

Our third party contractors are concentrated primarily in areas subject to earthquakes and other natural disasters. Any disruption to the operations of these
contractors could cause significant delays in the production or shipment of our products.

Substantially all of our products are
manufactured by third party contractors located in the Pacific Rim. The risk of an earthquake in these areas is significant due to the proximity of major earthquake fault lines to the facilities of our foundry, assembly and test subcontractors. The
occurrence of earthquakes or other natural disasters could result in the disruption of our foundry or assembly and test capacity. Any disruption resulting from such events could cause significant delays in the production or shipment of our products
until we are able to shift our manufacturing, assembling or testing from the affected contractor to another third party vendor. We may not be able to obtain alternate capacity on favorable terms, if at all.



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Risks Related to Ownership of Our Common Stock

Our stock price is volatile and may decline regardless of our operating performance, and you may not be able to resell your shares at or above the price at which you purchased such shares.

The market price for our common stock is volatile and may fluctuate significantly in response to a number of factors, most of which we cannot control,
including:



| |  |  | price and volume fluctuations in the overall stock market;
| | - |  | ----------------------------------------------------------



| |  |  | market conditions or trends in our industry or the economy as a whole;
| | - |  | ----------------------------------------------------------------------



| |  |  | changes in operating performance and stock market valuations of other technology companies generally, or those that sell semiconductor products in particular;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the timing of customer or service provider orders that may cause quarterly or other periodic fluctuations in our results that may, in turn, affect the market price
of our common stock;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the seasonal nature of our sales;
| | - |  | ---------------------------------



| |  |  | the timing of revenue recognition on sales arrangements, which may include multiple deliverables, and the effect of our use of inventory hubbing
arrangements;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in financial estimates or ratings by any securities analysts who follow our common stock, our failure to meet these estimates or failure of those analysts
to initiate or maintain coverage of our common stock;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the publics response to press releases or other public announcements by us or third parties, including our filings with the SEC and announcements relating to
product development, litigation and intellectual property impacting us or our business;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the sustainability of an active trading market for our common stock;
| | - |  | --------------------------------------------------------------------



| |  |  | future sales of our common stock by our executive officers, directors and significant stockholders;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | announcements of mergers or acquisition transactions;
| | - |  | -----------------------------------------------------



| |  |  | our inclusion or deletion from certain stock indices;
| | - |  | -----------------------------------------------------



| |  |  | announcements of technical innovations, new products or design wins by our competitors or customers;
| | - |  | ----------------------------------------------------------------------------------------------------



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



| |  |  | other events or factors, including those resulting from war, incidents of terrorism, natural disasters or responses to these events; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in accounting principles.
| | - |  | ---------------------------------

In addition, the stock markets, and in particular The NASDAQ Global Market, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology
companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following
periods of market volatility. If we were involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.



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Future sales of our common stock or the issuance of securities convertible into or exercisable for shares of our
common stock may depress our stock price.

A significant number of shares of our common stock are held by a small number of
stockholders. Sales of a substantial number of shares of our common stock, the issuance of securities convertible into or exercisable for shares of our common stock or the expectation or perception in the market that the holders of a large number of
our shares of common stock intend to sell their shares, could significantly reduce the market price of our common stock. In addition, because the average daily trading volume of our common stock is low, our common stock is less liquid than the stock
of companies with broader public ownership and, as a result, the trading of a relatively small volume of our common stock may have a greater impact on the trading price for our stock and lead to increased volatility in our stock price.

Holders of a significant number of shares of our common stock, from investments made when we were a private company, have rights, subject to some
conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. These rights will terminate in December 2009 or, for any
particular holder with registration rights who holds less than one percent of our outstanding capital stock, at any time when all securities held by that stockholder that are subject to registration rights may be sold pursuant to Rule 144 under
the Securities Act of 1933, as amended, or the Securities Act, within a single 90 day period. If shares of our common stock are sold in the public market after they are registered for resale, the sales could reduce the trading price of our
common stock and impede our ability to raise future capital.

Anti-takeover provisions in our charter documents and Delaware law might deter
acquisition bids for us that you might consider favorable.

Our amended and restated certificate of incorporation and bylaws
contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. These provisions:



| |  |  | establish a classified board of directors so that not all members of our board are elected at one time;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | authorize the issuance of undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval, and
which may include rights superior to the rights of the holders of common stock;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide that the board of directors is expressly authorized to make, alter, or repeal our bylaws;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder
meetings; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide that in addition to any vote required by law or by our amended and restated certificate of incorporation, the approval by holders of at least 66 2/3% of our
then outstanding common stock is required to adopt, amend or repeal any provision of our amended and restated bylaws.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits stockholders owning in excess of 15% of our outstanding
voting stock from merging or combining with us. These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company, even if doing so would benefit our
stockholders. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take other corporate actions you desire.



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Our principal stockholders, executive officers and directors have substantial control over the company, which may
prevent you and other stockholders from influencing significant corporate decisions and may harm the market price of our common stock.*

As of June 30, 2009, our executive officers, directors and holders of five percent or more of our outstanding common stock, beneficially owned, in the aggregate, 32% of our outstanding common stock. These stockholders may have
interests that conflict with our other stockholders and, if acting together, have the ability to substantially influence or determine the outcome of matters submitted to our stockholders for approval, including the election and removal of directors
and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, may have the ability to control our management and affairs. Accordingly, this concentration of ownership may harm the
market price of our common stock by:



| |  |  | delaying, deferring or preventing a change in control;
| | - |  | ------------------------------------------------------



| |  |  | impeding a merger, consolidation, takeover or other business combination involving us; or
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.
| | - |  | -------------------------------------------------------------------------------------------------------------

If securities or industry analysts publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts
publish about us or our business. If one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases
coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

We do not expect to pay any cash dividends for the foreseeable future.

The continued expansion of our business will
require substantial funding. Accordingly, we do not anticipate that we will pay any cash dividends on shares of our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of
directors and will depend upon our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. Investors seeking cash dividends in the
foreseeable future should not purchase or hold our common stock.

Our stock may be delisted from The NASDAQ Global Market if the closing bid price
for our common stock is not maintained at $1.00 per share or higher.*

Our common stock must trade at or above $1.00 to meet
NASDAQs minimum bid requirement for continued listing on The NASDAQ Global Market. Due to the turmoil in the stock markets, NASDAQ suspended its enforcement of the rules requiring a minimum $1.00 closing bid price during the period beginning
October 16, 2008 through July 31, 2009. As of August 3, 2009, NASDAQ has reinstated the minimum $1.00 closing bid price requirement. Therefore, if the closing bid price of our common stock falls below $1.00 at any time following NASDAQs
reinstatement of its minimum closing bid price requirement, NASDAQ may make a determination to delist our common stock. Any such delisting could adversely affect the market liquidity of our common stock and the market price of our common stock could
decrease and could also adversely affect our ability to obtain financing for the continuation of our operations and/or result in the loss of confidence by investors, customers, suppliers and employees. In the last 12 months, our common stock has
traded at below $1.00 per share at closing for an extended period of time.



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

Recent Sales of Unregistered Securities

The following sets forth information regarding all
unregistered securities of the Company that were sold during the three months ended June 30, 2009:



|(1) | As of March 31, 2009, options to purchase up to 3,717,000 shares of our common stock were outstanding under our 2001 Stock Option Plan, or 2001 Plan. Of these options, during
the three months ended June 30, 2009, options exercisable for up to 622,133 shares of common stock were cancelled without being exercised and options to purchase 331,837 shares of common stock were exercised at a weighted average exercise price
of $0.68 per share. As of June 30, 2009, options to purchase up to 2,763,030 shares of our common stock remained outstanding under the 2001 Plan.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | As of March 31, 2009, options to purchase up to 1,402,810 shares of our common stock were outstanding under our RF Magic Plan, Inc. 2000 Incentive Stock Plan, or RF Magic Plan.
Of these options, during the three months ended June 30, 2009, options exercisable for up to 64,699 shares of common stock were cancelled without being exercised and options to purchase 60,729 shares of common stock were exercised at a weighted
average exercise price of $0.48 per share. As of June 30, 2009, options to purchase up to 1,277,382 shares of our common stock remained outstanding under the RF Magic Plan.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

All of the offers, sales and issuances of the securities described in paragraphs (1) and (2) were deemed to be exempt from registration under
the Securities Act in reliance on Rule 701 in that the transactions were under compensatory benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of such securities were our employees, directors or bona fide
consultants and received the securities under the 2001 Plan or RF Magic Plan, as the case may be. Appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these transactions had
adequate access, through employment, business or other relationships, to information about us.

Issuer Purchases of Equity Securities

Pursuant to the terms of the 2001 Plan, options may be exercised prior to vesting. Shares of common stock issued prior to vesting that remain unvested are
subject to a repurchase option in our favor that lapses in accordance with the original vesting schedule for the option. The following table provides information with respect to purchases made by us of shares of our common stock during the three
months ended June 30, 2009:



|                                     |  |                                    |  |                            |      |                           |   |      
|------------------------------------ |  | ---------------------------------- |  | -------------------------- | ---- | ------------------------- | - | -----
|Period                               |  | Total Numberof SharesPurchased (1) |  | Average PricePaid PerShare |      | Total ValuePaid byCompany
|June 1, 2009 through June 30, 2009   |  |                                   |  | $                          |     |                           | $ |     
|May 1, 2009 through May 31, 2009     |  | 3,462                              |  |                            | 0.33 |                           |   | 1,125
|April 1, 2009 through April 30, 2009 |  |                                   |  |                            |     |                           |   |     
|                                     |  |                                    |  |                            |      |                           |   |      
|Total                                |  | 3,462                              |  |                            |      |                           | $ | 1,125
|                                     |  |                                    |  |                            |      |                           |   |      



|(1) | All shares were originally purchased from us by directors, employees and consultants pursuant to exercises of unvested stock options. During the months listed above, we routinely
repurchased the shares from our directors, employees and consultants upon the termination of their employment or consulting relationship with us pursuant to our right to repurchase unvested shares at the original exercise price under the terms of
our 2001 Plan and the related stock option agreements.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Working Capital Restrictions and Other Limitations upon the Payment of Dividends

Under the terms of our Loan and Security Agreement, as amended, with SVB, we are not permitted to pay cash dividends without SVBs prior consent.
Accordingly, we do not anticipate that we will pay any cash dividends on shares of our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board and will depend upon our results
of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board deems relevant.



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

Our Annual Meeting of Stockholders was held on May 19, 2009. At the Annual Meeting, our stockholders (i) elected each of the persons listed below to serve as a Class II director of the Company until the 2012
Annual Meeting of Stockholders, and (ii) ratified the selection by the audit committee of our board of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2009.

We had 69,488,675 shares of common stock outstanding and entitled to vote as of the close of business on March 31, 2009, the record
date for the Annual Meeting. At the Annual Meeting, 55,493,291 shares of common stock were present in person or represented by proxy for the two proposals indicated above. The following sets forth detailed information regarding the results of the
voting at the Annual Meeting:

Proposal 1: To elect two Class II directors to hold office until our 2012 Annual Meeting of Stockholders.



|                        |  |               |  |              
|----------------------- |  | ------------- |  | -------------
|Director                |  | Votes inFavor |  | VotesWithheld
|Kenneth Merchant, Ph.D. |  | 48,827,425    |  | 6,665,866    
|Umesh Padval            |  | 48,716,351    |  | 6,776,940    

Proposal 2: To ratify the selection by the audit committee of our board of Ernst & Young
LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2009.



|               |  |           
|-------------- |  | ----------
|Votes in Favor |  | 51,120,817
|Votes Against  |  | 4,256,339 
|Abstentions    |  | 116,135   



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

The exhibits listed
in the accompanying Index to Exhibits are filed with, or incorporated by reference into, this Quarterly Report. The exhibit numbers on the Index to Exhibits that are followed by an asterisk (*) indicate exhibits filed with this
Quarterly Report. All other exhibit numbers indicate exhibits filed by incorporation 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.



|                     |  |  |  |                               |  |                             
|-------------------- |  |  |  | ----------------------------- |  | ----------------------------
|                     |  |  |  | ENTROPIC COMMUNICATIONS, INC.
|                     |  |  | 
|Date: August 3, 2009 |  |  |  | By:                           |  | /s/ David Lyle              
|                     |  |  |  |                               |  |                             
|                     |  |  |  |                               |  | David Lyle                  
|                     |  |  |  |                               |  | Chief Financial Officer     
|                     |  |  |  |                               |  | (Duly Authorized Officer and
|                     |  |  |  |                               |  | Principal Financial Officer)



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INDEX TO EXHIBITS



|               |  |                                                                                                                                                   
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Document                                                                                                                           
|               | 
|3.1 (1)        |  | Amended and Restated Certificate of Incorporation of the Registrant.                                                                              
|               | 
|3.2 (2)        |  | Amended and Restated Bylaws of the Registrant.                                                                                                    
|               | 
|4.1            |  | Reference is made to Exhibits 3.1 and 3.2 above.                                                                                                  
|               | 
|4.2 (3)        |  | Form of Common Stock Certificate of the Registrant.                                                                                               
|               | 
|4.3 (4)        |  | Third Amended and Restated Investor Rights Agreement dated June 30, 2007, as amended, by and among the Registrant and certain of its stockholders.
|               | 
|10.1(5)        |  | Director Offer Letter dated June 9, 2009 by and between the Registrant and Keith Bechard.                                                         
|               | 
|10.2(6)        |  | Amendment to Loan and Security Agreement dated April 3, 2009 by and between the Registrant and Silicon Valley Bank.                               
|               | 
|10.3(6)        |  | Amendment to Loan and Security Agreement dated April 22, 2009 by and between the Registrant and Silicon Valley Bank.                              
|               | 
|10.4(6)        |  | Description of 2009 Bonus Plan, effective as of April 6, 2009.                                                                                    
|               | 
|31.1 *         |  | Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                       
|               | 
|31.2 *         |  | Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                       
|               | 
|32 *           |  | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.               



|(1) | Incorporated herein by reference to the Registrants Current Report on Form 8-K filed with the SEC on December 13, 2007.
|--- | ------------------------------------------------------------------------------------------------------------------------



|(2) | Incorporated herein by reference to the Registrants Current Report on Form 8-K filed with the SEC on December 5, 2008.
|--- | -----------------------------------------------------------------------------------------------------------------------



|(3) | Incorporated herein by reference to the Registrants Registration Statement on Form S-1 (No. 333-144899), as amended, filed with the SEC.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------



|(4) | Incorporated herein by reference to the Registrants Annual Report on Form 10-K filed with the SEC on March 3, 2008.
|--- | --------------------------------------------------------------------------------------------------------------------



|(5) | Incorporated herein by reference to the Registrants Current Report on Form 8-K filed with the SEC on June 17, 2009.
|--- | --------------------------------------------------------------------------------------------------------------------



|(6) | Incorporated herein by reference to the Registrants Quarterly Report on Form 10-Q filed with the SEC on May 5, 2009.
|--- | ---------------------------------------------------------------------------------------------------------------------



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