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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q







|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: 333-144520





INTELLON CORPORATION

(Exact name of registrant as specified in its charter)







|                         |  |                                        
|------------------------ |  | ---------------------------------------
|Delaware                 |  | 59-2744155                             
|(State of Incorporation) |  | (I.R.S. Employer Identification Number)

5955 T. G. Lee Boulevard, Suite 600, Orlando, FL 32822

(Address of principal executive offices)

(407) 428-2800

(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.    Yes  x    No   ̈

Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).    Yes   ̈    No   ̈

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



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large Accelerated filer |  |  ̈ |  | Accelerated filer         |  | x
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | Smaller reporting company |  |  ̈

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

As of August 3, 2009, there were 31,343,946 shares of the registrants $0.0001 par value common stock outstanding.









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INTELLON CORPORATION

INDEX



|                                                                                              |  |     
|--------------------------------------------------------------------------------------------- |  | ----
|                                                                                              |  | Page
|PART I. FINANCIAL INFORMATION                                                                 |  |     
|                                                                                              | 
|Item 1. Unaudited Financial Statements                                                        |  | 3   
|                                                                                              | 
|Condensed Consolidated Balance Sheets                                                         |  | 3   
|                                                                                              | 
|Condensed Consolidated Statements of Operations                                               |  | 4   
|                                                                                              | 
|Condensed Consolidated Statements of Cash Flows                                               |  | 5   
|                                                                                              | 
|Notes to Condensed Consolidated Financial Statements                                          |  | 6   
|                                                                                              | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations |  | 17  
|                                                                                              | 
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |  | 29  
|                                                                                              | 
|Item 4. Controls and Procedures                                                               |  | 29  
|                                                                                              | 
|PART II. OTHER INFORMATION                                                                    |  |     
|                                                                                              | 
|Item 1. Legal Proceedings                                                                     |  | 29  
|                                                                                              | 
|Item 1A. Risk Factors                                                                         |  | 30  
|                                                                                              | 
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 48  
|                                                                                              | 
|Item 3. Defaults Upon Senior Securities                                                       |  | 49  
|                                                                                              | 
|Item 4. Submission of Matters to a Vote of Security Holders                                   |  | 49  
|                                                                                              | 
|Item 5. Other Information                                                                     |  | 49  
|                                                                                              | 
|Item 6. Exhibits                                                                              |  | 49  
|                                                                                              | 
|Signature                                                                                     |  | 51  



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PART I. FINANCIAL INFORMATION



|ITEM 1. | UNAUDITED FINANCIAL STATEMENTS
|------- | ------------------------------

INTELLON CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)



|                                           |  |              |          |   |                    |   |          |  
|------------------------------------------ |  | ------------ | -------- | - | ------------------ | - | -------- | -
|                                           |  | June 30,2009 |          |   | December 31,2008 * |  
|                                           |  | (unaudited)  |          |   |                    |  
|Assets                                     |  |              |          |   |                    |   |          |  
|Current assets:                            |  |              |          |   |                    |   |          |  
|Cash and cash equivalents                  |  | $            | 37,104   |   |                    | $ | 35,375   |  
|Short-term investments                     |  |              | 25,005   |   |                    |   | 20,230   |  
|Accounts receivable                        |  |              | 9,482    |   |                    |   | 11,532   |  
|Inventory, net                             |  |              | 5,709    |   |                    |   | 8,029    |  
|Prepaid expenses                           |  |              | 1,307    |   |                    |   | 961      |  
|Other current assets                       |  |              | 192      |   |                    |   | 350      |  
|                                           |  |              |          |   |                    |   |          |  
|Total current assets                       |  |              | 78,799   |   |                    |   | 76,477   |  
|Property and equipment, net                |  |              | 2,362    |   |                    |   | 2,241    |  
|Intangible assets, net                     |  |              | 2,571    |   |                    |   | 2,403    |  
|Other assets                               |  |              | 100      |   |                    |   | 100      |  
|                                           |  |              |          |   |                    |   |          |  
|Total assets                               |  | $            | 83,832   |   |                    | $ | 81,221   |  
|                                           |  |              |          |   |                    |   |          |  
|                                           |  |             
|Liabilities and shareholders equity       |  |              |          |   |                    |   |          |  
|Current liabilities:                       |  |              |          |   |                    |   |          |  
|Accounts payable                           |  | $            | 7,693    |   |                    | $ | 6,843    |  
|Accrued expenses                           |  |              | 2,507    |   |                    |   | 2,166    |  
|                                           |  |              |          |   |                    |   |          |  
|Total current liabilities                  |  |              | 10,200   |   |                    |   | 9,009    |  
|                                           |  |              |          |   |                    |   |          |  
|                                           |  |             
|Shareholders equity:                      |  |              |          |   |                    |   |          |  
|Common stock                               |  |              | 3        |   |                    |   | 3        |  
|Additional paid in capital-common          |  |              | 208,978  |   |                    |   | 207,890  |  
|Accumulated deficit                        |  |              | (135,349 | ) |                    |   | (135,681 | )
|                                           |  |              |          |   |                    |   |          |  
|Total shareholders equity                 |  |              | 73,632   |   |                    |   | 72,212   |  
|                                           |  |              |          |   |                    |   |          |  
|Total liabilities and shareholders equity |  | $            | 83,832   |   |                    | $ | 81,221   |  
|                                           |  |              |          |   |                    |   |          |  



|* | Information derived from the audited Consolidated Financial Statements
|- | ----------------------------------------------------------------------

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



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INTELLON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)



|                                                                  |  |                                          |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------------------------- |  | ---------------------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                  |  | Three Months EndedJune 30,               |        |   | Six Months EndedJune 30, |  
|                                                                  |  | 2009                                     |        |   | 2008                     |   |        | 2009 |  |   | 2008   |  
|                                                                  |  | (in thousands, except per share amounts) |       
|Revenue                                                           |  | $                                        | 17,475 |   |                          | $ | 18,137 |      |  | $ | 32,983 |   |  | $ | 34,442 |  
|Cost of revenue                                                   |  |                                          | 8,667  |   |                          |   | 10,310 |      |  |   | 16,268 |   |  |   | 19,280 |  
|                                                                  |  |                                          |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Gross profit                                                      |  |                                          | 8,808  |   |                          |   | 7,827  |      |  |   | 16,715 |   |  |   | 15,162 |  
|Cost of operations:                                               |  |                                          |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Research and development                                          |  |                                          | 3,981  |   |                          |   | 3,935  |      |  |   | 7,588  |   |  |   | 8,379  |  
|Sales and marketing                                               |  |                                          | 2,239  |   |                          |   | 2,095  |      |  |   | 4,569  |   |  |   | 4,274  |  
|General and administrative                                        |  |                                          | 2,302  |   |                          |   | 2,202  |      |  |   | 4,331  |   |  |   | 4,271  |  
|                                                                  |  |                                          |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Operating income (loss)                                           |  |                                          | 286    |   |                          |   | (405   | )    |  |   | 227    |   |  |   | (1,762 | )
|                                                                  |  |                                          |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|                                                                  |  |                                          |        |  
|Other income (expense):                                           |  |                                          |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Interest income                                                   |  |                                          | 30     |   |                          |   | 252    |      |  |   | 93     |   |  |   | 695    |  
|Other expense                                                     |  |                                          | (20    | ) |                          |   | (32    | )    |  |   | (48    | ) |  |   | (63    | )
|                                                                  |  |                                          |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total other income                                                |  |                                          | 10     |   |                          |   | 220    |      |  |   | 45     |   |  |   | 632    |  
|                                                                  |  |                                          |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|                                                                  |  |                                          |        |  
|Income (loss) before income tax (benefit) expense                 |  |                                          | 296    |   |                          |   | (185   | )    |  |   | 272    |   |  |   | (1,130 | )
|Income tax (benefit) expense                                      |  |                                          | (31    | ) |                          |   | 57     |      |  |   | (60    | ) |  |   | 57     |  
|                                                                  |  |                                          |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|                                                                  |  |                                          |        |  
|Net income (loss)                                                 |  | $                                        | 327    |   |                          | $ | (242   | )    |  | $ | 332    |   |  | $ | (1,187 | )
|                                                                  |  |                                          |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss) per common share:                               |  |                                          |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Basic                                                             |  | $                                        | 0.01   |   |                          | $ | (0.01  | )    |  | $ | 0.01   |   |  | $ | (0.04  | )
|                                                                  |  |                                          |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Diluted                                                           |  | $                                        | 0.01   |   |                          | $ | (0.01  | )    |  | $ | 0.01   |   |  | $ | (0.04  | )
|                                                                  |  |                                          |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Weighted-average number of shares used in per share calculations: |  |                                          |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Basic                                                             |  |                                          | 31,095 |   |                          |   | 30,878 |      |  |   | 31,071 |   |  |   | 30,761 |  
|                                                                  |  |                                          |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|                                                                  |  |                                          |        |  
|Diluted                                                           |  |                                          | 31,391 |   |                          |   | 30,878 |      |  |   | 31,256 |   |  |   | 30,761 |  
|                                                                  |  |                                          |        |   |                          |   |        |      |  |   |        |   |  |   |        |  

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



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INTELLON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



|                                                                                         |  |                          |         |   |      |   |        |  
|---------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------ | -
|                                                                                         |  | Six Months EndedJune 30, |        
|                                                                                         |  | 2009                     |         |   | 2008 |  
|                                                                                         |  | (in thousands)           |        
|Operating activities                                                                     |  |                          |         |   |      |   |        |  
|Net income (loss)                                                                        |  | $                        | 332     |   |      | $ | (1,187 | )
|                                                                                         |  |                         
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                          |         |   |      |   |        |  
|Stock-based compensation                                                                 |  |                          | 1,084   |   |      |   | 809    |  
|Depreciation                                                                             |  |                          | 588     |   |      |   | 524    |  
|Amortization of intangible assets                                                        |  |                          | 37      |   |      |   | 26     |  
|Accretion of discount on investment securities                                           |  |                          | (61     | ) |      |   |       |  
|                                                                                         |  |                         
|Changes in operating assets and liabilities:                                             |  |                          |         |   |      |   |        |  
|Accounts receivable                                                                      |  |                          | 2,050   |   |      |   | 542    |  
|Inventory                                                                                |  |                          | 2,320   |   |      |   | 263    |  
|Prepaid expenses and other assets                                                        |  |                          | (369    | ) |      |   | 73     |  
|Income tax refund                                                                        |  |                          | 181     |   |      |   | 75     |  
|Accounts payable and accrued expenses                                                    |  |                          | 1,191   |   |      |   | 1,424  |  
|                                                                                         |  |                          |         |   |      |   |        |  
|                                                                                         |  |                         
|Net cash provided by operating activities                                                |  |                          | 7,353   |   |      |   | 2,549  |  
|                                                                                         |  |                          |         |   |      |   |        |  
|                                                                                         |  |                         
|Investing activities                                                                     |  |                          |         |   |      |   |        |  
|Purchase of property and equipment                                                       |  |                          | (709    | ) |      |   | (788   | )
|Purchase of short-term investments                                                       |  |                          | (24,964 | ) |      |   |       |  
|Proceeds from maturities of short-term investments                                       |  |                          | 20,250  |   |      |   |       |  
|Purchase of intangible assets, net                                                       |  |                          | (205    | ) |      |   | (426   | )
|                                                                                         |  |                          |         |   |      |   |        |  
|                                                                                         |  |                         
|Net cash (used in) investing activities                                                  |  |                          | (5,628  | ) |      |   | (1,214 | )
|                                                                                         |  |                          |         |   |      |   |        |  
|                                                                                         |  |                         
|Financing activities                                                                     |  |                          |         |   |      |   |        |  
|Proceeds from issuance of common stock, net of issuance costs                            |  |                          |        |   |      |   | 5,550  |  
|Proceeds from exercise of stock options                                                  |  |                          | 4       |   |      |   |       |  
|                                                                                         |  |                          |         |   |      |   |        |  
|                                                                                         |  |                         
|Net cash provided by financing activities                                                |  |                          | 4       |   |      |   | 5,550  |  
|                                                                                         |  |                          |         |   |      |   |        |  
|                                                                                         |  |                         
|Net increase in cash and cash equivalents                                                |  |                          | 1,729   |   |      |   | 6,885  |  
|Cash and cash equivalents, beginning of period                                           |  |                          | 35,375  |   |      |   | 52,074 |  
|                                                                                         |  |                          |         |   |      |   |        |  
|                                                                                         |  |                         
|Cash and cash equivalents, end of period                                                 |  | $                        | 37,104  |   |      | $ | 58,959 |  
|                                                                                         |  |                          |         |   |      |   |        |  

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



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INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009 (Unaudited)

1. The Company and Summary of Significant Accounting Policies

Description of Company

Intellon Corporation designs, develops, manufactures and markets integrated circuits (ICs) for powerline communications, or high-speed communications over existing electrical wiring. We provide HomePlug®-based and other powerline ICs for home networking, networked entertainment, broadband over powerline access, Ethernet-over-Coax (EoC), smart grid
management and other commercial applications. We believe our company is a leader in powerline networking technology, IC sales and product enablement. We also believe we are well positioned to capitalize on the growth in home networking, audio and
video connectivity and the convergence of the personal computer and consumer electronics environments. We operate in one segment: the design, license and marketing of integrated circuits.

Initial Public Offering

We commenced
our initial public offering (IPO) of common stock on December 14, 2007, and the offering was completed on December 19, 2007. We sold and issued 7,500,000 shares of our common stock in our IPO at an issue price of $6.00 per share. We raised
approximately $39.0 million in net proceeds after deducting underwriting discounts and commissions of $3.2 million and other offering costs of $2.8 million, which were received on December 19, 2007. Upon the closing of the IPO, all shares
of our redeemable convertible preferred stock outstanding automatically converted into 16,205,496 shares of common stock and the cumulative dividends that accrued on our redeemable convertible preferred stock in an amount of $15.9 million converted
into 3,584,522 shares of common stock.

During January 2008, the underwriters for our IPO exercised their option to purchase an additional
1,010,000 shares of our common stock to cover over-allotments at a price of $6.00 per share, less the underwriting discount. The net proceeds from the exercise of the over-allotment option were $5.5 million, after deducting underwriting discounts,
commissions and other offering costs.

Basis of Presentation

These interim condensed consolidated financial statements are unaudited but reflect, in the opinion of management, all adjustments, consisting of normal
recurring adjustments and accruals, necessary to present fairly our financial position and the financial position of our subsidiaries in conformity with U.S. generally accepted accounting principles (GAAP) as of June 30, 2009, our results of
operations for the three and six months ended June 30, 2009 and 2008 and cash flows for the six months ended June 30, 2009 and 2008. The condensed consolidated financial statements include Intellon and our wholly owned subsidiaries,
Intellon Canada, Inc., Intellon Taiwan Ltd., Intellon Hong Kong Limited and Intellon Korea, Ltd. All significant intercompany accounts and transactions have been eliminated. We have evaluated all subsequent events through August 5, 2009, the
date the financial statements were issued. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the Securities
and Exchange Commission (SEC).

These condensed consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and accompanying notes included in our 2008 Annual Report on Form 10-K (Annual Report) as filed on March 13, 2009 with the SEC. The results of operations for the three and six months ended June 30, 2009
are not necessarily indicative of the results to be expected for the entire fiscal year.

Use of Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have
been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to pricing, product returns, doubtful accounts, inventory valuation reserves, investments, intangible assets, income taxes and related
valuation allowances and contingencies. 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 and reported amounts of revenue and expenses that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.

Recent Accounting Pronouncements

With the exception of those stated below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2009, compared to the recent accounting pronouncements described
in the Annual Report, that are of material significance, or have potential material significance, to us.



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INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009
(Unaudited)

continued..



Effective January 1, 2009, we adopted the Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards (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 non-controlling 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 also provides guidance for recognizing changes in an acquirers existing income tax valuation
allowances and tax uncertainty accruals that result from a business combination transaction as adjustments to income tax expense. The adoption of SFAS 141R did not have a material impact on our financial position, results of operations, cash flows
or disclosures.

In April 2009, the FASB issued Staff Position (FSP) No. 141R-1, Accounting for Assets and Liabilities Assumed in a
Business Combination That Arise From Contingencies (FSP FAS 141R-1). FSP FAS 141R-1 amends and clarifies SFAS 141R to address application issues regarding initial recognition and measurement, subsequent measurement and accounting and disclosure
of assets and liabilities arising from contingencies in a business combination. FSP FAS 141R-1 is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of
the first annual reporting period beginning on or after December 15, 2008. The adoption of FSP FAS 141R-1 did not have a material impact on our financial position, results of operations, cash flows or disclosures.

Effective January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements (SFAS 157), with respect to our financial assets and
liabilities. In February 2008, the FASB issued FSP No. FAS 157-2, Effective Date of FASB Statement No. 157, which provided a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities,
except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, we adopted the provisions of SFAS 157 for non-financial assets and non-financial liabilities effective January 1, 2009, and
such adoption did not have a material impact on our financial position, results of operations, cash flows or disclosures.

Effective
April 1, 2009, we adopted FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2). FSP FAS 115-2 amends the other-than-temporary impairment (OTTI) guidance in U.S. GAAP to make the
guidance more operational and to improve the presentation of other-than-temporary impairments in the financial statements. Prior to FSP FAS 115-2, if OTTI had been determined to exist, we would have recognized an OTTI charge into earnings in an
amount equal to the difference between the investments amortized cost basis and its fair value as of the balance sheet date of the reporting period. Under FSP FAS 115-2, if OTTI has been incurred, and it is more-likely-than-not that we will
not sell the investment security before the recovery of its amortized cost basis, then the OTTI is separated into (a) the amount representing the credit loss and (b) the amount related to all other factors. The amount of the total OTTI
related to the credit loss is recognized in earnings. The amount of the total OTTI related to other factors would be recognized in accumulated other comprehensive income (AOCI). The total OTTI, which would include both credit and non-credit losses,
would be presented gross in our statements of operations and would be reduced by the non-credit loss amount of the total OTTI recognized in AOCI. There was no initial effect of our adoption of FSP FAS 115-2 on April 1, 2009 as we have no
securities that have previously been or are currently deemed as other-than-temporarily impaired.

Effective April 1, 2009, we adopted
FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4). FSP FAS 157-4 provides additional guidance
for estimating fair value in accordance with SFAS 157 when the volume and level of activity for an asset or liability have significantly decreased. FSP FAS 157-4 also includes guidance on identifying circumstances that indicate a transaction is not
orderly. The adoption of FSP FAS 157-4 did not have a material impact on our financial position, results of operations, cash flows or disclosures.

Effective April 1, 2009, we adopted FSP FAS 107-1 and Accounting Principles Board (APB) 28-1, Interim Disclosures About Fair Value of Financial Instruments (FSP FAS 107-1). FSP FAS 107-1 amends SFAS No. 107, Disclosures
about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements and also amends APB Opinion No. 28, Interim Financial
Reporting, to require those disclosures in all interim financial statements. The adoption of FSP FAS 107-1 did not have a material impact on our financial position, results of operations, cash flows or disclosures.

Effective January 1, 2009, we adopted FSP FAS No. 142-3,
Determination of the Useful Life of Intangible Assets(FSP FAS 142-3), which amends the guidance about estimating the useful lives of recognized intangible assets and requires additional disclosures related to renewing or extending the terms
of recognized intangible assets under SFAS No. 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2008. The adoption of FSP FAS 142-3 did not have a material impact on our financial position, results of operations, cash flows or disclosures.



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INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009
(Unaudited)

continued..



Effective April 1, 2009, we adopted FASB Statement No. 165, Subsequent Events (SFAS
165). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. This disclosure should alert all users of
financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. Adoption of SFAS 165 did not have a material impact on our financial position, results of operations, cash
flows or disclosures.

In June 2009, the FASB issued Statement No. 168, The FASB Accounting Standards
CodificationTMand the Hierarchy of Generally Accepted Accounting
Principles(SFAS 168). SFAS 168 establishes the FASB Accounting Standards Codification (the Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants.
All guidance contained in the Codification carries an equal level of authority. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification will supersede all existing
non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative. Following SFAS 168, the FASB will not issue new standards in the form of
Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates. The FASB will not consider Accounting Standards Updates as authoritative in their own right. Accounting Standards Updates
will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification. We will update our disclosures to conform to the Codification in our Quarterly
Report on Form 10-Q for the third quarter of 2009.

2. Short-Term Investments

As part of our cash management program, we maintain a portfolio of marketable securities, which we classify as held-to-maturity. These investments are
categorized as held-to-maturity because our management has the intent and ability to hold these securities to maturity. Held-to-maturity investments are stated at amortized cost, which approximates fair value. Interest income is accrued as
earned. We do not have any investments classified as available-for-sale or trading.

Our marketable securities consist of a laddered
portfolio of investment grade debt instruments consisting of obligations of the U.S. Treasury and U.S. Federal Home Loan Bank System. None of our held-to-maturity investments had maturities beyond 275 days as of June 30, 2009. In addition, none
of our held-to-maturity investments had maturities beyond 364 days at the time of purchase.

In accordance with SFAS 157, the following
table represents the fair value (based on level one inputs) of our held-to-maturity investments, all of which were included in short-term investments, as of June 30, 2009 (in thousands):



|                                              |  |               |        |                             |   |                              |  |                 |   |           |   |    |  |   |       
|--------------------------------------------- |  | ------------- | ------ | --------------------------- | - | ---------------------------- |  | --------------- | - | --------- | - | -- |  | - | ------
|                                              |  | AmortizedCost |        | GrossUnrealizedHoldingGains |   | GrossUnrealizedHoldingLosses |  | AccruedInterest |   | FairValue
|U.S. Treasury securities                      |  | $             | 12,499 |                             | $ | 1                            |  | $               |  |           | $ |   |  | $ | 12,500
|U.S. Federal Home Loan Bank System securities |  |               | 12,506 |                             |   | 31                           |  |                 |  |           |   | 21 |  |   | 12,558
|                                              |  |               |        |                             |   |                              |  |                 |   |           |   |    |  |   |       
|Total short-term investments                  |  | $             | 25,005 |                             | $ | 32                           |  | $               |  |           | $ | 21 |  | $ | 25,058
|                                              |  |               |        |                             |   |                              |  |                 |   |           |   |    |  |   |       

Accrued interest relates to a U.S. Federal Home Loan Bank System security which has a coupon rate
of 3.75%. Interest is payable to us on October 1, 2009 and April 1, 2010.

As of June 30, 2009, we did not have liabilities
or non-financial assets that are measured on a fair value basis on a recurring basis.

As of June 30, 2009, the weighted average
maturities for the U.S. Treasury securities and the U.S. Federal Home Loan Bank System securities were 0.3 months and 6.9 months, respectively. As of June 30, 2009, the weighted average maturity for total short-term investments was 3.6 months.



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INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009
(Unaudited)

continued..



3. Balance Sheet Components

Inventory

Inventory consisted of the following (in thousands):



|                                                               |  |              |       |                  |   |      
|-------------------------------------------------------------- |  | ------------ | ----- | ---------------- | - | -----
|                                                               |  | June 30,2009 |       | December 31,2008
|Finished goods                                                 |  | $            | 2,521 |                  | $ | 3,103
|Work-in-process                                                |  |              | 3,496 |                  |   | 5,186
|Raw materials                                                  |  |              | 91    |                  |   | 104  
|                                                               |  |              |       |                  |   |      
|                                                               |  |              | 6,108 |                  |   | 8,393
|Less: inventory reserves for obsolescence and excess inventory |  |              | 399   |                  |   | 364  
|                                                               |  |              |       |                  |   |      
|Inventory, net                                                 |  | $            | 5,709 |                  | $ | 8,029
|                                                               |  |              |       |                  |   |      

The following table summarizes the activity in the inventory reserves for obsolescence and excess
inventory for the stated periods (in thousands):



|                           |  |   |     |  
|-------------------------- |  | - | --- | -
|Balance, December 31, 2008 |  | $ | 364 |  
|Additions charged to costs |  |   | 43  |  
|Deductions                 |  |   | (8  | )
|                           |  |   |     |  
|Balance, June 30, 2009     |  | $ | 399 |  
|                           |  |   |     |  

Intangible Assets

Intangible assets consisted of the following (in thousands):



|                                       |  |              |       |                  |   |      
|-------------------------------------- |  | ------------ | ----- | ---------------- | - | -----
|                                       |  | June 30,2009 |       | December 31,2008
|Patents                                |  | $            | 2,898 |                  | $ | 2,696
|Trademarks                             |  |              | 69    |                  |   | 66   
|Trademarks not subject to amortization |  |              | 9     |                  |   | 9    
|                                       |  |              |       |                  |   |      
|                                       |  |              | 2,976 |                  |   | 2,771
|Less: accumulated amortization         |  |              | 405   |                  |   | 368  
|                                       |  |              |       |                  |   |      
|Intangible assets, net                 |  | $            | 2,571 |                  | $ | 2,403
|                                       |  |              |       |                  |   |      

Amortization expense for intangible assets for the three months ended June 30, 2009 and 2008
was approximately $19,000 and $14,000, respectively. Amortization expense for intangible assets for the six months ended June 30, 2009 and 2008 was approximately $37,000 and $26,000, respectively. At June 30, 2009, estimated amortization
expense for the remainder of 2009 and years thereafter is as follows (in thousands):



|                                    |  |                              |      
|----------------------------------- |  | ---------------------------- | -----
|                                    |  | Estimatedamortizationexpense
|2009 (remaining six months)         |  | $                            | 38   
|2010                                |  |                              | 174  
|2011                                |  |                              | 170  
|2012                                |  |                              | 168  
|2013                                |  |                              | 167  
|Thereafter                          |  |                              | 1,845
|                                    |  |                              |      
|Total expected amortization expense |  | $                            | 2,562
|                                    |  |                              |      



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INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009
(Unaudited)

continued..



Accrued Expenses

Accrued expenses consisted of the following (in thousands):



|                                    |  |              |       |                  |   |      
|----------------------------------- |  | ------------ | ----- | ---------------- | - | -----
|                                    |  | June 30,2009 |       | December 31,2008
|Accrued employee incentives/bonuses |  | $            | 1,071 |                  | $ | 927  
|Accrued vacation                    |  |              | 766   |                  |   | 610  
|Other                               |  |              | 670   |                  |   | 629  
|                                    |  |              |       |                  |   |      
|Total accrued expenses              |  | $            | 2,507 |                  | $ | 2,166
|                                    |  |              |       |                  |   |      

4. Net Income (Loss)

The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts):



|                                                                                               |  |                             |        |      |                           |        |      |  |      |        |  |   |        |  
|---------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | ---- | ------------------------- | ------ | ---- |  | ---- | ------ |  | - | ------ | -
|                                                                                               |  | Three Months Ended June 30, |        |      | Six Months Ended June 30, |       
|                                                                                               |  | 2009                        |        | 2008 |                           |        | 2009 |  | 2008 |       
|Numerator: Net income (loss)                                                                   |  | $                           | 327    |      | $                         | (242   | )    |  | $    | 332    |  | $ | (1,187 | )
|                                                                                               |  |                             |        |      |                           |        |      |  |      |        |  |   |        |  
|Denominator: Weighted average shares outstanding                                               |  |                             | 31,340 |      |                           | 31,338 |      |  |      | 31,340 |  |   | 31,258 |  
|Less: Unvested common shares outstanding                                                       |  |                             | 245    |      |                           | 460    |      |  |      | 269    |  |   | 497    |  
|                                                                                               |  |                             |        |      |                           |        |      |  |      |        |  |   |        |  
|                                                                                               |  |                             |        |     
|Denominator for basic net income (loss) per share                                              |  |                             | 31,095 |      |                           | 30,878 |      |  |      | 31,071 |  |   | 30,761 |  
|                                                                                               |  |                             |        |     
|Effect of dilutive securities:                                                                 |  |                             |        |      |                           |        |      |  |      |        |  |   |        |  
|Incremental common shares attributable to unvested restricted stock and restricted stock units |  |                             | 246    |      |                           |       |      |  |      | 163    |  |   |       |  
|Incremental common shares attributable to outstanding stock options                            |  |                             | 50     |      |                           |       |      |  |      | 22     |  |   |       |  
|                                                                                               |  |                             |        |      |                           |        |      |  |      |        |  |   |        |  
|Denominator for diluted net income (loss) per share                                            |  |                             | 31,391 |      |                           | 30,878 |      |  |      | 31,256 |  |   | 30,761 |  
|                                                                                               |  |                             |        |      |                           |        |      |  |      |        |  |   |        |  
|Basic net income (loss) per share                                                              |  | $                           | 0.01   |      | $                         | (0.01  | )    |  | $    | 0.01   |  | $ | (0.04  | )
|                                                                                               |  |                             |        |      |                           |        |      |  |      |        |  |   |        |  
|Diluted net income (loss) per share                                                            |  | $                           | 0.01   |      | $                         | (0.01  | )    |  | $    | 0.01   |  | $ | (0.04  | )
|                                                                                               |  |                             |        |      |                           |        |      |  |      |        |  |   |        |  

Basic net income (loss) per common share is computed by dividing net income (loss) by the
weighted-average number of vested common shares outstanding during the period. Diluted net income per common share is computed by using the weighted-average number of vested common shares outstanding during the period and, when dilutive, potential
dilutive common shares, including options, restricted common stock and restricted stock units (RSUs). For the three and six months ended June 30, 2009, diluted net income per common share includes the dilutive effects of stock options,
restricted common stock and RSUs. Because we reported a net loss for the three and six months ended June 30, 2008, all potential dilutive common shares have been excluded from the computation of the diluted net loss per share for that period
because the effect would have been antidilutive. The excluded potential common shares for the periods presented consist of the following (weighted average in thousands):



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INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009
(Unaudited)

continued..



|                                   |  |                             |  |                           |  |       |  |      
|---------------------------------- |  | --------------------------- |  | ------------------------- |  | ----- |  | -----
|                                   |  | Three Months Ended June 30, |  | Six Months Ended June 30,
|                                   |  | 2009                        |  | 2008                      |  | 2009  |  | 2008 
|Restricted common stock            |  |                            |  | 366                       |  |      |  | 403  
|Contingent restricted common stock |  | 94                          |  | 94                        |  | 94    |  | 94   
|Options to purchase common stock   |  | 2,466                       |  | 2,669                     |  | 3,176 |  | 2,278
|                                   |  |                             |  |                           |  |       |  |      
|Total                              |  | 2,560                       |  | 3,129                     |  | 3,270 |  | 2,775
|                                   |  |                             |  |                           |  |       |  |      

5. Stock-Based Compensation

Stock-Based Compensation Plans

We currently award equity incentive compensation under one
stock-based compensation plan, the Intellon Corporation 2007 Equity Incentive Plan (2007 Plan), which became effective upon our IPO in December 2007. The 2007 Plan allows for the grant of incentive and non-qualified stock options, as well as
restricted common stock, RSUs, stock appreciation rights, performance units and performance shares to employees, directors, and consultants and any parent and subsidiary corporations employees and consultants. Our 2007 Plan provides for annual
increases in the number of shares available for issuance thereunder on January 1 of each year, beginning with our 2009 fiscal year, equal to the least of (a) 4% of the outstanding shares of our common stock on the immediately preceding
December 31, (b) 2,000,000 shares, or (c) such other amount as our board of directors may determine.

On January 1,
2009, the number of shares available for future grant under the 2007 Plan increased by approximately 1.3 million shares to 1.9 million shares pursuant to this provision. As of June 30, 2009, approximately 1.1 million shares were
available for future grant under the 2007 Plan.

Stock-Based Compensation Expense

The fair value of the stock options granted to employees and officers for the periods presented was estimated using the following weighted average
assumptions (excluding stock options granted in connection with the Tender Offer, see below):



|                                          |  |                             |      |   |                           |   |      |      |  |   |      |   |  |   |      |  
|----------------------------------------- |  | --------------------------- | ---- | - | ------------------------- | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                          |  | Three Months Ended June 30, |      |   | Six Months Ended June 30, |  
|                                          |  | 2009                        |      |   | 2008                      |   |      | 2009 |  |   | 2008 |  
|Dividend yields                           |  |                             | None |   |                           |   | None |      |  |   | None |   |  |   | None |  
|Expected volatility                       |  |                             | 66.0 | % |                           |   | 49.6 | %    |  |   | 64.8 | % |  |   | 50.3 | %
|Risk-free interest rate                   |  |                             | 3.1  | % |                           |   | 2.6  | %    |  |   | 2.2  | % |  |   | 2.4  | %
|Expected lives (in years)                 |  |                             | 7.8  |   |                           |   | 2.2  |      |  |   | 5.4  |   |  |   | 3.1  |  
|Weighted average fair value at grant date |  | $                           | 2.62 |   |                           | $ | 1.32 |      |  | $ | 1.34 |   |  | $ | 2.05 |  



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INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009
(Unaudited)

continued..



The following table summarizes the stock-based compensation expense related to stock option,
restricted common stock and RSU grants under SFAS 123 (revised 2004), Share-Based Payment (SFAS 123(R), for the periods presented, which was allocated as follows (in thousands):



|                                             |  |                             |     |                           |   |      |  |      |       |  |   |    
|-------------------------------------------- |  | --------------------------- | --- | ------------------------- | - | ---- |  | ---- | ----- |  | - | ---
|                                             |  | Three Months Ended June 30, |     | Six Months Ended June 30,
|                                             |  | 2009                        |     | 2008                      |   | 2009 |  | 2008
|Stock-based compensation expense by caption: |  |                             |     |                           |   |      |  |      |       |  |   |    
|Research and development                     |  | $                           | 178 |                           | $ | 138  |  | $    | 325   |  | $ | 238
|Sales and marketing                          |  |                             | 141 |                           |   | 109  |  |      | 254   |  |   | 185
|General and administrative                   |  |                             | 278 |                           |   | 206  |  |      | 505   |  |   | 386
|                                             |  |                             |     |                           |   |      |  |      |       |  |   |    
|                                             |  |                             |     |                          
|Total stock-based compensation expense       |  | $                           | 597 |                           | $ | 453  |  | $    | 1,084 |  | $ | 809
|                                             |  |                             |     |                           |   |      |  |      |       |  |   |    



|                                                   |  |                             |     |                           |   |      |  |      |       |  |   |    
|-------------------------------------------------- |  | --------------------------- | --- | ------------------------- | - | ---- |  | ---- | ----- |  | - | ---
|                                                   |  | Three Months Ended June 30, |     | Six Months Ended June 30,
|                                                   |  | 2009                        |     | 2008                      |   | 2009 |  | 2008
|Stock-based compensation expense by type of award: |  |                             |     |                           |   |      |  |      |       |  |   |    
|Stock options                                      |  | $                           | 465 |                           | $ | 406  |  | $    | 892   |  | $ | 705
|Restricted common stock and RSUs                   |  |                             | 132 |                           |   | 47   |  |      | 192   |  |   | 104
|                                                   |  |                             |     |                           |   |      |  |      |       |  |   |    
|                                                   |  |                             |     |                          
|Total stock-based compensation expense             |  | $                           | 597 |                           | $ | 453  |  | $    | 1,084 |  | $ | 809
|                                                   |  |                             |     |                           |   |      |  |      |       |  |   |    

No tax benefit has been recognized on the stock-based compensation expense for either period
presented. We do not expect to recognize any income tax benefits relating to stock-based compensation expense until we determine that such tax benefits are more likely than not to be realized.

Stock Option Activity

The exercise
price of options granted under our 2007 Plan must at least be equal to the fair market value of our common stock on the date of grant. The term of an incentive stock option may not exceed ten years, except that with respect to any participant who
owns over 10% of the voting power of all classes of our outstanding stock as of the grant date, the term of an incentive stock option must not exceed five years and the exercise price must equal at least 110% of the fair market value on the grant
date. Grants and awards under the 2007 Plan generally vest as follows: 25% of the shares will vest on the first anniversary of the vesting commencement date and the remaining 75% will vest proportionately each quarter thereafter over the next twelve
quarters of continued service.

On May 1, 2009, we announced a stock option exchange program (Tender Offer) under which we offered all
employees, officers and directors the opportunity to tender any outstanding stock options issued under the 2007 Plan with an exercise price equal to or greater than $5.50 per share (Eligible Options) in exchange for a lesser number of either new
non-qualified stock options or RSUs, depending on the participants election. A participant who elected to receive new stock options was entitled to receive one new stock option for each 1.10 Eligible Options tendered for exchange. A
participant who elected to receive RSUs was entitled to receive one new RSU for each 2.03 Eligible Options tendered for exchange.

The
Tender Offer expired on May 29, 2009. We accepted for exchange Eligible Options to purchase 1,482,195 shares of our common stock from 93 eligible participants, representing 99% of the total Eligible Options. On June 1, 2009, under the
terms and subject to the conditions set forth in the Tender Offer, we issued new non-qualified stock options to purchase 644,466 shares of our common stock at an exercise price of $3.75 per share and new RSUs for 380,898 shares of our common stock
in exchange for the tendered Eligible Options.

The new stock options and RSUs issued to employees and officers will vest on a
three-and-one-half-year schedule, with 25% of the shares vesting on the six-month anniversary of the grant date and the remaining 75% vesting proportionately each quarter



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INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009
(Unaudited)

continued..



thereafter over the next twelve quarters of continued service. The new stock options and RSUs issued to non-employee directors will vest on a two-year
schedule, with 50% of the shares vesting on each of the one- and two-year anniversaries of the grant date. The new stock options will remain exercisable for a maximum term of seven years from the grant date.

The fair value for the tendered Eligible Options immediately prior to the exchange was estimated using the Black-Scholes valuation model with the
following weighted-average assumptions: dividend yield of 0.0%; expected volatility of 60.3%; risk-free interest rate of 3.1%; and expected life of 6.8 years. The fair value for the new stock options immediately after the exchange was estimated
using the Black-Scholes valuation model with the following weighted-average assumptions: dividend yield of 0.0%; expected volatility of 60.3%; risk-free interest rate of 2.3%; and expected life of 4.6 years. The weighted average fair value of the
tendered Eligible Options immediately prior to the exchange was $1.95 per stock option and the weighted average fair value of the new stock options immediately after the exchange was $1.88 per stock option. The fair value of the RSUs immediately
after the exchange was equal to the closing price of our common stock as reported on the NASDAQ Global Market on June 1, 2009. There was no incremental compensation cost associated with the Tender Offer. The total unrecognized compensation
costs of the tendered Eligible Options will be recognized over a weighted-average period of 2.7 years.

The following table summarizes
option activity for the six month period ended June 30, 2009 for all of our stock options:



|                                                            |  |                                                            |   |  |                              |      |                                                 |     |                          |   |      
|----------------------------------------------------------- |  | ---------------------------------------------------------- | - |  | ---------------------------- | ---- | ----------------------------------------------- | --- | ------------------------ | - | -----
|                                                            |  | Shares                                                     |   |  | WeightedAverageExercisePrice |      | WeightedAverageRemainingContractualTerm (years) |     | AggregateIntrinsic Value
|                                                            |  | (in thousands, except exercise price and contractual term)
|Options outstanding at December 31, 2008                    |  | 2,778                                                      |   |  | $                            | 6.22 |                                                 | 9.1 |                          | $ | 60   
|Granted (1)                                                 |  | 1,640                                                      |   |  |                              | 2.87 |                                                 |     |                          |   |      
|Exercised                                                   |  | (4                                                         | ) |  |                              | 1.04 |                                                 |     |                          |   |      
|Canceled/forfeited (1)                                      |  | (1,558                                                     | ) |  |                              | 5.68 |                                                 |     |                          |   |      
|                                                            |  |                                                            |   |  |                              |      |                                                 |     |                          |   |      
|Options outstanding at June 30, 2009                        |  | 2,856                                                      |   |  |                              | 4.60 |                                                 | 8.4 |                          |   | 2,556
|                                                            |  |                                                            |   |  |                              |      |                                                 |     |                          |   |      
|Options vested and expected to vest after June 30, 2009 (2) |  | 2,790                                                      |   |  |                              | 4.60 |                                                 | 8.4 |                          |   | 2,495
|                                                            |  |                                                            |   |  |                              |      |                                                 |     |                          |   |      
|Options exercisable at June 30, 2009                        |  | 498                                                        |   |  |                              | 6.80 |                                                 | 7.9 |                          |   | 133  
|                                                            |  |                                                            |   |  |                              |      |                                                 |     |                          |   |      



|(1) | The number of options granted and canceled/forfeited includes options granted and canceled in connection with the Tender Offer.
|--- | -------------------------------------------------------------------------------------------------------------------------------

|(2) | Options expected to vest reflect an estimated forfeiture rate.
|--- | --------------------------------------------------------------

At June 30, 2009, the total unrecognized stock-based compensation related to options granted under our share-based compensation plans accounted for under SFAS 123(R) was approximately $4.1 million. These options had a remaining
weighted-average period of 2.7 years over which the expense is expected to be recognized.

Restricted Common Stock Activity

Restricted common stock grants typically vest over a four-year period. Restricted common stock (all of which are shares of our common
stock) is subject to forfeiture if employment terminates prior to vesting. The cost of these awards is determined using the fair value of our common stock on the date of the grant, and compensation expense is recognized on a straight-line basis over
the requisite vesting period.



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INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009
(Unaudited)

continued..



The following table summarizes restricted stock activity for the six month period ended June 30,
2009 for all of our restricted stock:



|                           |  |                                         |   |  |                                      |     
|-------------------------- |  | --------------------------------------- | - |  | ------------------------------------ | ----
|                           |  | RestrictedCommonStock AwardsOutstanding |   |  | Weighted-AverageGrant Date FairValue
|                           |  | (in thousands)                          |   |  |                                     
|Balance, December 31, 2008 |  | 315                                     |   |  | $                                    | 1.50
|Granted                    |  |                                        |   |  |                                      |    
|Vested                     |  | (92                                     | ) |  |                                      | 0.93
|Forfeited                  |  | (3                                      | ) |  |                                      | 0.20
|                           |  |                                         |   |  |                                      |     
|Balance, June 30, 2009     |  | 220                                     |   |  |                                      | 1.76
|                           |  |                                         |   |  |                                      |     

The total unrecognized stock-based compensation expense for restricted stock was approximately
$365,000 as of June 30, 2009. The total unrecognized stock-based compensation expense related to restricted stock awards subject to a four year vesting schedule was approximately $178,000 as of June 30, 2009. These unvested restricted
common stock awards will vest on a weighted-average basis over a period of 0.9 years from June 30, 2009. The total unrecognized stock-based compensation expense related to awards which vest upon either the consummation of a change in control as
defined in the executives employment agreement or the consummation of an underwritten initial public offering of our equity securities, in either case that meets a certain valuation requirement, was approximately $187,000 as of June 30,
2009.

Restricted Stock Unit Activity

We began granting RSUs under the 2007 Plan during the first quarter of 2009. RSUs will convert into shares of our common stock upon vesting on a one-for-one basis. Our RSU grants typically vest as follows: 25% of
the shares will vest on the first anniversary of the vesting commencement date and the remaining 75% will vest proportionately each quarter thereafter over the next twelve quarters of continued service. RSUs are subject to forfeiture if employment
terminates prior to vesting. The cost of these awards is determined using the fair value of our common stock on the date of the grant, and compensation expense is recognized on a straight-line basis over the requisite vesting period.

The following table summarizes RSU activity under the 2007 Plan for the six month period ended June 30, 2009 for all of our RSUs:



|                           |  |                                  |   |  |                                      |     
|-------------------------- |  | -------------------------------- | - |  | ------------------------------------ | ----
|                           |  | RestrictedStock UnitsOutstanding |   |  | Weighted-AverageGrant Date FairValue
|                           |  | (in thousands)                   |   |  |                                     
|Balance, December 31, 2008 |  |                                 |   |  | $                                    |    
|Granted (1)                |  | 805                              |   |  |                                      | 2.97
|Vested                     |  |                                 |   |  |                                      |    
|Forfeited                  |  | (3                               | ) |  |                                      | 2.88
|                           |  |                                  |   |  |                                      |     
|Balance, June 30, 2009     |  | 802                              |   |  |                                      | 2.97
|                           |  |                                  |   |  |                                      |     
|                          

| | (1) | The number of RSUs includes RSUs granted in connection with the Tender Offer.
| | --- | -----------------------------------------------------------------------------

The total unrecognized stock-based compensation expense for RSUs was approximately $2.0 million as of June 30, 2009. The unvested RSUs will vest on a weighted-average basis over a period of 3.5 years from
June 30, 2009.

6. Commitments

Lease Commitments

We lease all of our facilities and certain of our equipment under non-cancelable terms that expire at
various dates through 2013. Rent expense for our leased facilities was approximately $221,000 and $206,000 for the three months ended June 30, 2009 and 2008, respectively. Rent expense for our leased facilities was approximately $435,000 and
$386,000 for the six months ended June 30, 2009 and 2008, respectively. In March 2009, we entered into an amendment to our operating lease for a sales office in San Jose, California, which extended the term of the lease through March 31,
2010 and reduced the area leased from approximately 4,300 square feet to 2,824 square feet.



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INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009
(Unaudited)

continued..



Legal Proceedings

We are not currently a party to any legal proceedings that we believe would have a material adverse effect on our consolidated financial position, results
of operations or cash flows.

7. Segment and Geographic Information and Significant Customers

We have determined that we are organized as, and operate in, one reportable segment: the design, license and marketing of integrated circuits. Our chief
operating decision maker is our Chief Executive Officer.

Revenue by geographic area is presented based upon the country of destination.
Export sales were $16.2 million for each of the three months ended June 30, 2009 and 2008, and $30.4 million and $30.2 million for the six months ended June 30, 2009 and 2008, respectively. Export sales were primarily attributable to
customers located in Asia and Europe. We believe a substantial portion of the products sold to distributors and original equipment manufacturers (OEMs) in Asia is ultimately shipped to end-markets in the Americas and Europe. Although a significant
portion of our revenue is from customers located outside of the U.S., all sales are denominated in U.S. dollars.

A change in or loss of
one or more of our customers could adversely affect results of operations. The following table illustrates the concentration of revenue for customers that individually accounted for 10% or more of total revenue.



|                                              |  |                             |   |  |                           |   |  |      |   |  |      |  
|--------------------------------------------- |  | --------------------------- | - |  | ------------------------- | - |  | ---- | - |  | ---- | -
|                                              |  | Three Months Ended June 30, |   |  | Six Months Ended June 30, |  
|                                              |  | 2009                        |   |  | 2008                      |   |  | 2009 |   |  | 2008 |  
|devolo AG (OEM)                               |  | 24                          | % |  | 17                        | % |  | 24   | % |  | 18   | %
|Free (Service Provider)                       |  | 21                          | % |  | 20                        | % |  | 22   | % |  | 19   | %
|Chenmtech Co Ltd (Distributor)                |  | 14                          | % |  | *                         |   |  | 12   | % |  | *    |  
|Lumax International Corporation (Distributor) |  | *                           |   |  | 12                        | % |  | *    |   |  | 14   | %
|Aztech Systems Ltd (OEM)                      |  | *                           |   |  | 11                        | % |  | *    |   |  | *    |  



|* | Denotes that a customer accounted for less than 10% of our revenue in the indicated period.
|- | -------------------------------------------------------------------------------------------

Three customers accounted for a total of 64.3% and 57.4% of accounts receivable at June 30, 2009 and December 31, 2008 respectively.

8. Income Taxes

During the three and
six months ended June 30, 2009, we recognized approximately $44,000 and $90,000, respectively, of income tax benefit related to our Canadian subsidiary and approximately $13,000 and $30,000, respectively, in U.S. Federal income tax expense. Our
practice is to recognize interest and penalties related to income tax matters as a component of income tax expense. As of June 30, 2009, we had no accrued interest or any penalty associated with any unrecognized tax benefits, nor was any
interest expense recognized during the three and six months ended June 30, 2009.

We recognize deferred tax assets and liabilities on
differences between the book and tax basis of assets and liabilities using currently effective tax rates. Further, deferred tax assets are recognized for the expected realization of available net operating loss carryforwards. A valuation allowance
is recorded to reduce a deferred tax asset to an amount that we expect to realize in the future. At June 30, 2009, we had recorded a full valuation allowance against the net deferred tax asset, based on our belief that available objective
evidence created sufficient uncertainty regarding the realizability of our deferred tax assets. We review the adequacy of the valuation allowance on an ongoing basis and recognize these benefits if a reassessment indicates that it is more likely
than not that these benefits will be realized. In addition, we evaluate our tax contingencies on an ongoing basis and recognize a liability when we believe that it is probable that a liability exists.



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INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009
(Unaudited)

continued..



9. Option Exchange

On April 28, 2009, our Board of Directors approved an offer to exchange outstanding stock options to purchase 1,504,195 shares of our common stock.

Under the terms of the stock option exchange program, we offered each of our employees, executive officers and directors the opportunity to tender any
outstanding stock options issued under our 2007 Plan with an exercise price equal to or greater than $5.50 per share in exchange for a lesser number of either new non-qualified stock options or stock-settled RSUs, depending on the participants
election. A participant who elected to receive new stock options received one new stock option for each 1.10 stock options tendered for exchange. A participant who elected to receive RSUs received one new RSU for each 2.03 stock options tendered for
exchange. Each new stock option or new RSU granted to our employees will vest on a three-and-one-half-year schedule, with 25% of the shares subject to the new stock option or new RSU vesting on the six-month anniversary of the grant date of the new
award, and the remaining unvested portion vesting ratably on a quarterly basis over the succeeding twelve quarters. Each new stock option or new RSU granted to our non-employee directors will vest on a two-year schedule, with 50% of the shares
subject to the new stock option or new RSU vesting on each of the one- and two-year anniversaries of the grant date of the new award. The new stock options will remain exercisable for a maximum term of seven years from the grant date of the new
stock options. The exercise price of the new stock options was $3.75, the closing price of our common stock as reported on the NASDAQ Global Market on the date the new stock options were granted. The offer expired on May 29, 2009 and the new
stock options and RSUs were granted on June 1, 2009.

This stock option exchange program was intended to provide additional incentive
and retention value for participants and better align the participants interests with those of our stockholders. The stock option exchange program was designed with the goal that the current fair value of the stock options surrendered would be
approximately the same as the fair value of the new stock options or RSUs received. This goal was achieved. No incremental compensation cost was incurred as a result of the stock option exchange program.

The terms and conditions of the stock option exchange program are contained in a Tender Offer Statement on Schedule TO that we filed with the Securities
and Exchange Commission on April 30, 2009.

10. Subsequent Events

During July 2009, we granted a total of 3,150 non-qualified stock options to new employees at an exercise price of $5.72 per share, which is equal to the closing sales price for our common stock as quoted on the
NASDAQ Global Market on the date of grant.

During August 2009, the compensation committee of our board of directors approved awards of
approximately $899,900 to be paid to our executive officers and employees under our Annual Cash Incentive Plan for performance during the first half of 2009.



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

Certain statements contained in this Quarterly Report, including those in this section entitled Managements Discussion and Analysis of Financial
Condition and Results of Operation that are not historical facts constitute forward-looking statements. Words such as expects, anticipates, targets, goals, projects,
intends, plans, believes, seeks, estimates, continues, will, may, might, can, variations of such words, and other similar
expressions are predictions of, or indicate, future events and trends, and typically are intended to identify forward-looking statements. Such statements are subject to a number of risks and uncertainties which could cause actual results to differ
materially from those projected, including those set forth under Part II. Item 1A. Risk Factors in this Quarterly Report. Given these uncertainties, you are cautioned not to place undue reliance on such statements. We also undertake
no obligation to publicly update or revise any forward-looking statement to reflect current or future events or circumstances.

The
interim financial statements and this Managements Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the audited financial statements and notes thereto for the year ended
December 31, 2008 and the related Managements Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K, as well as in conjunction with our subsequent reports
on Forms 10-Q and 8-K.

Overview

We are a leading fabless semiconductor company that designs and sells integrated circuits (ICs) for high-speed communications over existing electrical wiring. Our ICs enable home connectivity, which is the sharing and
moving of content among home gateways, personal computers and other consumer electronics products in the home. Consumer demand for broadband services and the proliferation of digital video, audio and data content are driving the market for home
connectivity. We believe our solutions are targeted to address the challenges of sharing entertainment content throughout the home. Products using our ICs are easy to install and use, and deliver connectivity through electrical outlets across the
home. Our newest ICs also meet the performance demands required for the delivery of high-definition video content.

We have made a
substantial investment in research and development and in sales and marketing since our inception in 1989, and, as a result, we sell two families of powerline ICs, HomePlug-based ICs, which account for the majority of our sales, and command and
control ICs. We outsource our semiconductor fabrication, assembly and test functions, reducing the level of our capital investment and enabling us to focus on the design, development, sale and marketing of our products. As of June 30, 2009, we
had shipped approximately 38.6 million powerline communications ICs, including over 30.6 million HomePlug-based ICs that have been integrated into adapters, set-top boxes and other commercial applications. We shipped over 2.4 million
powerline communications ICs in the three months ended June 30, 2009, a 10% decline from shipments of over 2.7 million powerline communications ICs in the three months ended June 30, 2008. We shipped approximately 4.8 million
powerline communications ICs in the six months ended June 30, 2009, a 9% decline from shipments of over 5.2 million powerline communications IC in the six months ended June 30, 2008. Our HomePlug-based ICs represented approximately
99% of our revenue for each of the three and six months ended June 30, 2009. We expect sales of our HomePlug-based products to continue to represent the predominant share of our revenue in the foreseeable future.

We sell our products directly to original equipment manufacturers (OEMs) and service providers, which include our ICs in their products. We also sell our
products directly to original design manufacturers (ODMs), which include our ICs in products they supply to OEMs and service providers. ODMs purchase our products only when an OEM incorporates our IC into the design of the OEMs product. In
addition, we sell our products to distributors, which are independent entities that assist us in identifying and servicing OEMs and ODMs and generally purchase our products directly from us for resale to their OEM and ODM customers. These OEMs and
ODMs, in turn, sell our products to service providers and, through retail channels, to end-user customers. Service providers use our HomePlug-based ICs to provide in-home connectivity for a variety of services, including Internet Protocol Television
(IPTV) and broadband distribution as well as movies-on-demand. In some cases, a service provider makes products containing our ICs available to its customers as part of the customers service subscription, sometimes as an installer option.
Other service providers offer such products to customers for purchase at the customers discretion. As a result, the percent of a service providers installations using product containing our ICs may vary significantly. For the three
months ended June 30, 2009, service providers accounted for approximately 55% of our revenue, or $9.6 million. Revenue from the service provider channel in the second quarter of 2009 declined approximately 15% compared to the first quarter of
2009, but increased approximately 15% compared to the second quarter of 2008. The fluctuations in demand for our HomePlug-based ICs in the service provider channel are due, in part, to order timing by our customers, as well as to changes in demand
from a single indirect customer deploying set-top boxes incorporating our HomePlug 1.0 ICs. Historically, demand from this indirect customer has fluctuated significantly. Sales to this customer declined approximately 39%, or $0.9 million, in the
three months ended June 30, 2009 and approximately 72%, or $6.4 million, in the six months ended June 30, 2009, compared to the corresponding periods in 2008, primarily as a result of an inventory over-stock position at this customer.
Although we expect sales to this customer to nearly double in the third quarter of 2009 compared to the second quarter of 2009, we expect that sales to this customer on an annual basis will be lower in 2009 compared to 2008.



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Our sales have historically been made on the basis of purchase orders rather than long-term agreements.
The demand for our products is ultimately dependent upon sales of our customers products through their channels to retail purchasers, service providers and other customers. As a result, it is difficult for us to accurately forecast our product
demand. If the resulting sales of our customers products are less than forecasted by our customers, our customers will reduce or terminate their demand for our products. Our lack of visibility into our own customers end-customer demand
causes us to experience sudden and unexpected fluctuations in our revenue, product mix, inventory levels and gross margins, and we expect these fluctuations to continue and potentially increase in frequency and severity. The limited visibility
experienced by us and our customers is exacerbated during product transitions, such as our current transition from our INT6300 IC to our INT6400 IC, where we must assess demand both for the new product being introduced and the existing product being
replaced. During the first half of 2009, the global economic downturn significantly and adversely affected end-customer demand for our products, particularly in the retail channel, and further reduced our visibility into our customers demand
and our customers end customer demand. During the first half of 2009, revenue in the retail channel declined approximately 19% and 36% compared to the second half of 2008 and the first half of 2008, respectively, largely due to the global
economic downturn. During the second quarter of 2009, sales into the retail channel increased approximately 96% compared to the first quarter of 2009 due, in part, to channel inventory replacement by our customers. Sales in our retail channel during
the second quarter of 2009 were still 23% below the second quarter of 2008, and we expect sales in this channel to decline sequentially in the third quarter of 2009 due to the channel inventory replacement by our customers in the second quarter.

Our customers products are complex and require significant time to define, specify, design and manufacture to meet production
requirements and volume demands. Accordingly, our sales cycle is long. The typical time from early engagement by our sales force to actual product introduction typically runs 6 to 12 months for adapter products to as much as 12 to 30 months for
embedded consumer electronics products and products used by service providers and electric utilities. This cycle begins with our technical marketing, sales and field application engineers engaging with the decision maker, either an OEM or service
provider, who selects our product. These lengthy sales cycles require significant investments of time, resources and engineering support before we realize revenue from product sales, if at all. However, if we are successful, a customer will decide
to incorporate our IC in its product, which we refer to as a design win. We believe design wins provide a competitive advantage, particularly for embedded products, because once one of our products is incorporated into a customers
design, a redesign to incorporate a competitors product in place of ours would generally be time-consuming and expensive. However, a design win does not assure continued business with the customer or, in the case of a service provider,
indicate the percent of the service providers subscriber installations where our product will be deployed.

We sell our products
worldwide through multiple channels that include distributors, independent sales representatives and direct sales. Our sales organization consists of sales professionals, technical sales support and field application engineering. Our independent
distributors primarily receive discounts on our products for resale, and occasionally they earn commissions on the products sold directly to our OEMs or ODMs. For the three months ended June 30, 2009 and 2008, 78% and 73% of our revenue was
from direct channels, respectively. For the six months ended June 30, 2009 and 2008, 81% and 74% of our revenue was from direct channels, respectively.

We have direct sales personnel based in the U.S., Europe and Asia. We also have field applications engineering personnel based in each of these locations who support all of our market channels. These employees provide
technical support and assistance to existing and potential customers in designing, testing and qualifying products that incorporate our ICs. In addition, we have a business development group that focuses on marketing to service providers in all of
our geographic markets.

In the second quarter of 2009, we realized net income of $0.3 million, compared to net income of $5,000 in the
first quarter of 2009 and a net loss of $0.2 million in the second quarter of 2008. Our accumulated deficit as of June 30, 2009 was $135.3 million. In the second quarter of 2009, our total revenue was $17.5 million compared to $15.5 million in
the first quarter of 2009 and $18.1 million in the second quarter of 2008. The sequential increase in revenue was primarily due to increased sales in the retail channel, as well as increased sales in the commercial channel for Ethernet-over-Coax
(EoC) applications in China, which were partially offset by a decline in sales in our service provider channel. In addition, sales of our command and control ICs continued to decline in the second quarter of 2009 due to the macroeconomic
environment, as well as a planned inventory over-stock position at certain customers as a result of a change in our supply chain. In the third quarter of 2009, we expect our revenue and aggregate unit sales of our ICs to increase compared to the
second quarter of 2009 but to decrease compared to the third quarter of 2008. However, we continue to be concerned about the global economic downturn and any further deterioration that may occur as well as the associated risks of delays and
cancellations in customer orders and the related difficulty in forecasting our product demand, which could adversely impact our revenue, inventory levels, gross profit and results of operations and we could incur losses as a result.

In the second quarter of 2009, our operating expenses were $8.5 million, compared to $8.0 million in the first quarter of 2009 and $8.2 million in the
second quarter of 2008. In the second half of 2009, we expect to hire additional employees to support our operations. As a result, we expect personnel costs to increase in the future as we increase the number of our full-time employees. The actual
increase in costs will depend on the timing and compensation of new hires. In the third quarter of 2009, we expect a sequential increase in operating expenses compared to the second quarter of 2009 due to the anticipated increases in engineering
program costs related to our next generation ICs and product feature enhancements, as well as increases in payroll for new hires, payroll taxes and legal fees and expenses.



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Description of Our Revenue, Cost of Revenue and Expenses

Revenue

Our revenue is generated
primarily from shipments of our IC products. The price of our IC products is influenced by market and competitive conditions. Periodically, we reduce the price of our products as market and competitive conditions change or as we are able to reduce
our manufacturing costs. In addition, the average selling price of our ICs can vary due to changes in our product mix and customer base. To date, all of our revenue has been denominated in U.S. dollars. Therefore, the main factors that impact our
revenue are unit volumes and average selling prices.

We also sell development tools to our customers to enable them to build their
products around our ICs. Revenue from the sale of development tools was approximately $20,000 and $49,000 for the three month periods ended June 30, 2009 and 2008, respectively. Revenue from the sale of development tools was approximately
$68,000 and $99,000 for the six month periods ended June 30, 2009 and 2008, respectively.

We sell our ICs directly to OEMs and
service providers or indirectly through ODMs and distributors. Historically, a small number of customers have accounted for a substantial portion of our revenue and this concentration has been increasing. We anticipate that significant customer
concentration will continue for the foreseeable future and may increase during 2009. Our top five customers accounted for approximately 72% and 68% of our revenue for the six months ended June 30, 2009 and 2008, respectively. The customers
representing 10% or more of our revenue during the periods presented were:



|                                              |  |                             |   |  |                           |   |  |      |   |  |      |  
|--------------------------------------------- |  | --------------------------- | - |  | ------------------------- | - |  | ---- | - |  | ---- | -
|                                              |  | Three Months Ended June 30, |   |  | Six Months Ended June 30, |  
|                                              |  | 2009                        |   |  | 2008                      |   |  | 2009 |   |  | 2008 |  
|devolo AG (OEM)                               |  | 24                          | % |  | 17                        | % |  | 24   | % |  | 18   | %
|Free (Service Provider)                       |  | 21                          | % |  | 20                        | % |  | 22   | % |  | 19   | %
|Chenmtech Co Ltd (Distributor)                |  | 14                          | % |  | *                         |   |  | 12   | % |  | *    |  
|Lumax International Corporation (Distributor) |  | *                           |   |  | 12                        | % |  | *    |   |  | 14   | %
|Aztech Systems Ltd (OEM)                      |  | *                           |   |  | 11                        | % |  | *    |   |  | *    |  



|* | Denotes that a customer accounted for less than 10% of our revenue in a given period.
|- | -------------------------------------------------------------------------------------

In general, we are not able to track the amount of our product sold by our OEM, ODM and distributor customers to their ultimate end-use customers. However, we believe that several of our ODM customers produce products
using our HomePlug 1.0 ICs for a single end-use customer, EchoStar Corporation (EchoStar). For the three months ended June 30, 2009 and 2008, we estimate that EchoStars indirect purchases through its various ODMs would have accounted for
approximately 8% and 13% of our aggregate revenue, respectively. For the six months ended June 30, 2009 and 2008, we estimate that EchoStars indirect purchases through its various ODMs would have accounted for approximately 7% and 13% of
our aggregate revenue, respectively.

We have experienced variations in demand from most of our customers, including our largest customers.
These variations, which will likely continue, are due to a number of factors, including our customers inability to predict accurately their end-customer demand, delays in customer programs using our ICs, the rate of adoption of powerline
communications in the markets we serve, changes in our product mix and customer base, our efforts to streamline our sales channel, the market acceptance of our products, particularly our new products, the availability of competitive products and
fluctuations in the global economy. We have therefore been subject to significant variations in orders from our customers, with orders, including large orders, followed by periods of limited demand from such customers. In light of the current
adverse economic conditions, we believe there will be a higher risk of delays and cancellations in customer orders. In the event of material order delays or cancellations or the loss of business to competing suppliers or technologies, we will
experience significantly greater volatility in our revenue and earnings or losses, as applicable, and this volatility could be more pronounced than expected given our customer concentration. In the event of an order delay or cancellation by a large
customer, by a group of customers serving the same indirect customer, or by a large number of smaller customers, we could experience a significant quarterly or annual decline in revenue and increase in operating losses.

Most of our sales are to customers outside the U.S. and Canada, which we consider North America. These sales statistics only relate to our direct
customers and not the end-customers purchasing the products that incorporate our ICs. The following sets forth our revenue breakdown by geographic region, in thousands and as a percentage of revenue, during the periods presented.



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|              |  |                                    |        |  |                           |   |  |      |        |  |       |   |  |   |        |  |       |   |  |   |        |  |       |  
|------------- |  | ---------------------------------- | ------ |  | ------------------------- | - |  | ---- | ------ |  | ----- | - |  | - | ------ |  | ----- | - |  | - | ------ |  | ----- | -
|              |  | Three Months Ended June 30,        |        |  | Six Months Ended June 30, |  
|              |  | 2009                               |        |  | 2008                      |   |  | 2009 |        |  | 2008  |  
|              |  | (in thousands, except percentages) |       
|Europe        |  | $                                  | 8,587  |  | 49.1                      | % |  | $    | 7,474  |  | 41.2  | % |  | $ | 17,928 |  | 54.4  | % |  | $ | 14,639 |  | 42.5  | %
|Asia          |  |                                    | 7,575  |  | 43.3                      |   |  |      | 8,718  |  | 48.1  |   |  |   | 12,499 |  | 37.9  |   |  |   | 15,528 |  | 45.1  |  
|North America |  |                                    | 1,304  |  | 7.5                       |   |  |      | 1,945  |  | 10.7  |   |  |   | 2,547  |  | 7.7   |   |  |   | 4,269  |  | 12.4  |  
|Other         |  |                                    | 9      |  | 0.1                       |   |  |      |       |  |      |   |  |   | 9      |  | 0.0   |   |  |   | 6      |  | 0.0   |  
|              |  |                                    |        |  |                           |   |  |      |        |  |       |   |  |   |        |  |       |   |  |   |        |  |       |  
|              |  |                                    |        |  |                           |   |  |     
|Total         |  | $                                  | 17,475 |  | 100.0                     | % |  | $    | 18,137 |  | 100.0 | % |  | $ | 32,983 |  | 100.0 | % |  | $ | 34,442 |  | 100.0 | %
|              |  |                                    |        |  |                           |   |  |      |        |  |       |   |  |   |        |  |       |   |  |   |        |  |       |  

Cost of Revenue

We outsource the wafer fabrication, assembly and test functions of our IC products. We purchase processed wafers on a per wafer basis from our
fabrication, or foundry, suppliers, which are currently United Microelectronics Corporation and Chartered Semiconductor Manufacturing, Ltd for our HomePlug-based ICs, and Chartered Semiconductor Manufacturing, Ltd for our command and control ICs. We
also outsource the assembly, final testing and other processing of our products to third-party contractors. We negotiate wafer fabrication on a purchase order basis and we do not have long-term agreements with any of our third-party contractors. For
some of our HomePlug AV-based products, we also purchase analog front-end ICs and line drivers from third parties, which are incorporated into multi-chip modules or chipsets sold by us. Any significant product quality or reliability concerns or
disruption in the operations of one or more of our wafer fabrication facilities, assembly or test subcontractors, or third-party analog front-end and line driver IC suppliers would adversely impact the production of our products and our ability to
meet customer demand.

Cost of revenue includes primarily the cost of silicon wafers purchased from our foundry suppliers as well as the
analog front-end ICs and line drivers we purchase from third parties. In addition, cost of revenue includes other outsourced manufacturing costs and costs associated with the assembling and testing of our ICs. Cost of revenue also includes items
such as license expense, purchasing and production planning personnel and related expenses and inventory valuation write-downs to state inventory at the lower of cost or market caused by product obsolescence and transitions from older to newer
products. Our future cost of goods sold could fluctuate based on the volume of ICs sold and the resulting product mix, which consists of products with different costs per IC.

As we do not have formal, long-term pricing agreements with our outsourcing suppliers, our wafer costs and services are subject to price fluctuations
based on the cyclical supply and demand for semiconductors, our suppliers production costs and inflation. We also face the risks associated with how much acceptable product will result from the manufacturing process of our ICs, or yield, as
identified when the product is tested. These risks exist at several stages of the manufacturing process, including the manufacture of the wafers, cutting the wafers into the die that comprise the individual ICs and assembling the die into a
multi-chip or a single-chip package. If our manufacturing yields decrease at any stage of production, our cost per unit increases, which could have a significant adverse impact on our gross margins. Manufacturing yields on newly-introduced ICs may
vary significantly until such time as the manufacturing process parameters are fully engineered. Manufacturing yields on mature products may also vary. We believe that the difficulty of achieving satisfactory IC yields will increase as we continue
to move our IC production processes to smaller geometries, transition existing products to different wafer foundries and integrate our ICs into more multi-chip modules in an effort to offer competitive cost and performance advantages.

Gross Profit

Our gross profit has
varied from period-to-period. Factors that have affected and will continue to affect gross profit in the future include product sales mix, customer mix, manufacturing yields, wafer pricing, excess and obsolete inventory, pricing by competitors,
subcontractors and suppliers and new product introductions. In the third quarter of 2009, we anticipate that our gross profit margins may be slightly lower compared to the second quarter of 2009 due to changes in product and customer mix. Among
other factors, we expect demand for the lower margin HomePlug 1.0 ICs we sell to one of our service provider customers to more than double sequentially in the third quarter of 2009 as a percentage of our total product mix, which will negatively
affect our gross profit margins. We expect that this negative impact may be partially offset by a further increase in the percentage of our total product mix attributable to our INT6400 HomePlug AV-based IC, which has an improved cost structure
compared to our earlier generation HomePlug AV-based IC, the INT6300.

Research and Development

Research and development expense primarily consists of compensation and associated costs related to development employees and contractors, mask costs,
prototype wafers, software and engineering development, software licenses, reference design development costs, development testing and evaluation, occupancy costs, travel, depreciation expense and stock-based compensation under Statement of
Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)). All research and development costs are expensed as incurred.



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We have experienced significant fluctuations in research and development expenses, in part, due to the
timing of our creation and introduction of new products and product enhancements and the degree to which our new products and product enhancements have represented major changes from our then-existing products. As we create new products and product
enhancements, we often use third-party contractors to supplement our own research and development teams. We also incur costs for third-party intellectual property that we incorporate into our designs. If we are producing a major new product
platform, as we did with the introduction of our first HomePlug AV-based IC, these costs are generally more significant than if we are producing a cost-down version of an existing IC, as we did with our second and third generation HomePlug AV-based
ICs and second sourced HomePlug 1.0 with Turbo IC. In addition, as is common in the semiconductor industry, we incur costs associated with the creation of the masks that our foundry vendors use to produce our ICs. Mask costs are more expensive for
ICs that use smaller geometries for the manufacturing process. In the future, we may continue to transition our ICs to lower process geometries, which we expect would increase the cost of the masks for such ICs. In addition, we may be required to
pay for multiple masks as part of our IC design creation process, which could have a significant adverse effect on research and development expense. Historically, most of our new IC development has occurred on a sequential basis, with only one
design project occurring at a time. In the future, we believe that we will need to pursue multiple IC development efforts simultaneously in order to be competitive, which will increase our overall research and development expenses.

We expect our research and development costs to increase in absolute dollars in the future as we invest to develop new products. Additionally, we expect
these costs, as a percentage of revenue, to fluctuate from one period to another. Specifically, we expect our research and development expenses will increase for the third quarter of 2009 compared to the second quarter of 2009 as we develop our next
generation ICs, focus resources on future designs and hire additional personnel.

Sales and Marketing

Sales and marketing expense relates primarily to compensation and associated costs for marketing, business development and selling personnel, public
relations, promotional and other marketing expenses, travel, trade show expenses, depreciation expenses, occupancy costs and stock-based compensation under SFAS 123(R). We expect that sales and marketing expenses will be approximately the same in
the third quarter of 2009 compared to the second quarter of 2009.

General and Administrative

General and administrative expense relates primarily to compensation and associated costs for general and administrative personnel, information systems,
insurance, professional fees, occupancy costs, travel and stock-based compensation under SFAS 123(R). We expect that general and administrative expenses will be approximately the same in the third quarter of 2009 compared to the second quarter
of 2009.

Total Other Income (Expense)

Total other income (expense) consists primarily of interest income, interest expense and other expenses. Interest income consists of interest earned on cash, cash equivalents and short-term investments. Other expenses
consist primarily of fees and expenses related to incorporation and franchise taxes. Because our net cash balances have historically exceeded our debt balances and fees and expenses, we have earned total other income. We expect our total other
income and expense to decline in the third quarter of 2009, compared to the second quarter of 2009, primarily as a result of lower interest rates on our investments. We incurred no interest expense in the three and six months ended June 30,
2009.

Provision for Income Taxes

During the three and six months ended June 30, 2009, we recognized approximately $44,000 and $90,000 of income tax benefit, respectively, related to our Canadian subsidiary, which was partially offset by
approximately $13,000 and $30,000, respectively, in U.S. Federal income tax expense. As of June 30, 2009, we had no accrued interest or any penalty associated with any unrecognized tax benefits, nor was any interest expense recognized during
the three and six months ended June 30, 2009.

Critical Accounting Policies and Estimates

Our managements discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements, as well as reported revenue and expenses during the reporting periods. We base our estimates on historical experience and on various other factors that we believe are
reasonable under the circumstances. The Securities and Exchange Commission (SEC) considers an accounting policy to be critical if it is important to a companys financial condition and results of operations and if it requires the exercise of
significant judgment and the use of estimates on the part of management in its application. We have discussed the selection and development of critical accounting policies with the audit committee of our board of directors, and the audit committee
has reviewed our related disclosures in this filing. Although we



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believe that our judgments and estimates are appropriate, actual results may differ from those estimates. Our critical accounting policies are discussed in
our Annual Report on Form 10-K for the year ended December 31, 2008 and there have been no material changes.

Consolidated Results of Operations

The following sets forth our selected consolidated statement of operations data expressed in thousands and as a percentage of revenue
for the periods presented:



|                                                  |  |                                    |        |   |                           |       |   |      |   |        |             |  |       |      |  |   |             |   |  |       |   |  |             |        |   |  |       |   
|------------------------------------------------- |  | ---------------------------------- | ------ | - | ------------------------- | ----- | - | ---- | - | ------ | ----------- |  | ----- | ---- |  | - | ----------- | - |  | ----- | - |  | ----------- | ------ | - |  | ----- | --
|                                                  |  | Three Months Ended June 30,        |        |   | Six Months Ended June 30, |      
|                                                  |  | 2009                               |        |   | % ofRevenue               |       |   | 2008 |   |        | % ofRevenue |  |       | 2009 |  |   | % ofRevenue |   |  | 2008  |   |  | % ofRevenue |       
|                                                  |  | (in thousands, except percentages) |       
|Revenue                                           |  | $                                  | 17,475 |   |                           | 100.0 | % |      | $ | 18,137 |             |  | 100.0 | %    |  | $ | 32,983      |   |  | 100.0 | % |  | $           | 34,442 |   |  | 100.0 | % 
|                                                  |  |                                    |        |   |                           |       |   |     
|Cost of revenue                                   |  |                                    | 8,667  |   |                           | 49.6  |   |      |   | 10,310 |             |  | 56.8  |      |  |   | 16,268      |   |  | 49.3  |   |  |             | 19,280 |   |  | 56.0  |   
|                                                  |  |                                    |        |   |                           |       |   |      |   |        |             |  |       |      |  |   |             |   |  |       |   |  |             |        |   |  |       |   
|Gross profit                                      |  |                                    | 8,808  |   |                           | 50.4  |   |      |   | 7,827  |             |  | 43.2  |      |  |   | 16,715      |   |  | 50.7  |   |  |             | 15,162 |   |  | 44.0  |   
|                                                  |  |                                    |        |   |                           |       |   |     
|Cost of operations:                               |  |                                    |        |   |                           |       |   |      |   |        |             |  |       |      |  |   |             |   |  |       |   |  |             |        |   |  |       |   
|Research and development                          |  |                                    | 3,981  |   |                           | 22.8  |   |      |   | 3,935  |             |  | 21.7  |      |  |   | 7,588       |   |  | 23.0  |   |  |             | 8,379  |   |  | 24.3  |   
|Sales and marketing                               |  |                                    | 2,239  |   |                           | 12.8  |   |      |   | 2,095  |             |  | 11.6  |      |  |   | 4,569       |   |  | 13.9  |   |  |             | 4,274  |   |  | 12.4  |   
|General and administrative                        |  |                                    | 2,302  |   |                           | 13.2  |   |      |   | 2,202  |             |  | 12.1  |      |  |   | 4,331       |   |  | 13.1  |   |  |             | 4,271  |   |  | 12.4  |   
|                                                  |  |                                    |        |   |                           |       |   |      |   |        |             |  |       |      |  |   |             |   |  |       |   |  |             |        |   |  |       |   
|Operating income (loss)                           |  |                                    | 286    |   |                           | 1.6   |   |      |   | (405   | )           |  | (2.2  | )    |  |   | 227         |   |  | 0.7   |   |  |             | (1,762 | ) |  | (5.1  | ) 
|                                                  |  |                                    |        |   |                           |       |   |     
|Other income (expense)                            |  |                                    |        |   |                           |       |   |      |   |        |             |  |       |      |  |   |             |   |  |       |   |  |             |        |   |  |       |   
|Interest income                                   |  |                                    | 30     |   |                           | 0.2   |   |      |   | 252    |             |  | 1.4   |      |  |   | 93          |   |  | 0.2   |   |  |             | 695    |   |  | 2.0   |   
|Other expense                                     |  |                                    | (20    | ) |                           | (0.1  | ) |      |   | (32    | )           |  | (0.2  | )    |  |   | (48         | ) |  | (0.1  | ) |  |             | (63    | ) |  | (0.2  | ) 
|                                                  |  |                                    |        |   |                           |       |   |      |   |        |             |  |       |      |  |   |             |   |  |       |   |  |             |        |   |  |       |   
|Total other income                                |  |                                    | 10     |   |                           | 0.1   |   |      |   | 220    |             |  | 1.2   |      |  |   | 45          |   |  | 0.1   |   |  |             | 632    |   |  | 1.8   |   
|                                                  |  |                                    |        |   |                           |       |   |      |   |        |             |  |       |      |  |   |             |   |  |       |   |  |             |        |   |  |       |   
|                                                  |  |                                    |        |   |                           |       |   |     
|Income (loss) before income tax (benefit) expense |  |                                    | 296    |   |                           | 1.7   |   |      |   | (185   | )           |  | (1.0  | )    |  |   | 272         |   |  | 0.8   |   |  |             | (1,130 | ) |  | (3.3  | ) 
|                                                  |  |                                    |        |   |                           |       |   |     
|Income tax (benefit) expense                      |  |                                    | (31    | ) |                           | (0.2  | ) |      |   | 57     |             |  | 0.3   |      |  |   | (60         | ) |  | (0.2  | ) |  |             | 57     |   |  | 0.1   |   
|                                                  |  |                                    |        |   |                           |       |   |      |   |        |             |  |       |      |  |   |             |   |  |       |   |  |             |        |   |  |       |   
|Net income (loss)                                 |  | $                                  | 327    |   |                           | 1.9   | % |      | $ | (242   | )           |  | (1.3  | )%   |  | $ | 332         |   |  | 1.0   | % |  | $           | (1,187 | ) |  | (3.4  | )%
|                                                  |  |                                    |        |   |                           |       |   |      |   |        |             |  |       |      |  |   |             |   |  |       |   |  |             |        |   |  |       |   

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

Revenue



|        |  |                                    |        |      |                           |               |  |      |      |  |      |        |               |   |        |  |      |   
|------- |  | ---------------------------------- | ------ | ---- | ------------------------- | ------------- |  | ---- | ---- |  | ---- | ------ | ------------- | - | ------ |  | ---- | --
|        |  | Three Months Ended June 30,        |        |      | Six Months Ended June 30, |              
|        |  | 2009                               |        | 2008 |                           | PercentChange |  |      | 2009 |  | 2008 |        | PercentChange |  
|        |  | (in thousands, except percentages) |       
|Revenue |  | $                                  | 17,475 |      | $                         | 18,137        |  | (3.6 | )%   |  | $    | 32,983 |               | $ | 34,442 |  | (4.2 | )%

Our revenue for the three and six months ended June 30, 2009 was lower in both aggregate unit
volume and absolute dollars compared to the corresponding period in 2008. The decrease in revenue for the three month period was primarily due to the decrease in sales of our command and control ICs to $0.1 million for the three months ended
June 30, 2009, compared to $0.6 million for the corresponding period in 2008, an 83.5% decrease. The decrease in revenue for our command and control ICs for the three months ended June 30, 2009 over the prior year period was primarily due
to an 86.6% decrease in unit volumes, which was partially offset by a 23.5% increase in average selling prices. In addition, the sales of our HomePlug-based ICs decreased to $17.4 million in the three months ended June 30, 2009 from $17.5
million in the corresponding period in 2008, a 0.7% decrease. The decrease in revenue for our HomePlug-based ICs for the three months ended June 30, 2009 over the prior year period was primarily due to a 5.4% decrease in unit volumes, which was
partially offset by a 5.3% increase in average selling prices due to product mix.

The decrease in revenue for the six month period was
primarily due to the decrease in sales of our command and control ICs to $0.3 million for the six months ended June 30, 2009, compared to $1.3 million for the corresponding period in 2008, a 79.0%



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decrease. The decrease in revenue for our command and control ICs for the six months ended June 30, 2009 over the prior year period was primarily due to
a 79.4% decrease in unit volumes, which was partially offset by a 1.5% increase in average selling prices. In addition, the sales of our HomePlug-based ICs decreased to $32.6 million in the six months ended June 30, 2009 from $33.0 million in
the corresponding period in 2008, a 1.2% decrease. The decrease in revenue for our HomePlug-based ICs for the six months ended June 30, 2009 over the prior year period was primarily due to a 4.7% decrease in unit volumes, which was partially
offset by a 3.7% increase in average selling prices due to product mix.

Sales to our top customers varied for the three and six months
ended June 30, 2009 and 2008. There are a number of factors that influence the percent of sales to our top customers. These factors include, among others, changes in product and customer mix, transitions to newer products, market acceptance of
our products, changes in our customers end-customer demand and our customers inability to predict accurately their end-customer demand, delays in customer programs using our ICs and our efforts to improve our sales channel. Examples of
these trends include:



| |  |  | End Customer Demand. The volume of our sales to ODM customers is dependent, in part, on the demand from their end customers and their ability to accurately predict
such demand. For example, our sales of HomePlug 1.0 ICs to several ODM customers fluctuate as their customer, EchoStar, makes unexpected changes to its product requirements or alternates the ODM building its product. We estimate that our indirect
sales to EchoStar through its various ODMs for the three months ended June 30, 2009 increased by approximately 41% compared to the three months ended March 31, 2009 and decreased by approximately 39% compared to the three months ended
June 30, 2008. Also, for the three months ended June 30, 2009, sales to devolo AG increased as a percentage of revenue to 24% from 17% in the corresponding period in 2008, primarily as a result of increased demand from its end customers.
These changes in end customer demand also affect our product and customer mix.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Product and Customer Mix. Sales of our HomePlug-based ICs were $17.4 million in the three months ended June 30, 2009 compared to $17.5 million in the three
months ended June 30, 2008 and $15.3 million in the three months ended March 31, 2009. Sales of our command and control ICs decreased to $0.1 million in the three months ended June 30, 2009 from $0.6 million in the three months ended
June 30, 2008 and $0.2 million in the three months ended March 31, 2009. The sequential increase in sales of our HomePlug-based ICs in the three months ended June 30, 2009 was primarily the result of the increased sales of our
HomePlug 1.0 ICs described above, as well as increased demand in the retail channel and increased demand in the commercial channel for EoC applications in China. These increases were offset, in part, by decreased sales of our HomePlug 1.0 with Turbo
ICs in the service provider channel in the three months ended June 30, 2009 compared to the three months ended March 31, 2009. The sequential and quarter-over-quarter declines in sales of our command and control ICs were primarily the
result of continued decreased demand for these ICs in the three months ended June 30, 2009 due to the macroeconomic environment, as well as a planned inventory over-stock position at certain customers as a result of a change in our supply
chain.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Sales Channel Improvements. From time to time, we make changes in our sales channel relationships. For example, Chenmtech Co Ltd, which individually accounted for
14% of our revenue for the three months ended June 30, 2009, purchases some product previously sold to other distributors.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We continue to expect variations in our top customers as a result of these and other trends, including the global economic downturn.

Cost of Revenue



|                   |  |                                    |       |   |                           |   |        |               |  |       |      |  |   |        |   |  |               |        |   |  |       |   
|------------------ |  | ---------------------------------- | ----- | - | ------------------------- | - | ------ | ------------- |  | ----- | ---- |  | - | ------ | - |  | ------------- | ------ | - |  | ----- | --
|                   |  | Three Months Ended June 30,        |       |   | Six Months Ended June 30, |  
|                   |  | 2009                               |       |   | 2008                      |   |        | PercentChange |  |       | 2009 |  |   | 2008   |   |  | PercentChange |       
|                   |  | (in thousands, except percentages) |      
|Cost of Revenue    |  | $                                  | 8,667 |   |                           | $ | 10,310 |               |  | (15.9 | )%   |  | $ | 16,268 |   |  | $             | 19,280 |   |  | (15.6 | )%
|Percent of revenue |  |                                    | 49.6  | % |                           |   | 56.8   | %             |  |       |      |  |   | 49.3   | % |  |               | 56.0   | % |  |       |   

The decrease in cost of revenue during the three and six months ended June 30, 2009, compared
to the corresponding periods in 2008, was primarily due to a decrease in unit sales of our HomePlug 1.0 ICs as well as a second sourcing of our HomePlug 1.0 with Turbo ICs and supply chain and product design efficiencies. Our expenses for purchasing
and production planning personnel and related expenses were approximately $0.1 million for each of the three month periods ended June 30, 2009 and 2008. In addition, our expenses for licensing third-party technologies were approximately $0.2
million and $0.3 million for the three month periods ended June 30, 2009 and 2008, respectively.

Our expenses for purchasing and
production planning personnel and related expenses were approximately $0.3 million and $0.2 million for the six month periods ended June 30, 2009 and 2008, respectively. In addition, our expenses for licensing third-party technologies were
approximately $0.5 million and $0.6 million for the six month periods ended June 30, 2009 and 2008, respectively.



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Gross Profit



|                   |  |                                    |       |   |                           |   |       |               |  |      |      |  |   |        |   |  |               |        |   |  |      |  
|------------------ |  | ---------------------------------- | ----- | - | ------------------------- | - | ----- | ------------- |  | ---- | ---- |  | - | ------ | - |  | ------------- | ------ | - |  | ---- | -
|                   |  | Three Months Ended June 30,        |       |   | Six Months Ended June 30, |  
|                   |  | 2009                               |       |   | 2008                      |   |       | PercentChange |  |      | 2009 |  |   | 2008   |   |  | PercentChange |       
|                   |  | (in thousands, except percentages) |      
|Gross Profit       |  | $                                  | 8,808 |   |                           | $ | 7,827 |               |  | 12.5 | %    |  | $ | 16,715 |   |  | $             | 15,162 |   |  | 10.2 | %
|Percent of revenue |  |                                    | 50.4  | % |                           |   | 43.2  | %             |  |      |      |  |   | 50.7   | % |  |               | 44.0   | % |  |      |  

Gross profit as a percentage of revenue increased in the three and six months ended June 30,
2009, compared to the corresponding periods in 2008, primarily due to a decrease in unit sales of our HomePlug 1.0 ICs, and a shift in product mix towards our lower cost 65 nanometer HomePlug AV ICs and second sourced HomePlug 1.0 with Turbo ICs, as
well as decreases in the average unit costs of our HomePlug-based ICs resulting from supply chain and product design efficiencies.

Gross
profit margins improved in the three months ended June 30, 2009, compared to the corresponding period in 2008, primarily due to decreases in the average unit costs of our HomePlug-based ICs of 10.0% and an increase in average selling prices for
our HomePlug-based ICs of 5.3%. In addition, the average unit costs for our command and control ICs decreased approximately 1.1%, and our average selling prices increased 23.5% for the three months ended June 30, 2009, compared to the
corresponding period in 2008. In addition, expenses for our purchasing and production planning personnel were a slightly higher percentage of our revenue in the three months ended June 30, 2009 compared to the corresponding period in 2008.

Gross profit margins improved in the six months ended June 30, 2009, compared to the corresponding period in 2008, primarily due to
decreases in the average unit costs of our HomePlug-based ICs of 10.6% and an increase in average selling prices for our HomePlug-based ICs of 3.7%. In addition, the average selling prices for our command and control ICs increased 1.5% for the six
months ended June 30, 2009, compared to the corresponding period in 2008, which was partially offset by an increase in the average unit costs for our command and control ICs of approximately 1.3%. In addition, expenses for our purchasing and
production planning personnel were a slightly higher percentage of our revenue in the six months ended June 30, 2009 compared to the corresponding period in 2008.

Research and Development



|                         |  |                                    |       |   |                           |   |       |               |  |     |      |  |   |       |   |  |               |       |   |  |      |   
|------------------------ |  | ---------------------------------- | ----- | - | ------------------------- | - | ----- | ------------- |  | --- | ---- |  | - | ----- | - |  | ------------- | ----- | - |  | ---- | --
|                         |  | Three Months Ended June 30,        |       |   | Six Months Ended June 30, |  
|                         |  | 2009                               |       |   | 2008                      |   |       | PercentChange |  |     | 2009 |  |   | 2008  |   |  | PercentChange |      
|                         |  | (in thousands, except percentages) |      
|Research and Development |  | $                                  | 3,981 |   |                           | $ | 3,935 |               |  | 1.2 | %    |  | $ | 7,588 |   |  | $             | 8,379 |   |  | (9.4 | )%
|Percent of revenue       |  |                                    | 22.8  | % |                           |   | 21.7  | %             |  |     |      |  |   | 23.0  | % |  |               | 24.3  | % |  |      |   

Research and development expenses were essentially the same for each of the three month periods
ended June 30, 2009 and 2008. The slight increase in expenses for the three months ended June 30, 2009, compared to the corresponding period in 2008, was primarily due to increased compensation-related and new hire expenses of $0.1
million.

The decrease in research and development expenses for the six months ended June 30, 2009, compared to the corresponding
period in 2008, was primarily due to a decrease in engineering related expenses of $0.8 million, primarily for the design and development of our 65 nanometer HomePlug AV-based IC which was introduced in October 2008.



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Sales and Marketing



|                    |  |                                    |       |   |                           |   |       |               |  |     |      |  |   |       |   |  |               |       |   |  |     |  
|------------------- |  | ---------------------------------- | ----- | - | ------------------------- | - | ----- | ------------- |  | --- | ---- |  | - | ----- | - |  | ------------- | ----- | - |  | --- | -
|                    |  | Three Months Ended June 30,        |       |   | Six Months Ended June 30, |  
|                    |  | 2009                               |       |   | 2008                      |   |       | PercentChange |  |     | 2009 |  |   | 2008  |   |  | PercentChange |      
|                    |  | (in thousands, except percentages) |      
|Sales and Marketing |  | $                                  | 2,239 |   |                           | $ | 2,095 |               |  | 6.9 | %    |  | $ | 4,569 |   |  | $             | 4,274 |   |  | 6.9 | %
|Percent of revenue  |  |                                    | 12.8  | % |                           |   | 11.6  | %             |  |     |      |  |   | 13.9  | % |  |               | 12.4  | % |  |     |  

The increase in sales and marketing expenses for the three months ended June 30, 2009,
compared to the corresponding period in 2008, was primarily due to increased compensation-related and new hire expenses of $0.1 million.

The increase in sales and marketing expenses for the six months ended June 30, 2009, compared to the corresponding period in 2008, was primarily due to increased tradeshow and other marketing related expenses of $0.3 million.

General and Administrative



|                           |  |                                    |       |   |                           |   |       |               |  |     |      |  |   |       |   |  |               |       |   |  |     |  
|-------------------------- |  | ---------------------------------- | ----- | - | ------------------------- | - | ----- | ------------- |  | --- | ---- |  | - | ----- | - |  | ------------- | ----- | - |  | --- | -
|                           |  | Three Months Ended June 30,        |       |   | Six Months Ended June 30, |  
|                           |  | 2009                               |       |   | 2008                      |   |       | PercentChange |  |     | 2009 |  |   | 2008  |   |  | PercentChange |      
|                           |  | (in thousands, except percentages) |      
|General and Administrative |  | $                                  | 2,302 |   |                           | $ | 2,202 |               |  | 4.5 | %    |  | $ | 4,331 |   |  | $             | 4,271 |   |  | 1.4 | %
|Percent of revenue         |  |                                    | 13.2  | % |                           |   | 12.1  | %             |  |     |      |  |   | 13.1  | % |  |               | 12.4  | % |  |     |  

The increase in general and administrative expenses for the three months ended June 30, 2009,
compared to the corresponding period in 2008, was primarily due to increased compensation-related expenses of $0.1 million.

The slight
increase in general and administrative expenses for the six months ended June 30, 2009, compared to the corresponding period in 2008, was primarily due to increased compensation-related expenses of $0.2 million and occupancy related expenses of
$0.2 million, which were partially offset by decreased professional fees of $0.2 million and other operating related expense of $0.1 million.

Total Other Income



|                   |  |                                    |     |   |                           |   |     |               |  |       |      |  |   |      |   |  |               |     |   |  |       |   
|------------------ |  | ---------------------------------- | --- | - | ------------------------- | - | --- | ------------- |  | ----- | ---- |  | - | ---- | - |  | ------------- | --- | - |  | ----- | --
|                   |  | Three Months Ended June 30,        |     |   | Six Months Ended June 30, |  
|                   |  | 2009                               |     |   | 2008                      |   |     | PercentChange |  |       | 2009 |  |   | 2008 |   |  | PercentChange |    
|                   |  | (in thousands, except percentages) |    
|Total Other Income |  | $                                  | 10  |   |                           | $ | 220 |               |  | (95.5 | )%   |  | $ | 45   |   |  | $             | 632 |   |  | (92.9 | )%
|Percent of revenue |  |                                    | 0.1 | % |                           |   | 1.2 | %             |  |       |      |  |   | 0.1  | % |  |               | 1.8 | % |  |       |   

The decrease in other income for the three and six months ended June 30, 2009, compared to
the corresponding periods in 2008, was primarily due to a decrease in interest income resulting from reduced interest rates on our invested cash, cash equivalents and short-term investments.

Income Tax (Benefit) Expense



|                             |  |                                    |      |    |                           |   |     |               |  |       |      |  |   |      |    |  |               |     |   |  |       |  
|---------------------------- |  | ---------------------------------- | ---- | -- | ------------------------- | - | --- | ------------- |  | ----- | ---- |  | - | ---- | -- |  | ------------- | --- | - |  | ----- | -
|                             |  | Three Months Ended June 30,        |      |    | Six Months Ended June 30, |  
|                             |  | 2009                               |      |    | 2008                      |   |     | PercentChange |  |       | 2009 |  |   | 2008 |    |  | PercentChange |    
|                             |  | (in thousands, except percentages) |     
|Income Tax (Benefit) Expense |  | $                                  | (31  | )  |                           | $ | 57  |               |  | 154.4 | %    |  | $ | (60  | )  |  | $             | 57  |   |  | 205.3 | %
|Percent of revenue           |  |                                    | (0.2 | )% |                           |   | 0.3 | %             |  |       |      |  |   | (0.2 | )% |  |               | 0.1 | % |  |       |  

The income tax benefit for the three and six months ended June 30, 2009 comprises net income
tax credits attributable to our Canadian subsidiary of approximately $44,000 and $90,000, respectively, which were partially offset by U.S. Federal income tax expense of approximately $13,000 and $30,000, respectively.

Income tax expense for the three and six months ended June 30, 2008 represents taxes attributable to our Canadian subsidiary.



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Liquidity and Capital Resources

The following table summarizes our cash flows:



|                                          |  |                          |        |   |      |   |        |  
|----------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | -
|                                          |  | Six Months EndedJune 30, |       
|                                          |  | 2009                     |        |   | 2008 |  
|                                          |  | (in thousands)           |       
|Consolidated Cash Flow Data:              |  |                          |        |   |      |   |        |  
|Net cash provided by operating activities |  | $                        | 7,353  |   |      | $ | 2,549  |  
|Net cash (used in) investing activities   |  |                          | (5,628 | ) |      |   | (1,214 | )
|Net cash provided by financing activities |  |                          | 4      |   |      |   | 5,550  |  
|                                          |  |                          |        |   |      |   |        |  
|Net increase in cash and equivalents      |  | $                        | 1,729  |   |      | $ | 6,885  |  
|                                          |  |                          |        |   |      |   |        |  

Our principal uses of cash historically have consisted of payments to our suppliers for the costs
related to the outsourcing of wafer fabrication, assembly and test functions for our IC products. We have also applied cash for payroll, incentives and other operating expenses including mask expenses and development tools for new product
development. In addition, we have made payments related to the purchase of equipment as well as working capital.

As of June 30, 2009,
our principal sources of liquidity consisted of cash, cash equivalents and short-term investments of $62.1 million, an increase of $6.5 million compared to $55.6 million as of December 31, 2008. Our cash, cash equivalents and short-term
investment balances are primarily the result of net proceeds of $44.5 million, after deducting underwriting discounts, commissions and other offering costs, from our initial public offering in December 2007 and from the exercise of the
underwriters over-allotment option to purchase additional shares of our common stock in January 2008.

Operating Activities

Our cash flows provided by operating activities are significantly influenced by our investments in personnel and infrastructure intended to
position our business for the future, sales made to customers, increases in the number of customers using our products and the amount and timing of payments made by these customers and payments made by us to our vendors.

During the six months ended June 30, 2009, our operating activities provided approximately $7.4 million of net cash. Cash provided by operating
activities for the six months ended June 30, 2009 resulted primarily from a decrease of $2.3 million in inventory, a decrease of $2.1 million in accounts receivable related to the timing of customer payments, an increase of $1.2 million in
accounts payable and accrued expenses related to the timing of payments to vendors, non-cash expenses for stock-based compensation of $1.1 million, non-cash depreciation and amortization expenses of $0.6 million, net income of $0.3 million and the
receipt of $0.2 million in income tax refunds. These increases in cash were partially offset by an increase of $0.4 million in prepaid expenses and other assets.

During the six months ended June 30, 2008, our operating activities provided approximately $2.5 million of net cash. Cash provided by operating activities for the six months ended June 30, 2008 resulted
primarily from an increase of $1.4 million in accounts payable and accrued expenses related to the timing of payments to vendors, non-cash expenses for stock-based compensation of $0.8 million, non-cash depreciation and amortization expenses of $0.6
million, a decrease of $0.5 million in accounts receivable related to the timing of customer payments, a decrease of $0.3 million in inventory and the receipt of income tax refunds and the decrease in prepaid expenses and other assets of $0.1
million. The increase in cash was partially used to fund our $1.2 million net operating loss during the six months ended June 30, 2008.

Investing Activities

Our primary investing activities have consisted of purchases of marketable securities, the purchase or
development of intangible assets, improvements made to our leased facilities and purchases of laboratory and computer equipment and software tools used in the design of our ICs. As we continue to invest in our business, we expect purchases of
computer and laboratory equipment and development tools to grow in absolute dollars.

During the six months ended June 30, 2009, we
used approximately $5.6 million of net cash in investing activities, primarily for the purchase of short-term investments of $25.0 million, which was partially offset by the proceeds from the maturity of short-term investments of $20.3 million. The
remaining $0.9 million was used to purchase property and equipment, as well as for the development of intangible assets. During the six months ended June 30, 2008, we used approximately $1.2 million of net cash in investing activities,
primarily to purchase property and equipment as well as for the purchase or development of intangible assets.



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Financing Activities

During the six months ended June 30, 2009, employees exercises of stock options provided approximately $4,000 of net cash.

During the six months ended June 30, 2008, we raised $5.6 million in net proceeds, after deducting underwriting discounts and commissions of $0.4 million and other offering costs of $0.1 million, from the
exercise of the underwriters over-allotment option subsequent to our initial public offering in December 2007.

Off Balance Sheet
Arrangements

We do not have any special purpose entities, and, other than operating leases as described below, we had no off-balance
sheet financing arrangements as of June 30, 2009 or 2008.

Contractual Obligations and Known Future Cash Requirements

Set forth below is information concerning our known contractual obligations as of June 30, 2009 that are fixed and determinable.



|                            |  |                |        |                 |   |           |  |           |       |                  |   |     |  |   |  
|--------------------------- |  | -------------- | ------ | --------------- | - | --------- |  | --------- | ----- | ---------------- | - | --- |  | - | -
|                            |  | Total          |        | Less than1 year |   | 1-3 years |  | 3-5 years |       | More than5 years
|                            |  | (in thousands)
|Operating lease obligations |  | $              | 3,267  |                 | $ | 1,571     |  | $         | 1,223 |                  | $ | 473 |  | $ | 
|Purchase obligations        |  |                | 8,294  |                 |   | 8,294     |  |           |      |                  |   |    |  |   | 
|                            |  |                |        |                 |   |           |  |           |       |                  |   |     |  |   |  
|Total                       |  | $              | 11,561 |                 | $ | 9,865     |  | $         | 1,223 |                  | $ | 473 |  | $ | 
|                            |  |                |        |                 |   |           |  |           |       |                  |   |     |  |   |  

Our principal lease commitments consist of obligations under leases for office space, office
equipment and third-party engineering software.

Future Capital Requirements

We believe that our existing cash, cash equivalents, short-term investments and any operating cash flow will be sufficient to meet our projected operating
and capital expenditure requirements for at least the next twelve months. In addition, we expect that our existing cash, cash equivalents, short-term investments and any operating cash flow will provide us with the financial flexibility to execute
our strategic objectives, including the ability to make acquisitions and strategic investments. Our ability to generate cash, however, is subject to our performance, general economic conditions, industry trends and other factors. To the extent that
our existing cash, cash equivalents, short-term investments and operating cash flow are insufficient to fund our future activities and requirements, we may need to raise additional funds through public or private equity or debt financing. If we
issue equity securities in order to raise additional funds, substantial dilution to existing stockholders may occur. Additional funds may not be available on terms favorable to us or at all, particularly given the current economic downturn and
tightening of credit markets.

Recent Accounting Pronouncements

With the exception of those stated below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2009, as compared to the recent
accounting pronouncements described in the Annual Report, that are of material significance, or have potential material significance, to us.

Effective January 1, 2009, we adopted the Financial Accounting Standards Board (FASB) 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 non-controlling 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 also provides guidance for recognizing
changes in an acquirers existing income tax valuation allowances and tax uncertainty accruals that result from a business combination transaction as adjustments to income tax expense. The adoption of SFAS 141R did not have a material impact on
our financial position, results of operations, cash flows or disclosures.

In April 2009, the FASB issued Staff Position (FSP)
No. 141R-1, Accounting for Assets and Liabilities Assumed in a Business Combination That Arise From Contingencies (FSP FAS 141R-1). FSP FAS 141R-1 amends and clarifies SFAS 141R to address application issues regarding initial recognition
and measurement, subsequent measurement and accounting and disclosure of assets and liabilities arising from contingencies in a business combination. FSP FAS 141R-1 is effective for assets or liabilities arising from contingencies in business
combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of FSP FAS 141R-1 did not have a material impact on our financial position,
results of operations, cash flows or disclosures.



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Effective January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements (SFAS 157),
with respect to our financial assets and liabilities. In February 2008, the FASB issued FSP No. FAS 157-2, Effective Date of FASB Statement No. 157, which provided a one year deferral of the effective date of SFAS 157 for non-financial
assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, we adopted the provisions of SFAS 157 for non-financial assets and non-financial liabilities
effective January 1, 2009, and such adoption did not have a material impact on our financial position, results of operations, cash flows or disclosures.

Effective April 1, 2009, we adopted FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2). FSP FAS 115-2 amends the other-than-temporary impairment
(OTTI) guidance in U.S. GAAP to make the guidance more operational and to improve the presentation of other-than-temporary impairments in the financial statements. Prior to FSP FAS 115-2, if OTTI had been determined to exist, we would have
recognized an OTTI charge into earnings in an amount equal to the difference between the investments amortized cost basis and its fair value as of the balance sheet date of the reporting period. Under FSP FAS 115-2, if OTTI has been incurred,
and it is more-likely-than-not that we will not sell the investment security before the recovery of its amortized cost basis, then the OTTI is separated into (a) the amount representing the credit loss and (b) the amount related to all
other factors. The amount of the total OTTI related to the credit loss is recognized in earnings. The amount of the total OTTI related to other factors would be recognized in accumulated other comprehensive income (AOCI). The total OTTI, which would
include both credit and non-credit losses, would be presented gross in our statements of operations and would be reduced by the non-credit loss amount of the total OTTI recognized in AOCI. There was no initial effect of our adoption of FSP FAS 115-2
on April 1, 2009 as we have no securities that have previously been or are currently deemed as other-than-temporarily impaired.

Effective April 1, 2009, we adopted FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS
157-4). FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for an asset or liability have significantly decreased. FSP FAS 157-4 also includes guidance on
identifying circumstances that indicate a transaction is not orderly. The adoption of FSP FAS 157-4 did not have a material impact on our financial position, results of operations, cash flows or disclosures.

Effective April 1, 2009, we adopted FSP FAS 107-1 and Accounting Principles Board (APB) 28-1, Interim Disclosures About Fair Value of Financial
Instruments (FSP FAS 107-1). FSP FAS 107-1 amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments in interim financial statements as well as in
annual financial statements and also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in all interim financial statements. The adoption of FSP FAS 107-1 did not have a material impact on our financial
position, results of operations, cash flows or disclosures.

Effective January 1, 2009, we adopted FSP FAS No. 142-3,
Determination of the Useful Life of Intangible Assets(FSP FAS 142-3), which amends the guidance about estimating the useful lives of recognized intangible assets and requires additional disclosures related to renewing or extending the terms
of recognized intangible assets under SFAS No. 142, Goodwill and Other Intangible Assets.FSP FAS 142-3 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2008. The adoption of FSP FAS 142-3 did not have a material impact on our financial position, results of operations, cash flows or disclosures.

Effective April 1, 2009, we adopted FASB Statement No. 165, Subsequent Events (SFAS 165). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance
sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date
represents the date the financial statements were issued or were available to be issued. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial
statements being presented. Adoption of SFAS 165 did not have a material impact on our financial position, results of operations, cash flows or disclosures.

In June 2009, the FASB issued Statement No. 168, The FASB Accounting Standards CodificationTMand the Hierarchy of Generally Accepted Accounting Principles(SFAS 168). SFAS 168 establishes the FASB Accounting Standards Codification (the Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in
the preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All guidance contained in
the Codification carries an equal level of authority. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification will supersede all existing non-SEC accounting and
reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative. Following SFAS 168, the FASB will not issue new standards in the form of Statements, FASB Staff
Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates. The FASB will not consider Accounting Standards Updates as authoritative in their own right. Accounting Standards Updates will serve only to
update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification. We will update our disclosures to conform to the Codification in our Quarterly Report on Form 10-Q
for the third quarter of 2009.



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|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. The primary objectives of our investment activities, in order of importance, are to preserve
principal, provide liquidity, seek diversification and maximize income without significantly increasing risk. We do not hold or issue financial instruments for trading purposes or have any derivative financial instruments. As of June 30, 2009,
our cash reserves were maintained primarily in U.S Treasury and U.S. Federal Home Loan Bank System obligations, money market investment accounts and bank deposit accounts totaling $62.1 million. Our investment policy requires that all securities
mature in one year or less, with a weighted average maturity of no longer than nine months.

We consider our direct exposure to foreign
exchange rate fluctuations to be minimal. Currently, sales to customers and payments made under our contracts and purchase orders with third-party manufacturers are denominated in U.S. dollars and are not subject to exchange rate fluctuations. As of
June 30, 2009, we have not experienced material gains or losses as a result of transactions denominated in foreign currencies.

We
have operating expenses in foreign currencies, predominantly Canadian dollars but also Pounds Sterling and Euros that are converted to U.S. dollars for financial reporting. If these foreign currencies strengthen against the U.S. dollar, this
increases our reported operating expenses. These currencies weakened against the U.S. dollar for the first six months of 2009 compared to the year ago period. As a result, our operating expenses were approximately $0.7 million lower during the six
months ended June 30, 2009 relative to the six months ended June 30, 2008. In addition, these currencies began strengthening against the U.S. dollar in June 2009. As a result, our operating expenses would have been approximately $0.1
million higher during the six month period ended June 30, 2009 had currencies remained at the June 2009 exchange rates.

We expect to
experience further fluctuations in currency exchange rates in the future that may adversely affect our revenue and operating margins. If foreign currencies strengthen against the U.S. dollar, inventory and expenses denominated in foreign currencies
will become more expensive. Alternatively, if the value of the U.S. dollar increases relative to other currencies, the effective cost of our ICs for customers that use such currencies for their operations could increase, thereby reducing demand for
our products or increasing customer pressure for price reductions that could adversely affect our gross margins. Furthermore, our foreign competitors could benefit from such a currency fluctuation, making it more difficult for us to compete with
them. We do not use derivative financial instruments to hedge against foreign currency exchange fluctuations or other risks in our investment portfolio.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Evaluation of Disclosure Controls and
Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) that are designed to
provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is (i) accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, to allow timely decisions regarding required disclosure and (ii) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. In designing and evaluating these disclosure
controls and procedures, our 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.

Prior to filing this Quarterly Report on Form 10-Q, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls
and procedures. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that as of June 30, 2009, our disclosure controls and procedures were effective to provide reasonable assurance of the achievement
of these objectives.

Changes in Internal Control Over Financial Reporting

There were no significant changes in our internal control over financial reporting identified in connection with the evaluation described in this
Item 4 that occurred during our second quarter of 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

We are not currently a party to
any litigation. However, the semiconductor industry is marked by a significant number of patents, copyrights, trade secrets and trademarks and by frequent litigation based on allegations of infringement or other violation of



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intellectual property rights. In the future we could become involved in various legal proceedings relating to these or other claims arising out of our
ordinary course of business. For additional discussion of certain risks associated with legal proceedings, see the section entitled Risk Factors in Part II, Item 1A of this Quarterly Report.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

The risk factors that could
potentially adversely affect our business are set forth below. These risk factors include any material changes to and supersede the description of our risk factors associated with our business previously set forth in Part II, Item 1A of
our Quarterly Report on Form 10-Q for the quarter ended March 31, 2009.

Risks Related to Our Business and Industry

We have incurred substantial losses in the past, and we may incur additional future losses.

Prior to the quarter ended September 30, 2008, we sustained losses and did not achieve profitability under U.S. GAAP for any fiscal quarter or year.
Although we realized net income of $0.3 million for the six months ended June 30, 2009 and $0.9 million for the year ended December 31, 2008, our accumulated deficit as of June 30, 2009 was $135.3 million. We may incur operating
losses in the future due to a number of factors, including lower revenues and gross margins, increased expenses related to product development and hiring personnel for sales, marketing and research and development, and public company expenses. We
have incurred and will continue to incur substantial additional costs related to being a public company that we did not incur as a private company. If our revenue and gross margins decline or fail to grow, or if we fail to manage our expenses, we
may not sustain profitability in the future. As a result, our business could be harmed, and our stock price could decline.

Economic conditions may
adversely affect our revenue, inventory levels, gross margins and results of operations.

The adverse conditions in the global economy
may result in reduced spending, constrained credit, reluctance to adopt new technology, and loss of consumer and business confidence. Any of these factors could lead to decreased or delayed purchases of products containing our ICs by our customers,
including our retail, service provider, commercial and utility customers. For example, for the quarter ended June 30, 2009, sales in our retail channel, which represented approximately 38% of our total revenue, were 23% below the prior year
quarter. In addition, while sales in the retail channel increased sequentially during the second quarter of 2009, we expect sales in the retail channel to decline in the third quarter of 2009 over the second quarter of 2009.

Powerline communications is an emerging market, and, in the retail channel, the purchase of products including our ICs may involve changes to established
consumer purchasing patterns. As consumers reduce discretionary spending or transition spending to discount retailers and lower cost products, demand for our products in the retail channel could decline. In the service provider channel, if
subscriber growth or demand for new services such as IPTV or Internet-based movies-on-demand slows, end-customer turnover increases, service providers experience payment collection issues, new program rollouts are delayed or cancelled or our
customers attempt to minimize their inventory levels, demand for our products from service providers could decline. Any reduction in demand for our products could adversely affect our revenue, increase our inventory levels, and result in lower
selling prices and gross margins. If the economic downturn is further prolonged, we may have difficulty maintaining and establishing a market for our existing and new products, and our financial performance may suffer. Further, the adverse economic
conditions will make it more difficult for us to forecast customer purchases, and our revenue and financial results could become more volatile, particularly due to our customer concentration, which has been increasing. The lack of visibility is
particularly acute for indirect customers to whom we do not sell directly but who nevertheless account for a material portion of our revenue. These adverse economic conditions may also make it more difficult for our customers to operate and finance
their businesses, which could result in credit losses on our accounts receivable or lead to consolidation among our customers. In addition, changes in foreign currency exchange rates that increase the effective cost of our ICs to customers whose
businesses operate in other currencies could make our ICs less attractive to those customers and require us to reduce selling prices, which could have an adverse effect on our revenue, gross margins and profitability.

We may also experience adverse conditions in our operating expenses and product costs due to price increases by our suppliers, inflationary trends in the
economy, changes in foreign currency exchange rates that reduce the purchasing power of the U.S. dollar, increases in energy costs, and increases in salaries and benefits and general and administrative expenses, as well as other factors. These
conditions may harm our gross margins and profitability if we are unable to offset these costs by, among other things, controlling our expenses or increasing our pricing.

Furthermore, interest rates earned on our cash, cash equivalents and short-term investments have declined significantly. This has reduced the interest income we are earning on our cash, cash equivalents and short-term
investments, which has had, and will continue to have, an adverse effect on our results of operations.



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Our operating results may fluctuate significantly due to a number of factors that could adversely affect our business
and our stock price.

Historically, our operating results have fluctuated and are likely to fluctuate from quarter-to-quarter in the
future. These fluctuations are due to a number of factors, including:



| |  |  | the level of and fluctuations in demand for our ICs by our customers and our associated revenue, as well as fluctuations in the available supply of ICs from our
competitors;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the product mix and related gross margins of our sales;
| | - |  | -------------------------------------------------------



| |  |  | the introduction of new products and product features by us and by our competitors;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | the timing and amount of our research and development expenditures;
| | - |  | -------------------------------------------------------------------



| |  |  | delays or other problems in the introduction of our new products, the emergence of new markets, or the acceptance of our products in those markets;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the availability and pricing of third-party products and services, including commodities used to manufacture, test and assemble our ICs;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the highly cyclical nature of the semiconductor industry; and
| | - |  | -------------------------------------------------------------



| |  |  | general economic conditions, including adverse conditions in the financial and credit markets.
| | - |  | ----------------------------------------------------------------------------------------------

As a result, it is difficult for us to accurately forecast our revenue and results of operations on a quarterly basis, and you should not rely upon
quarter-to-quarter or year-over-year comparisons to predict our future financial performance. These factors could be exacerbated by the current economic downturn and by increased competition. If we fail to meet investors or analysts
expectations or if our operating results are below guidance that we may provide to the market, our stock price could decline, rapidly and without notice.

We are subject to order and shipment uncertainties, and differences in our estimates of customer demand and product mix from actual results could negatively impact our inventory levels, sales and operating results.

Our revenue is generated on the basis of purchase orders with our customers rather than long-term purchase commitments. We historically have not
experienced significant backlog of customer orders for our ICs. In addition, our customers can cancel purchase orders or defer the shipments of our products under certain circumstances. Our products are manufactured according to our estimates of
customer demand, which requires us to make separate demand forecast assumptions for every customer, each of which may introduce significant variability into our aggregate estimate. We have limited visibility into the future customer demand and
product mix that our customers will require, including the extent to which our customers requirements may be affected by the current adverse conditions in the global economy or by new products introduced by us or our competitors. In the past,
we have been subject to significant variations in orders from our customers, with orders, including large orders, followed by periods of limited demand from such customers. Our visibility into customer demand is particularly limited for new markets
with respect to which we have limited or no experience and for customers to whom we do not sell to directly. Some of these indirect customers account for a material portion of our revenue. Such limited visibility could adversely affect our revenue
forecasts and gross margins, particularly in the event a large customer, a group of customers serving the same indirect customer, or a large number of smaller customers were to delay or cancel orders or shift their future business to one of our
competitors. We may also be subject to greater revenue and gross margin volatility due to our customer concentration, which has been increasing. Moreover, many of our customers have difficulty accurately forecasting their own product requirements
and customer demand, as well as difficulty accurately estimating the timing of their new product and service rollouts and those of their customers (which ultimately affects their demand for our ICs). The limited visibility experienced by us and our
customers is exacerbated during product transitions, such as our current transition from our INT6300 IC to our INT6400 IC, where we must assess demand both for the new product being introduced and the existing product being replaced. Historically,
because of the limited visibility experienced by us and our customers, our actual results have been different from our forecasts of customer demand, and some of these differences have been sudden and material, leading to excess inventory or product
shortages and revenue and gross margin results below those forecast by us. Given our relatively fixed operating costs, adjustments to our expenditures to account for lower revenue can be difficult to implement and take time, resulting in additional
operating losses. Such differences in actual results from forecasts may occur in the future, and the adverse impact of these differences could grow if we are successful in selling a much larger number of ICs to some customers. In addition, the rapid
progress of innovation and competition in our industry, with a corresponding adverse effect on revenues and operating results, could cause us to lose business and render significant portions of our inventory obsolete. Excess or obsolete inventory
levels could result in lower selling prices, unexpected expenses or increases in our reserves that would adversely affect our business, operating results and financial condition. Conversely, if we were to underestimate customer demand or if
sufficient manufacturing capacity were unavailable, we would forego revenue opportunities, potentially lose market share and damage our customer relationships and our reputation in the industry.



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In addition, in light of the current adverse economic conditions, we believe there will be a higher risk
of delays and cancellations in customer orders, which may be followed by unexpected increases in demand as customers subsequently replenish inventory levels. In the event of material order delays and cancellations, we would experience significantly
greater volatility in our revenue and earnings or losses, as applicable, and this volatility could be more pronounced than expected given our customer concentration. Any significant future cancellations or deferrals of product orders or the return
of previously sold products due to manufacturing defects could materially and adversely impact our business, revenue, inventory levels, gross margins, and operating results on a quarterly or annual basis, as well as increase our product obsolescence
and restrict our ability to fund our operations. If these cancellations or deferrals are followed by unexpected increases in demand for our products, we may be unable to meet this demand, which could cause us to lose business to our competitors, or
we may be required to expend considerable resources in an effort to meet this demand, which could have a material adverse effect on our business regardless of whether we are successful in doing so.

In the past, we have experienced periods of rapid growth, and if we fail to sustain our growth or fail to effectively manage future growth, if any, our business will
suffer.

Our revenue grew to $17.5 million for the second quarter of 2009 from $15.5 million for the first quarter of 2009. In
addition, our operating expenses increased to $8.5 million for the second quarter of 2009 from $8.0 million for the first quarter of 2009. Historically, we have experienced periods of significant growth and expansion. Such historic growth has
placed, and any future growth will continue to place, a significant strain on our management, personnel, systems and financial resources. We anticipate that we will continue to expand our workforce and increase our operating expenses through
internal growth as well as through potential acquisitions. If we expand our business too rapidly in anticipation of increased demand for our products and this demand does not materialize at the rate we expect, our inventory levels could be
negatively impacted, the rate of our increased operating expenses could exceed our revenue growth, and we could incur operating losses. If we are unable to manage future growth, if any, effectively, we may not be able to take advantage of market
opportunities, develop new or enhanced products, satisfy customer requirements, execute our business plan, or respond to competitive pressures, and our business could be harmed.

We face significant and increasing competition and may be unsuccessful against current and future competitors.

The markets for ICs generally, and ICs for powerline communications in particular, are intensely competitive. We expect competition to increase and intensify as more and larger IC manufacturers enter our markets.
Increased competition could result in price pressure, reduced profitability and loss of market share, any of which could materially adversely affect our business, revenue and operating results.

As several technologies enable communications for high-bandwidth home networking applications, we compete with suppliers of ICs based on powerline, other
wireline and wireless technologies. Our primary powerline competitors for HomePlug 1.0 ICs include Arkados Group Inc., Conexant Systems, Inc., and Maxim Integrated Products Inc. In addition, Gigle Semiconductor released its first HomePlug AV-based
IC during the second quarter of 2009, using a design with a proprietary second frequency band that is designed to deliver a higher PHY rate than HomePlug AV. We also compete with Design of Systems on Silicon (DS2) and Panasonic, which build
ICs based on incompatible non-HomePlug powerline communications technologies. Because they use different technologies but share the same electrical wire, powerline communications solutions based on different standards do not interoperate and
will cause interference that will prevent the systems from coexisting effectively. We also expect to have additional HomePlug powerline competition this year from several new competitors, including CopperGate Communications, Ltd., which we believe
will introduce a HomePlug AV-based IC, and STMicroelectronics, which in October 2008 announced an agreement with Arkados Group, Inc. to develop and manufacture a HomePlug AV-based system-on-a-chip, which is expected to interoperate with HomePlug 1.0
devices. In addition, we expect to have increased powerline competition this year from Spidcom Technologies S.A., which recently announced a HomePlug AV-based system-on-a-chip, and Xeline Co., Ltd. We compete or expect to compete with most of these
companies in our digital home, commercial and utility markets and in the use of powerline communications technology over coaxial cable and telephone wiring as well as powerlines. We expect the products from our HomePlug AV competitors will include
features not offered by us. We also face competition from a large number of companies that offer other wireline and wireless communications ICs based on various technologies, including Atheros Communication Inc., Broadcom Corporation, CopperGate
Communications, Ltd., Entropic Communications, Inc., Intel Corporation, Marvell Technology Group Ltd., Realtek Semiconductor Corp. and Texas Instruments Incorporated. Any of these companies as well as others could also decide to offer powerline
communications ICs in the future. We also face competition from companies that provide enabling technology for applications related to the management of electrical distribution systems that can be monitored or managed remotely, known as smart grid,
and the use of powerline technology to provide Internet access to homes over neighborhood powerlines, known as broadband over powerline. Our primary competitor for sales of broadband ICs for utility applications is DS2. We also face competition
from systems providers and manufacturers of narrow band ICs who have developed proprietary utility communications technology including fixed wireless over private and public networks, in-home wireless, powerline, other wireline and hybrid networks
that utilize wireless, powerline and/or other wireline technologies. These competitors include Cellnet Technology, Inc., Echelon Corporation, Ember Corporation, Esco Corporation, Freescale Semiconductor, Maxim Integrated Products, Inc. Sigma
Designs, Texas Instruments and Yitran. We expect to face competition from new and emerging companies that may enter our existing or future markets. We may also face increased competition in the event of industry consolidation from companies that
acquire, or enter into licensing arrangements or strategic alliances with, our competitors. These companies may have financial, sales, marketing, manufacturing, distribution, technical and other resources that exceed our own. Because substantial
time, expense and technology are required to design, manufacture and bring to market a new or modified IC, our ability to compete with the products or product features offered by our competitors may be delayed or limited, and we may be unable to do
so.



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Many of our competitors and potential competitors have longer operating histories, greater resources,
greater name recognition, more extensive product offerings, a larger customer base, longer relationships with customers and distributors and lower wafer and supply chain costs than we do. As a result, they may be able to respond more quickly to
customer requirements, devote greater resources to the development, promotion and sales of their products and influence industry standards and market acceptance of their products better than we can. Our competitors may also own or have better access
to complementary technologies that can be integrated into system-on-a-chip devices that offer lower cost implementation of powerline communications. These competitors may also be able to adapt more quickly to new or emerging technologies or
standards and may be able to deliver products with performance comparable or superior to that of our products at a lower cost. In addition, regardless of whether our competitors products offer any performance or cost benefits, we may face
increased competitive pressures to the extent our customers decide to second source the ICs used in their products.

If our customers do not design our
products into their product offerings, or if our customers product offerings are delayed or are not commercially successful, our revenue and operating results will be adversely affected.

Our powerline communications products are not sold directly to end-users but are used as components in the products developed and sold by others. We sell
our products directly or indirectly through resellers to OEMs and service providers, which include our ICs in their products, and to ODMs, which include our ICs in the products they supply to OEMs and service providers. Our products are generally
incorporated into our customers products in the early stages of their development after an evaluation of our and our competitors products. As a result, we rely on OEMs and service providers to specify our products into the products they
sell, which we refer to as a design win. Without these design wins, we would not be able to sell our products and our business would be materially and adversely affected. We often incur significant expenditures on the development of a
new product without any assurance that an OEM or service provider will specify our product into its products. If we do not complete our design-in activities before a customers design window closes, we will lose the opportunity, which could
eliminate or substantially delay revenues from certain target customers and markets and adversely affect our future sales and revenues, as well as harm our customer relationships. Once an OEM or service provider specifies a competitors product
into its product offering, it becomes significantly more difficult for us to sell our products to that customer because changing suppliers involves significant cost, time, effort and risk for the customer. This is especially true for applications
where the IC is embedded into a personal computer or consumer electronics product. Furthermore, even if an OEM designs one of our products into its product offering, we cannot be assured that its product will be commercially successful, that we will
receive any revenue from that OEM, that the OEM will not second source the ICs using a competitors product, or that a successor design will include one of our products. The timing and amount of our revenue depends on the ability of the OEMs
who use our ICs to develop, market, produce and ship products incorporating our technology, a process over which we have no control. If we are unable to accurately forecast the demand from these OEMs, our product mix, margins and inventory levels
could be adversely affected. In addition, any decline in the sales of OEM products that use our ICs would decrease our revenue. If our customers experience delays in completing one of their products, if they are unsuccessful in commercializing a
product or if they experience reductions or delays in orders from their customers, they would likely postpone or terminate their purchase of our ICs for that product, which would cause our sales to decrease. Moreover, because our IC solution is only
one component included in the products sold by our customers, our customers must obtain the other components needed to complete their products from third parties. Some of these other components may have long lead times or be changed or discontinued,
which could delay shipment or require redesign of the affected customer product, any of which would delay or reduce our revenue.

If we fail to develop
and introduce new and enhanced products that achieve market acceptance in a timely and cost-effective manner, our operating results and competitive position will be harmed.

Our markets are characterized by rapidly changing technology, evolving and competing industry standards, changing customer needs and intense competition.
Our future success will depend on our ability to anticipate and adapt to changes in technology, standards, customer demand and competing products in a timely and cost-effective manner, particularly by developing and introducing new products and
product enhancements that offer increased performance and a lower total solution cost to the customer. Our product development efforts, including those for our HomePlug AV-based ICs, are time-consuming and require substantial research and
development expense. Our research and development expenses were approximately $4.0 and $7.6 million in the three and six months ended June 30, 2009. If we have not made, or in the future do not make, adequate investments in research and
development, sales and marketing and customer support, or if we do not have sufficient resources to do so, we may be unable to develop and introduce new or enhanced products, or identify and make technological advances, as necessary to be
competitive and grow our business. In the future, it may be necessary for us to acquire complementary technologies, licenses and designs to create new and enhanced products and to be able to integrate our IC designs or technology into
system-on-a-chip devices. There can be no assurance that we will be successful in developing or acquiring new products or product enhancements, that our new and/or enhanced products will be introduced before our competitors new releases, that
our products will meet market requirements, or that we will achieve an acceptable return on our research and development investment.



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The development of our products is highly complex. Due to the relatively small size of our hardware and
software design teams, our research and development efforts may lag behind those of our competitors, some of whom may have substantially greater financial and technical resources. In addition, we have in the past and may in the future experience
unexpected delays in developing and introducing new products and product enhancements. Such delays divert substantial engineering resources, which may increase our costs, impair our ability to develop new products and enhancements, and adversely
impact the commercial acceptance of such new products and product enhancements, which may negatively affect the revenue generated from sales of such products. These delays may also shift the associated product development expenses from one reporting
period into another and, as a result, create unexpected differences in anticipated operating expenses. The risk of these delays and expense shifts may be exacerbated by the use of independent contractors and vendors who fail to deliver on time. If
we fail to meet investors or analysts expectations regarding operating expenses, or our operating expenses exceed any guidance we may provide to the market, our stock price could be negatively impacted. In addition, we may expend
significant amounts on research and development programs for new HomePlug AV-based ICs or other future products that may not achieve market acceptance. We began shipping the first, second and third generations of our newest products, our HomePlug
AV-based ICs, in the second quarter of 2006, the second quarter of 2007 and the third quarter of 2008, respectively. If our HomePlug AV-based ICs or our other new and enhanced products do not achieve market acceptance or are not adopted at the rate
we anticipate, we may not earn an acceptable return on our research and development or technology acquisition expenditures, and we may be unable to maintain or increase our revenue or achieve our margin forecasts, any of which could materially
adversely affect our business and result in a decline in our stock price.

The average selling price of our products will decrease over their product
life cycle. If the selling price reductions are greater than we expect, or if we are unable to effectively offset average selling price erosion, our results of operations may be adversely affected.

Historically, and consistent with trends in the IC industry generally, the average selling price of our products has decreased over their product life
cycle. We believe that we will be required to continue to reduce the average unit prices of our powerline communications products due to a number of factors, including competitive pricing pressures and product bundling, new product introductions and
the future introduction of system-on-a-chip devices that include powerline communications and other technologies. We expect to face increased pricing pressure on our HomePlug AV ICs as new HomePlug AV competitors enter the market this year.
Moreover, if the cost of our ICs increases the retail cost of our customers product to an unacceptable level, the customer will not add a powerline communications solution to the product, regardless of whether our ICs are priced competitively.
In products where powerline communications is the second or third communications technology (for example, after Ethernet and wireless capabilities), we face particularly strong pricing pressure with respect to our products. A reduction in the
average selling price to one of our customers could force us to lower our average selling price to other customers, both as a result of competitive factors and as a result of most favored nation pricing commitments to certain customers. If we are
unable to offset any reductions in our average selling prices with increased sales volumes or reduced production costs or if we are unable to manage our inventory to reduce the impact of such price declines, our results of operations would be
harmed.

Changes to the mix of products we sell may have a significant impact on our financial results.

As we sell several ICs with differing functionality, prices and costs, the mix and types of our ICs sold to customers affect the average selling price
and average cost of our products and can substantially impact our revenue and gross margins. Our gross margins may vary from quarter-to-quarter for a number of reasons, including market conditions, customer demand, changes in our customer base,
product mix and our sales volume, average selling price, and cost for each product sold. To the extent that our sales mix results in a decline in our gross margins, our ability to recover our fixed costs and investments associated with a particular
product and our business, results of operations and financial condition could be materially adversely affected.

Changes to current or future laws and
regulations, or the imposition of new laws and regulations, by federal, state, local and foreign governments and government agencies in the markets where the products using our ICs are sold could restrict or eliminate our ability to sell our
products or otherwise harm our business.

Devices such as our customers products containing our ICs for powerline communications
are subject to various U.S. and foreign governmental regulations, including, for example, regulations regarding transmission power, permissible frequencies of operation, electromagnetic interference and electrical wiring. These regulations and the
interpretation and enforcement of the regulations may vary from country-to-country and are subject to change. For example, in the U.S., rules governing power limits and measuring techniques for broadband over powerline devices have been adopted by
the Federal Communications Commission (FCC). Access broadband over powerline rules govern systems installed and operated by an electric utility on the supply side of the customers premises. In-house broadband over
powerline rules govern that portion of a broadband over powerline system that operates on customer premise lines not owned by the utility. In April 2008, after the access broadband over powerline rules were appealed to the U.S. Court of Appeals for
the District of Columbia, the Court remanded the rules to the FCC. The Court ordered the FCC, in part, to provide justification for its choice of extrapolation factor for access broadband over powerline, or in the alternative, to adopt another
factor. If, in response to this ruling or otherwise, the FCC were to amend the rules applicable to products using our ICs for smart grid and access broadband over powerline applications, for example by effectively reducing the allowable transmit
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our ICs might be unable to meet customer requirements or to be competitive against alternative solutions and our business could be harmed as a result. If the
application of the ruling and any resulting rule changes were to be extended to products using our ICs for in-home powerline communications, the impact would be more severe and we could experience a material adverse effect on our business, results
of operations and financial condition.

In most countries outside of the U.S., regulations governing powerline communications devices are
generally based upon standards adopted by the International Electrotechnical Commission, International Special Committee on Radio Interference (IEC/CISPR). Based on information provided in part by our customers, we believe that the majority of the
ICs we sell are ultimately used in devices that are sold in countries that base their regulations on standards adopted by IEC/CISPR. The IEC/CISPR rules and test procedures on powerline communications are currently in a state of flux. A CISPR
project to address the subject of powerline communications standards for both access and in-house broadband over powerline is expected to take several years to complete, and there is no guarantee that favorable IEC/CISPR standards will eventually be
adopted. Powerline communications regulations are based upon specific country requirements in the absence of adoption of IEC/CISPR or other international standards. In some countries, including Japan, the regulations limit use of powerline
communications to in-home devices, thereby prohibiting use of broadband over the power grid, and require in-home transmission power levels that are below those permitted in the U.S. Other countries may require that certain frequency bands, such as
those used for search and rescue, be filtered out of the spectrum being used for powerline communications, which reduces throughput.

A
change, including a rapid change, in the existing regulations, the adoption of new regulations or a change in the interpretation or testing methods used to demonstrate compliance with the regulations could prevent products using our ICs from being
used in the applicable country, could reduce the performance of such products below customer requirements, or could require us to redesign our ICs or require our customers to redesign their products to comply with the new regulatory requirements.
Such actions could also require the use of products already sold into the marketplace to be terminated. Although some of our HomePlug-based ICs have limited capabilities to filter additional frequencies to meet specific country requirements, our
other ICs do not have this flexibility and even those that do may not be able to meet future regulatory requirements or may perform below customer requirements if substantial portions of the available spectrum are required to be filtered. Any
regulatory reduction in the available frequencies or the available transmit power of our ICs will reduce the performance of our ICs and, depending on the amount of the reduction and the intended use of the IC, could cause the IC to fail to meet
customer requirements or cause it to be less competitive with other communications solutions. If we were required to redesign an IC to meet new regulatory filtering, transmit power or other requirements, we would be required to incur substantial
time and expense and there is no assurance that we would be able to make changes to our IC, or introduce a new IC, that would result in a product that would meet regulatory or customer requirements by the time necessary for compliance, if at all.

The products containing our ICs may also be subject to regulations specifying the maximum amount of electric current that the product may
use when in operation, in standby mode or not in use. These provisions, which are intended to promote power conservation, are sometimes referred to as code of conduct regulations. Governmental interest in promulgating these regulations
appears to be increasing, particularly in Europe, which is our largest geographic market. If our ICs do not allow a product manufacturer to meet applicable code of conduct regulations for a product, the manufacturer will not use our ICs in the
product. If our competitors offer ICs with lower power consumption, this may give them a competitive advantage. If we were required to redesign an IC to meet new code of conduct or other power consumption requirements, we would be required to incur
substantial time and expense and there is no assurance that we would be able to make changes to our IC, or introduce a new IC, that would result in a product that would meet regulatory or customer requirements by the time necessary for compliance,
if at all. Even if our ICs are competitive in terms of power consumption, the time required for a manufacturer to comply with new code of conduct requirements applicable to the manufacturers product could delay deployment of the product and,
accordingly, the manufacturers purchase of our ICs.

We depend upon a small number of customers for a significant portion of our revenue, and the
loss of, or significant delay, reduction, or cancellation in sales to, any one of these customers could adversely affect our operations and financial condition.

We have derived a significant portion of our revenue from a small number of OEM, ODM and distributor customers, and our customer concentration has increased since 2008. We expect such customer concentration to
continue for the foreseeable future. In the three months ended June 30, 2009, devolo AG, an OEM; Free, a service provider; and Chenmtech Co Ltd, a distributor, accounted for approximately 24%, 21%, and 14% of total revenue, respectively. In
general, we are not able to track the amount of our product sold by our OEM, ODM and distributor customers to their ultimate end-use customers. We are also less able to accurately forecast our revenues for such indirect customers, and their revenues
are subject to greater uncertainty and therefore greater volatility. In addition, we are also exposed to certain customer concentration risk for our indirect customers. For example, we believe that several of our ODM customers produce products using
our ICs for EchoStar. For the three months ended June 30, 2009 and 2008, we estimate that EchoStars indirect purchases of our HomePlug 1.0 ICs through its various ODMs would have accounted for approximately 8% and 13% of our aggregate
revenue, respectively. Our aggregate customer concentration may increase in future periods if we are successful in adding new customers who buy our ICs in substantially higher volumes than our existing customers. In addition, the percentage of



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revenue accounted for by one or more of our customers could increase if our total revenue were to decline. The loss of any large customer, a significant
reduction in sales we make to them, any delay or cancellation of orders they have made with us, any failure to pay for the products we have shipped to them, any return of products previously sold to them due to manufacturing defects or any shift of
their future business to one of our competitors could materially and adversely affect our results of operations and financial condition. Increased customer concentration may also adversely impact our gross margins in the event of large purchases of
our lower margin products. We may not be able to maintain, increase or accurately forecast sales of our products to these customers for a number of reasons, including, but not limited to, the following:



| |  |  | our customers typically purchase from us based on a purchase order rather than an agreement that requires them to purchase minimum quantities of our products;
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| |  |  | our customers can stop incorporating our products into their own products with limited notice to us and with little or no penalty;
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| |  |  | our customers and our customers customers may be unable to forecast the demand for their products;
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| |  |  | our customers and our customers customers may experience delays in rolling out new products and services that use our ICs;
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| |  |  | our customers may use our competitors products instead of ours;
| | - |  | ----------------------------------------------------------------



| |  |  | our customers may be unsuccessful in selling the products that use our ICs;
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| |  |  | we may be unsuccessful in providing the ICs or customer enablement support that our customers require to meet their volume targets; or
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may be unable to develop new products or product enhancements that are desirable to our customers at competitive prices and on the schedule they require.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

HomePlug powerline communications solutions for our digital home, utility and commercial markets may not gain widespread acceptance,
which could materially adversely affect our business.

During the three months ended June 30, 2009, approximately 99% of our
revenue was derived from the sale of HomePlug-based ICs. Our HomePlug-based ICs are primarily used in retail and service provider-specified applications for home connectivity, which is the sharing and moving of content among home gateways, personal
computers and other consumer electronics products in the home. The home connectivity market is currently dominated by wired Ethernet and wireless (Wi-Fi) local area network (LAN) technologies. The powerline communications and networking market is
relatively new and lacks broad consumer market awareness and acceptance. Powerline communications generally, and the HomePlug standards in particular, face competition from other wireline communications technologies as well as Ethernet and wireless
technologies. Among the competing technologies, including coaxial cable, Ethernet, phone line, wireless and non-HomePlug powerline, many are actively supported by larger companies and by various global and regional industry and standards development
organization (SDO) alliances, and some offer performance and features that HomePlug powerline communications products cannot provide. Some of these competing communications technologies have a longer history of availability and stronger industry
alliance support and have become integrated within products offered by service providers, electric utilities and technology leaders in the personal computer and consumer electronics markets, and therefore have gained greater market acceptance and
have the benefit of higher economies of scale associated with larger product volumes. Leading semiconductor companies continue to invest heavily in promoting and improving wireless technologies, particularly Wi-Fi LAN. To help advance the
establishment of the HomePlug standards and accelerate the growth and adoption of our HomePlug-based products, we endeavor to develop formal and informal relationships with technology leaders in the personal computer, consumer electronics, service
provider and utility markets. If we are unable to establish and maintain these relationships and these technology leaders fail to promote the advantages of the HomePlug standards and our HomePlug-based ICs, or if competing technologies or standards
such as wireless, coaxial cable, Ethernet, or non-HomePlug powerline provide better performance at a more competitive price than we can offer, our solutions could fail to achieve widespread market adoption. If HomePlug powerline communications
technology generally, and our HomePlug-based ICs specifically, do not achieve widespread market acceptance in the digital home, utility or commercial markets, there may be less demand or no demand for some of our products, causing our business to
suffer and our stock price to decline.

Powerline technology is subject to significant technical challenges that may make it difficult for us to meet
future market requirements.

The use of existing electrical wiring as a method for reliable communications is technically challenging.
Powerlines are subject to interference, or noise, and the amount and type of noise varies significantly. For example, simple household products, such as cell phone chargers, power supplies, halogen lights, compact florescent lights and hair dryers,
can all create noise that can have a serious adverse effect on the quality of powerline communications. The operation of other large electrical devices such as refrigerators and air conditioning units can also have an adverse effect. Powerline
communications are also subject to signal reduction, or attenuation, based on the length of the wiring paths and the presence of other devices including arc fault circuit interrupters, or AFCIs,



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residual current devices, or RCDs, earth leakage circuit breakers, or ELCBs, and surge protectors. The U.S. National Electrical Code requires AFCIs for newly
installed bedroom outlets and, in the future, may require AFCIs for all newly installed outlets. AFCIs are also being considered or required by other jurisdictions. RCDs and ELCBs are also required by many countries. AFCIs, RCDs and ELCBs from
certain manufacturers may cause attenuation and/or impedance modulation sufficient to block or substantially impair powerline communications. In addition, attenuation may be caused by surge protectors which block the communications signal from a
powerline adapter or other product that is plugged into the surge protector. The instructions to HomePlug-enabled products generally instruct customers to plug the devices into surge protectors designed to pass the HomePlug signal or directly into
electrical outlets (as most HomePlug-based adapters and other product designs include surge protection circuitry). However, end users may experience unacceptable results if they fail to follow these instructions. Future products not yet identified
by us or released into the marketplace may also have adverse effects on powerline communications due to noise, attenuation or other causes. The degree to which household products and devices such as AFCIs, RCDs, ELCBs and surge protectors adversely
affect the performance of our products, and the relative competitive impact of any reduction in performance, depends on a large number of factors, including the number and combination of devices creating noise or attenuation in a home, the timing,
spectrum and extent of the noise and the throughput required for the specific powerline connectivity application. Some of these factors and the resulting impact on our ability to meet customer requirements may vary be geography.

Although the HomePlug technologies provide solutions to many of these challenges, powerline remains a more difficult medium than competing wireline
technologies such as Ethernet and coaxial cable LANs. As a result, powerline communications may be unable to provide the reliable data or video transmission capacity, or throughput, required by some customers and may be an ineffective or less
competitive connectivity solution in some environments. These technical challenges may also make it more difficult to achieve further performance improvements in powerline communications compared to other wireline communications technologies, which
may put powerline communications technologies at a disadvantage as customer bandwidth requirements and interest in anywire communications technologies continue to grow. Furthermore, unlike other communications such as Wi-Fi and some coaxial cable
LANs, which offer multiple channels, powerline technology to date has generally been limited to a single channel, making it difficult to increase throughput by adding additional channels. The lack of multiple channels presents challenges in multiple
dwelling unit (MDU) environments, as the powerline signal from one apartment may bleed into an adjacent apartment. Although security routines may prevent any misuse of content between the units, the total transmission capacity, or bandwidth, must be
shared on some basis. As the use of powerline communications increases, the potential need for sharing will become greater. The technical solutions for this sharing have not been fully resolved. Even if the technical requirements for sharing are
developed, the shared bandwidth available to each unit could reduce performance to unacceptable levels. The lack of multiple channels also creates challenges when incompatible powerline technologies are used in the same home or in MDUs or other
environments where the respective incompatible products can interfere with each other. When this occurs, all of the incompatible powerline communications products may be unable to provide a satisfactory consumer experience.

We may be required to apply significant human and financial resources to evaluate and address these technical challenges. These efforts and expenditures
could be substantial with no certainty that we would be able to develop a solution. If we are unsuccessful, our ability to maintain or attract new customers may be adversely affected and our ability to maintain or grow our business may be harmed.
Also, concerns about the uncertain and adverse effects of incompatible powerline communications products may persuade service providers, electric utilities and personal computer and consumer electronics manufacturers not to adopt powerline
communications or embed powerline communications ICs into their products. HomePlug-based ICs do not coexist effectively with powerline communications ICs based on other standards, such as those made by DS2 and Panasonic. If a major service provider,
electric utility or other major customer were to adopt an existing or future powerline or anywire communications technology that cannot coexist with our HomePlug-based ICs, we could face difficulties selling our ICs in the applicable markets.

Our business is highly dependent on the expansion of new and rapidly evolving segments of the consumer electronics and service provider markets and our
ability to have our ICs embedded into products in these markets. Our business could be harmed if this expansion does not continue or if our products fail to gain market acceptance in embedded applications.

We derive a substantial portion of our revenue from the sale of our ICs for use in adapters that enable communication across existing powerlines in the
home. We are working to increase the portion of our revenue that is derived from selling ICs that are embedded into consumer electronics and service provider products, such as broadband gateways, internet protocol and other video set-top boxes,
digital media adapters (DMAs), and televisions, among others. Our ability to sustain and increase revenue is in large part dependent on the continued growth of these new and rapidly evolving markets and on our ability to have our ICs embedded into
products in these markets. Many factors could slow or prevent the expansion of these markets, including general economic conditions, other competing technologies and products, uncertainty about industry standards, technology challenges associated
with powerline technology, and insufficient interest in new technology innovations. In addition, even if these markets expand, manufacturers of products in these markets may not choose to embed our ICs in their own products, but rather may adopt
communications solutions from our competitors, develop their own, or delay embedding pending the release of new communications products or standards. Moreover, market acceptance of the products of manufacturers that do embed our ICs may not occur at
all or as quickly as expected. Furthermore, to the extent that there are any problems or defects with embedded ICs, we may be required to incur substantial costs to re-work, repair or replace the entire product into which the ICs are embedded. In
any such case, our business could be materially and adversely affected.



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As we rely on a limited number of third parties to manufacture, assemble and test our IC products and to supply
required parts and materials, we are exposed to significant supplier risks.

As a fabless semiconductor company, we do not maintain our
own manufacturing, assembly or testing facilities. Instead, we rely on a limited number of third-party vendors to manufacture, assemble and test the products we design. In recent years, we have historically used a single wafer foundry to manufacture
our HomePlug-based wafers. However, during the second half of 2008, we began using a second wafer foundry to manufacture the wafers for two of our HomePlug-based ICs. We also use this second wafer foundry to manufacture wafers for our command and
control ICs. However, we still use only one foundry for each of our ICs except our HomePlug 1.0 with Turbo IC. We also use only a limited number of principal subcontractors for the assembly and testing of our ICs. In addition, our third-party
vendors that test our products often utilize third-party test equipment. As we rely on these vendors and their use of third-party test equipment, we have less control over quality assurance, delivery schedules and costs, which could result in
product shortages and increased costs. The production of our ICs for powerline communications requires a wide range of parts and materials, which our foundry suppliers currently procure from domestic and foreign sources. Some components have a
long-lead time, requiring us to place orders months in advance of our anticipated demand, which increases our risk that forecasts will vary substantially from actual demand and which could lead to excess inventory or loss of sales, particularly
during product transitions. In addition, in some cases, we rely on a sole source for certain components, including the third-party analog front-end devices used in some of our HomePlug AV-based products. If any of our third-party vendors ceases to
do business, fails to provide us in a timely manner with the products and services we request, fails to meet the pricing or performance standards we require or terminates its relationship with us, we may be unable to obtain replacement products or
services to fill customer orders in a timely and cost-effective manner, if at all, and our relationships with our customers and our sales could suffer.

As we do not have long-term supply contracts with our third-party vendors, they are not obligated to provide the products and services we request for any specified period, in any specific quantities or at any specific
price, except as provided in each purchase order we submit. As a result, our third-party vendors have the right to increase the prices we pay for our products and services or to allocate their resources to other customers projects and reduce
efforts for our products on short notice, exposing us to risks of late deliveries, poor quality and inadequate supply. If our third-party vendors enter into long-term agreements with other customers, these vendors may decrease their services to us
on a more permanent scale. Our supplier risk is also significant due to the general cyclicality of the semiconductor industry, the adverse effect of the current economic downturn on the financial stability of our suppliers, decisions during recent
years by some large technology companies to outsource more of their IC production to third party foundries and the substantial time and capital investment required to construct new foundry facilities to meet increased demand. If demand for ICs
increases or available capacity declines, our suppliers could allocate resources to larger customers and we could face shortages, longer delivery cycles and higher prices from our suppliers. This risk could increase if, and when, general economic
conditions improve since many semiconductor companies have reduced their inventory levels and may need to increase orders in the event of unanticipated demand from their customers. In order to secure specified pricing or sufficient supply to meet
our customers demands, we may enter into various arrangements with vendors that could be costly and harm our operating results, including, for example, entering into agreements that commit us to purchase minimum quantities of components over
extended periods.

Regardless of the reason, if we are unable to secure sufficient supply, it may be difficult for us to develop
relationships with other third-party vendors who are able to satisfy our production and supply requirements, and it can take several months to qualify a new service provider. Changes in providers may also require the affected ICs to go through
re-qualification testing and customer approvals, adding further delay and cost and the potential for our customers to cancel orders or fail to place new orders. In addition, because many of the design libraries used in the design of an IC may be
specific to a particular wafer foundry or foundry process, the change from one foundry or foundry vendor to another may require us to redesign all or part of the affected IC, which could take approximately 6 to 15 months, and to incur the costs of
new IC masks, which can be substantial, particularly for lower process geometries. Furthermore, if we are unable to obtain the parts and materials necessary for our operations in a timely manner and on favorable terms, or, if we are unable to pass
on to our customers any increased costs charged by our suppliers, our business and financial results may be adversely affected.

Furthermore, not all of our vendors provide us with indemnification regarding our product purchases. Other vendors impose limits on their indemnification obligations. If such products infringe the intellectual property rights of a third
party either alone or in combination, or if we are found to owe license fees or royalties relating to these products, our margins and operating results would be severely negatively impacted.

The development of new industry standards by various global and regional industry alliances and SDOs may cause our products to become uncompetitive or obsolete and
force us to incur substantial development costs and time to bring new products to market.



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Although most of the transceiver ICs we sell are based upon the HomePlug 1.0 and HomePlug AV
specifications adopted by the HomePlug Powerline Alliance, the HomePlug Powerline Alliance could adopt changes to these specifications or adopt new or additional specifications that would require us to make changes to our ICs or to create new ICs in
order to comply with the new specifications. More than 75 companies are members of the HomePlug Powerline Alliance, including some of our competitors that have developed or may in the future develop technology competitive to ours that could be
included in future HomePlug specifications. In addition, other industry associations formed to promote powerline communications, such as the Universal Powerline Association (UPA), the HD-PLC Alliance and the Consumer Electronics Powerline
Communication Alliance (CEPCA), have already established their own specifications for powerline communications or the coexistence among powerline communications products, and these specifications conflict with the specifications adopted by the
HomePlug Powerline Alliance. Other groups that have more international recognition as independent SDOs, such as the Institute of Electrical and Electronics Engineers Communications Society (IEEE) and the International Telecommunication Union (ITU),
as well as regional SDOs with strong local support, are working on the adoption of powerline and anywire wireline communications standards that may be different from and incompatible with the specifications adopted by the HomePlug Powerline Alliance
and used by our products. For example, in July 2009, the IEEE 1901 standards work group on powerline communications approved the in-home and access 1901 draft powerline standards, which include technology contributions from HomePlug and Panasonic,
among others. The draft standards provide for the flexibility to support either the HomePlug AV or the Panasonic physical layer. Under this approach, future ICs based on the draft standards would use either one or the other physical layers and would
interoperate with other future products using the same physical layer as well as with existing products based on the same physical layer. Future products using different physical layers would coexist but not interoperate. Although we believe that
our HomePlug AV ICs would interoperate with the HomePlug physical layer version of the 1901 draft standard, we are unable to predict whether or when the final specification will be confirmed by the IEEE or, if it is, the degree to which the final
specification, or subsequent changes to the specification, will require us to make changes to our existing ICs or to IC designs we have in progress. With respect to the anywire communications standard being developed by the ITU, in December 2008,
the ITU G.hn work group moved most of the physical layer components for the proposed standard to what is called the consent stage, which will be followed by efforts at comment resolution as well as work on the media access control layer.
We do not believe that our HomePlug AV ICs would interoperate or coexist with the G.hn physical layer that moved to consent. We are unable to predict whether or when a G.hn standard will be ratified by the ITU or, if it is, the degree to which the
final specification, or subsequent changes to the specification, may require us to make changes to our existing ICs or to IC designs we have in progress in order to have those ICs or IC designs qualify as G.hn compliant.

Standards organizations sometimes take years to reach agreement on new final specifications and may be unable to do so, even when a baseline technology
for a proposed specification is selected early in the adoption process. The adoption or expected adoption of new or different powerline or anywire communications standards, including by the HomePlug Powerline Alliance, more established global SDOs
such as the IEEE or the ITU, or regional SDOs with strong local support, could make our products incompatible with the new standard or otherwise uncompetitive or obsolete and cause us to incur substantial development costs to adapt to new or
alternative industry standards, particularly if the new or alternative standards were to receive, or be perceived as likely to receive, greater penetration in the marketplace than the HomePlug-based specifications used by us for our ICs. Moreover,
the adoption or expected adoption of such standards, or the support of such standards by industry alliances such as the HomeGrid Forum, could have a chilling effect on the sale of existing products even before products based on the new standard
become available. The time and expense required for us to develop new products or change our existing products to comply with new industry standards would be substantial, and there is no assurance that we would be successful in doing so. If we were
not successful in complying with the industry standards required by our customers, we could lose market share, causing our business to suffer.

The adoption of new powerline or anywire standards by global or regional SDOs such as the IEEE or the ITU may increase competition in the market for powerline and other wireline communications ICs by reducing or eliminating the uncertain
market acceptance of various competing standards established by industry alliance groups such as HomePlug, the UPA and the HD-PLC Alliance, potentially attracting larger semiconductor companies to join the market.

Our use of standards-based technology reduces the value of our intellectual property and exposes us to additional competition.

As we believe that some of our customers and potential customers prefer to use powerline communications ICs that are based on industry standards rather
than proprietary technologies, we have in the past elected, and may in the future elect, to base our powerline transceiver ICs on specifications approved by standards bodies or industry alliances and to have our intellectual property included in
these specifications. The applicable standards bodies and alliances, including the HomePlug Powerline Alliance, typically require that participating companies license their necessary patent claims on non-exclusive, reasonable and non-discriminatory
terms to other members, including competitors, who elect to produce products compliant with the applicable standard. For example, as a sponsor member of the HomePlug Powerline Alliance, we are obligated to license our necessary patent claims on
non-exclusive, reasonable and non-discriminatory terms to other HomePlug Powerline Alliance members, including competitors, who elect to produce products compliant with the HomePlug 1.0 and HomePlug AV specifications, as well as any future HomePlug
specifications, to the extent that the necessary claims are needed to allow compatibility of a product based on the future specification to HomePlug 1.0 or HomePlug AV. We have similar obligations with respect to the necessary claims relating to our
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we are successful in having our intellectual property included in additional industry standards, the scope of these licensing obligations could increase.
These obligations to license our necessary patent claims may allow our competitors to use our patents to develop and sell products that compete with our products without spending the time and expense that we incurred to develop the technology
covered by the patents, thereby potentially reducing any time to market advantage we might have as a result of these patents. These obligations also substantially restrict and may eliminate our ability to use our patents as a barrier to entry or as
a significant source of revenue. Moreover, because the specifications for these industry standards are generally available to members of the applicable standards bodies and alliances for little or no cost, competitors can more easily create ICs that
compete with our products.

We have limited experience in applying our powerline communications technology to other media, such as coaxial cable and
telephone wiring, and if we are unsuccessful in our efforts to do so, our business could be harmed.

Although some service providers
are using our powerline ICs for communications over coaxial cable and telephone wiring, we intend to continue to evaluate whether we can successfully extend the use of our powerline communications technology and ICs to these other media. We do not
currently derive a significant portion of our revenue from these applications. In addition, because of interest from customers and standards organizations in single solutions that can enable communications over multiple wired media, including
powerline, coaxial cable and telephone wiring, sometimes referred to as anywire technology, we expect that our future product roadmap will need to include ICs with enhanced anywire capabilities. We have far less experience with these other media
than we have with powerline communications. As a result, we may be unable to gain, or may need to incur significant costs in order to obtain, the necessary experience and expertise required to apply our powerline communications technology to these
other media or to develop and obtain other wireline communications technology and intellectual property. In pursuing this business, we will be competing with companies that have substantially greater experience with, and technologies specifically
designed to optimize communications over, these other media. In addition, some applications of our products on these other media may interfere with other technologies that use the same wires, such as Data Over Cable Service Interface Specification
(DOCSIS) or Very High Speed Digital Subscriber Line (VDSL) protocols, potentially making commercialization of these applications impractical.

The sales
cycle for our products is long and requires expenditures and the development of new products in advance of sales that may or may not be realized when anticipated, if at all.

Our customers generally take a considerable amount of time to evaluate our HomePlug-based ICs before purchasing. The typical time from early engagement
by our sales force to actual product introduction typically runs 6 to 12 months for adapter products to as much as 12 to 30 months for embedded consumer electronics products and products used by service providers and electric utilities. The delays
inherent in these lengthy sales cycles increase the risk that a customer will decide to cancel, curtail, reduce or delay its product plans, causing us to lose or delay anticipated sales. Additionally, while our sales cycles can be long, our average
product life cycles tend to be short because we operate in an environment of rapidly changing technology and evolving customer requirements. As a result, the resources devoted to product sales and marketing may not generate material revenue for us
when expected, if at all, and from time-to-time, we may need to write-off excess and obsolete inventory. In addition, we typically are required to incur substantial development costs in advance of a prospective sale with no certainty that we will
recover such costs. There can be no assurance that our products will be able to meet the specifications required by our customers or that our products will be delivered to the market in a timely manner as compared with our competitors
products. A substantial amount of time may pass between the selection of our technology for use in a customers product and the generation of revenue related to the expenses previously incurred, which can potentially cause our operating
results to fluctuate significantly from period to period. In addition, if we do not generate revenue after we have incurred substantial expenses to develop any of our products, our business will suffer.

We derive a small portion of our revenue from sales of our ICs to customers in the commercial and utility markets, and our business could be materially adversely
affected if we are unable to maintain or grow our sales in these markets.

While we only derived a small portion of our revenue from
sales of our ICs to customers in the commercial and utility markets in the three months ended June 30, 2009, we expect to continue to strive to achieve sales of our ICs to customers in these markets. Customers in the commercial market use our
ICs to enable distribution of broadband services and back channel communications over existing electrical wiring and coaxial cable to individual units within apartment buildings and other MDUs. Customers in the utility market use our ICs in smart
grid and broadband over powerline applications. Although service providers in the commercial market and electric utilities in the utility market are conducting field trials and limited deployments of these applications, the number of volume
commercial deployments is low.

Our ability to maintain and increase revenue in the commercial and utility markets depends upon the growth
of these markets, the standards and technologies adopted for use in these markets and our competitive position within such markets. We have fewer strategic and customer relationships in these markets and, in some cases, different competitors than we
have in the digital home market. The growth of the commercial market will depend, in part, on the expansion of Internet, video-on-demand and other broadband services to MDUs. In the utility market, the growth of smart grid management and broadband
over powerline applications will depend upon a number of factors, including a favorable utility regulatory environment that allows the cost of smart grid systems to be funded by the utilitys rate base and the development of new third-party
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necessary to commercialize these applications. In recent periods, customer interest in broadband over powerline applications has declined due to concerns
about the financial and operational success of such systems, while customer interest in smart grid applications has increased. The standards and technologies that will be used in utility and smart grid applications are still being determined and
both narrowband and broadband powerline and wireless technologies are being considered, as well as hybrid systems, with narrowband communications systems being more prevalent to date. We do not offer narrowband powerline ICs or wireless ICs for
smart grid applications. In addition, the sales cycle for commercial and utility customers is typically long. If demand for utility applications using our broadband powerline ICs does not grow or we are otherwise unable to increase our revenue
within these markets, our business could be materially and adversely affected. We may also need to make changes to our existing products or develop new products for our commercial and utility business to be successful. For example, the HomePlug
Powerline Alliance is working on a proposed powerline specification for narrowband smart grid applications as well as a proposed specification for broadband over powerline applications. The IEEE is also working on an access powerline standard as
part of its 1901 initiative as well as other standards efforts. We have not determined whether we will create any products based on these specifications, and there is no assurance that, if we were to attempt to do so, any such products would be
successful. To the extent we do develop new products or product enhancements for these markets, we will be required to expend significant resources and to adapt our business processes to address the unique challenges and requirements of these
markets. If we are unsuccessful in tailoring our existing products or creating new products to meet the needs of our customers in the commercial and utility markets on a timely and cost-effective basis, we will remain at a competitive disadvantage
to other companies that currently service these markets, we will be unable to grow or maintain our sales in these markets, and the growth of our overall business may be adversely affected.

Our ability to compete may be affected by our ability to protect our intellectual property and proprietary information.

We believe that the protection of our intellectual property rights, both domestic and foreign, is and will continue to be important to the success of our
business. To protect our proprietary technologies and processes, we rely primarily on patent, copyright, trademark and trade secret laws, as well as nondisclosure and confidentiality agreements and other methods. We currently have 34 issued U.S.
patents and 44 pending U.S. patents, with foreign counterparts in some jurisdictions. The process of seeking patent protection can be long and expensive. We cannot be certain that any currently pending or future applications will actually result in
issued patents, and our existing and future patents may be challenged. The rights granted under any issued patents may not be of sufficient scope or strength to provide meaningful protection or provide us with a competitive advantage, and our
competitors may be able to develop similar or superior technology to our own now or in the future. Any future infringement upon our intellectual property or proprietary information may require us to engage in litigation in the future. Such
litigation could result in significant costs to us and the distraction of our management. Despite our efforts to protect our intellectual property and proprietary information, some of our innovations may not be protectable. Some countries may limit
or deny protection of our patents, copyrights, trademarks and trade secrets. In addition, the steps that we have taken to protect our intellectual property rights may not be adequate to preclude misappropriation or infringement of our intellectual
property rights. If our patents do not adequately protect our technology, our competitors may be able to offer similar products and may also be able to develop similar technology, designed around our patents. In addition, it is possible that third
parties may copy or obtain and use our proprietary information without our authorization, and no adequate remedies may be available. The ability of our competitors to access and use our proprietary information may inhibit our ability to compete.

Claims that we have infringed upon third-party intellectual property rights could subject us to significant liability and could invalidate our
intellectual property rights.

Participants in the IC industry vigorously protect and pursue their intellectual property rights. We
have in the past received, and expect that in the future we may receive, communications from various industry participants alleging our infringement of their patents or other intellectual property. With respect to past claims we completed
investigating, we concluded and, in each case, replied to such third parties that we believed their claims were without merit, and we received no further claims or notices of infringement from such third parties. From time to time, we also identify
third party intellectual property that could result in claims of infringement even though we have not received any notice of infringement or we believe that we are not infringing or that the intellectual property involves claims that are invalid. In
those situations, we may seek to obtain licenses from the owners of such intellectual property to reduce the risks, costs and management diversion from litigation with a third party that may otherwise seek to assert a claim against us. For example,
we are currently seeking a non-exclusive cross license from a third party for certain intellectual property rights used in our HomePlug family of products. We believe this third party is contractually obligated to license such intellectual property
rights to us pursuant to a membership agreement with the HomePlug Powerline Alliance. This cross license would also provide such third party a limited non-exclusive license to certain of our patents which are used in a product currently marketed by
such third party. We may not be able to obtain licenses to such intellectual property on reasonable terms, if at all. Any litigation relating to the intellectual property rights of third parties, including claims arising through our contractual
indemnification of our customers, would be costly and could divert the efforts and attention of our management and technical personnel, regardless of the merit of such claims. Given the complex technical issues and uncertainties inherent in
intellectual property litigation, we cannot assure you that we would prevail in any such suit. In the event of an adverse ruling in any such litigation, we could be required to:



| |  |  | pay substantial damages;
| | - |  | ------------------------



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| |  |  | cease the manufacture, use or sale of infringing products, processes or technologies;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | expend significant resources to develop non-infringing technology; or
| | - |  | ---------------------------------------------------------------------



| |  |  | license technology from the third party claiming infringement, which may not be available on commercially reasonable terms or at all.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------

Our business also could be harmed if our customers become involved in litigation regarding infringement of third-party intellectual property rights,
which adversely affects their ability to sell their products incorporating our ICs and their demand for our ICs. In addition, under the standard terms and conditions of our customer purchase orders, we are required to defend, at our expense, certain
third-party intellectual property infringement suits against our customers who purchase our ICs subject to such terms and conditions. We are also required to pay any damages that are awarded. The defense and settlement of such suits would increase
our costs, could require us to pay substantial damages and could hurt our relationships with our customers, which would have a material adverse effect on our business, results of operations and financial condition.

We must integrate third-party technology into some of our products, which exposes us to risks of incompatibility, additional product defects and the risk that this
third-party technology would no longer be supported or made available to us.

We rely extensively on third-party technology that is
integrated into some of our products, including third-party intellectual property that we license to meet the HomePlug specifications. Due to the complexity of our products, the incorporation of third-party technology could result in unforeseen or
undetected defects or bugs, which could delay the introduction or adversely affect the market acceptance of new products and damage our reputation with customers. We have in the past experienced, and may in the future experience, reliability,
quality or compatibility problems because of the use of third-party technology. As a result, we may have to expend significant financial and other resources to correct these problems, including the costs of repair, rework, recall, replacement and
resolving claims by our customers or third parties. Due to our reliance on third-party technology, if we were unable to continue to use or license these third-party technologies on reasonable and cost-effective terms or if the third-party technology
were to fail to operate as required, we could be unable to secure alternatives in a timely manner, if at all, and our business would be harmed. In addition, if we were unable to license technology from third parties to develop future products, we
would be unable to develop such products in a timely manner, or at all.

In order to broaden the market acceptance of our products, we have entered
into, and in the future we may enter into, licensing and joint venture arrangements, which may require us to incur substantial development costs, result in reduced product revenue, lower gross margins on our products and tie the success of our
products to the success of our collaborators in marketing their products.

Pricing pressures and business strategies may lead us to
seek to enter into licensing or joint venture arrangements designed to increase the penetration of our HomePlug-based powerline communications solutions into high-volume applications, particularly price-sensitive products, such as personal
computers, home gateways or routers, that we believe would expand the market for our ICs in other products. For example, in June 2005, we entered into a technology collaboration and license agreement with Intel Corporation that provides, among other
things, for most favored pricing and supply terms for our HomePlug AV-based products and for an option to license from us a HomePlug AV-based IC design and, if we either then have or own (or then have commenced or later commence work on), a related
analog front-end IC design, for use in Intel microprocessors, chipsets and platforms at Intels sole discretion on a worldwide basis, either royalty-free or royalty-bearing, depending on product application. The license option is only
exercisable under certain circumstances and does not permit Intel to use the designs licensed in an IC product having communications over powerlines and/or coaxial cable as its primary purpose or communications over wireless and over powerlines
and/or coaxial cable as its primary purpose. Further, Intel may not distribute Intel products incorporating the licensed HomePlug AV design until Intel or Intel customers using certain Intel personal computer reference designs first purchase from us
a certain volume of our HomePlug AV-based ICs. There is no assurance that Intel will exercise its option. Even if Intel exercises its option, it may not be able to successfully market and sell products incorporating our designs, and accordingly, our
license of our designs to Intel may not expand the market for our ICs in other products. The agreement expires in June 2010, but can be renewed upon the mutual consent of the parties. Either party may terminate the agreement upon default and failure
to cure by the other party, and in the event of such termination, the non-defaulting party may revoke the grant of license rights to the defaulting party.

Our licensing and joint venture arrangements could include licensing our HomePlug-based designs for use in third-party system-on-a-chip solutions that include other communications, interface or home gateway
technologies. The royalty income, if any, we would derive from these arrangements would be substantially less than our expected dollar value of gross profits from the sale of an equivalent volume of ICs, and there is no assurance that we would
derive enough revenue from the sale of our ICs for use in other products to make the licensing arrangement successful from the standpoint of our overall business. These third-party arrangements may require us to grant certain important rights to
third parties, including exclusive rights to one or more of our IC designs and issuance of warrants or other securities. In addition, we have entered into, and from time to time in the future may be required to enter into, licenses and covenants
that could limit our ability to initiate patent infringement actions against third parties, including third-party collaborators, their customers, distributors, agents and contractors. Packaging our designs for use in these arrangements would



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require us to incur substantial development costs with no certainty we would recover these costs. Implementing the arrangements would also involve
substantial risks that we have not faced before, including converting our design for use in the system-on-a-chip device and being reliant on our third-party partner for the integration, production, marketing and sale of the resulting product. There
is no assurance that we would be successful in entering into or implementing any such arrangement.

The complexity of our products and the process used
to produce our products could result in unforeseen delays or expenses arising from undetected problems or defects, which could impair market acceptance for our products, result in lost revenues, increase our costs and negatively impact our
reputation and relationships with our customers.

Powerline communications is a complex and relatively new technology. Highly complex
ICs such as our powerline communications ICs may contain design defects, errors and software flaws, or bugs, in the IC hardware or software, particularly when first introduced or as new versions are released. We have experienced in the past and may
experience in the future delays and problems in completing the development and introduction of new products and product enhancements due to problems such as design defects, errors and bugs. In addition, products incorporating our ICs that are
supplied to customers by our OEMs or ODMs have in the past and may in the future contain defects that are unrelated to our ICs. Furthermore, because we outsource the manufacturing of our ICs, and in some cases purchase the analog front-end
components and line drivers used in our chipsets from others, we have been, and in the future we may be subject to problems resulting from the actions or omissions of these third parties. The process of producing ICs, referred to as the wafer
fabrication process, is extremely complicated, where even small changes in design, materials or specifications can result in material decreases in the percentage of acceptable product resulting from the manufacturing process, referred to as the
manufacturing yield, and even the suspension of production. On occasion, we and our third-party vendors have experienced in the past, and may experience in the future, manufacturing defects and resultant reductions in manufacturing yields due to
errors in the manufacturing, assembly or testing processes or the implementation of our designs, particularly in connection with new products and new technologies. Detection of manufacturing defects is difficult, and identifying problems may not be
possible early in the fabrication process. Failure to detect manufacturing defects may negatively impact the quality or reliability of our products, and low manufacturing yields may inhibit our ability to fulfill customer orders on a timely basis
and may increase our cost of goods sold and negatively impact our operating results.

Any of these problems may delay the introduction,
volume shipment and market acceptance of the applicable products, harm our ability to retain existing customers and attract new customers, adversely affect sales and cause existing customers to cancel orders or return previously sold product. If any
of these problems are not found until after we have commenced commercial production of a product, we may be required to incur the cost of product recalls, repairs or replacements and of resolving claims by our customers or third parties.
Furthermore, if any problem is found after our ICs have been incorporated into a customers product, we may be required to re-work, repair or replace our customers product, which would require us to incur costs substantially higher than
the costs of repairing or replacing our ICs alone. Furthermore, these problems may require us to incur additional development and customer support costs in an effort to correct the problems, which could divert human and financial resources from
other new product developments, resulting in the delay of those projects as well. The time and expense required to correct IC defects, errors and bugs and to improve manufacturing yields, reliability and quality can be very high, particularly if the
masks for smaller geometry ICs must be redesigned, and there is no assurance that we will be able to successfully correct the problems at all or within the time required for the product to be successful in the marketplace. Any of the foregoing
events could have a material adverse effect on our business, results of operations and financial condition.

We may experience difficulties in
transitioning to smaller geometry process technologies or in achieving higher levels of design integration, which may result in reduced manufacturing yields, delays in product deliveries, increased expenses and loss of design wins and sales.

We periodically evaluate the anticipated benefits, risks and expenses of migrating one or more of our IC designs and manufacturing to
smaller geometry process technologies in an effort to reduce our product costs. Any such transition would require us to redesign the applicable product and require us and our foundry suppliers to use new or modified manufacturing processes for the
product. We also evaluate whether we can use smaller geometry processes in our new ICs. Prior to 2008, the smallest geometry process we used for any of our ICs was 90 nanometer. In 2008, we began shipping a HomePlug AV-based IC which uses a 65
nanometer process. We are dependent on our relationships with our foundry subcontractors to transition to smaller geometry processes successfully. The foundries that we use may not have the tools, design libraries or manufacturing facilities
required to use the smaller geometries we want to use, may be unable to produce the smaller geometry ICs with the yields we need to be successful or may be unwilling to make the smaller geometries available to us on a timely or cost-effective basis.
The yield risks associated with smaller geometry ICs are generally much higher than those with higher geometry processes. As we try to move to smaller geometry processes, we may be unable to maintain our existing foundry relationships, which could
adversely affect the availability and cost of the existing products we buy from them, or develop new ones. If any of our foundry suppliers cannot meet our requirements or we experience significant delays in this transition or fail to efficiently
implement this transition, we could experience reduced manufacturing yields, delays in product deliveries and increased expenses, all of which could harm our relationships with our customers and result in the loss of design wins and sales, which
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Our operating results could be adversely affected if we have to satisfy product warranty or liability claims.

If our ICs or chipsets, or products that integrate our ICs or chipsets, malfunction or are found to be defective, we could be subject to
product warranty or product liability claims that could have significant warranty-related charges or litigation costs. In addition, we may spend significant resources investigating potential product design, quality and reliability claims, which
could result in additional expenses.

We may be unable to raise additional needed capital, which could substantially harm our business and our ability
to compete.

We believe that our existing balance of cash, cash equivalents, short-term investments and cash expected to be generated
from operations will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, unexpected circumstances could require us to raise additional funds, which we may be unable to obtain on favorable terms, if at all.
Recent market conditions have effectively shut down the availability of the equity markets for many companies, including us. We may not have the ability to raise equity in the financial markets for the foreseeable future until conditions in the
equity markets improve. Raising additional funds through equity financings may result in a significant dilution of our stockholders ownership interest, causing the per share value of our common stock to decline. On the other hand, additional
debt financings may only be available on strict terms, if at all, restricting our business through high interest rates or by requiring us to maintain certain liquidity or other ratios. The global credit markets are currently experiencing significant
distress and instability, resulting in a dramatic reduction of the willingness by lenders to make new loans and tightened credit requirements, particularly for emerging companies including us. If we were required to seek debt financing, we may not
be able to secure such debt financing on commercially reasonable terms, if at all. Holders of new equity or debt securities may also have rights, preferences and privileges senior to those of our holders of common stock. In either case, an inability
to raise additional funds may frustrate our ability to compete and to meet our business objectives, causing our stock price to decline and our stockholders to lose some or all of their investment.

An inability to raise necessary additional capital on acceptable terms may reduce our ability to, among other things, enhance our existing products and
services and develop new products, expand operations and hire, train and retain employees. Additionally, failure to raise additional capital could harm our ability to acquire complementary businesses, technologies or products. Our failure to take
any of these actions could have a material adverse effect on our business, operating results and financial condition.

The consolidation of industry
participants may result in stronger competitors, fewer customers and reduced demand, any of which could harm our business.

Historically, consolidation within the semiconductor industry is not uncommon, and we expect it to continue as companies attempt to strengthen their positions in the various markets we have targeted. Consolidation may also increase as a
result of the adverse conditions in the global economy. Consolidation or strategic alliances among competitors, or the acquisition of a competitor by a larger semiconductor company not yet engaged in the powerline communications business, could
result in stronger competitors with larger customer bases, more diversified product offerings and greater technological and marketing expertise, allowing them to compete more effectively against us. Consolidation among customers could also result in
fewer customers, reduced demand and increased pressure on the prices we charge for our products. Consolidation among our third-party suppliers could increase the costs of, or reduce our ability to obtain, needed materials and services, thereby
reducing our ability to compete. Any of the above occurrences could have a materially adverse effect on our business, operating results and financial condition.

If we are unable to attract and retain qualified management, technical and other personnel, our business could suffer.

Our
success depends on our ability to hire and retain experienced executive management and other key employees. Due to the complexity of our products, we are also particularly dependent on qualified research and development personnel who possess unique
skills and experience that are not replicated within the company and may be difficult to replace. We have entered into employment agreements with some of our management and other employees. However, these agreements do not require them to provide
services to us for any specific length of time, and they can terminate their employment with us at any time, with or without notice, without penalty. If we were to lose the services of these executives or of one or more other key employees, our
business could be seriously harmed.

Competition for qualified personnel in the semiconductor industry is intense, and our historic growth
has placed a significant burden on our human resources. If we are unable to attract and retain additional qualified personnel as needed, our business results will be negatively impacted. We maintain our headquarters in Orlando, Florida and a portion
of our research and development team and other significant operations in Ocala, Florida. As Central Florida often has few, if any, candidates for the positions we are seeking to fill, and many of the potential candidates we recruit may choose not to
relocate to Central Florida, we must expend additional time and expense to recruit new employees for our Central Florida locations from outside of our immediate geography. We have also experienced difficulties in recruiting experienced personnel in
other areas. Adverse conditions in the housing markets and home mortgage business may make it more difficult for employees being recruited to relocate, reducing our pool of available personnel or increasing our recruiting and relocation costs. Due
to these challenges, we may be unable to attract candidates



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with the qualifications and experience we desire or we may be required to base certain employees in other locations. Moreover, we may need to incur
additional costs to hire subcontractors to perform certain functions that would ideally be performed by employees. We expect competition in these areas to continue and we may experience similar difficulties in the future. In addition, we may
outsource or expand our operations into overseas locations where we could face significant competition for qualified employees or subcontractors and face additional challenges and incur significant costs in managing those operations from the U.S. We
may also face challenges in retaining some of our existing employees to the extent the then current market value of our common stock is substantially below the exercise prices of the stock options held by such employees. If we cannot attract
additional key employees or if we do not maintain competitive compensation policies to retain current employees, we may not be able to scale our business and operations effectively, and the efficiency and effectiveness of our operations could be
impaired.

We may pursue acquisitions of, or investments in, businesses that may not be successful and that could adversely affect our operating
results.

As the complexity and speed of technological changes make it impractical for us to pursue development of all technological
solutions on our own, we continually evaluate acquisitions of or investments in businesses that may complement our existing product offerings, augment our market coverage or enhance our technological capabilities. However, we cannot assure you that
we will be able to identify and consummate suitable acquisition or investment transactions in the future.

These acquisitions and
investments involve numerous risks, including but not limited to:



| |  |  | problems associated with integrating acquired companies, products or technologies;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | the incurrence of substantial debt and assumption of unknown liabilities;
| | - |  | -------------------------------------------------------------------------



| |  |  | the risk of entering market segments where we have little or no prior experience and where competitors are in a stronger market position than we are;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the potential loss of key employees from the acquired company;
| | - |  | --------------------------------------------------------------



| |  |  | the potential dilution of existing stockholders and subordination to rights, preferences and privileges senior to those of our common stock;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | uncertain capital markets reaction to the acquisition or investment;
| | - |  | --------------------------------------------------------------------



| |  |  | amortization expenses related to intangible assets;
| | - |  | ---------------------------------------------------



| |  |  | the potential disruption of our ongoing business;
| | - |  | -------------------------------------------------



| |  |  | the diversion of managements attention from other core business concerns; and
| | - |  | ------------------------------------------------------------------------------



| |  |  | potential goodwill impairment.
| | - |  | ------------------------------

We
cannot assure you that any acquisitions or investments will be successfully integrated with our business, and the failure to avoid any of these or other risks associated with such acquisitions or investments could cause a material adverse effect on
our business, results of operations and financial condition.

We have incurred, and will continue to incur, increased costs as we comply with the laws
and regulations affecting public companies.

As a public company, we incur significant legal, accounting and other costs associated
with the reporting requirements of public companies. We are required to, among other things, create and periodically review the effectiveness of internal controls over financial reporting and may be required to hire additional accounting and
financial staff with appropriate public company experience and technical accounting knowledge. In addition, the requirements of the Sarbanes-Oxley Act of 2002 and the rules of the SEC and The NASDAQ Global Market oblige our management to devote a
substantial amount of time to new compliance initiatives, which could increase our legal and financial compliance costs. These costs of compliance, both in the form of monetary expenditures and additional management responsibilities, have been
increasing, making them difficult to estimate with any degree of certainty. We also expect further changes in the laws and regulations affecting public companies, which will increase our expenses as we comply with the new requirements.

If our internal controls over financial reporting are inadequate or we have material weaknesses or significant deficiencies, investors could lose confidence in our
financial reports, and our business and stock price may be adversely affected.

Section 404 of the Sarbanes-Oxley Act of 2002
(Section 404) requires our management to report on, and our independent auditors to attest to, the effectiveness of our internal control structure and procedures for financial reporting. We have incurred, and expect that we will continue to incur
significant costs, and expend significant time and management resources, to comply with Section 404. Although we have an ongoing program to perform the system and process evaluation and testing necessary to comply with these requirements, we
cannot be certain that our management or our independent registered public accounting firm will not



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identify significant deficiencies or material weaknesses in our internal control over financial reporting. In addition, over the course of our ongoing
evaluation of our internal controls, we may identify areas requiring improvement and may have to design enhanced processes and controls to address issues identified through this review. If our internal control over financial reporting is found by
management or by our independent registered public accounting firm to be inadequate or if we disclose significant existing or potential deficiencies or material weaknesses in those controls, investors could lose confidence in our financial reports,
we could be subject to sanctions or investigations by The NASDAQ Global Market, the SEC or other regulatory authorities and our stock price could be adversely affected. In addition, such deficiencies could impair our ability to obtain financing or
could increase the cost of any financing we obtain and require additional expenditures to comply with applicable requirements.

We face business,
political, operational, financial and economic risks in our markets outside of the U.S.

We conduct a substantial amount of our
business with customers and third-party vendors located outside the U.S, and our future growth is dependent, in part, on continued geographic expansion. We have four wholly-owned foreign subsidiaries, Intellon Canada Inc., Intellon Hong Kong
Limited, Intellon Korea Ltd. and Intellon Taiwan Ltd., and may form additional subsidiaries. We also have employees and distributor relationships in Asia and Europe. Our sales to customers in Europe and Asia accounted for approximately 49.1% and
43.3% of revenue in the three months ended June 30, 2009, respectively. Our sales to customers in Europe and Asia accounted for approximately 54.4% and 37.9% of revenue in the six months ended June 30, 2009, respectively. Nearly all of our
sales in Europe are currently to customers in France and Germany. Most of our sales in Asia are in Taiwan but also include sales to customers in China, the Republic of Korea and Singapore, among others. In addition, our customers often integrate our
ICs into their products that are then sold to end-customers in various locations, including foreign locations. As a result of our international business relationships, we face numerous risks and challenges, including but not limited to:



| |  |  | longer and more difficult collection of receivables;
| | - |  | ----------------------------------------------------



| |  |  | increased difficulty in enforcement of contractual obligations;
| | - |  | ---------------------------------------------------------------



| |  |  | limited protection of our intellectual property and other assets;
| | - |  | -----------------------------------------------------------------



| |  |  | compliance with local laws and regulations and unanticipated changes in those laws and regulations, including tax laws and regulations;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | trade and foreign exchange restrictions and tariffs;
| | - |  | ----------------------------------------------------



| |  |  | travel restrictions;
| | - |  | --------------------



| |  |  | timing and availability of import and export licenses and other governmental approvals, permits and licenses, including export classification requirements;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | transportation delays and limited local infrastructure and disruptions, such as large scale outages or interruptions of service from utilities and
telecommunications providers;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | local business and cultural factors that differ from our normal standards and practices;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | differing employment practices and labor issues;
| | - |  | ------------------------------------------------



| |  |  | regional health issues, including epidemics such as H1N1 influenza (swine flu), avian bird flu and SARS;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | work stoppages;
| | - |  | ---------------



| |  |  | fluctuations in currency exchange rates and the resulting gains or losses on the conversion to or from U.S. dollars; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | acts of terrorism, war or natural disasters including, particularly in Asia, earthquakes, typhoons, floods and fires.
| | - |  | ---------------------------------------------------------------------------------------------------------------------

Because most of our OEMs, ODMs and third-party vendors are located overseas, we also face the risk that any impact upon these customers and vendors from
the above factors could affect us as well and have a material adverse effect on our business, results of operations and financial condition.

Our
headquarters are located in Florida, and many of our customers and third-party vendors are concentrated in Asia, areas subject to significant natural disaster risks.

Our HomePlug-based ICs are manufactured in Taiwan and Singapore and assembled and tested primarily in Taiwan and the
Republic of Korea. Our command and control ICs are manufactured, assembled and tested primarily in Singapore, the Philippines, Taiwan and/or the U.S. Many of our customers and other third-party vendors are also located in Asia. The Pacific Rim
region is subject to extreme weather and frequent earthquakes due to the presence of major fault lines. As a result of natural disasters, our customers and third-party vendors in the past have experienced, and in the future may again experience,
power outages and other damage and disruptions to their operations. Any disruption in the operations of our customers or our customers suppliers could make it difficult or impossible for our customers to produce their products that use our
ICs. Any disruption of the operations of our third-party vendors could reduce or eliminate the manufacture, assembly or testing of our ICs by those vendors or make it difficult or impossible for us or our vendors to obtain components or materials
necessary for the production of our ICs. In such an event, we may be required to seek alternative sources of supply on reasonable terms and timeframes, and we could be required to incur substantial



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costs and time delays in doing so, if we can at all. Any significant damage to or destruction of any of the foundries that manufacture the wafers for our ICs
would have a particularly adverse effect on us, as the rebuilding of a foundry or locating an alternative manufacturer would be difficult and time consuming. In addition, because the design libraries and manufacturing process used in producing the
wafers for our ICs may be specific to the particular foundry, we may be unable to transfer production to an alternative foundry, even if one were available, without incurring substantial time and expense to redesign all or part of the affected IC
and to incur the costs of a new IC mask, which can be substantial, particularly for lower process geometries. We do not have any arrangements for any backup sources of supply for the wafers used in our ICs.

Our headquarters are located in Florida, an area that often experiences forest fires as well as hurricanes, tropical storms and other extreme weather. We
have in the past experienced, and may again in the future experience, power outages and other damage and disruptions in our operations due to these natural disasters. Any of the foregoing disruptions could have a material adverse effect on our
business, operating results and financial condition.

Our ability to utilize our net operating loss and tax credit carry forwards may be limited, which
could result in our payment of income taxes earlier than if we were able to fully utilize our net operating loss and tax credit carry forwards.

As of June 30, 2009, we had estimated available U.S. federal income tax net operating loss (NOL) carryforwards of approximately $99.1 million, state income tax net operating loss carryforwards of approximately $66.1 million and
estimated U.S. tax credit carryforwards of approximately $5.1 million. To the extent then available, these can be used to offset federal taxable income and federal tax liabilities in future years. Our NOL carryforwards will begin to expire in 2009
and are scheduled to continue to expire through 2027. Section 382 of the Internal Revenue Code of 1986, as amended (Section 382), imposes an annual limitation on the amount of net operating loss carryforwards and tax credit carryforwards that
may be used to offset federal taxable income and federal tax liabilities when a corporation has undergone significant changes in its ownership. Our ability to utilize NOL carryforwards and federal tax credit carryforwards may be limited by the
issuance of common stock in future offerings or as a result of future events. In addition, utilization of these net operating loss and tax credit carryforwards is dependent upon our achieving profitable results. In connection with our initial public
offering in December 2007, we experienced an ownership change as defined by Section 382. As a result of this ownership change, our ability to use our federal NOL carryforwards and tax credit carry forwards in subsequent periods is limited to
approximately $5.3 million per year, plus recognized built-in gain during the five years beginning on the date of the ownership change. To the extent our use of net operating loss and tax credit carryforwards is further limited by Section 382
as a result of the issuance of common stock in future transactions or by our implementation of an international tax structure or other future events, our income would be subject to cash payments of income tax earlier than it would if we were able to
fully use our net operating loss and tax credit carryforwards in the U.S. In addition, we operate in foreign jurisdictions and are subject to paying foreign taxes even though we have net operating losses. We are also subject to alternative minimum
tax.

Risks Related to Ownership of Our Common Stock

Market volatility could reduce your ability to resell shares of our outstanding common stock.

The
trading price of our common stock is volatile and is influenced by various factors, some of which are beyond our control. We cannot predict the prices at which, or the volumes in which, our common stock will trade. In addition, public stock markets
have recently experienced extreme price and trading volume volatility, as well as sharp price declines, particularly with respect to technology sectors of the market. Stock prices of many technology companies have fluctuated in a manner apparently
unrelated or disproportionate to the operating performance of those companies. Historically, periods of volatility in a companys stock prices are sometimes followed by securities class action litigation. Such litigation, if brought against us,
could result in substantial legal costs and diversion of managements attention from the conduct of our business.

Future sales of our common stock
by existing stockholders could cause the per share price of our common stock to decline.

Any sale, or announcement of any sale, of
substantial amounts of our common stock (including sales by our management), or the perception that such sales could occur, could adversely affect the market price for our common stock. Such sales or announcements could also make it more difficult
for us to sell equity or equity-related securities upon favorable terms in the future, if at all.

An active trading market for our common stock may not
be sustained.

Since our initial public offering in December 2007, there has been, and we expect that there will continue to be, only a
limited volume of trading in our common stock. Although the trading volume in our common stock increased during the second quarter of 2009 compared to earlier periods, the increase may not be sustained. We cannot predict whether an active trading
market in our common stock will develop or be sustained, or how liquid any such market might become. In the absence of an active public market, it may be difficult for an investor to sell shares of our common stock in the volume, or at a price and
time, which is attractive to such investor, if at all. In addition, relatively small trades have had, and may continue to have, a significant impact on the market



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price of our common stock, which could increase the volatility and depress the price of our common stock. Moreover, our common stock is trading below $5.00
per share on the NASDAQ Global Market. At that price level, with our limited trading volume, the policies and practices of institutional investors and brokerage houses may limit investment in our common stock. Furthermore, because much of our common
stock is held by our affiliates, unless we achieve a wider dissemination of those shares, a more active trading market in our common stock may not develop. All of these factors may discourage purchases of our common stock, which may further affect
the liquidity of our common stock and potentially lead to further declines in our stock price.

Any guidance that we provide about our business or
expected future results may differ from actual results.

From time to time we have shared our views in press releases, filings with the
SEC and on public conference calls about current business conditions and our expectations as to potential future results. Correctly identifying the key factors affecting business conditions and predicting future events is inherently an uncertain
process especially in the current adverse economic environment. Given the complexity and volatility of our business, our analyses and forecasts may prove to be incorrect. We offer no assurances that such predictions or analyses will ultimately be
accurate, and investors should treat any such predictions or analyses with appropriate caution. Any analysis or forecast that we make which ultimately proves to be inaccurate may adversely affect our stock price.

If securities or industry analysts do not publish research or publish misleading or unfavorable research about our business, our stock price and trading volume could
decline.

The trading market for our common stock depends in part on the research and reports that securities or industry analysts
publish about us or our business. The number of securities analysts who cover our company is limited. If no or few securities or industry analysts cover our company, the trading price for our stock could be negatively impacted. If one or more of the
analysts who covers us downgrades our stock or publishes misleading or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us
regularly, demand for our stock could decrease, which could cause our stock price or trading volume to decline.

Our certificate of incorporation,
bylaws and provisions under Delaware law might discourage, delay or prevent a change in control of our company or changes in our management and, therefore, depress the trading price of our common stock.

Our certificate of incorporation and bylaws contain provisions that act to discourage, delay or prevent a change in control of our company or changes in
our management, even where the stockholders of our company may deem such changes advantageous. These provisions:



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



| |  |  | authorize the board to issue blank check preferred stock to increase the number of outstanding shares to discourage a takeover attempt;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | prohibit stockholders from calling a special meeting of our stockholders;
| | - |  | -------------------------------------------------------------------------



| |  |  | grant the board of directors the authority to make, alter or repeal our bylaws;
| | - |  | -------------------------------------------------------------------------------



| |  |  | establish advance notice requirements for actions to be taken at stockholder meetings or for the nomination of directors to be elected to the board; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | require a supermajority (662/3%) vote by stockholders to adopt, amend or repeal certain provisions of our certificate of incorporation or bylaws.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------

Additionally, Section 203 of the Delaware General Corporation Law prohibits a Delaware corporation from engaging in any of a broad range of business
combinations with any holder of 15% or more of its capital stock for a period of three years following the date on which the holder acquired such percentage of the corporations stock, unless, among other things, the board of directors approves
the transaction. This provision may discourage, delay or prevent a change in control of our company. Any provision that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium
for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------

Unregistered Sales of Equity Securities

None.

Use of Proceeds

None.



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|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------

Not applicable.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------

Our 2009 Annual Meeting of Stockholders was held on June 10, 2009 at the Hyatt Regency Orlando Airport Hotel, 9300 Airport Blvd., Orlando, Florida. At the meeting, our stockholders voted upon the following matters: (1) the
election of two Class II directors, Richard I. Goldstein and R. Douglas Norby, each for a term of three years and until his successor has been duly elected and qualified or until his earlier resignation, death or removal; (2) the approval
of an amendment and restatement of our amended and restated certificate of incorporation to decrease the number of authorized shares of our common stock from 200,000,000 shares to 125,000,000 shares; and (3) ratification of the appointment of
Ernst & Young LLP as our independent registered public accounting firm for the calendar year ending December 31, 2009.

The
results of each proposal are as follows:

In Proposal No. 1, our stockholders elected two Class II directors to serve for a
three-year term expiring at the Annual Meeting of Stockholders in 2012. The nominees received the following votes:



|                     |  |            |  |          
|-------------------- |  | ---------- |  | ---------
|                     |  | For        |  | Withheld 
|Richard I. Goldstein |  | 12,993,269 |  | 7,388,138
|R. Douglas Norby     |  | 13,031,420 |  | 7,349,987

In Proposal No. 2, our stockholders approved an amendment and restatement of our amended and
restated certificate of incorporation to decrease the number of authorized shares of our common stock from 200,000,000 shares to 125,000,000 shares. This proposal received the following votes:



|        |  |           
|------- |  | ----------
|        |  | Votes     
|For     |  | 20,362,751
|Against |  | 451       
|Abstain |  | 18,205    

In Proposal No. 3, our stockholders ratified the appointment of Ernst & Young LLP as
our independent registered public accounting firm for the calendar year ending December 31, 2009. This proposal received the following votes:



|        |  |           
|------- |  | ----------
|        |  | Votes     
|For     |  | 20,317,983
|Against |  | 61,600    
|Abstain |  | 1,824     



|ITEM 5. | OTHER INFORMATION
|------- | -----------------

None.



|ITEM 6. | EXHIBITS
|------- | --------



|        |  |                                                                                                                                      
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------
|3.1*    |  | Amended and Restated Certificate of Incorporation                                                                                    
|        | 
|3.2**   |  | Bylaws, as amended                                                                                                                   
|        | 
|4.1**   |  | Second Amended and Restated Investors Rights Agreement, dated December 15, 2006                                                     
|        | 
|10.1*** |  | HomePlug Powerline Alliance Sponsors Agreement, between the registrant and the HomePlug Powerline Alliance, Inc., dated June 5, 2009



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|     |  |                                                                                                       
|---- |  | ------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|     | 
|31.2 |  | Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|     | 
|32.1 |  | Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|     | 
|32.2 |  | Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



|* | Incorporated by reference to the identical document filed as an exhibit to the registrants Current Report on Form 8-K dated June 11, 2009.
|- | -------------------------------------------------------------------------------------------------------------------------------------------

|** | Incorporated by reference to the identical document filed as an exhibit to the registrants Registration Statement on Form S-1, as amended (Registration Statement
No. 333-144520).
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*** | Incorporated by reference to the identical document filed as an exhibit to the registrants Current Report on Form 8-K dated June 5, 2009.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURE

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

Date: August 7, 2009



Intellon Corporation (Registrant)By:

/S/ BRIAN T. MCGEEBrian T. McGeeSenior Vice President and Chief Financial Officer




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