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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 March 31, 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 May 5, 2009, there were 31,338,945 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 |  | 15  
|                                                                                              | 
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |  | 26  
|                                                                                              | 
|Item 4. Controls and Procedures                                                               |  | 26  
|                                                                                              | 
|PART II. OTHER INFORMATION                                                                    |  |     
|                                                                                              | 
|Item 1. Legal Proceedings                                                                     |  | 27  
|                                                                                              | 
|Item 1A. Risk Factors                                                                         |  | 27  
|                                                                                              | 
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 45  
|                                                                                              | 
|Item 3. Defaults Upon Senior Securities                                                       |  | 46  
|                                                                                              | 
|Item 4. Submission of Matters to a Vote of Security Holders                                   |  | 46  
|                                                                                              | 
|Item 5. Other Information                                                                     |  | 46  
|                                                                                              | 
|Item 6. Exhibits                                                                              |  | 46  
|                                                                                              | 
|Signature                                                                                     |  | 47  



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PART I. FINANCIAL INFORMATION



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

INTELLON CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)



|                                           |  |               |          |   |                    |   |          |  
|------------------------------------------ |  | ------------- | -------- | - | ------------------ | - | -------- | -
|                                           |  | March 31,2009 |          |   | December 31,2008 * |  
|                                           |  | (unaudited)   |          |   |                    |  
|Assets                                     |  |               |          |   |                    |   |          |  
|Current assets:                            |  |               |          |   |                    |   |          |  
|Cash and cash equivalents                  |  | $             | 34,531   |   |                    | $ | 35,375   |  
|Short-term investments                     |  |               | 24,926   |   |                    |   | 20,230   |  
|Accounts receivable                        |  |               | 8,510    |   |                    |   | 11,532   |  
|Inventory, net                             |  |               | 6,372    |   |                    |   | 8,029    |  
|Prepaid expenses                           |  |               | 1,286    |   |                    |   | 961      |  
|Other current assets                       |  |               | 108      |   |                    |   | 350      |  
|                                           |  |               |          |   |                    |   |          |  
|Total current assets                       |  |               | 75,733   |   |                    |   | 76,477   |  
|Property and equipment, net                |  |               | 2,274    |   |                    |   | 2,241    |  
|Intangible assets, net                     |  |               | 2,449    |   |                    |   | 2,403    |  
|Other assets                               |  |               | 100      |   |                    |   | 100      |  
|                                           |  |               |          |   |                    |   |          |  
|Total assets                               |  | $             | 80,556   |   |                    | $ | 81,221   |  
|                                           |  |               |          |   |                    |   |          |  
|                                           |  |              
|Liabilities and shareholders equity       |  |               |          |   |                    |   |          |  
|Current liabilities:                       |  |               |          |   |                    |   |          |  
|Accounts payable                           |  | $             | 6,186    |   |                    | $ | 6,843    |  
|Accrued expenses                           |  |               | 1,666    |   |                    |   | 2,166    |  
|                                           |  |               |          |   |                    |   |          |  
|Total current liabilities                  |  |               | 7,852    |   |                    |   | 9,009    |  
|                                           |  |               |          |   |                    |   |          |  
|Shareholders equity:                      |  |               |          |   |                    |   |          |  
|Common stock                               |  |               | 3        |   |                    |   | 3        |  
|Additional paid in capital-common          |  |               | 208,377  |   |                    |   | 207,890  |  
|Accumulated deficit                        |  |               | (135,676 | ) |                    |   | (135,681 | )
|                                           |  |               |          |   |                    |   |          |  
|Total shareholders equity                 |  |               | 72,704   |   |                    |   | 72,212   |  
|                                           |  |               |          |   |                    |   |          |  
|Total liabilities and shareholders equity |  | $             | 80,556   |   |                    | $ | 81,221   |  
|                                           |  |               |          |   |                    |   |          |  



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

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



3



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INTELLON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)



|                                                                  |  |                                          |        |   |      |   |        |  
|----------------------------------------------------------------- |  | ---------------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                  |  | Three Months EndedMarch 31,              |       
|                                                                  |  | 2009                                     |        |   | 2008 |  
|                                                                  |  | (in thousands, except per share amounts) |       
|Revenue                                                           |  | $                                        | 15,508 |   |      | $ | 16,305 |  
|Cost of revenue                                                   |  |                                          | 7,601  |   |      |   | 8,970  |  
|                                                                  |  |                                          |        |   |      |   |        |  
|Gross profit                                                      |  |                                          | 7,907  |   |      |   | 7,335  |  
|Cost of operations:                                               |  |                                          |        |   |      |   |        |  
|Research and development                                          |  |                                          | 3,607  |   |      |   | 4,444  |  
|Sales and marketing                                               |  |                                          | 2,330  |   |      |   | 2,179  |  
|General and administrative                                        |  |                                          | 2,029  |   |      |   | 2,069  |  
|                                                                  |  |                                          |        |   |      |   |        |  
|Operating loss                                                    |  |                                          | (59    | ) |      |   | (1,357 | )
|                                                                  |  |                                          |        |   |      |   |        |  
|Other income (expense):                                           |  |                                          |        |   |      |   |        |  
|Interest income                                                   |  |                                          | 63     |   |      |   | 443    |  
|Other expense                                                     |  |                                          | (28    | ) |      |   | (31    | )
|                                                                  |  |                                          |        |   |      |   |        |  
|Total other income                                                |  |                                          | 35     |   |      |   | 412    |  
|                                                                  |  |                                          |        |   |      |   |        |  
|Loss before income tax benefit                                    |  |                                          | (24    | ) |      |   | (945   | )
|Income tax benefit                                                |  |                                          | (29    | ) |      |   |       |  
|                                                                  |  |                                          |        |   |      |   |        |  
|Net income (loss)                                                 |  | $                                        | 5      |   |      | $ | (945   | )
|                                                                  |  |                                          |        |   |      |   |        |  
|Net income (loss) per common share:                               |  |                                          |        |   |      |   |        |  
|Basic                                                             |  | $                                        |       |   |      | $ | (0.03  | )
|                                                                  |  |                                          |        |   |      |   |        |  
|Diluted                                                           |  | $                                        |       |   |      | $ | (0.03  | )
|                                                                  |  |                                          |        |   |      |   |        |  
|Weighted-average number of shares used in per share calculations: |  |                                          |        |   |      |   |        |  
|Basic                                                             |  |                                          | 31,048 |   |      |   | 30,643 |  
|                                                                  |  |                                          |        |   |      |   |        |  
|Diluted                                                           |  |                                          | 31,173 |   |      |   | 30,643 |  
|                                                                  |  |                                          |        |   |      |   |        |  

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)



|                                                                                                   |  |                             |         |   |      |   |        |  
|-------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------ | -
|                                                                                                   |  | Three Months EndedMarch 31, |        
|                                                                                                   |  | 2009                        |         |   | 2008 |  
|                                                                                                   |  | (in thousands)              |        
|Operating activities                                                                               |  |                             |         |   |      |   |        |  
|Net income (loss)                                                                                  |  | $                           | 5       |   |      | $ | (945   | )
|                                                                                                   |  |                            
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                             |         |   |      |   |        |  
|Depreciation                                                                                       |  |                             | 284     |   |      |   | 272    |  
|Amortization of intangible assets                                                                  |  |                             | 18      |   |      |   | 13     |  
|Stock-based compensation                                                                           |  |                             | 487     |   |      |   | 356    |  
|Accretion of discount on investment securities                                                     |  |                             | (47     | ) |      |   |       |  
|                                                                                                   |  |                            
|Changes in operating assets and liabilities:                                                       |  |                             |         |   |      |   |        |  
|Accounts receivable                                                                                |  |                             | 3,022   |   |      |   | (753   | )
|Inventory                                                                                          |  |                             | 1,657   |   |      |   | 153    |  
|Prepaid expenses and other assets                                                                  |  |                             | (264    | ) |      |   | (206   | )
|Income tax refund                                                                                  |  |                             | 181     |   |      |   | 78     |  
|Accounts payable and accrued expenses                                                              |  |                             | (1,157  | ) |      |   | (184   | )
|                                                                                                   |  |                             |         |   |      |   |        |  
|Net cash provided by (used in) operating activities                                                |  |                             | 4,186   |   |      |   | (1,216 | )
|                                                                                                   |  |                             |         |   |      |   |        |  
|Investing activities                                                                               |  |                             |         |   |      |   |        |  
|Purchase of property and equipment                                                                 |  |                             | (317    | ) |      |   | (460   | )
|Purchase of short-term investments                                                                 |  |                             | (22,649 | ) |      |   |       |  
|Proceeds from maturities of short-term investments                                                 |  |                             | 18,000  |   |      |   |       |  
|Purchase of intangible assets, net                                                                 |  |                             | (64     | ) |      |   | (112   | )
|                                                                                                   |  |                             |         |   |      |   |        |  
|Net cash (used in) investing activities                                                            |  |                             | (5,030  | ) |      |   | (572   | )
|                                                                                                   |  |                             |         |   |      |   |        |  
|Financing activities                                                                               |  |                             |         |   |      |   |        |  
|Proceeds from issuance of common stock, net of issuance costs                                      |  |                             |        |   |      |   | 5,555  |  
|                                                                                                   |  |                             |         |   |      |   |        |  
|Net cash provided by financing activities                                                          |  |                             |        |   |      |   | 5,555  |  
|                                                                                                   |  |                             |         |   |      |   |        |  
|Net (decrease) increase in cash and cash equivalents                                               |  |                             | (844    | ) |      |   | 3,767  |  
|Cash and cash equivalents, beginning of period                                                     |  |                             | 35,375  |   |      |   | 52,074 |  
|                                                                                                   |  |                             |         |   |      |   |        |  
|Cash and cash equivalents, end of period                                                           |  | $                           | 34,531  |   |      | $ | 55,841 |  
|                                                                                                   |  |                             |         |   |      |   |        |  

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

MARCH 31, 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 March 31, 2009, our results of
operations for the three months ended March 31, 2009 and 2008 and cash flows for the three months ended March 31, 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. 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 as filed on
March 13, 2009 with the SEC. The results of operations for the three months ended March 31, 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.



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INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

MARCH 31,
2009 (Unaudited)



Recent Accounting Pronouncements

With the exception of those stated below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the three
months ended March 31, 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) Statement of Financial Accounting Standards (SFAS)
No. 141R, Business Combination, (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), which was issued by the FASB in September 2006.
SFAS 157 establishes a common definition for fair value to be applied to U.S. GAAP guidance requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007. The adoption of SFAS 157 did not have a material impact on our financial position, results of operations, cash flows or disclosures.

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

In April 2009, the FASB issued three FSPs related to fair value measurements,
disclosures and other-than-temporary impairments. 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, 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. FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, amends the other-than-temporary impairment 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. Finally, FSP 107-1 and Accounting Principles Board (APB) 28-1, Interim Disclosures About Fair Value of Financial Instruments, 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 three FSPs are effective for periods ending after June 15, 2009. Early adoption is permitted for periods ending after March 15, 2009,
however we will adopt the FSPs during the second quarter of 2009. We are currently assessing the impact of these FSPs on our consolidated financial statements, but do not expect these FSPs to 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 (continued)

MARCH 31,
2009 (Unaudited)



In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of
Intangible Assets(FSP 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
142. FSP 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 142-3 did not have a material impact on our financial position,
results of operations, cash flows or disclosures.

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 282 days as of March 31, 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 March 31, 2009 (in thousands):



|                                              |  |               |        |                             |   |                              |  |           |   |  |   |       
|--------------------------------------------- |  | ------------- | ------ | --------------------------- | - | ---------------------------- |  | --------- | - |  | - | ------
|                                              |  | AmortizedCost |        | GrossUnrealizedHoldingGains |   | GrossUnrealizedHoldingLosses |  | FairValue
|U.S. Treasury securities                      |  | $             | 12,490 |                             | $ | 3                            |  | $         |  |  | $ | 12,493
|U.S. Federal Home Loan Bank System securities |  |               | 12,436 |                             |   | 24                           |  |           |  |  |   | 12,460
|                                              |  |               |        |                             |   |                              |  |           |   |  |   |       
|Total short-term investments                  |  | $             | 24,926 |                             | $ | 27                           |  | $         |  |  | $ | 24,953
|                                              |  |               |        |                             |   |                              |  |           |   |  |   |       

As of March 31, 2009, we did not have liabilities or non-financial assets that are measured
on a fair value basis on a recurring basis.

As of March 31, 2009, the weighted average maturities for the U.S. Treasury securities
and the U.S. Federal Home Loan Bank System securities were 3.3 months and 7.7 months, respectively. As of March 31, 2009, the weighted average maturity for total short-term investments was 5.5 months.

3. Balance Sheet Components

Inventory

Inventory consisted of the following (in thousands):



|                                                               |  |               |       |                  |   |      
|-------------------------------------------------------------- |  | ------------- | ----- | ---------------- | - | -----
|                                                               |  | March 31,2009 |       | December 31,2008
|Finished goods                                                 |  | $             | 2,463 |                  | $ | 3,103
|Work-in-process                                                |  |               | 4,132 |                  |   | 5,186
|Raw materials                                                  |  |               | 140   |                  |   | 104  
|                                                               |  |               |       |                  |   |      
|                                                               |  |               | 6,735 |                  |   | 8,393
|Less: inventory reserves for obsolescence and excess inventory |  |               | 363   |                  |   | 364  
|                                                               |  |               |       |                  |   |      
|Net inventory                                                  |  | $             | 6,372 |                  | $ | 8,029
|                                                               |  |               |       |                  |   |      

The following table summarizes the activity in the inventory reserves for obsolescence and excess
inventory for the stated



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INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

MARCH 31,
2009 (Unaudited)



periods (in thousands):



|                           |  |   |     |  
|-------------------------- |  | - | --- | -
|Balance, December 31, 2008 |  | $ | 364 |  
|Additions charged to costs |  |   |    |  
|Deductions                 |  |   | (1  | )
|                           |  |   |     |  
|Balance, March 31, 2009    |  | $ | 363 |  
|                           |  |   |     |  

Intangible Assets

Intangible assets consisted of the following (in thousands):



|                                       |  |               |       |                  |   |      
|-------------------------------------- |  | ------------- | ----- | ---------------- | - | -----
|                                       |  | March 31,2009 |       | December 31,2008
|Patents                                |  | $             | 2,760 |                  | $ | 2,696
|Trademarks                             |  |               | 66    |                  |   | 66   
|Trademarks not subject to amortization |  |               | 9     |                  |   | 9    
|                                       |  |               |       |                  |   |      
|                                       |  |               | 2,835 |                  |   | 2,771
|Less: accumulated amortization         |  |               | 386   |                  |   | 368  
|                                       |  |               |       |                  |   |      
|Net intangible assets                  |  | $             | 2,449 |                  | $ | 2,403
|                                       |  |               |       |                  |   |      

Amortization expense for intangible assets for the three months ended March 31, 2009 and
March 31, 2008 was $18,000 and $13,000, respectively. At March 31, 2009, estimated amortization expense for the remainder of 2009 and years thereafter is as follows (in thousands):



|                                    |  |                              |      
|----------------------------------- |  | ---------------------------- | -----
|                                    |  | Estimatedamortizationexpense
|2009 (remaining nine months)        |  | $                            | 66   
|2010                                |  |                              | 165  
|2011                                |  |                              | 161  
|2012                                |  |                              | 159  
|2013                                |  |                              | 159  
|Thereafter                          |  |                              | 1,730
|                                    |  |                              |      
|Total expected amortization expense |  | $                            | 2,440
|                                    |  |                              |      

Accrued Expenses

Accrued expenses consisted of the following (in thousands):



|                                      |  |               |       |                  |   |      
|------------------------------------- |  | ------------- | ----- | ---------------- | - | -----
|                                      |  | March 31,2009 |       | December 31,2008
|Accrued vacation                      |  | $             | 679   |                  | $ | 610  
|Accrued employee incentives / bonuses |  |               | 534   |                  |   | 927  
|Other                                 |  |               | 453   |                  |   | 629  
|                                      |  |               |       |                  |   |      
|Total accrued expenses                |  | $             | 1,666 |                  | $ | 2,166
|                                      |  |               |       |                  |   |      



9



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##### Table of Contents

INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

MARCH 31,
2009 (Unaudited)



4. Net Income (Loss) Attributable to Common Shareholders

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 March 31, |       
|                                                                    |  | 2009                         |        | 2008 |  
|                                                                    |  |                             
|Numerator:                                                          |  |                              |        |      |   |        |  
|                                                                    |  |                             
|Net income (loss) attributable to common shareholders               |  | $                            | 5      |      | $ | (945   | )
|                                                                    |  |                              |        |      |   |        |  
|Denominator: Weighted average shares outstanding                    |  |                              | 31,340 |      |   | 31,177 |  
|Less: Unvested common shares outstanding                            |  |                              | 292    |      |   | 534    |  
|                                                                    |  |                              |        |      |   |        |  
|Denominator for net income (loss) per share basic                   |  |                              | 31,048 |      |   | 30,643 |  
|                                                                    |  |                             
|Effect of dilutive securities:                                      |  |                              |        |      |   |        |  
|Incremental common shares attributable to unvested restricted stock |  |                              | 108    |      |   |       |  
|Incremental common shares attributable to outstanding stock options |  |                              | 17     |      |   |       |  
|                                                                    |  |                              |        |      |   |        |  
|Denominator for net income (loss) per share diluted                 |  |                              | 31,173 |      |   | 30,643 |  
|                                                                    |  |                              |        |      |   |        |  
|Net income (loss) per share basic                                   |  | $                            | 0.00   |      | $ | (0.03  | )
|                                                                    |  |                              |        |      |   |        |  
|Net income (loss) per share diluted                                 |  | $                            | 0.00   |      | $ | (0.03  | )
|                                                                    |  |                              |        |      |   |        |  

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 months ended March 31, 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 months ended March 31, 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 three months ended March 31, 2009 and 2008 consist of the following (weighted average in thousands):



|                                   |  |                              |  |      
|---------------------------------- |  | ---------------------------- |  | -----
|                                   |  | Three Months Ended March 31,
|                                   |  | 2009                         |  | 2008 
|Restricted common stock            |  |                             |  | 440  
|Contingent restricted common stock |  | 94                           |  | 94   
|Options to purchase common stock   |  | 3,039                        |  | 1,894
|                                   |  |                              |  |      
|Total                              |  | 3,133                        |  | 2,428
|                                   |  |                              |  |      

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 March 31, 2009, approximately 0.7 million shares were available for future grant under the 2007 Plan.



10



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##### Table of Contents

INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

MARCH 31,
2009 (Unaudited)



Stock-Based Compensation Expense

The fair value of the stock options granted to employees and officers for the three months ended March 31, 2009 and 2008 was estimated using the
following weighted average assumptions:



|                                          |  |                              |      |   |      |   |      |  
|----------------------------------------- |  | ---------------------------- | ---- | - | ---- | - | ---- | -
|                                          |  | Three Months Ended March 31, |     
|                                          |  | 2009                         |      |   | 2008 |  
|Dividend yields                           |  |                              | None |   |      |   | None |  
|Expected volatility                       |  |                              | 64.6 | % |      |   | 50.3 | %
|Risk-free interest rate                   |  |                              | 2.0  | % |      |   | 2.0  | %
|Expected lives (in years)                 |  |                              | 5.1  |   |      |   | 2.2  |  
|Weighted average fair value at grant date |  | $                            | 1.19 |   |      | $ | 5.68 |  

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 three months ended March 31, 2009 and 2008, which was allocated as follows (in thousands):



|                                                   |  |                              |     |      |   |    
|-------------------------------------------------- |  | ---------------------------- | --- | ---- | - | ---
|                                                   |  | Three Months Ended March 31,
|                                                   |  | 2009                         |     | 2008
|Stock-based compensation expense by caption:       |  |                              |     |      |   |    
|Research and development                           |  | $                            | 147 |      | $ | 100
|Sales and marketing                                |  |                              | 113 |      |   | 76 
|General and administrative                         |  |                              | 227 |      |   | 180
|                                                   |  |                              |     |      |   |    
|Total stock-based compensation expense             |  | $                            | 487 |      | $ | 356
|                                                   |  |                              |     |      |   |    
|                                                   |  |                             
|Stock-based compensation expense by type of award: |  |                              |     |      |   |    
|Stock options                                      |  | $                            | 427 |      | $ | 299
|Restricted common stock and RSUs                   |  |                              | 60  |      |   | 57 
|                                                   |  |                              |     |      |   |    
|Total stock-based compensation expense             |  | $                            | 487 |      | $ | 356
|                                                   |  |                              |     |      |   |    

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 36
months of continued service.

The following table summarizes option activity for the three month period ended March 31, 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                                                  |  | 891                                                        |   |  |                              | 2.13 |                                                 |     |                          |   |    
|Exercised                                                |  |                                                           |   |  |                              |     |                                                 |     |                          |   |   
|Canceled                                                 |  | (38                                                        | ) |  |                              | 4.79 |                                                 |     |                          |   |    
|                                                         |  |                                                            |   |  |                              |      |                                                 |     |                          |   |    
|Options outstanding at March 31, 2009                    |  | 3,631                                                      |   |  |                              | 5.23 |                                                 | 8.9 |                          |   | 129
|                                                         |  |                                                            |   |  |                              |      |                                                 |     |                          |   |    
|Options vested and expected to vest after March 31, 2009 |  | 3,551                                                      |   |  |                              | 5.23 |                                                 | 8.9 |                          |   | 126
|                                                         |  |                                                            |   |  |                              |      |                                                 |     |                          |   |    
|Options exercisable at March 31, 2009                    |  | 815                                                        |   |  |                              | 6.26 |                                                 | 8.5 |                          |   | 29 
|                                                         |  |                                                            |   |  |                              |      |                                                 |     |                          |   |    



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##### Table of Contents

INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

MARCH 31,
2009 (Unaudited)



At March 31, 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 $5.4 million. These options had a remaining weighted-average period of 3.0 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.

The following table summarizes restricted stock activity for the three month period ended March 31, 2009 for all of our restricted stock:



|                           |  |                                         |   |  |                                      |     
|-------------------------- |  | --------------------------------------- | - |  | ------------------------------------ | ----
|                           |  | RestrictedCommonStock AwardsOutstanding |   |  | Weighted-Average GrantDate FairValue
|                           |  | (in thousands)                          |   |  |                                     
|Balance, December 31, 2008 |  | 315                                     |   |  | $                                    | 1.50
|Granted                    |  |                                        |   |  |                                      |    
|Vested                     |  | (47                                     | ) |  |                                      | 0.92
|Forfeited                  |  | (2                                      | ) |  |                                      | 0.19
|                           |  |                                         |   |  |                                      |     
|Balance, March 31, 2009    |  | 266                                     |   |  |                                      | 1.62
|                           |  |                                         |   |  |                                      |     

The total unrecognized stock-based compensation expense for restricted stock was approximately
$407,000 as of March 31, 2009. The total unrecognized stock-based compensation expense related to restricted stock awards subject to a four year vesting schedule was approximately $220,000 as of March 31, 2009. These unvested restricted
common stock awards will vest on a weighted-average basis over a period of 0.7 years from March 31, 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
March 31, 2009.

Restricted Stock Unit Activity

We began granting RSUs under the 2007 Plan during the first quarter of 2009. RSUs are converted 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 36 months 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.

A summary of the RSU activity under the 2007 Plan during the three months ended March 31, 2009 is presented below:



|                           |  |                                  |  |                                      |     
|-------------------------- |  | -------------------------------- |  | ------------------------------------ | ----
|                           |  | RestrictedStock UnitsOutstanding |  | Weighted-AverageGrant DateFair Value
|                           |  | (in thousands)                   |  |                                     
|Balance, December 31, 2008 |  |                                 |  | $                                    |    
|Granted                    |  | 396                              |  |                                      | 2.10
|Vested                     |  |                                 |  |                                      |    
|Forfeited                  |  |                                 |  |                                      |    
|                           |  |                                  |  |                                      |     
|Balance, March 31, 2009    |  | 396                              |  |                                      | 2.10
|                           |  |                                  |  |                                      |     



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INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

MARCH 31,
2009 (Unaudited)



The total unrecognized stock-based compensation expense related to RSUs was approximately $814,000 as
of March 31, 2009. The unvested RSUs will vest on a weighted-average basis over a period of 3.9 years from March 31, 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 amounted to approximately $214,000 and $181,000 for the quarters ended
March 31, 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 extends the term of the lease through March 31, 2010 and reduces the area leased
from approximately 4,300 square feet to 2,824 square feet.

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 $14.3 million and $14.7 million for the three months ended March 31, 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 March 31, |  
|                                              |  | 2009                         |   |  | 2008 |  
|devolo AG (OEM)                               |  | 25                           | % |  | 19   | %
|Free (service provider)                       |  | 23                           |   |  | 18   |  
|LEA SA (OEM)                                  |  | 12                           |   |  | *    |  
|Lumax International Corporation (distributor) |  | *                            |   |  | 17   |  



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

Three customers accounted for a total of 53.6% and 59.1% of accounts receivable at March 31, 2009 and December 31, 2008, respectively.

8. Income Taxes

During the three
months ended March 31, 2009, we recognized approximately $46,000 of income tax benefit related to our Canadian subsidiary and approximately $17,000 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 March 31, 2009, we had no accrued interest or any penalty associated with any unrecognized tax benefits, nor was any interest expense recognized during the three months ended
March 31, 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 March 31, 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



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INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

MARCH 31,
2009 (Unaudited)



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.

9. Subsequent Events

During April 2009, we granted a total of 31,700 non-qualified stock options to
our employees at an exercise price of $2.01 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.

On April 14, 2009, we formed Intellon Hong Kong Limited, a wholly-owned subsidiary incorporated in Hong Kong.

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 are offering 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 elects to receive new stock options will receive one new stock option for each 1.1 stock options tendered for exchange. A participant who elects to receive RSUs will receive 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 12 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 will be the closing price of our common stock as reported on the NASDAQ Global Market on the date the new stock options are granted. We expect the offer to
expire on May 29, 2009 and expect to grant the new stock options and RSUs on June 1, 2009.

This stock option exchange program is
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 has been designed with the goal that the current fair
value of the stock options surrendered will be approximately the same as the fair value of the new stock options or RSUs received. However, the fair value of the new stock options or RSUs received will not be known until the grant date and,
accordingly, could be more or less than the fair value of the stock options surrendered.

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.



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##### Table of Contents

|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 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.

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 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, enabling us to focus on the design, development, sale and marketing of our products and to reduce the level of our capital investment. As of March 31, 2009, we had shipped approximately 36.1 million powerline communications
ICs, including over 28.2 million HomePlug-based ICs that have been integrated into adapters, set-top boxes and other commercial applications. We shipped over 2.2 million powerline communications ICs in the first quarter of 2009, a 6%
decline from shipments of over 2.4 million powerline communications ICs in the first quarter of 2008. Our HomePlug-based ICs represented approximately 99% of our revenue for the first quarter of 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. In the first quarter of 2009, service providers accounted for approximately 73% of our revenue, or $11.3 million. Revenue from the service provider
channel in the first quarter of 2009 declined approximately 22% compared to the fourth quarter of 2008, but increased approximately 33% compared to the first quarter of 2008. The fluctuations in demand for our HomePlug-based ICs in the service
provider channel are due, in part, to changes in demand from a single indirect customer deploying set-top boxes incorporating our HomePlug 1.0 ICs. Historically, demand from this customer has fluctuated significantly, and in the first quarter of
2009, sales to this customer decreased approximately 75%, or $3.2 million, compared to the fourth quarter of 2008 primarily as a result of an inventory over-stock position at this customer. Although we expect demand from this customer to increase in
the second quarter of 2009 compared to the first quarter of 2009, we expect that sales to this customer on an annual basis will decline in 2009 compared to 2008.



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##### Table of Contents

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. During the first quarter 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 quarter of 2009, revenue in the retail channel declined approximately 29% and 52% compared to the fourth quarter of 2008 and the first quarter of 2008, respectively, largely due to the global economic downturn.

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 March 31, 2009 and 2008, 85% and 76% 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
first quarter of 2009, we realized net income of $5,000, compared to net income of $1.6 million in the fourth quarter of 2008 and a net loss of $0.9 million in the first quarter of 2008. Our accumulated deficit as of March 31, 2009 was $135.7
million. In the first quarter of 2009, our total revenue declined to $15.5 million from $20.8 million in the fourth quarter of 2008 and $16.3 million in the first quarter of 2008. The sequential decline in revenue was primarily due to the current
adverse conditions in the global economy as well as the inventory over-stock position at one of our service provider customers. In addition, sales of our command and control ICs declined in the first quarter of 2009 after increasing significantly in
the fourth quarter of 2008 when a change in our supply chain required our customers to procure enough ICs in the fourth quarter to allow time for re-qualification of the product from our new supplier. In the second quarter of 2009, we expect our
revenue and aggregate unit sales of our ICs to increase compared to the first quarter of 2009 but to decrease compared to the second quarter of 2008. We believe it is too early to determine the degree to which the anticipated sequential increase in
revenue and aggregate unit sales of our ICs in the second quarter will prove to be due to channel inventory replacement by our customers and their suppliers or a real increase in end market demand for our products. We continue to be concerned about
the economic downturn and the associated risks of delays and cancellations in customer orders and the related difficulty of forecasting our product demand, revenue, product mix and gross margins.

In the first quarter of 2009, our operating expenses were $8.0 million, compared to $7.4 million in the fourth quarter of 2008 and $8.7 million in the
first quarter of 2008. In 2009, we expect to hire additional employees to support our expanded 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 second quarter of 2009, we expect a sequential increase in operating expenses compared to the first quarter of 2009 due to the anticipated increases in full-time employees, as
well as increases in engineering program costs, payroll taxes and legal fees and expenses. In addition, in the second half of 2009, we expect to incur substantial costs and expenses related to the engineering development and mask costs for our next
generation IC, as well as research and development efforts related to our next generation ICs.



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##### Table of Contents

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 $49,000 and $50,000 for each of the three month periods ended March 31, 2009 and 2008, respectively. We do not expect the sales of these products to be
significant in the future.

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 further during 2009. Our top five customers accounted for approximately 76% and 68% of our revenue for the three months ended March 31, 2009 and 2008, respectively. The customers representing 10% or more of our revenue in the three
months ended March 31, 2009 and 2008 were:



|                                              |  |                              |   |  |      |  
|--------------------------------------------- |  | ---------------------------- | - |  | ---- | -
|                                              |  | Three Months Ended March 31, |  
|                                              |  | 2009                         |   |  | 2008 |  
|devolo AG (OEM)                               |  | 25                           | % |  | 19   | %
|Free (service provider)                       |  | 23                           |   |  | 18   |  
|LEA SA (OEM)                                  |  | 12                           |   |  | *    |  
|Lumax International Corporation (distributor) |  | *                            |   |  | 17   |  



|* | 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 ICs for a single end-use customer, EchoStar Corporation (EchoStar). For the three months ended March 31, 2009 and March 31, 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 March 31,       |       
|              |  | 2009                               |        |  | 2008  |  
|              |  | (in thousands, except percentages) |       
|Europe        |  | $                                  | 9,341  |  | 60.2  | % |  | $ | 7,169  |  | 44.0  | %
|Asia          |  |                                    | 5,000  |  | 32.3  |   |  |   | 7,443  |  | 45.6  |  
|North America |  |                                    | 1,167  |  | 7.5   |   |  |   | 1,676  |  | 10.3  |  
|Other         |  |                                    |       |  |      |   |  |   | 17     |  | 0.1   |  
|              |  |                                    |        |  |       |   |  |   |        |  |       |  
|Total         |  | $                                  | 15,508 |  | 100.0 | % |  | $ | 16,305 |  | 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 second quarter of 2009, we anticipate that our gross profit margins will be slightly lower compared to the first 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 increase in the second quarter of 2009 as a percentage of our total product mix, which will negatively affect our gross profit
margins.

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.

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 the degree to which our new products have represented major changes from our then-existing products. As we create new
products, 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



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##### Table of Contents

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 second quarter of 2009 over our actual spending for these expenses for the first
quarter of 2009 as we hire additional personnel, increase research and development expenses and focus resources on future designs.

Sales and Marketing

Sales and marketing expense relates primarily to compensation and associated costs for marketing 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
decrease slightly in absolute dollars in the second quarter of 2009 compared to the first 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 increase in the second quarter of 2009, compared to the first
quarter of 2009, as we hire additional personnel and incur costs to operate as a public company, including expenses related to maintaining compliance with the Sarbanes-Oxley Act of 2002 and legal and administrative fees associated with our stock
option exchange program.

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 second quarter of 2009, compared to the first quarter of 2009, primarily as a result of lower interest rates on our investments. We incurred no interest expense in the three months ended March 31, 2009.

Provision for Income Taxes

During the three months ended March 31, 2009, we recognized approximately $46,000 of income tax benefit related to our Canadian subsidiary, which was partially offset by approximately $17,000 in U.S. Federal income tax expense. As of
March 31, 2009, we had no accrued interest or any penalty associated with any unrecognized tax benefits, nor was any interest expense recognized during the three months ended March 31, 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 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.



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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 EndedMarch 31,        |       
|                               |  | 2009                               |        |   | % ofRevenue |       |   | 2008 |   |        | % ofRevenue | 
|                               |  | (in thousands, except percentages) |       
|Revenue                        |  | $                                  | 15,508 |   |             | 100.0 | % |      | $ | 16,305 |             |  | 100.0 | % 
|                               |  |                                    |        |  
|Cost of revenue                |  |                                    | 7,601  |   |             | 49.0  |   |      |   | 8,970  |             |  | 55.0  |   
|                               |  |                                    |        |   |             |       |   |      |   |        |             |  |       |   
|                               |  |                                    |        |  
|Gross profit                   |  |                                    | 7,907  |   |             | 51.0  |   |      |   | 7,335  |             |  | 45.0  |   
|                               |  |                                    |        |  
|Cost of operations:            |  |                                    |        |   |             |       |   |      |   |        |             |  |       |   
|Research and development       |  |                                    | 3,607  |   |             | 23.3  |   |      |   | 4,444  |             |  | 27.2  |   
|Sales and marketing            |  |                                    | 2,330  |   |             | 15.0  |   |      |   | 2,179  |             |  | 13.4  |   
|General and administrative     |  |                                    | 2,029  |   |             | 13.1  |   |      |   | 2,069  |             |  | 12.7  |   
|                               |  |                                    |        |   |             |       |   |      |   |        |             |  |       |   
|                               |  |                                    |        |  
|Operating loss                 |  |                                    | (59    | ) |             | (0.4  | ) |      |   | (1,357 | )           |  | (8.3  | ) 
|                               |  |                                    |        |  
|Other income (expense)         |  |                                    |        |   |             |       |   |      |   |        |             |  |       |   
|Interest income                |  |                                    | 63     |   |             | 0.4   |   |      |   | 443    |             |  | 2.7   |   
|Other expense                  |  |                                    | (28    | ) |             | (0.2  | ) |      |   | (31    | )           |  | (0.2  | ) 
|                               |  |                                    |        |   |             |       |   |      |   |        |             |  |       |   
|Total other income             |  |                                    | 35     |   |             | 0.2   |   |      |   | 412    |             |  | 2.5   |   
|                               |  |                                    |        |   |             |       |   |      |   |        |             |  |       |   
|Loss before income tax benefit |  |                                    | (24    | ) |             | (0.2  | ) |      |   | (945   | )           |  | (5.8  | ) 
|                               |  |                                    |        |  
|Income tax benefit             |  |                                    | (29    | ) |             | (0.2  | ) |      |   |       |             |  |      |   
|                               |  |                                    |        |   |             |       |   |      |   |        |             |  |       |   
|Net income (loss)              |  | $                                  | 5      |   |             | 0.0   | % |      | $ | (945   | )           |  | (5.8  | )%
|                               |  |                                    |        |   |             |       |   |      |   |        |             |  |       |   

Comparison of Three Months Ended March 31, 2009 and 2008

Revenue



|        |  |                                    |        |      |   |               |  |      |   
|------- |  | ---------------------------------- | ------ | ---- | - | ------------- |  | ---- | --
|        |  | Three Months EndedMarch 31,        |       
|        |  | 2009                               |        | 2008 |   | PercentChange | 
|        |  | (in thousands, except percentages) |       
|Revenue |  | $                                  | 15,508 |      | $ | 16,305        |  | (4.9 | )%

Our revenue for the three months ended March 31, 2009 decreased 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 $0.2 million for the three months ended March 31,
2009, compared to $0.7 million for the corresponding period in 2008, a 75.1% decrease. The decrease in revenue for the three months ended March 31, 2009 over the prior year period was primarily due to a 73.2% decrease in unit volumes and a 7.3%
decrease in average selling prices, respectively for our command and control ICs. In addition, the sales of our HomePlug-based ICs decreased to $15.3 million in the three months ended March 31, 2009 from $15.6 million in the corresponding
period in 2008, a 1.7% decrease. The decrease in revenue for our HomePlug-based ICs for the three months ended March 31, 2009 over the prior year period was primarily due to a 0.9% decrease in average selling prices due to product mix and a
0.7% decrease in unit volumes.



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##### Table of Contents

Sales to our top customers varied for the three months ended March 31, 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 March 31, 2009 declined by approximately 51% and 75% compared to the three months ended March 31, 2008 and December 31, 2008, respectively. In contrast, for the
three months ended March 31, 2009, sales to devolo AG and LEA SA increased as a percentage of revenue to 25% and 12% from 19% and less than 10%, respectively, in the corresponding period in 2008, primarily as a result of increased demand from
their 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 decreased to $15.3 million in the three months ended March 31, 2009 from $15.6 million in the three
months ended March 31, 2008 and $19.8 million in the three months ended December 31, 2008. Sales of our command and control ICs decreased to $0.2 million in the three months ended March 31, 2009 from $0.7 million in the three months
ended March 31, 2008 and $1.0 million in the three months ended December 31, 2008. The sequential and quarter-over-quarter declines in sales of our HomePlug-based ICs were primarily the result of the decline in sales of our HomePlug 1.0
ICs described above, as well as reduced demand in the retail channel largely due to the global economic downturn. These declines were offset, in part, by increased sales of our HomePlug 1.0 with Turbo ICs in the service provider channel in the three
months ended March 31, 2009, compared to each of the three month periods ended March 31, 2008 and December 31, 2008. The sequential and quarter-over-quarter declines in sales of our command and control ICs were primarily the result of
decreased demand for these ICs in the three months ended March 31, 2009 after sales of our command and control ICs significantly increased in the three months ended December 31, 2008 when a change in our supply chain required our customers
to procure enough ICs to allow time for re-qualification of the product from our new supplier.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Sales Channel Improvements. From time to time, we make changes in our sales channel relationships. For example, other distributors, which individually accounted for
less than 10% of our revenue, now purchase product previously sold to Lumax.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 EndedMarch 31,        |      
|                   |  | 2009                               |       |   | 2008 |   |       | PercentChange | 
|                   |  | (in thousands, except percentages) |      
|Cost of revenue    |  | $                                  | 7,601 |   |      | $ | 8,970 |               |  | (15.3 | )%
|Percent of revenue |  |                                    | 49.0  | % |      |   | 55.0  | %             |  |       |   

The decrease in cost of revenue during the three months ended March 31, 2009, compared to the
corresponding period 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 March 31, 2009 and 2008. In addition, our expenses for licensing third-party technologies were approximately $0.3
million for each of the three month periods ended March 31, 2009 and 2008.



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##### Table of Contents

Gross Profit





|                   |  |                                    |       |   |      |   |       |               |  |     |  
|------------------ |  | ---------------------------------- | ----- | - | ---- | - | ----- | ------------- |  | --- | -
|                   |  | Three Months EndedMarch 31,        |      
|                   |  | 2009                               |       |   | 2008 |   |       | PercentChange | 
|                   |  | (in thousands, except percentages) |      
|Gross Profit       |  | $                                  | 7,907 |   |      | $ | 7,335 |               |  | 7.8 | %
|Percent of revenue |  |                                    | 51.0  | % |      |   | 45.0  | %             |  |     |  

Gross profit as a percentage of revenue increased in the three months ended March 31, 2009,
compared to the corresponding period in 2008, primarily due to a lesser concentration of lower margin HomePlug 1.0 ICs as a percentage of our total product mix sold, 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 March 31, 2009, compared
to the corresponding period in 2008, primarily due to decreases in the average unit costs of our HomePlug-based ICs of 13.9% which were slightly offset by a decrease in average selling prices for our HomePlug-based ICs of 0.9%. In addition, the
average unit costs for our command and control ICs increased approximately 2.8%, while our average selling prices decreased 7.3% for the three months ended March 31, 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 March 31, 2009 compared to the corresponding period in 2008.

Research and Development



|                         |  |                                    |       |   |      |   |       |               |  |       |   
|------------------------ |  | ---------------------------------- | ----- | - | ---- | - | ----- | ------------- |  | ----- | --
|                         |  | Three Months EndedMarch 31,        |      
|                         |  | 2009                               |       |   | 2008 |   |       | PercentChange | 
|                         |  | (in thousands, except percentages) |      
|Research and Development |  | $                                  | 3,607 |   |      | $ | 4,444 |               |  | (18.8 | )%
|Percent of revenue       |  |                                    | 23.3  | % |      |   | 27.2  | %             |  |       |   

The decrease in research and development expenses for the three months ended March 31, 2009,
compared to the corresponding period in 2008, was primarily due to a decrease in engineering related expenses of $0.6 million, primarily for the design and development of our 65 nanometer HomePlug AV-based IC which was introduced in October 2008,
decreased payroll and other employee related expenses of $0.1 million and decreased occupancy related expenses of $0.1 million.

Sales and Marketing



|                    |  |                                    |       |   |      |   |       |               |  |     |  
|------------------- |  | ---------------------------------- | ----- | - | ---- | - | ----- | ------------- |  | --- | -
|                    |  | Three Months EndedMarch 31,        |      
|                    |  | 2009                               |       |   | 2008 |   |       | PercentChange | 
|                    |  | (in thousands, except percentages) |      
|Sales and Marketing |  | $                                  | 2,330 |   |      | $ | 2,179 |               |  | 6.9 | %
|Percent of revenue  |  |                                    | 15.0  | % |      |   | 13.4  | %             |  |     |  

The increase in sales and marketing expenses for the three months ended March 31, 2009,
compared to the corresponding period in 2008, was primarily due to increased tradeshow and other marketing expenses of $0.4 million, which was partially offset by decreased payroll and other employee related expenses of $0.2 million.

General and Administrative



|                           |  |                                    |       |   |      |   |       |               |  |      |   
|-------------------------- |  | ---------------------------------- | ----- | - | ---- | - | ----- | ------------- |  | ---- | --
|                           |  | Three Months EndedMarch 31,        |      
|                           |  | 2009                               |       |   | 2008 |   |       | PercentChange | 
|                           |  | (in thousands, except percentages) |      
|General and Administrative |  | $                                  | 2,029 |   |      | $ | 2,069 |               |  | (1.9 | )%
|Percent of revenue         |  |                                    | 13.1  | % |      |   | 12.7  | %             |  |      |   

General and administrative expenses were essentially the same for each of the three month periods
ended March 31, 2009 and 2008. The slight decrease during the three months ended March 31, 2009, compared to the corresponding period in 2008, was



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primarily due to a decrease in professional fees of $0.2 million, which was almost entirely offset by increases in payroll and other employee related
expenses of $0.1 million and occupancy related expenses of $0.1 million.

Total Other Income



|                   |  |                                    |     |   |      |   |     |               |  |       |   
|------------------ |  | ---------------------------------- | --- | - | ---- | - | --- | ------------- |  | ----- | --
|                   |  | Three Months EndedMarch 31,        |    
|                   |  | 2009                               |     |   | 2008 |   |     | PercentChange | 
|                   |  | (in thousands, except percentages) |    
|Total Other Income |  | $                                  | 35  |   |      | $ | 412 |               |  | (91.5 | )%
|Percent of revenue |  |                                    | 0.2 | % |      |   | 2.5 | %             |  |       |   

The decrease in other income for the three months ended March 31, 2009, compared to the
corresponding period in 2008, was primarily due to a decrease of $0.4 million in interest income resulting from lower interest rates on our invested cash, cash equivalents and short-term investments.

Income Tax Benefit



|                   |  |                                    |      |    |      |   |   |               |  |    
|------------------ |  | ---------------------------------- | ---- | -- | ---- | - | - | ------------- |  | ---
|                   |  | Three Months EndedMarch 31,       
|                   |  | 2009                               |      |    | 2008 |   |   | PercentChange
|                   |  | (in thousands, except percentages)
|Income Tax Benefit |  | $                                  | (29  | )  |      | $ |  |               |  | N/A
|Percent of revenue |  |                                    | (0.2 | )% |      |   |  | %             |  |    

The income tax benefit for the three months ended March 31, 2009 comprises net income tax
credits attributable to our Canadian subsidiary of approximately $46,000, which was partially offset by U.S. Federal income tax expense of approximately $17,000.

Liquidity and Capital Resources

The following table summarizes our cash flows:



|                                                    |  |                             |        |   |      |   |        |  
|--------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                    |  | Three Months EndedMarch 31, |       
|                                                    |  | 2009                        |        |   | 2008 |  
|                                                    |  | (in thousands)              |       
|Consolidated Cash Flow Data:                        |  |                             |        |   |      |   |        |  
|Net cash provided by (used in) operating activities |  | $                           | 4,186  |   |      | $ | (1,216 | )
|Net cash (used in) investing activities             |  |                             | (5,030 | ) |      |   | (572   | )
|Net cash provided by financing activities           |  |                             |       |   |      |   | 5,555  |  
|                                                    |  |                             |        |   |      |   |        |  
|Net (decrease) increase in cash and equivalents     |  | $                           | (844   | ) |      | $ | 3,767  |  
|                                                    |  |                             |        |   |      |   |        |  

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, bonuses and other operating expenses including mask expenses and development tools for new product development.
In addition, we made payments related to the purchase of equipment as well as working capital.

As of March 31, 2009, our principal
sources of liquidity consisted of cash, cash equivalents and short-term investments of $59.5 million, an increase of $3.9 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.



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Operating Activities

Our cash flows used in 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.

During the three months ended March 31, 2009, our operating activities provided approximately $4.2 million of net cash. Cash provided by operating activities for the three months ended March 31, 2009
resulted primarily from a decrease of $3.0 million in accounts receivable related to the timing of customer payments, a decrease of $1.7 million in inventory, non-cash expenses for stock-based compensation of $0.5 million and depreciation and
amortization expenses of $0.3 million and the receipt of $0.2 million in income tax refunds. These increases in cash were offset by a decrease of $1.2 million in accounts payable and accrued expenses due to timing of payments to vendors and the
payment for second half 2008 incentive programs and an increase of $0.3 million in prepaid expenses and other assets.

During the three
months ended March 31, 2008, we used approximately $1.2 million of net cash in operating activities. The significant uses of cash in operations were a net loss of $0.9 million, an increase of $0.8 million in accounts receivable due to increased
revenue and the timing of customer payments, a decrease in accounts payable and accrued expenses of $0.2 million due to increased revenue and increases in prepaid expenses and other assets of $0.2 million. These uses were partially offset by
decreases in inventory of $0.2 million as well as non-cash expenses for stock-based compensation expenses of $0.4 million and depreciation and amortization expenses of $0.3 million and the receipt of $0.1 million in income tax refunds.

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, purchases of laboratory and computer equipment and software tools used
in the design of our ICs to support our operations and research and development. 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 three months ended March 31, 2009, we used approximately $5.0 million of net cash in investing activities, primarily for the purchase of
short-term investments of $22.6 million, which was partially offset by the proceeds from the maturity of short-term investments of $18.0 million. The remaining $0.4 million was used to purchase property and equipment, as well as for the development
of intangible assets. During the three months ended March 31, 2008, we used approximately $0.6 million of net cash in investing activities, primarily to purchase property and equipment as well as for the purchase or development of intangible
assets.

Financing Activities

During the three months ended March 31, 2009, there were no financing activities.

During the three
months ended March 31, 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
March 31, 2009 or 2008.

Contractual Obligations and Known Future Cash Requirements

Set forth below is information concerning our known contractual obligations as of March 31, 2009 that is fixed and determinable.



|                            |  |                |       |                 |   |           |  |           |       |                  |   |     |  |   |  
|--------------------------- |  | -------------- | ----- | --------------- | - | --------- |  | --------- | ----- | ---------------- | - | --- |  | - | -
|                            |  | Total          |       | Less than1 year |   | 1-2 years |  | 3-5 years |       | More than5 years
|                            |  | (in thousands)
|Operating lease obligations |  | $              | 3,531 |                 | $ | 1,565     |  | $         | 1,358 |                  | $ | 608 |  | $ | 
|Purchase obligations        |  |                | 4,782 |                 |   | 4,761     |  |           | 21    |                  |   |    |  |   | 
|                            |  |                |       |                 |   |           |  |           |       |                  |   |     |  |   |  
|Total                       |  | $              | 8,313 |                 | $ | 6,326     |  | $         | 1,379 |                  | $ | 608 |  | $ | 
|                            |  |                |       |                 |   |           |  |           |       |                  |   |     |  |   |  

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



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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 three months ended March 31, 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.

Effective January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements(SFAS 157), which was issued by the FASB in September 2006.
SFAS 157 establishes a common definition for fair value to be applied to U.S. GAAP guidance requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007. The adoption of SFAS 157 did not have a material impact on our financial position, results of operations, cash flows or disclosures.

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

In April 2009, the FASB issued three FSPs related to fair value measurements,
disclosures and other-than-temporary impairments. 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, 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. FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, amends the other-than-temporary impairment 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. Finally, FSP 107-1 and Accounting Principles Board (APB) 28-1, Interim Disclosures About Fair Value of Financial Instruments, amends SFAS No. 107,
Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of



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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 three FSPs are effective for periods ending after June 15, 2009. Early adoption is permitted for periods ending after March 15, 2009, however we will
adopt the FSPs during the second quarter of 2009. We are currently assessing the impact of these FSPs on our consolidated financial statements, but do not expect these FSPs to have a material impact on our financial position, results of operations,
cash flows or disclosures.

In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible
Assets(FSP 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 142. FSP
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 142-3 did not have a material impact on our financial position, results
of operations, cash flows or disclosures.



|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 March 31, 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 $59.5 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
March 31, 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 have weakened significantly for the first three months of 2009 compared to the year ago period. As a result, our operating expenses were approximately $0.3 million lower during the three
months ended March 31, 2009 relative to the three months ended March 31, 2008.

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, any of our competitors who are foreign companies could benefit from such a currency fluctuation, making it more difficult for us to compete with those
companies. 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 March 31, 2009, our disclosure controls and procedures were effective to provide reasonable assurance of the achievement
of these objectives.



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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 first 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 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 I, Item 1A of our
Yearly Report on Form 10-K for the year ended December 31, 2008.

Risks Related to Our Business and Industry

We have incurred substantial losses in the past, and we anticipate 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 $5,000 for the quarter ended March 31, 2009 and $0.9 million for the year ended December 31, 2008, our accumulated deficit as of March 31, 2009 was $135.7 million. We may incur additional operating
losses in the future due to a number of factors, including lower revenues and gross margins, 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, our total revenue in the first quarter of 2009 decreased sequentially from the prior quarter, including sequential revenue declines of 29% and 22% in our retail channel and
service provider channel, respectively.

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 further. 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.



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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, the economic downturn may impair the value and liquidity of our investments, which may negatively impact our ability to take advantage of
market opportunities, develop new or enhanced products, respond to competitive pressures, acquire complementary businesses, technology or products, or otherwise execute our business plan.

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.

Primarily as a result of the current adverse conditions in the global economy, as well as an inventory over-stock position at
one of our service provider customers, in the first quarter of 2009, our total revenue declined to $15.5 million from $20.8 million in the fourth quarter of 2008 and $16.3 million in the first quarter of 2008. However, 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, demand for our products continues to decline and we are unable to return
to revenue growth, our inventory levels could be negatively impacted and our operating losses could increase. In addition, prior to the first quarter of 2009, we experienced a period of significant growth and expansion. Our historic growth has
placed, and future growth, if any, would continue to place, a significant strain on our management, personnel, systems and financial resources. If we are unable to manage any future growth effectively, we may not be able to take advantage of market
opportunities, develop new products, satisfy customer requirements, execute our business plan, or respond to competitive pressures, and our business could be harmed.

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 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



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customers. Our visibility into customer demand is particularly limited for customers to whom we do not sell to directly, and 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. 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). Historically, because of this limited visibility, 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.

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.

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 include Arkados Group Inc., Conexant Systems, Inc. and Maxim Integrated Products Inc., which build HomePlug-based ICs, and Design of Systems on Silicon
(DS2) and Panasonic, which build ICs 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 Gigle
Semiconductor, which claims that its recently announced HomePlug AV-based IC includes higher levels of integration and additional proprietary features that increase bandwidth and throughput and facilitate communications over multiple types of
wiring, 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 these new HomePlug AV competitors will include features not offered by us. We 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, Conexant Systems Inc., 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



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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 and from companies that acquire, or enter into licensing arrangements or strategic alliances with, our competitors and who 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.

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. 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 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, require substantial research and development expense. Our research
and development expenses were approximately $3.6 million in the three months ended March 31, 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



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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. 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 or that our new and/or enhanced products will be introduced before our competitors new releases, or that our products
will meet market requirements.

We have in the past and may in the future experience unexpected delays in developing and introducing new
products and product enhancements. Such delays can adversely impact the commercial acceptance of new products and product enhancements, as well as 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, our HomePlug AV-based ICs or any of our future products 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 later 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



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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, which could require broadband over powerline devices to reduce output power levels. 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, our business could be harmed and, 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, 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. 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 March 31, 2009, devolo AG, an OEM; Free, a service provider; and LEA SA, an OEM, accounted for approximately 25%, 23%, and 12% 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 March 31, 2009 and March 31, 2008, we estimate that EchoStars indirect purchases through its various ODMs would have accounted for approximately 7% and 13% of our



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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 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. 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;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our customers can stop incorporating our products into their own products with limited notice to us and with little or no penalty;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | our customers and our customers customers may be unable to forecast the demand for their products;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | our customers and our customers customers may experience delays in rolling out new products and services that use our ICs;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | our customers may use our competitors products instead of ours;
| | - |  | ----------------------------------------------------------------



| |  |  | our customers may be unsuccessful in selling the products that use our ICs;
| | - |  | ---------------------------------------------------------------------------



| |  |  | 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 March 31, 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 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 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 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 and service provider 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 such as wireless, coaxial cable 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. 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 (AFCIs) and surge



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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. AFCIs from certain manufacturers may cause attenuation 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. The degree to which household products and devices such as AFCIs and surge protectors adversely impact the performance of our products 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.

Although the HomePlug technologies provide solutions to many of these challenges, powerline remains a more difficult medium than competing technologies
such as Ethernet and coaxial cable LANs. As a result, powerline communications may be unable to provide the reliable data transmission capacity, or throughput, required by some customers and may be an ineffective 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 grow our business may be harmed. Also, concerns
about the uncertain and adverse effects of incompatible powerline communications products may persuade service providers, 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, 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 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. In any such case, our
business could be materially and adversely affected.

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.



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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. 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 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 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 ICs 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. 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 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.

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 70 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



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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), 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 December 2008, the IEEE P1901 standards work group on powerline communications confirmed joint
proposals from HomePlug and Panasonic as the baseline technology for the in-home and access P1901 powerline standards. The joint proposals provide for the flexibility to support either the HomePlug AV or the Panasonic physical layer, as well as a
possible future generation physical layer that would be compatible with a future ITU G.hn anywire standard. Under this approach, future ICs based on the joint proposals 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 P1901 baseline, we are unable to predict whether or when the baseline will be ratified 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. Also in December 2008, the ITU G.hn work group moved most of the physical layer components for the proposed G.hn anywire communications
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 in 2009. 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 by the HomePlug Powerline Alliance, or more established global SDOs such as the IEEE or the ITU, or industry alliances such as the HomeGrid
Forum supporting the activities of such organizations, 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 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 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 contributor
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 command and control ICs. If 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.



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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 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 limited portion of our revenue from sales of
our ICs to customers in the commercial and utility markets in the three months ended March 31, 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 products
and services, as well as business models, 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



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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. Furthermore, 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 P1901 initiative. 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. 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, we will be unable to grow or maintain our
sales in these markets.

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 33
issued U.S. patents and 43 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. 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;
| | - |  | ------------------------



| |  |  | 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,



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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 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.



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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. Historically, the smallest geometry process we used for any of our ICs was 90 nanometer, but we recently began shipping a HomePlug AV-based IC which is based on 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 would materially adversely affect our results of operations.

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.



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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. 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. 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 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.



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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.

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 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.



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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 60.2% and 32.3% of revenue in the three months ended March 31, 2009, respectively. Most of our sales in Asia
are in Taiwan but also include sales to customers in China, Japan, the Republic of Korea and Singapore, among others. Nearly all of our sales in Europe are currently to customers in France and Germany. 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;
| | - |  | -----------------------



| |  |  | 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 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



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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 carryforwards 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 carryforwards.

As of March 31, 2009, we had estimated available U.S. federal income tax net operating loss (NOL) carryforwards of approximately $100.0 million,
state income tax net operating loss carryforwards of approximately $66.5 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 carryforwards 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. 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 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 $3.00 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.



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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 (66 2/3%) 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
|------- | ---------------------------------------------------

None.



|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 March 11, 2009
|        | 
|10.2*** |  | Third Amendment to Office Lease Agreement between the registrant and CA-The Concourse Limited Partnership, dated March 18, 2009        
|        | 
|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 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 Annual Report on Form 10-K filed March 13, 2009.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------

|** | Incorporated by reference to the identical document filed as an exhibit to the registrants Current Report on Form 8-K dated March 18, 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: May 8, 2009

Intellon Corporation (Registrant)By:

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




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