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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(Mark One)

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

For the quarterly period ended March 31, 2006

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 No. 0-50534



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ATHEROS COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 77-0485570                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

5480 Great America Parkway, Santa Clara, CA 95054-3644

(Address of principal executive offices, Zip Code)

(408) 773-5200

(Registrants telephone number, including area code)



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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.    Yesx    No ̈

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

Large accelerated filer ̈Accelerated filerx                                   
     Non-accelerated filer ̈

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

As of May 4, 2006, 51,614,020
shares of Common Stock, par value $0.0005, were issued and outstanding.



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Table of Contents

ATHEROS COMMUNICATIONS, INC.

INDEX TO

QUARTERLY REPORT ON FORM 10-Q

FOR
THE QUARTER ENDED MARCH 31, 2006



|           |  |                                                                                       |  |     
|---------- |  | ------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                       |  | Page
|           |  | PART I  FINANCIAL INFORMATION                                                        |  |     
|           |  |                                                                                      
|Item 1.    |  | Financial Statements (Unaudited)                                                      |  |     
|           |  |                                                                                      
|           |  | 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 |  | 13  
|           |  |                                                                                      
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 20  
|           |  |                                                                                      
|Item 4.    |  | Controls and Procedures                                                               |  | 21  
|           |  |                                                                                      
|           |  | PART II  OTHER INFORMATION                                                           |  |     
|           |  |                                                                                      
|Item 1.    |  | Legal Proceedings                                                                     |  | 22  
|           |  |                                                                                      
|Item 1A.   |  | Risk Factors                                                                          |  | 22  
|           |  |                                                                                      
|Item 6.    |  | Exhibits                                                                              |  | 35  
|           | 
|Signatures |  | 36                                                                                   



2



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PART I: FINANCIAL INFORMATION

Item 1.Financial Statements

ATHEROS COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)



|                                                                 |  |               |         |   |                  |   |         |  
|---------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                 |  | March 31,2006 |         |   | December 31,2005 |  
|ASSETS                                                           |  |               |         |   |                  |   |         |  
|Current assets:                                                  |  |               |         |   |                  |   |         |  
|Cash and cash equivalents                                        |  | $             | 82,695  |   |                  | $ | 75,425  |  
|Marketable securities                                            |  |               | 103,018 |   |                  |   | 98,220  |  
|Accounts receivable, net                                         |  |               | 30,455  |   |                  |   | 28,381  |  
|Inventory                                                        |  |               | 24,606  |   |                  |   | 20,475  |  
|Prepaid expenses, deferred income taxes and other current assets |  |               | 4,760   |   |                  |   | 9,111   |  
|                                                                 |  |               |         |   |                  |   |         |  
|Total current assets                                             |  |               | 245,534 |   |                  |   | 231,612 |  
|Property and equipment, net                                      |  |               | 6,146   |   |                  |   | 5,557   |  
|Deferred income taxes and other assets                           |  |               | 8,750   |   |                  |   | 2,010   |  
|                                                                 |  |               |         |   |                  |   |         |  
|Total assets                                                     |  | $             | 260,430 |   |                  | $ | 239,179 |  
|                                                                 |  |               |         |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                             |  |               |         |   |                  |   |         |  
|Current liabilities:                                             |  |               |         |   |                  |   |         |  
|Accounts payable                                                 |  | $             | 21,665  |   |                  | $ | 14,755  |  
|Deferred revenue                                                 |  |               | 2,097   |   |                  |   | 2,435   |  
|Accrued and other liabilities                                    |  |               | 23,820  |   |                  |   | 24,023  |  
|                                                                 |  |               |         |   |                  |   |         |  
|Total current liabilities                                        |  |               | 47,582  |   |                  |   | 41,213  |  
|                                                                 |  |               |         |   |                  |   |         |  
|Other long-term liabilities                                      |  |               | 1,036   |   |                  |   | 1,000   |  
|Commitments and contingencies                                    |  |               |         |   |                  |   |         |  
|Stockholders equity:                                            |  |               |         |   |                  |   |         |  
|Common stock                                                     |  |               | 262,963 |   |                  |   | 255,469 |  
|Deferred stock-based compensation                                |  |               | (461    | ) |                  |   | (935    | )
|Accumulated deficit                                              |  |               | (50,265 | ) |                  |   | (57,079 | )
|Accumulated other comprehensive loss                             |  |               | (425    | ) |                  |   | (489    | )
|                                                                 |  |               |         |   |                  |   |         |  
|Total stockholders equity                                       |  |               | 211,812 |   |                  |   | 196,966 |  
|                                                                 |  |               |         |   |                  |   |         |  
|Total liabilities and stockholders equity                       |  | $             | 260,430 |   |                  | $ | 239,179 |  
|                                                                 |  |               |         |   |                  |   |         |  

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



3



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ATHEROS COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



|                                                      |  |                             |        |      |   |       
|----------------------------------------------------- |  | --------------------------- | ------ | ---- | - | ------
|                                                      |  | Three Months EndedMarch 31,
|                                                      |  | 2006                        |        | 2005
|Net revenue                                           |  | $                           | 61,084 |      | $ | 41,233
|Cost of goods sold                                    |  |                             | 31,666 |      |   | 22,893
|                                                      |  |                             |        |      |   |       
|Gross profit                                          |  |                             | 29,418 |      |   | 18,340
|                                                      |  |                             |        |      |   |       
|Operating expenses:                                   |  |                             |        |      |   |       
|Research and development                              |  |                             | 15,529 |      |   | 10,933
|Sales and marketing                                   |  |                             | 5,649  |      |   | 4,096 
|General and administrative                            |  |                             | 2,896  |      |   | 2,320 
|                                                      |  |                             |        |      |   |       
|Total operating expenses                              |  |                             | 24,074 |      |   | 17,349
|                                                      |  |                             |        |      |   |       
|Income from operations                                |  |                             | 5,344  |      |   | 991   
|Interest income, net                                  |  |                             | 1,816  |      |   | 972   
|                                                      |  |                             |        |      |   |       
|Income before income taxes                            |  |                             | 7,160  |      |   | 1,963 
|Provision for income taxes                            |  |                             | 346    |      |   | 294   
|                                                      |  |                             |        |      |   |       
|Net income                                            |  | $                           | 6,814  |      | $ | 1,669 
|                                                      |  |                             |        |      |   |       
|Basic net income per share                            |  | $                           | 0.14   |      | $ | 0.03  
|                                                      |  |                             |        |      |   |       
|Shares used in computing basic net income per share   |  |                             | 50,445 |      |   | 48,091
|                                                      |  |                             |        |      |   |       
|Diluted net income per share                          |  | $                           | 0.13   |      | $ | 0.03  
|                                                      |  |                             |        |      |   |       
|Shares used in computing diluted net income per share |  |                             | 54,472 |      |   | 53,830
|                                                      |  |                             |        |      |   |       

Net income for the three months ended March 31, 2006 included stock-based compensation expense totaling $2,973
before tax for stock options and purchases under the Companys Employee Stock Purchase Plan recorded by the Company as a result of its adoption of SFAS123R on January 1, 2006. There was no stock-based compensation expense related to employee
stock purchases under SFAS 123 for the three months ended March 31, 2005 because the Company did not adopt the optional recognition provisions of SFAS 123. Pro forma net income including stock-based compensation expense was $111 during the three
months ended March 31, 2005. See Note 3 to the condensed consolidated financial statements for additional information.

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



4



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ATHEROS COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                  |  |                             |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Three Months EndedMarch 31, |        
|                                                                                  |  | 2006                        |         |   | 2005 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |  |                             |         |   |      |   |         |  
|Net income                                                                        |  | $                           | 6,814   |   |      | $ | 1,669   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                             |         |   |      |   |         |  
|Depreciation and amortization                                                     |  |                             | 635     |   |      |   | 365     |  
|Stock-based compensation                                                          |  |                             | 2,973   |   |      |   | 454     |  
|Deferred income tax                                                               |  |                             | (772    | ) |      |   |        |  
|Excess tax benefits from stock-based compensation                                 |  |                             | (885    | ) |      |   | 64      |  
|Change in assets and liabilities:                                                 |  |                             |         |   |      |   |         |  
|Accounts receivable                                                               |  |                             | (2,074  | ) |      |   | 1,743   |  
|Inventory                                                                         |  |                             | (4,131  | ) |      |   | (2,715  | )
|Prepaid expenses and other current assets                                         |  |                             | (1,617  | ) |      |   | (2,130  | )
|Accounts payable                                                                  |  |                             | 6,587   |   |      |   | 4,552   |  
|Deferred revenue                                                                  |  |                             | (263    | ) |      |   | 445     |  
|Other accrued liabilities                                                         |  |                             | 264     |   |      |   | (323    | )
|                                                                                  |  |                             |         |   |      |   |         |  
|Net cash provided by operating activities                                         |  |                             | 7,531   |   |      |   | 4,124   |  
|                                                                                  |  |                             |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |  |                             |         |   |      |   |         |  
|Purchase of property and equipment                                                |  |                             | (522    | ) |      |   | (367    | )
|Purchase of marketable securities                                                 |  |                             | (22,437 | ) |      |   | (23,187 | )
|Maturities of marketable securities                                               |  |                             | 17,703  |   |      |   | 29,504  |  
|                                                                                  |  |                             |         |   |      |   |         |  
|Net cash provided by (used in) investing activities                               |  |                             | (5,256  | ) |      |   | 5,950   |  
|                                                                                  |  |                             |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |  |                             |         |   |      |   |         |  
|Issuance of common stock                                                          |  |                             | 4,110   |   |      |   | 950     |  
|Excess tax benefits from stock-based compensation                                 |  |                             | 885     |   |      |   |        |  
|                                                                                  |  |                             |         |   |      |   |         |  
|Net cash provided by financing activities                                         |  |                             | 4,995   |   |      |   | 950     |  
|                                                                                  |  |                             |         |   |      |   |         |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                         |  |                             | 7,270   |   |      |   | 11,024  |  
|CASH AND CASH EQUIVALENTS, Beginning of period                                    |  |                             | 75,425  |   |      |   | 32,971  |  
|                                                                                  |  |                             |         |   |      |   |         |  
|CASH AND CASH EQUIVALENTS, End of period                                          |  | $                           | 82,695  |   |      | $ | 43,995  |  
|                                                                                  |  |                             |         |   |      |   |         |  

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



5



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization and Basis of Presentation

Organization  Atheros Communications, Inc. (the Company) was incorporated in May 1998 in the state of Delaware and commenced operations in December 1998. The Company is a developer of semiconductor system
solutions for wireless communications products.

Basis of Presentation and Use of Estimates  The accompanying unaudited
Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) related to interim financial statements based on applicable Securities
and Exchange Commission (the SEC) rules and regulations. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. This financial information reflects all adjustments,
which are, in the opinion of the Company, of a normal and recurring nature and necessary to present fairly the statements of financial position, results of operations and cash flows for the dates and periods presented. The December 31, 2005 balance
sheet was derived from audited financial statements as of that date. All significant intercompany transactions and balances have been eliminated.

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of expenses during the reporting period. Actual results may differ from these estimates.

These Condensed Consolidated Financial Statements should be read in conjunction with the Companys audited consolidated financial statements for the fiscal year ended December 31, 2005 included in its annual report on Form 10-K, as
filed on March 10, 2006 with the SEC. The results of operations for the three months ended March 31, 2006 are not necessarily indicative of the results to be expected for any future periods.

2. Significant Accounting Policies

The
Companys significant accounting policies are disclosed in its audited consolidated financial statements for the year ended December 31, 2005.

Stock-Based Compensation  Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS
123R) using the modified prospective application method. Accordingly, results for prior periods have not been restated. Under the modified prospective application method, stock-based compensation expense for the three months ended March 31,
2006 includes compensation expense for stock-based awards granted by the Company as a public company prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provision of SFAS
No. 123, Accounting for Stock-Based Compensation (SFAS 123). For stock-based awards granted before the Companys initial public offering in February 2004, the Company continues to amortize previously recorded deferred stock
compensation expense following the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees(APB 25). Stock-based compensation expense for all stock-based compensation awards granted after
December 31, 2005 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. The Company recognizes compensation costs for all stock-based compensation awards granted after December 31, 2005 on a straight line
basis over the requisite service period of the awards, which is generally the option vesting term of four to five years.

Prior to the adoption of SFAS
123R, the Company recognized stock-based compensation expense in accordance with the provisions of APB 25 and complied with the disclosure provisions of SFAS 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation 
Transition and Disclosures (SFAS 148). The Company amortized deferred stock-based compensation using the graded vesting method over the vesting periods of the stock options, generally four to five years. The graded vesting method
provided for vesting of the overall awards at interim dates and resulted in accelerated vesting as compared to the straight-line method.

Net Income (Loss) per Share  Basic net income (loss) per share is computed by dividing the net income for the period by the weighted-average number of common shares outstanding during the period, less shares subject to
repurchase. Diluted net income (loss) per share is computed by dividing the net income for the period by the weighted-average number of common shares and potentially dilutive common shares outstanding during the period. The dilutive effect of
outstanding options, warrants and restricted stock is reflected in dilutive earnings per share by application of the treasury stock method, which takes into consideration the unrecognized compensation cost as required by SFAS 123R.



6



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Product Warranty  The Company generally provides a warranty on its products for a period of one year, however, it may be longer for
certain customers. Accordingly, the Company provides for the warranty costs at the time of sale based on historical activity. The determination of such provisions requires the Company to make estimates of product return rates and expected costs to
repair or replace the products under warranty. If the actual return rates and/or repair and replacement costs differ significantly from these estimates, adjustments to cost of sales may be required in future periods. Components of the accrual for
warranty costs are as follows (in thousands):



|                                                      |  |                            |       |   |      |   |       |  
|----------------------------------------------------- |  | -------------------------- | ----- | - | ---- | - | ----- | -
|                                                      |  | Three MonthsEndedMarch 31, |      
|                                                      |  | 2006                       |       |   | 2005 |  
|Beginning balance                                     |  | $                          | 1,161 |   |      | $ | 1,023 |  
|Additions related to current period sales             |  |                            | 396   |   |      |   | 399   |  
|Warranty costs incurred in the current period         |  |                            | (107  | ) |      |   | (99   | )
|Adjustments to accruals related to prior period sales |  |                            | (278  | ) |      |   | (193  | )
|                                                      |  |                            |       |   |      |   |       |  
|Ending balance                                        |  | $                          | 1,172 |   |      | $ | 1,130 |  
|                                                      |  |                            |       |   |      |   |       |  

3. Stock-Based Compensation

Stock-Based Compensation Plans

The Company has two Stock Incentive Plans: the 1998 Stock
Incentive Plan (the 1998 Plan) and the 2004 Stock Incentive Plan (the 2004 Plan). Upon completion of the Companys initial public offering in February 2004, the 1998 Plan was terminated and no shares are available for
future issuance under the 1998 Plan. Shares that are subject to options that expire, terminate or are cancelled, that are forfeited or as to which options have not been granted under the 1998 Plan will become available for issuance under the 2004
Plan.

The 2004 Plan, which became effective upon the completion of the Companys initial public offering in February 2004, provides
for the grant of options to purchase shares of common stock, restricted stock, stock appreciation rights and stock units. A total of 2,250,000 shares of common stock were originally authorized for issuance under the 2004 Plan. In addition to shares
that may from time to time be transferred from the 1998 Plan to the 2004 Plan reserve, an annual increase in the 2004 Plan reserve is added on the first day of each year. Initial hire-on stock options granted under the 2004 Plan are exercisable upon
vesting and generally vest 25% on the first anniversary of the grant date and then monthly thereafter over the remaining 36 months. Subsequent discretionary stock option grants generally vest equally each month over 48 months. Initial hire-on
options expire ten years from the date of grant while discretionary options granted subsequent to September 2005 generally expire five years from the date of grant.

The cost of restricted stock awards granted under the 2004 Plan, determined based on the fair market value of the shares at the date of grant, is expensed on a graded vesting method for grants issued prior to January
1, 2006 and on a straight line basis for restricted stock awards issued after December 31, 2005. At March 31, 2006, the Company had 77,000 shares of restricted stock outstanding.

The Company also has an Employee Stock Purchase Plan (ESPP) under which eligible employees may purchase shares of the Companys common
stock through periodic payroll deductions of up to 15% of total compensation at the lower of 85% of the fair market value of the of the common stock on either the first trading day of the offering period or on the last trading day of the purchase
period over a 24 month overlapping period, whichever is less. In April 2006, the Company amended its ESPP so that offering periods under the plan shall consist of consecutive six month periods instead of overlapping 24 month periods. The
Companys ESPP is considered compensatory under the provisions of SFAS123R.

The Companys 1998 Plan, 2004 Plan and ESPP are
described more fully in the Companys 2005 Annual Report on Form 10-K and Form 8-K dated April 19, 2006.



7



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

Adoption of SFAS 123R

Effective January 1, 2006, the Company adopted SFAS 123R using the modified prospective application method. Accordingly, results for prior periods have not been restated. Under the modified prospective application method, stock-based
compensation expense for the three months ended March 31, 2006 includes compensation expense for stock-based awards granted by the Company as a public company prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value
estimated in accordance with the original provision of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123). For stock-based awards granted before November 26, 2003 (the date on which the Company filed its registration
statement for its initial public offering), the Company continues to amortize deferred stock compensation expense following the provisions of APB 25. The Company recognizes these compensation costs for stock awards granted prior to January 1, 2006
using the graded vesting method, and for stock awards granted after December 31, 2005 on a straight line basis, over the requisite service period of the awards, which is generally the option vesting term of four to five years. The graded vesting
method provides for vesting of portions of the overall awards at interim dates and results in accelerated vesting as compared to the straight-line method. Stock-based compensation expense for all stock-based compensation awards granted after
December 31, 2005 is based on the grant-date fair value in accordance with the provisions of SFAS123R.

Prior to the adoption of SFAS 123R,
the Company recognized stock-based compensation expense in accordance with the provisions of APB 25 and provided the disclosures required by SFAS 123, as amended by SFAS 148.

Prior to the adoption of SFAS 123R, the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash
flows in the Condensed Consolidated Statement of Cash Flows. In accordance with SFAS 123R, the cash flows resulting from excess tax benefits (tax deductions in excess of the stock-based compensation cost recognized for those options) are classified
as financing cash flows.

As a result of adopting SFAS 123R on January 1, 2006, the Companys net income for the three months ended
March 31, 2006 is approximately $2,320,000 lower than the net income the Company would have reported had it not adopted SFAS123R. Basic and diluted net income per share for the three months ended March 31, 2006 would have been $0.18 and $0.17,
respectively, if the Company had not adopted SFAS 123R.

Determining Fair Value

Valuation and amortization method  The Company estimates the fair value of stock options granted using the Black-Scholes valuation model. The
fair value is amortized on a graded vesting basis over the requisite service periods of the awards for options granted prior to January 1, 2006 and using a straight-line basis for options granted after December 31, 2005.

Expected Term  The expected term represents the period that the Companys stock-based awards are expected to be outstanding and was
determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its
stock-based awards. As the Company does not have sufficient historical experience for determining the expected term of the stock option awards granted, the Company has based its expected term on the expected terms used by similar entities.

ExpectedVolatility  Through November 26, 2003, the date of the Companys initial filing with the SEC related to
its initial public offering, the Company used the Black-Scholes valuation model assuming no volatility (minimum value method) to estimate the fair value of options granted to employees. Options granted from November 26, 2003 to December 31, 2005
were valued using the Black-Scholes valuation model, with a volatility factor based on the average stock volatilities of the Companys publicly traded competitors because the Company did not have a sufficient trading history. For the quarter
ended March 31, 2006, the Company estimated volatility based on considerations of the implied volatility of long-term options traded on the open market and the average historical volatilities of similar entities.

Risk-Free Interest Rate  The Company bases the risk-free interest rate used in the Black-Scholes valuation model on the implied yield
currently available on the U.S. Treasury zero-coupon issues with an equivalent remaining term.

Expected Dividend  The
expected dividend assumption is based on the Companys current expectations about its anticipated dividend policy.



8



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

The fair value of the Companys stock-based awards to employees was estimated using the following weighted-average assumptions for the three months
ended March 31, 2006 and 2005:



|                                       |  |                             |      |   |      |   |      |  
|-------------------------------------- |  | --------------------------- | ---- | - | ---- | - | ---- | -
|                                       |  | Three Months EndedMarch 31, |     
|                                       |  | 2006                        |      |   | 2005 |  
|Estimated life (in years)              |  |                             | 4.0  |   |      |   | 4.0  |  
|Expected Volatility                    |  |                             | 42   | % |      |   | 64   | %
|Risk-free interest rate                |  |                             | 4.4  | % |      |   | 3.6  | %
|Expected dividends                     |  |                             |     |   |      |   |     |  
|                                       |  |                            
|Weighted average grant-date fair value |  | $                           | 6.06 |   |      | $ | 5.29 |  

During the three months ended March 31, 2006 and 2005 there were no purchases under the Employee
Stock Purchase Plan.

Stock-based Compensation Expense

The following table shows total stock-based compensation expense included in the Condensed Consolidated Statements of Operations for the three
months ended March 31, 2006 and 2005 (in thousands):



|                           |  |                             |       |      |   |    
|-------------------------- |  | --------------------------- | ----- | ---- | - | ---
|                           |  | Three Months EndedMarch 31,
|                           |  | 2006                        |       | 2005
|Cost of sales              |  | $                           | 118   |      | $ | 26 
|Research and development   |  |                             | 1,690 |      |   | 169
|Sales and marketing        |  |                             | 677   |      |   | 88 
|General and administrative |  |                             | 488   |      |   | 171
|                           |  |                             |       |      |   |    
|                           |  | $                           | 2,973 |      | $ | 454
|                           |  |                             |       |      |   |    

As required by SFAS 123R, management has estimated expected forfeitures and is recognizing
compensation costs only for the stock-based awards expected to vest.

At March 31, 2006, the total compensation cost related to unvested
stock-based awards granted to employees under the Companys stock incentive plans but not yet recognized was approximately $19,397,000, net of estimated forfeitures of $2,528,000. This cost will be amortized on a graded vesting basis for awards
granted prior to January 1, 2006 and on a straight line basis for awards granted after December 31, 2005 over a weighted-average period of approximately 2.6 years and will be adjusted for subsequent changes in estimated forfeitures.

Stock Options and Awards Activity

The following is a summary of option activity for the Companys Stock Incentive Plans (in thousands, except per share amounts):



|                                              |  |                 |   |  |                              |       |                                                 |      |                         |   |        
|--------------------------------------------- |  | --------------- | - |  | ---------------------------- | ----- | ----------------------------------------------- | ---- | ----------------------- | - | -------
|                                              |  | Numberof Shares |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualLife (Years) |      | AggregateIntrinsicValue
|Outstanding at January 1, 2006                |  | 10,298          |   |  | $                            | 5.93  |                                                 |      |                         |   |        
|Granted                                       |  | 1,204           |   |  |                              | 15.78 |                                                 |      |                         |   |        
|Exercised                                     |  | (1,260          | ) |  |                              | 3.32  |                                                 |      |                         |   |        
|Forfeitures and cancellations                 |  | (298            | ) |  |                              | 7.54  |                                                 |      |                         |   |        
|                                              |  |                 |   |  |                              |       |                                                 |      |                         |   |        
|Outstanding at March 31, 2006                 |  | 9,944           |   |  | $                            | 7.40  |                                                 | 6.74 |                         | $ | 186,821
|                                              |  |                 |   |  |                              |       |                                                 |      |                         |   |        
|Vested and expected to vest at March 31, 2006 |  | 9,199           |   |  | $                            | 7.25  |                                                 | 6.73 |                         | $ | 174,224
|                                              |  |                 |   |  |                              |       |                                                 |      |                         |   |        
|Exercisable at March 31, 2006                 |  | 3,736           |   |  | $                            | 4.28  |                                                 | 6.63 |                         | $ | 81,845 
|                                              |  |                 |   |  |                              |       |                                                 |      |                         |   |        



9



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of our common
stock for the 9,944,000 options that were in-the-money at March 31, 2006. During the three months ended March 31, 2006, the aggregate intrinsic value of options exercised under the Companys stock incentive plans was $17,183,000, determined as
of the date of option exercise.

The following table summarizes the companys restricted stock award activity for the three months
ended March 31, 2006 (in thousands, except per share amounts):



|                                   |  |                 |   |  |                                     |      
|---------------------------------- |  | --------------- | - |  | ----------------------------------- | -----
|                                   |  | Numberof Shares |   |  | WeightedAverageGrant DateFair Value
|Nonvested stock at January 1, 2006 |  | 59              |   |  | $                                   | 8.35 
|Granted                            |  | 30              |   |  |                                     | 24.30
|Vested                             |  | (12             | ) |  |                                     | 8.35 
|Forfeited                          |  |                |   |  |                                     |     
|                                   |  |                 |   |  |                                     |      
|Nonvested stock at March 31, 2006  |  | 77              |   |  | $                                   | 14.41
|                                   |  |                 |   |  |                                     |      

Pro Forma Disclosures

Pro forma information required under SFAS 123 for periods prior to fiscal 2006 as if the Company had applied the fair value recognition provisions of SFAS
123, to options granted under the Companys stock-based compensation plans, was as follows (in thousands, except per share amounts):



|                                                                                                 |  |                                  |        |  
|------------------------------------------------------------------------------------------------ |  | -------------------------------- | ------ | -
|                                                                                                 |  | Three Months EndedMarch 31, 2005 |       
|Net income as reported                                                                           |  | $                                | 1,669  |  
|Add: total stock-based employee compensation included in reported net income                     |  |                                  | 454    |  
|Less: total stock-based compensation determined under the fair value based method for all awards |  |                                  | (2,012 | )
|                                                                                                 |  |                                  |        |  
|Pro forma net income                                                                             |  | $                                | 111    |  
|                                                                                                 |  |                                  |        |  
|Basic net income per share as reported                                                           |  | $                                | 0.03   |  
|                                                                                                 |  |                                  |        |  
|Diluted net income per share as reported                                                         |  | $                                | 0.03   |  
|                                                                                                 |  |                                  |        |  
|Pro forma basic net income per share                                                             |  | $                                | 0.00   |  
|                                                                                                 |  |                                  |        |  
|Pro forma diluted net income per share                                                           |  | $                                | 0.00   |  
|                                                                                                 |  |                                  |        |  

4. Inventory

Inventory consists of (in thousands):



|                |  |               |        |                  |   |       
|--------------- |  | ------------- | ------ | ---------------- | - | ------
|                |  | March 31,2006 |        | December 31,2005
|Finished goods  |  | $             | 10,957 |                  | $ | 8,574 
|Work-in-process |  |               | 9,821  |                  |   | 9,505 
|Raw materials   |  |               | 3,828  |                  |   | 2,396 
|                |  |               |        |                  |   |       
|Total           |  | $             | 24,606 |                  | $ | 20,475
|                |  |               |        |                  |   |       



10



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

5. Accrued Liabilities

Accrued liabilities consist
of (in thousands):



|                                  |  |               |        |                  |   |       
|--------------------------------- |  | ------------- | ------ | ---------------- | - | ------
|                                  |  | March 31,2006 |        | December 31,2005
|Accrued customer incentives       |  | $             | 10,048 |                  | $ | 9,471 
|Accrued compensation and benefits |  |               | 4,578  |                  |   | 6,068 
|Other liabilities                 |  |               | 9,194  |                  |   | 8,484 
|                                  |  |               |        |                  |   |       
|Total                             |  | $             | 23,820 |                  | $ | 24,023
|                                  |  |               |        |                  |   |       

6. Income Taxes

The Companys tax expense for the quarter ended March 31, 2006 is based on applying an annual effective tax rate of approximately 24% to pre-tax income less a one-time tax benefit of $1,392,000 due to the
release of valuation allowance against deferred tax assets. At March 31, 2006, the Company reassessed the valuation allowance previously recorded against its net deferred tax assets which consisted primarily of net operating loss carryforwards and
research and development tax credits. Based on the Companys projected future taxable income, the Company determined that it is more likely than not that a portion of the deferred tax assets would be realized. Accordingly, the Company released
a portion of the valuation allowance previously recorded against its deferred tax assets in the amount of $1,392,000.

7. Net Income Per Share

Net income per share is calculated as follows (in thousands, except per share amounts):



|                                                      |  |                             |        |   |      |   |        |  
|----------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                      |  | Three Months EndedMarch 31, |       
|                                                      |  | 2006                        |        |   | 2005 |  
|Net income (numerator)                                |  | $                           | 6,814  |   |      | $ | 1,669  |  
|                                                      |  |                             |        |   |      |   |        |  
|Denominator for basic net income per share:           |  |                             |        |   |      |   |        |  
|Weighted average shares outstanding                   |  |                             | 50,557 |   |      |   | 48,241 |  
|Weighted average shares subject to repurchase         |  |                             | (112   | ) |      |   | (150   | )
|                                                      |  |                             |        |   |      |   |        |  
|Shares used to calculate basic net income per share   |  |                             | 50,445 |   |      |   | 48,091 |  
|Effect of dilutive securities:                        |  |                             |        |   |      |   |        |  
|Common stock options and warrants                     |  |                             | 3,915  |   |      |   | 5,589  |  
|Shares subject to repurchase                          |  |                             | 112    |   |      |   | 150    |  
|                                                      |  |                             |        |   |      |   |        |  
|Shares used to calculate diluted net income per share |  |                             | 54,472 |   |      |   | 53,830 |  
|                                                      |  |                             |        |   |      |   |        |  
|Basic net income per share                            |  | $                           | 0.14   |   |      | $ | 0.03   |  
|                                                      |  |                             |        |   |      |   |        |  
|Diluted net income per share                          |  | $                           | 0.13   |   |      | $ | 0.03   |  
|                                                      |  |                             |        |   |      |   |        |  

The Company excludes potentially dilutive securities from its diluted net income per share
calculation when their effect would be antidilutive to net income per share amounts. The common stock equivalents related to options to purchase 81,000 and 349,000 shares of the Companys common stock were excluded from the net income per share
calculation in the periods ended March 31, 2006 and 2005, respectively, as their effect would have been antidilutive.

8. Comprehensive Income

The components of comprehensive income are as follows (in thousands):



|                                         |  |                             |       |      |   |       |  
|---------------------------------------- |  | --------------------------- | ----- | ---- | - | ----- | -
|                                         |  | Three Months EndedMarch 31, |      
|                                         |  | 2006                        |       | 2005 |  
|Net income                               |  | $                           | 6,814 |      | $ | 1,669 |  
|Other comprehensive income (loss):       |  |                             |       |      |   |       |  
|Change in unrealized loss on investments |  |                             | 64    |      |   | (300  | )
|                                         |  |                             |       |      |   |       |  
|Total comprehensive income               |  | $                           | 6,878 |      | $ | 1,369 |  
|                                         |  |                             |       |      |   |       |  



11



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

9. Segment Information, Operations by Geographic Area and Significant Customers

The Company currently operates in one reportable segment, the design and marketing of semiconductors for the wireless industry. The Companys Chief Operating Decision Maker is the CEO.

Geographic Information

Net revenue
consists of sales to customers in the following countries:



|              |  |                             |   |  |      |  
|------------- |  | --------------------------- | - |  | ---- | -
|              |  | Three Months EndedMarch 31, |  
|              |  | 2006                        |   |  | 2005 |  
|Taiwan        |  | 56                          | % |  | 78   | %
|China         |  | 32                          |   |  | 6    |  
|United States |  | 1                           |   |  | 5    |  
|Other         |  | 11                          |   |  | 11   |  

Significant Customers

Customers representing greater than 10% of net revenue are as follows:



|                                     |  |                             |   |  |      |  
|------------------------------------ |  | --------------------------- | - |  | ---- | -
|                                     |  | Three Months EndedMarch 31, |  
|                                     |  | 2006                        |   |  | 2005 |  
|Hon Hai Precision Industry Co., Ltd. |  | 15                          | % |  | 17   | %
|UTStarcom, Inc                       |  | 13                          |   |  | *    |  
|Alpha Networks, Inc.                 |  | 12                          |   |  | 13   |  
|Askey Computer Corporation           |  | 11                          |   |  | 10   |  
|Cameo Communications, Inc.           |  | *                           |   |  | 21   |  

Customers representing greater than 10% of net accounts receivable are as follows:



|                                     |  |               |   |  |                  |  
|------------------------------------ |  | ------------- | - |  | ---------------- | -
|                                     |  | March 31,2006 |   |  | December31, 2005 |  
|UTStarcom, Inc.                      |  | 19            | % |  | 11               | %
|Hon Hai Precision Industry Co., Ltd. |  | 18            |   |  | 16               |  
|Alpha Networks, Inc.                 |  | 13            |   |  | 16               |  
|Askey Computer Corporation           |  | 13            |   |  | 11               |  



|* | less than 10% in the applicable period.
|- | ---------------------------------------

10. Subsequent Event

On April 24, 2006 the Company signed a definitive agreement to acquire ZyDAS Technology Corporation (ZyDAS), a
privately held Taiwan-based fabless integrated circuit design company, specializing in high performance WLAN USB solutions. Under the terms of the agreement, the Company will issue a combination of $17,000,000 in cash and shares of the
Companys common stock, valued at approximately $6,700,000 for an aggregate purchase price of approximately $23,700,000. The definitive agreement includes other consideration that is contingent upon the future achievement of certain milestones.
In addition, the Company will issue a combination of $1,000,000 in cash and restricted shares of the Companys common stock valued at approximately $1,900,000 as guaranteed additional amounts to ZyDAS employees. The Company may record a
one-time charge for purchased in-process research and development expenses related to the acquisition. The amount of that charge, if any, and the period in which it would be recorded has not yet been determined. A portion of the consideration
payable to the stockholders of ZyDAS will be placed into escrow pursuant to the terms of the acquisition agreement.



12



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

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

The
following discussion of our financial condition and results of operations should be read together with the financial statements and related notes that are included elsewhere in this quarterly report. This report on Form 10-Q contains forward-looking
statements, including, but not limited to, statements about our expectations regarding our average selling prices, the growth of our business, the market for our products and our market share, our strategy regarding new markets, our customer base
and concentration, our revenue and sources of revenue, our sales and revenue to customers in Asia, sales by ODMs through to OEMs outside Asia, our expenses, cost of goods sold and gross margins, development of new products, expanding our sales and
marketing efforts, recognizing stock-based compensation and related accounting charges, our research and development activities in Taiwan, our accounts receivable balance, our anticipated cash needs, our anticipated capital expenditures and capital
requirements, the adequacy of our capital resources, our needs for additional financing, our acquisition and investment strategy, our dependence on key personnel, our intellectual property, our compliance with applicable industry standards, market
risk sensitive instruments, potential legal proceedings, our disclosure controls and procedures, the volatility of our stock, and the expected impact of various accounting policies and rules adopted by the Financial Accounting Standards Board. These
statements may be identified by such terms as anticipate, will, expect, may, might, intend, could, can, or the negative of those terms or similar
expressions intended to identify forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied by the forward-looking
statements. These risks and uncertainties include, but are not limited to, the factors affecting our quarterly results, our ability to manage our growth, our ability to sustain or increase profitability, demand for our chipsets, our reliance on
third party foundries, the effect of declines in average selling prices for our products, our ability to compete in new and existing markets and other risks discussed in Part II, Item 1A. Risk Factors, in this report. These forward-looking
statements represent our estimates and assumptions only as of the date of this report. Unless required by law, we undertake no responsibility to update these forward-looking statements.

Overview

We are a leading developer of semiconductor system solutions for wireless communications
products. We combine our wireless systems expertise with high-performance radio frequency, or RF, mixed signal and digital semiconductor design skills to provide highly integrated chipsets that are manufacturable on low-cost, standard complementary
metal-oxide semiconductor, or CMOS, processes.

We provide a comprehensive portfolio of multi-chip and single chip products ranging from
entry-level wireless networking products for the home and small office markets to sophisticated wireless infrastructure systems-on-chip with advanced network management capabilities for the enterprise market. Our wireless systems solutions are used
in a variety of applications in the personal computer, enterprise access, small office and branch office networking, home networking, hotspot, wireless broadband, voice, mobile computing devices, and consumer electronics markets supporting the
Institute of Electrical and Electronics Engineers, or IEEE, family of wireless local area networking, or WLAN, standards, including the 802.11b, 802.11g and 802.11a standards and the draft 802.11n standard. We have a broad base of leading personal
computer original equipment manufacturer, or PC OEM, customers, including Acer, Fujitsu, Hewlett-Packard, Lenovo, NEC, Samsung, Sony and Toshiba and networking equipment manufacturers, including 2Wire, Cisco Systems, D-Link, NEC AT, and NETGEAR, and
consumer electronics customers.

In addition, since June 2005 we have been shipping our cellular solution for Personal Access Systems, or
PAS, also referred to as Personal Handyphone Systems, or PHS, consisting of a single chip that implements a complete cellular transceiver, baseband, application processor, audio paths, power management, keyboard, speaker and display interfaces.
PAS/PHS, which is widely deployed in China, Japan and Taiwan, is an advanced Time Division Multiple Access-Time Division Duplex, or TDMA-TDD, technology operating at 1.9 GHz providing high quality voice, advanced data services and long battery life.

Revenue. Our revenue is derived primarily from the sale of WLAN chipset products, PAS chip solutions and, to a lesser extent, from
licensed software and services. Our sales have historically been made on the basis of purchase orders rather than long-term agreements. Original equipment manufacturers, or OEMs, utilize our chipsets in developing their wireless system solutions
such as access point, cardbus handsets and integrated circuit card products. Some OEMs purchase chipsets directly from us and manufacture their products. Other OEMs utilize original design manufacturers, or ODMs, to design and build subsystem
products that the OEM then purchases from the ODM and incorporates into the OEMs wireless system solution. Accordingly, we ship our products either directly to the OEM or to the ODM based on the requirements of each OEM. Purchase orders are
received from an OEM or an ODM and we generally recognize revenue based on the shipment of chipsets to this customer. A single ODM usually provides our chipsets to numerous OEMs. However, we attempt to maintain a close relationship with the target
OEM to monitor end-market demand. Due to the use of ODMs, our direct customer base is relatively concentrated, although we believe that the number of total OEMs who purchase our chipsets through ODMs is broader. We anticipate that we may continue to
experience changes in our ODM customer base as our end customers change ODMs for a variety of reasons while still using our chipsets.



13



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

We provide customer incentives to some of our direct and indirect customers. These obligations are estimated and recorded as a reduction of revenue at
the time at which we ship product to the customers. Estimating incentive amounts requires that we make estimates regarding the percentage of committed incentives that will be submitted by our customers and the value of the incentives at the time of
redemption. These estimates may require revisions at later dates if the actual sales data submitted by the customers differs significantly from the original estimates, which may have the effect of increasing or decreasing net revenue in particular
periods.

In the three months ended March 31, 2006, Hon-Hai Precision Industry Co., Ltd., UTStarcom, Inc., Alpha Networks, Inc. and Askey
Computer Corporation accounted for 15%, 13%, 12% and 11% of our net revenue, respectively. In the three months ended March 31, 2005, Cameo Communications, Inc., Hon-Hai Precision Industry Co., Ltd., Alpha Networks, Inc. and Askey Computer
Corporation accounted for 21%, 17%, 13% and 10% of our net revenue, respectively. We expect to continue to have major concentrations of sales to a relatively small number of ODM and OEM customers.

Substantially all of our sales are to customers outside the United States and Canada. Sales to customers in Asia accounted for 98% and 95% of net revenue
in the three months ended March 31, 2006 and 2005, respectively. Because many of our ODM customers are located in Asia, we anticipate that a majority of our revenue will continue to be represented by sales to customers in that region. Although a
large percentage of our sales are made to customers in Asia, we believe that a significant number of the systems designed by these customers are then sold through to OEMs outside of Asia. All of our sales are denominated in United States dollars.

Cost of Goods Sold. Cost of goods sold relates primarily to the purchase of silicon wafers, costs associated with assembly, test
and inbound and outbound shipping of our chipsets, costs of personnel, materials and occupancy associated with manufacturing support and quality assurance, royalty costs and writedowns to state inventory at the lower of cost or market caused by
product obsolescence and transitions from older to newer products. Additionally, our cost of goods sold includes accruals for warranty obligations, which we record when revenue is recognized. Because we do not have long-term, fixed supply
agreements, our wafer, assembly and test costs are subject to changes based on the cyclical demand for semiconductors. In addition, after we purchase wafers from foundries, we also bear the yield risk related to manufacturing these wafers into
finished goods.

Research and Development. Research and development expense relates primarily to compensation and associated costs
related to development employees and contractors, mask and reticle costs, prototype wafers, software and computer-aided design software licenses, intellectual property license costs, reference design development costs, development testing and
evaluation costs, regulatory testing costs, depreciation expense and allocated occupancy costs. All research and development costs are expensed as incurred. We expect our research and development costs to increase in absolute dollars in the future
as we invest to develop new products to be competitive and address new markets in the future.

Sales and Marketing. Sales and
marketing expense relates primarily to compensation and associated costs for marketing and selling personnel, sales commissions to independent sales representatives, public relations, promotional and other marketing expenses, travel, trade show
expenses, depreciation expenses and allocated occupancy costs. We expect sales and marketing expenses will increase in absolute dollars as we hire additional personnel and expand our sales and marketing efforts.

General and Administrative. General and administrative expense relates primarily to compensation and associated costs for general and
administrative personnel, professional fees and banking fees, charges related to allowance for doubtful accounts and allocated occupancy costs. We expect that general and administrative expense will increase in absolute dollars as we hire additional
personnel and incur costs related to the anticipated growth of our business.

Interest Income and Expense. Interest income consists
of interest earned on cash and cash equivalents and marketable securities balances. Interest expense consists of interest on our revolving line of credit, equipment loans and equipment lease.

Provision for Income Taxes. We make certain estimates and judgments in determining income tax expense for financial statement purposes. These
estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes and the realizability of assets in
future years.

We continually assess the likelihood that we will be able to recover our deferred tax assets. We consider all available
evidence, both positive and negative, including historical levels of income, projections of future income, expectations and risks associated with estimates of future taxable income, and ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance. If recovery is not assessed as being more likely than not, we would increase our provision for taxes by recording a valuation allowance against the deferred tax assets that will not ultimately be
recoverable.



14



---

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and the results of operations are based on our financial statements which have been prepared in
accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. We base our
estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies are set forth below.

Revenue Recognition. We derive revenue primarily from three sources:



| |  |  | the sale of our wireless chipsets and reference designs;
| | - |  | --------------------------------------------------------



| |  |  | the licensing of our software and technical documentation; and
| | - |  | --------------------------------------------------------------



| |  |  | the provision of our services and technical support.
| | - |  | ----------------------------------------------------

We
recognize revenue in accordance with SEC Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition. SAB 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on managements judgment regarding the fixed
nature of the fee charged for the products delivered and the collectibility of those fees. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting
period could be adversely impacted.

We provide customer incentives to some of our direct and indirect customers. These obligations are
estimated and recorded as a reduction of revenue at the time at which we ship product to the customers in accordance with Emerging Issues Task Force Issue No. 01-09, Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendors Products).Estimated incentive amounts are recorded as a reduction of revenue and are based on agreements between us and our customers. Estimating incentive amounts requires that we make estimates regarding the
percentage of committed incentives that will be submitted by our customers and the value of the incentives at the time of redemption. These estimates may require revisions at later dates if the actual claims submitted by the customers differ
significantly from the original estimates, which may have the effect of increasing or decreasing net revenue and gross profit as a percentage of revenue in a particular period.

Inventory Valuation. We continually assess the recoverability of our inventory based on assumptions about demand and market conditions. Forecasted
demand is determined based on historical sales and expected future sales. We value our inventory at the lower of actual cost (using the first-in, first-out method) or its current estimated market value. We adjust our inventory to the estimated lower
of cost or market value to account for its obsolescence or lack of marketability. Adjustments are calculated as the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required that may adversely affect our operating results. If actual market conditions are more favorable, we may
have higher gross margins when products are sold.

Stock-Based Compensation. Prior to January 1, 2006, we elected to follow the
intrinsic value-based method prescribed by Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees, or APB 25, and related interpretations in accounting for employee stock options rather than adopting the alternative
fair value accounting provided under Statement of Financial Accounting Standards, or SFAS, No. 123, Accounting for Stock Based Compensation. Therefore, we did not record any compensation expense for stock options we granted to our employees
where the exercise price equaled the fair market value of the stock on the date of grant and the exercise price, number of shares eligible for issuance under the options and vesting period were fixed. We complied with the disclosure requirements of
SFAS No. 123 and SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosures, which require that we disclose our pro forma net income or loss and net income or loss per common share as if we had expensed the fair
value of the options.



15



---

Effective January 1, 2006 we adopted the fair value recognition provisions of SFAS No. 123(revised 2004),
Share-Based Payment, or SFAS 123R, using the modified prospective application method. Under the modified prospective application method, compensation expense for stock-based awards granted by us as a public company prior to, but not yet
vested as of January 1, 2006, is based on the grant-date fair value estimated in accordance with the original provision of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123). For stock-based awards granted before our
initial public offering in February 2004, we continue to record compensation expense following the provisions of APB 25. Stock-based compensation expense for all stock-based compensation awards granted after December 31, 2005 is based on the
grant-date fair value estimated in accordance with the provisions of SFAS 123R. Results for prior periods have not been restated. At March 31, 2006 there was $22.1 million of total unrecognized compensation cost related to non-vested compensation
arrangements granted under all equity compensation plans. We expect to recognize that cost over a weighted average period of 2.6 years.

We
estimate the fair value of options granted using the Black-Sholes option valuation model and the assumptions used shown in Note 4 to the condensed consolidated financial statements. We estimate the expected term of options based on the expected
terms of similar entities since we do not have sufficient historical experience for determining the expected term of our stock option awards. We estimate the volatility of our common stock at the date of grant based on considerations of the implied
volatility of long-term options traded on the open market and the average historical volatilities of similar entities since we do not have sufficient historical volatility to be able to make that determination.

Allowance for Doubtful Accounts. We perform ongoing credit evaluations of our customers and adjust credit limits and their credit worthiness, as
determined by our review of current credit information. We continuously monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience, our anticipation of uncollectible
accounts receivable and any specific customer collection issues that we have identified. While our credit losses have historically been within our expectations and the allowance established, we might not continue to experience the same credit loss
rates that we have in the past. Our receivables are concentrated in a relatively few number of customers. Therefore, a significant change in the liquidity or financial position of any one customer could make collection of our accounts receivable
more difficult, require us to increase our allowance for doubtful accounts and negatively affect our working capital.

Product Warranty
Reserve.We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our chipset
suppliers, our warranty obligation is affected by product failure rates, the cost of replacement chipsets and inbound and outbound freight costs incurred in replacing a chipset after failure. We continuously monitor chipset returns for warranty and
maintain an accrual for the related warranty expenses based on historical experience of similar products as well as various other assumptions that we believe to be reasonable under the circumstances. Should actual failure rates, cost of chipset
replacement and inbound and outbound freight costs differ from our estimates, revisions to the estimated warranty accrual would be required.

Income Taxes. We account for income taxes under the asset and liability approach. We record a valuation allowance to reduce our net deferred tax assets to the amount that we believe is more likely than not to be realized. In
assessing the need for a valuation allowance, we consider historical levels of income, projections of future income, expectations and risks associated with estimates of future taxable income, and ongoing prudent and practical tax planning
strategies. To the extent we believe it is more likely than not that some portion of our deferred tax assets will not be realized, we would increase the valuation allowance against the deferred tax assets. Realization of our deferred tax assets is
dependent primarily upon future U.S. taxable income. Our judgments regarding future profitability may change due to future market conditions, changes in U.S. or international tax laws and other factors. These changes, if any, may require possible
material adjustments to these deferred tax assets, resulting in a reduction in net income or an increase in net loss in the period when such determinations are made.



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Results of Operations

The following table shows the percentage relationships of the listed items from our consolidated statements of operations, as a percentage of net revenue for the periods indicated.



|                                            |  |                             |   |  |      |  
|------------------------------------------- |  | --------------------------- | - |  | ---- | -
|                                            |  | Three Months EndedMarch 31, |  
|                                            |  | 2006                        |   |  | 2005 |  
|Consolidated Statements of Operations Data: |  |                             |   |  |      |  
|Net revenue                                 |  | 100                         | % |  | 100  | %
|Cost of goods sold                          |  | 52                          |   |  | 55   |  
|                                            |  |                             |   |  |      |  
|Gross profit                                |  | 48                          |   |  | 45   |  
|Operating expenses:                         |  |                             |   |  |      |  
|Research and development                    |  | 25                          |   |  | 27   |  
|Sales and marketing                         |  | 9                           |   |  | 10   |  
|General and administrative                  |  | 5                           |   |  | 5    |  
|                                            |  |                             |   |  |      |  
|Total operating expenses                    |  | 39                          |   |  | 42   |  
|                                            |  |                             |   |  |      |  
|Income from operations                      |  | 9                           |   |  | 3    |  
|Interest income, net                        |  | 3                           |   |  | 2    |  
|Provision for income taxes                  |  | (1                          | ) |  | (1   | )
|                                            |  |                             |   |  |      |  
|Net income                                  |  | 11                          | % |  | 4    | %
|                                            |  |                             |   |  |      |  

Comparison of Three Months Ended March 31, 2006 to Three Months Ended March 31, 2005

(tables presented in thousands, except percentage amounts)

Net Revenue



|            |  |                             |        |                 |   |        |  |    |  
|----------- |  | --------------------------- | ------ | --------------- | - | ------ |  | -- | -
|            |  | Three Months EndedMarch 31, |        | % Change in2006 |  
|            |  | 2006                        |        | 2005            |  
|Net revenue |  | $                           | 61,084 |                 | $ | 41,233 |  | 48 | %

The increase in net revenue for the three months ended March 31, 2006 as compared to the same
period in 2005 was due to the increased volume of chipsets shipped as a result of increased acceptance of our wireless chipset products, increased market demand for wireless networking products and the increased demand for our cellular solution for
PAS products. The total number of chipsets shipped increased from approximately 4.7 million in the first quarter of 2005 to approximately 9.6 million in the first quarter of 2006. The increase in chipsets shipped was partially offset by a decrease
in the average selling price as we competitively priced our chipsets to aggressively pursue market share. Additionally, our single chipset solutions, which have increased as a percentage of total chipsets shipped, are generally priced lower than the
combined average selling prices of our multi-chip solutions.

Gross Profit



|                 |  |                             |        |   |                 |   |        |   |  |    |  
|---------------- |  | --------------------------- | ------ | - | --------------- | - | ------ | - |  | -- | -
|                 |  | Three Months EndedMarch 31, |        |   | % Change in2006 |  
|                 |  | 2006                        |        |   | 2005            |   |       
|Gross profit     |  | $                           | 29,418 |   |                 | $ | 18,340 |   |  | 60 | %
|% of net revenue |  |                             | 48     | % |                 |   | 45     | % |  |    |  

Gross profit as a percentage of revenue in the three months ended March 31, 2006 increased as
compared to gross profit as a percentage of revenue in the comparable period of 2005 primarily as a result of an increase in higher margin products as a percentage of our total product mix, partially offset by a decline in the overall blended
average selling prices of our products from $8.79 in the first quarter of 2005 to $6.35 in the first quarter of 2006. We expect our gross margins will continue to fluctuate in the second fiscal quarter of 2006 based on changes in the product mix.



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Research and Development



|                         |  |                             |        |   |                 |   |        |   |  |    |  
|------------------------ |  | --------------------------- | ------ | - | --------------- | - | ------ | - |  | -- | -
|                         |  | Three Months EndedMarch 31, |        |   | % Change in2006 |  
|                         |  | 2006                        |        |   | 2005            |   |       
|Research and development |  | $                           | 15,529 |   |                 | $ | 10,933 |   |  | 43 | %
|% of net revenue         |  |                             | 25     | % |                 |   | 27     | % |  |    |  

The increase in research and development expenses was primarily due to costs related to
stock-based compensation, which increased by $1,597,000 due to the adoption of SFAS 123R, and an increase in other compensation-related costs of $1,403,000, due to a 21% increase in the number of employees engaged in research and development
activities. In addition, there were increases in costs related to outside services, consulting, equipment and recruiting of $929,000, primarily resulting from increased chip development and recruiting efforts.

Sales and Marketing



|                    |  |                             |       |   |                 |   |       |   |  |    |  
|------------------- |  | --------------------------- | ----- | - | --------------- | - | ----- | - |  | -- | -
|                    |  | Three Months EndedMarch 31, |       |   | % Change in2006 |  
|                    |  | 2006                        |       |   | 2005            |   |      
|Sales and marketing |  | $                           | 5,649 |   |                 | $ | 4,096 |   |  | 38 | %
|% of net revenue    |  |                             | 9     | % |                 |   | 10    | % |  |    |  

The increase in sales and marketing expenses was primarily due to an increase in
compensation-related costs of $1,026,000, primarily attributable to a 45% increase in the number of employees engaged in sales and marketing activities. In addition, there was an increase in costs related to stock-based compensation of $589,000 due
to the adoption of SFAS 123R. The increases were partially offset by decreases totaling $306,000 related to commissions to independent sales representatives and consulting expenses.

General and Administrative



|                           |  |                             |       |   |                 |   |       |   |  |    |  
|-------------------------- |  | --------------------------- | ----- | - | --------------- | - | ----- | - |  | -- | -
|                           |  | Three Months EndedMarch 31, |       |   | % Change in2006 |  
|                           |  | 2006                        |       |   | 2005            |   |      
|General and administrative |  | $                           | 2,896 |   |                 | $ | 2,320 |   |  | 27 | %
|% of net revenue           |  |                             | 5     | % |                 |   | 5     | % |  |    |  

The increase in general and administrative expenses was primarily due to an increase in
compensation-related costs of $371,000, primarily attributable to a 38% increase in the number of employees engaged in general and administrative activities. In addition, there was an increase in costs related to stock-based compensation of $317,000
due to the adoption of SFAS 123R.

Interest Income, Net



|                     |  |                             |       |   |                 |   |     |   |  |    |  
|-------------------- |  | --------------------------- | ----- | - | --------------- | - | --- | - |  | -- | -
|                     |  | Three MonthsEnded March 31, |       |   | % Change in2006 |  
|                     |  | 2006                        |       |   | 2005            |   |    
|Interest income, net |  | $                           | 1,816 |   |                 | $ | 972 |   |  | 87 | %
|% of net revenue     |  |                             | 3     | % |                 |   | 2   | % |  |    |  

During the three months ended March 31, 2006 we experienced increased interest income as compared
to the same period in 2005, primarily due to increased cash, cash equivalents and marketable securities, resulting from working capital generated from operations. In addition, yields achieved on our investment portfolio have increased in the three
months ended March 31, 2006 over the same period in 2005.



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Provision for Income Taxes



|                           |  |                              |     |                 |   |     |  |    |  
|-------------------------- |  | ---------------------------- | --- | --------------- | - | --- |  | -- | -
|                           |  | Three Months Ended March 31, |     | % Change in2006 |  
|                           |  | 2006                         |     | 2005            |  
|Provision for income taxes |  | $                            | 346 |                 | $ | 294 |  | 18 | %

Our tax expense for the three months ended March 31, 2006 is $346,000, which is comprised of our annual effective
tax rate of approximately 24% less a one-time tax benefit of $1,392,000 due to the release of valuation allowance against deferred tax assets recognized due to sufficient positive evidence regarding realization of these deferred tax assets in future
years. Our annual effective tax rate for 2006 differs from the fiscal 2005 rate and the U.S. statutory rate primarily due to the realization of previously reserved deferred tax assets such as net operating loss carryforwards and credits. Our annual
effective tax rate for 2005 differs from the U.S. statutory rate due to the realization of net operating loss carryforwards.

We make certain estimates and
judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and
expense for tax and financial statement purposes and the realizability of assets in future years.

We continually assess the likelihood that we will be
able to recover our deferred tax assets. We consider all available evidence, both positive and negative, including historical levels of income, projections of future income, expectations and risks associated with estimates of future taxable income,
and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If recovery is not likely, we would increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we
estimate will not ultimately be recoverable. As a result of our analysis of all available evidence at March 31, 2006, it was considered more likely than not that a further valuation allowance release was required, generating a $1,392,000 tax
benefit. In the event that actual results differ from our estimates or we adjust our estimates in future periods, tax expense could increase if additional valuation allowance is provided.

Liquidity and Capital Resources

Our principal
sources of liquidity as of March 31, 2006, consisted of cash, cash equivalents and marketable securities of $185.7 million, and our revolving credit facility, under which $10.0 million was available to borrow.

Operating Activities. Our operating activities provided $7.5 million of cash for the three months ended March 31, 2006 as compared to $4.1 million
for the three months ended March 31, 2005. Cash flow from operating activities for the three months ended March 31, 2006 resulted from net income of $6.8 million, an increase in accounts payable of $6.6 million related to increases in inventory,
partially offset by an increase in inventory of $4.1 million due to an inventory rise to meet increased future demand and an increase in accounts receivable of $2.1 million due to increased revenue and timing of customer payments. Cash flow from
operating activities for the three months ended March 31, 2005 resulted from net income of $1.7 million, an increase in our accounts payable balance of $4.6 million due to the timing of payments for inventory, and a decrease in accounts receivable
of $1.7 million due to the timing of collections from our customers, partially offset by an increase in our inventory by $2.7 million, due to inventory growth to meet increased demand.

Investing Activities. Our investing activities used $5.3 million in the three months ended March 31, 2006, and provided $6.0 million in the three
months ended March 31, 2005. Our investing activities primarily consisted of the purchase and maturities of marketable securities and purchases of property and equipment.

Capital expenditures were $522,000 and $367,000 for the three months ended March 31, 2006 and 2005, respectively. These expenditures primarily consisted of computer and test equipment purchases. We anticipate that
further capital expenditures will be required to support future growth.

Financing Activities. Our financing activities provided
cash of $5.0 million and $950,000 in the three months ended March 31, 2006 and 2005, respectively. The cash provided in these periods primarily related to the issuance of common stock under our employee stock option plans. Our net cash provided by
financing activities during the three months ended March 31, 2006 also included excess tax benefits from stock-based compensation.



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

We believe that our existing cash and cash equivalents and existing
amounts available under our revolving credit facility will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements will depend on many factors including our rate of revenue growth, the timing
and extent of spending to support development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, the costs to ensure access to adequate manufacturing capacity
and the continuing market acceptance of our products. On April 24, 2006 we signed a definitive agreement to acquire a company based in Taiwan. Under the terms of the agreement, we will issue a combination of $17.0 million in cash and shares of our
common stock, valued at approximately $6.7 million. We may also enter into arrangements in the future with respect to potential investments in, or acquisitions of, complementary businesses, products or technologies, which could require us to seek
additional equity or debt financing. The sale of additional equity securities or convertible debt securities would result in additional dilution to our stockholders. Additional debt would result in increased interest expense and could result in
covenants that would restrict our operations. We have not made arrangements to obtain additional financing and there is no assurance that such financing, if required, will be available in amounts or on terms acceptable to us, if at all.

Contractual Obligations and Off-Balance Sheet Arrangements

Information regarding our contractual obligations is provided in Managements Discussion and Analysis of Results of Operations and Financial Condition of our Form 10-K filed with the SEC on March 10, 2006.

As of March 31, 2006, we have no off-balance sheet arrangements as defined in Item 303(a)(4) of the SECs Regulation S-K.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

The primary objectives
of our investment activity are, in order of importance, to preserve principal, provide liquidity and maximize the income without significantly increasing the risk. Some of the securities we invest in are subject to market risk. This means that a
change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk, we maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial
paper, money market funds, government and non-government debt securities and certificates of deposit. The risk associated with fluctuating interest rates is limited to our investment portfolio and we do not believe that a 10% change in interest
rates will have a significant impact on the fair value of our investment portfolio or on our interest income. As of March 31, 2006, our investments were in money market funds, commercial paper, corporate notes, corporate bonds, market auction
preferred stock and U.S. government securities.

Our exposure to market risk also relates to the increase or decrease in the amount of
interest we must pay on our outstanding debt instruments, primarily certain borrowings under the revolving credit facility. Our revolving credit facility provides financing up to $10.0 million for working capital requirements. As of March 31, 2006,
no balances were outstanding under the revolving credit facility. The loan bears interest at the banks prime rate. We do not believe that a 10% change in the prime rate would have a significant impact on our interest expense.

We do not currently engage in foreign currency hedging transactions and as a result we have relatively little exposure to foreign currency exchange rate
risk.



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Item 4.Controls and Procedures

(a) Evaluation of disclosure controls and
procedures. We maintain disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act), that are designed to ensure that information required
to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and
procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our
disclosure controls and procedures have been designed to meet the reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that
any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of
the period covered by this quarterly report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

(b) Changes in internal control over financial reporting. There was no change in our internal control over financial
reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified in connection with the evaluation described in Item 4 above that occurred during the period covered by this quarterly report that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.



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PART II  OTHER INFORMATION

Item 1.Legal Proceedings.

We are not involved in any legal matters that management
believes will have a material adverse effect on our business. Many companies in the semiconductor, networking, software and related industries have a significant number of patents and have demonstrated a willingness to instigate litigation based on
allegations of patent, trademark and other claims of infringement. From time to time, we have received, and expect to continue to receive, notices of claims of infringement, misappropriation or misuse of other parties proprietary rights. Some
of these claims may lead to litigation.

Item 1A.Risk Factors

Fluctuations in our operating results on a quarterly and
annual basis could cause the market price of our common stock to decline.

Our revenue and operating results have fluctuated
significantly from period to period in the past and are likely to do so in the future. These fluctuations could cause the market price of our common stock to decline. As a result, you should not rely on period to period comparisons of our operating
results as an indication of our future performance. In future periods, our revenue and results of operations may be below the expectations of analysts and investors, which could cause the market price of our common stock to decline. Factors that are
likely to cause our revenue and operating results to fluctuate include those discussed in the risk factors below.

If demand for our
chipsets declines or does not grow, we will be unable to increase or sustain our revenue and our business will be severely harmed.

We derive substantially all of our revenue from the sale of chipsets for wireless applications. We currently expect our chipsets for wireless applications to account for substantially all of our revenue for the foreseeable future. If we are
unable to develop new products in a timely manner or demand for our chipsets declines as a result of competition or technological changes, it would have a material negative impact on our business, operating results and financial position and our
competitive position. For instance, we have recently developed and begun shipping products based on the draft 802.11n standard, and if we are not successful in marketing and selling this product, and in timely developing enhancements to this
product, our financial results would be adversely affected. The markets for our wireless networking products are characterized by frequent introduction of next generation and new products, short product life cycles and significant price competition.
If our customers or we are unable to manage product transitions in a timely and cost-effective manner, our business and results of operations will suffer. In addition, frequent technology changes and introduction of next generation products may
result in inventory obsolescence, which could reduce our gross margins and adversely affect our operating performance. Also, we are currently dependent on one customer for our single chip solution for PAS products. If we fail to maintain or grow our
share of business with this customer and subsequently fail to win new customers for our PAS product, our revenue growth would be adversely affected.

If we are unable to develop competitive products that comply with rapidly changing standards, or if our products become obsolete as a result of changing standards, our operating results would suffer.

We design some of our products to conform to standards set by industry standards bodies such as the Institute of Electrical and
Electronics Engineers, Inc. We also depend on industry groups such as the WiFi Alliance to certify and maintain certification of our products. If our customers adopt new or competing industry standards with which our products are not compatible, or
such industry groups fail to adopt standards with which our products are compatible, our existing products would become less desirable to our customers and our sales would suffer. The emergence of markets for our chipsets is affected by a variety of
factors beyond our control. In particular, our products are designed to conform to current specific industry standards. Competing standards may emerge that are preferred by our customers, which could also reduce our sales and require us to make
significant expenditures to develop new products. For example, the IEEE recently adopted a draft 802.11n specification after considering many different proposals for the 802.11n standard and we have developed products based on this draft
specification. If the IEEE does not formally adopt the 802.11n standard in a form substantially similar to the current draft, our products could become obsolete and our financial results would be harmed. In addition, if the 802.11n standard is
widely adopted and our products are viewed by the market as not being competitive, our financial results would be adversely affected.



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We may not be able to sustain our recent growth rate, and we may not be able to manage our future
growth effectively.

We have experienced significant growth in a short period of time. Our revenue increased from $169.6 million in
2004 to $183.5 million in 2005 and our quarterly revenue increased from $41.2 million in the first quarter of 2005 to $61.1 million in the first quarter of 2006. We may not be able to achieve similar revenue growth rates for the remainder of 2006 or
in future periods. In the event that we do achieve continued growth, the expansion of our business and operations will likely place a significant strain on our resources and increased demands on our management information and reporting systems,
financial and management controls and personnel. We may not be able to develop the internal capabilities or collaborative relationships required to manage future growth and expansion or to support future operations. If we are unable to manage growth
effectively, our financial results could be adversely affected.

Since we have limited visibility as to the volume of sales of our
products by our customers and inventory levels of our products held by our customers, our ability to forecast accurately future demand for and sales of our products is limited.

We sell our chipsets to OEMs who integrate our chipsets into their products or to ODMs who include our chipsets in the products they supply to OEMs. We
have limited visibility as to the volume of our products that our OEM and ODM customers are selling to their customers or carrying in their inventory. If our customers have excess inventory or experience a slowing of products sold through to their
end customers, it would likely result in a slowdown in orders from our customers and adversely impact our future sales and inventory.

Any future downturns in the semiconductor industry may reduce our revenue and result in excess inventory.

The
semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and
demand. The industry has, from time to time, experienced significant downturns, often connected with, or in anticipation of, maturing product cycles of both semiconductor companies and their customers products and declines in general
economic conditions. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. Any future downturns may reduce our revenue or our
percentage of revenue growth on a quarter-to-quarter basis and result in us having excess inventory. Furthermore, any upturn in the wireless communications market in which we sell our chipsets could result in increased competition for access to
limited third-party foundry, assembly and test capacity.

Although we achieved profitability in the current and past quarters and in
fiscal 2005 and 2004, we incurred a net loss in the second quarter of 2005, and we may incur losses in the future. Accordingly, we may not be able to generate sufficient revenue, or sufficiently control costs, in the future to sustain profitability.

At March 31, 2006, we had an accumulated deficit of approximately $50.3 million. During the three months ended March 31,
2006 we incurred $24.2 million in operating expenses and generated net income of $6.8 million. During the three months ended March 31, 2005, we incurred $17.3 million in operating expenses and generated net income of $1.7 million. We did,
however, incur a net loss in the second quarter of 2005 and may incur losses in the future. To sustain profitability, we will need to maintain or increase our revenue while maintaining reasonable cost and expense levels. In addition, since we expect
average selling prices of our products to continue to decrease in the future, we will need to continue to reduce the average unit costs of our products and increase sales volumes in our existing markets as well as successfully introduce additional
products for new markets in order to maintain profitability. We expect to increase expense levels in absolute dollars in each of the next several quarters to support increased research and development efforts related to new and existing product
development and sales and marketing efforts. Because many of our expenses are fixed in the short term, or are incurred in advance of anticipated sales, we may not be able to decrease our expenses in a timely manner to offset any shortfall of sales.
We may not be able to sustain or increase profitability on a quarterly or an annual basis.

The average selling prices of products in
our markets have historically decreased rapidly and will likely do so in the future, which could harm our revenue and gross profits.

The products we develop and sell, especially those for wireless networking solutions, are used for high volume applications and are subject to rapid declines in average selling prices. The average selling prices have historically decreased
significantly in order to meet market demand, and we expect that we will continue to reduce prices in the future. Reductions in our average selling prices to one customer could impact our average selling prices to all customers. Historically, we
have generally been able to substantially offset reductions in our average selling prices with decreases in our product costs and increases in our unit volumes. Our financial results will suffer if we are unable to offset any future reductions in
our average selling prices by increasing our unit volumes, reducing our costs or developing new or enhanced products on a timely basis with higher selling prices or gross profit. While gross profit may decline as a result of reductions in average
selling prices, we may continue to incur research and development costs at higher or existing levels to develop future products. This continued spending would have an adverse impact on our immediate operating results if our revenue does not continue
to grow or our gross margins decline.



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We may not be able to compete effectively and increase or maintain revenue and market share.

We may not be able to compete successfully against current or potential competitors. If we do not compete successfully, our market
share and revenue may decline. We compete with large semiconductor manufacturers and designers and start-up integrated circuit companies. Most of our current and potential competitors have longer operating histories, significantly greater resources
and name recognition and a larger base of customers than we do. This may allow them to respond more quickly than us to new or emerging technologies or changes in customer requirements. In addition, these competitors may have greater credibility with
our existing and potential customers. Moreover, many of our competitors have been doing business with customers for a longer period of time and have established relationships, which may provide them with information regarding future trends and
requirements that may not be available to us. In addition, some of our larger competitors may be able to provide greater incentives to customers through rebates and marketing development funds and similar programs. Some of our competitors with
multiple product lines may bundle their products to offer a broader product portfolio or integrate wireless functionality into other products that we do not sell, which may make it difficult for us to gain or maintain market share.

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

We believe our future success will depend
in large part upon our ability to attract and retain highly skilled managerial, engineering and sales and marketing personnel. The loss of any key employees or the inability to attract or retain qualified personnel, including engineers and sales and
marketing personnel, could delay the development and introduction of, and harm our ability to sell, our products and harm the markets perception of us. We believe that our future success is highly dependent on the contributions of our senior
management, including our President and Chief Executive Officer and our senior engineering personnel. We do not have long-term employment contracts with these or any other key personnel, and their knowledge of our business and industry would be
extremely difficult to replace.

There is currently a shortage of qualified technical personnel with significant experience in the design,
development, manufacture, marketing and sales of integrated circuits for use in wireless products. Our key technical personnel and consultants represent a significant asset and serve as the source of our technological and product innovations. We may
not be successful in attracting and retaining sufficient numbers of technical personnel to support our business plan.

If we fail to
develop and introduce new products and enhancements for wireless applications or if our proprietary features do not achieve market acceptance on a timely basis, our ability to attract and retain customers could be impaired, and our competitive
position may be harmed.

The wireless communications market is characterized by rapidly changing technology, evolving industry
standards, rapid changes in customer requirements and frequent product introductions. We must continually design, develop and introduce new products with improved features to be competitive. Our current and future products may not achieve market
acceptance or adequately address the changing needs of the wireless market, and we may not be successful in developing and marketing new products or enhancements to our existing products on a timely basis. The introduction of products embodying new
technologies, the emergence of new industry standards or changes in customer requirements could render our existing products obsolete and unmarketable. In particular, if our recently developed products based on the draft 802.11n standard are not
competitive or successful in the market, our financial results would be adversely affected. In addition, we introduce from time to time products with proprietary enhancements. Although we believe our products are fully compliant with applicable
industry standards, proprietary enhancements may not in the future result in full conformance with existing industry standards under all circumstances. Our introduction of proprietary features involves risks associated with market acceptance of
these new products and certification by industry standards groups. We have reviewed the rules and regulations of the various standards bodies and related industry organizations to which we belong or with which we are affiliated, and we believe there
is not a significant risk that action would be taken that would undermine our ability to continue to leverage our affiliation with these organizations.

The development of our products is highly complex. We occasionally have experienced delays in completing the development and introduction of new products and product enhancements, and we could experience delays in the
future. Unanticipated problems in developing wireless products could also divert substantial engineering resources, which may impair our ability to develop new products and enhancements and could substantially increase our costs. Even if the new and
enhanced products are introduced to the market, we may not be able to achieve market acceptance of these products and our proprietary features in a timely manner.



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We will continue to expend substantial resources developing products for new applications or
markets and may never achieve the sales volume for these products that we anticipate, which may limit our future growth and harm our results of operations.

With the exception of our new product for the PAS cellular handset market, all of our products introduced to date have been for use in wireless networking applications. Our strategy includes developing and introducing
new products for use in applications other than wireless data networking. Our future success will depend in part upon the success of any such products, and we face a number of risks in connection with these products, including those described in
other risk factors in this report. We have in the past, and will likely in the future, expend substantial resources in developing new and additional products for new applications and markets. We may experience unforeseen difficulties and delays in
developing these products and defects upon volume production and broad deployment. In addition, we have no experience in markets other than wireless data networking and PAS, and may be unsuccessful in marketing and selling any products we develop.
The markets we choose to enter will likely be highly competitive and many of our competitors will have substantially more experience in these markets. Our success will depend on the growth of the markets we enter, the competitiveness of our products
and our ability to increase our market share in these markets. If we choose to enter markets that do not achieve or sustain the growth we anticipate, or if our products are not competitive, we may not achieve volume sales, which may limit our future
growth and harm our results of operations.

If our product for the PAS cellular market is not successful, or if the PAS cellular
market does not grow, our future results will be harmed.

We introduced a new product for the PAS cellular handset market and
commenced shipments in the second quarter of 2005. Our future success will depend in part upon the success of this product, and we face a number of risks in connection with the product, including those described in the risk factors in this report.
Since the product was recently developed, we may experience unforeseen defects in this product upon volume production and broad deployment. In addition, we have no experience in the cellular market, and may be unsuccessful in marketing and selling
this product. The China PAS cellular market is dominated by a very small number of handset providers and to date we have relied solely on UTStarcom for sales of our new product. If these providers, and in particular UTStarcom, are not successful in
this market, or if they do not choose to incorporate our products into a significant number of their handsets, we will not be successful in selling our product. In addition we have no control over UTStarcoms schedule for launching its
products, and UTStarcoms initial launch of products using our PAS product was delayed from our prior expectations. Any further delay by UTStarcom would delay revenues for our PAS products and could adversely affect our quarterly operating
results. In addition, the China PAS cellular market may stop growing or may contract as competing technologies, such as wideband cellular third generation technologies and Time Division Synchronous Code Division Multiple Access become available. The
market for cellular handset semiconductors is highly competitive and many of our competitors have substantially more experience in this market. There are a number of cellular technologies, some of which have technological advantages over PAS, and
the market for PAS cellular may not continue to grow or remain a successful technology. If this product is not successful, our future growth would be adversely affected and our future results harmed.

Our PAS customer has trial licenses for PAS handsets in China.

Our PAS customer has trial licenses for PAS systems and handsets. Our customer has applied for, but has not yet received, a final official network access
license for its PAS systems and handsets, including handsets that include our chipsets. We understand that these PAS systems and handsets are considered to still be in the trial period and that sales of PAS systems and handsets may continue to be
made by our customer during this trial period, but that licenses will ultimately be required. If our customer fails to obtain the required licenses, or if the trial period ends, it could be prohibited from making further sales of the unlicensed
products in China, including PAS handsets that include our chipsets, which would substantially harm our business, financial condition and results of operations. The regulations implementing these requirements have not been applied by a court and may
be interpreted and enforced by regulatory authorities in a number of different ways. Chinas governmental authorities may interpret or apply the regulations with respect to which licenses are required, and with respect to our customers
ability to sell a product while a product is in the trial period, in a manner that could have a material adverse effect on our business, financial condition and results of operations.



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We rely on a limited number of independent foundries and subcontractors for the manufacture,
assembly and testing of our chipsets and on a third party logistics provider to ship products to our customers. The failure of any of these third-party vendors to deliver products or otherwise perform as requested could damage our relationships with
our customers, decrease our sales and limit our growth.

We do not have our own manufacturing or assembly facilities and have
limited in-house testing facilities. Therefore, we must rely on third-party vendors to manufacture, assemble and test the products we design. We primarily rely on Taiwan Semiconductor Manufacturing Corporation in Taiwan, Semiconductor Manufacturing
International Corporation in Shanghai, China and Tower Semiconductor Ltd. in Israel to produce our chips. We also rely on Amkor Technology, Inc. in China and Korea, ASAT Holdings Limited in China and Hong Kong, Siliconware Precision Industries Co.,
Ltd. in Taiwan, STATS ChipPAC Limited in Singapore and other third-party assembly and test subcontractors to assemble, package and test our products. In addition, we use JSI Shipping in Singapore and Hong Kong to warehouse and ship our products to
our customers. If these vendors do not provide us with high-quality products, services and/or production and test capacity in a timely manner, or if the relationship with one or more of these vendors is terminated, we may be unable to obtain
satisfactory replacements and/or we may be unable to fulfill customer orders on a timely basis, our relationships with our customers could suffer, our sales could decrease and our growth could be limited.

We face risks associated with relying on third-party vendors for the manufacture, assembly and testing of our chipsets.

We face significant risks associated with relying on third-party vendors, including:



| |  |  | capacity shortages;
| | - |  | -------------------



| |  |  | reduced control over product cost, delivery schedules and product quality;
| | - |  | --------------------------------------------------------------------------



| |  |  | potential price increases;
| | - |  | --------------------------



| |  |  | inability to achieve sufficient production, increase production or test capacity and achieve acceptable yields on a timely basis;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | increased exposure to potential misappropriation of our intellectual property;
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| |  |  | shortages of materials that foundries use to manufacture products; and
| | - |  | ----------------------------------------------------------------------



| |  |  | labor shortages or labor strikes.
| | - |  | ---------------------------------

We do not have
long-term supply contracts with our third-party manufacturing vendors and they may allocate capacity to other customers and may not allocate sufficient capacity to us to meet future demands for our products.

We currently do not have long-term supply contracts with any of our third-party vendors. Therefore, they are not obligated to perform services or supply
products to us for any specific period, in any specific quantities, or at any specific price, except as may be provided in a particular accepted purchase order. None of our third-party foundry or assembly and test vendors has provided contractual
assurances to us that adequate capacity will be available to us to meet future demand for our products. Recently, our manufacturing vendors have indicated that, due to the current upturn in the semiconductor market, they will likely experience
production capacity constraints for the foreseeable future. Under these circumstances, these foundries and assembly and test vendors may allocate capacity to the production of other companies products while reducing deliveries to us on short
notice. In particular, other customers that are larger and better financed than us or that have long-term agreements with these foundries or assembly and test vendors may cause these foundries or assembly and test vendors to reallocate capacity to
those customers, decreasing the capacity available to us. If we enter into costly arrangements with suppliers that include nonrefundable deposits or loans in exchange for capacity commitments, commitments to purchase specified quantities over
extended periods or investment in a foundry, our operating results could be harmed. To date, we have not entered into such arrangements with our suppliers. If we need another integrated circuit foundry or assembly and test subcontractor because of
increased demand, or the inability to obtain timely and adequate deliveries from our providers, we might not be able to cost-effectively and quickly retain other vendors to satisfy our requirements.



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If our third-party foundries or suppliers do not achieve satisfactory yields or quality, our
relationships with our customers and our reputation will be harmed.

The fabrication of chipsets is a complex and technically
demanding process. Minor deviations in the manufacturing process can cause substantial decreases in yields, and in some cases, cause production to be suspended. Our third-party foundries and suppliers have from time to time experienced manufacturing
defects and reduced manufacturing yields. Changes in manufacturing processes or the inadvertent use of defective or contaminated materials by our foundries could result in lower than anticipated manufacturing yields or unacceptable performance. Many
of these problems are difficult to detect at an early stage of the manufacturing process and may be time consuming and expensive to correct. In addition, designing RF circuits using standard, complementary metal-oxide semiconductor processes is
difficult and can result in unsatisfactory yields. Because we primarily purchase wafers, our exposure to low wafer yields from our foundries is increased. Poor yields from our foundries or defects, integration issues or other performance problems in
our products could cause us significant customer relations and business reputation problems, or force us to sell our products at lower gross margins and therefore harm our financial results. In addition, manufacturing defects may not be detected by
our testing, or may be caused by defective packaging of our products by our third-party suppliers. If these defects arise or are discovered after we have shipped our products, our reputation and business would suffer.

We depend on a small number of customers for a significant portion of our revenue. If we fail to retain or expand customer relationships, our
revenue could decline.

We derive a significant portion of our revenue from a small number of customers, and we anticipate that we
will continue to do so in the foreseeable future. These customers may decide not to purchase our products at all, to purchase fewer products than they did in the past, for example due to an increase in inventory, or to alter their purchasing
patterns in some other way, particularly because substantially all of our sales are made on a purchase order basis, which permits our customers to cancel, change or delay product purchase commitments with little or no notice to us and without
penalty.

In the quarter ended March 31, 2006, Hon-Hai Precision Industry Co., Ltd, UTStarcom, Inc., Alpha Networks, Inc. and Askey
Computer Corporation accounted for 15%, 13%, 12% and 11% of our net revenue, respectively. In the quarter ended March 31, 2005, Cameo Communications, Inc., Hon-Hai Precision Industry Co., Ltd., Alpha Networks, Inc. and Askey Computer
Corporation accounted for 21%, 17%, 13% and 10% of our net revenue, respectively. Some of our OEM customers are also ODM customers, which may increase the impact of the loss of any customer. We must obtain orders from new customers on an ongoing
basis to increase our revenue and grow our business. Our largest customers are typically ODMs. Sales to our largest customers have fluctuated significantly from period to period primarily due to OEMs that incorporate our products changing their
designated ODM and the continued diversification of our OEM customer base in our current markets. We believe that sales will likely continue to fluctuate significantly in the future as we enter into new markets. The loss of any significant customer,
a significant reduction in sales we make to them, or any problems collecting receivables from them would likely harm our financial condition and results of operations.

We will have difficulty selling our products if customers do not design our products into their product offerings or if our customers product offerings are not commercially successful.

We sell our products directly to OEMs, who include our chipsets in their products, and to ODMs, who include our chipsets in the products they supply to
OEMs. Our products are generally incorporated into our customers products at the design stage. As a result, we rely on OEMs to design our products into the products they sell. Without these design wins, 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 will select our product for design into its own product. Once an OEM designs 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. 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 manufacturer or that a successor design will include one of our products.



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The complexity of our products could result in unforeseen delays or expenses from undetected
defects, errors or bugs in hardware or software, which could reduce the market acceptance for our new products, damage our reputation with current or prospective customers and adversely affect our operating costs.

Highly complex products such as our chipsets and the related reference designs we provide to our customers frequently contain defects, errors and bugs
when they are first introduced or as new versions are released. We have in the past and may in the future experience these defects, errors and bugs. If any of our products have reliability, quality, or compatibility problems, we may not be able to
successfully correct these problems. In addition, if any of our proprietary features contain defects, errors or bugs when first introduced or as new versions are released, we may be unable to correct these problems. Consequently, our reputation may
be damaged and customers may be reluctant to buy our products, which could harm our ability to retain existing customers and attract new customers and our financial results. In addition, these defects, errors or bugs could interrupt or delay sales
to our customers. If any of these problems are not found until after we have commenced commercial production of a new product, we may be required to incur additional development costs and product recalls, repairs or replacement costs. These problems
may also result in claims against us by our customers or others.

Because we do not have long-term commitments from our customers, we
must estimate customer demand, and errors in our estimates can have negative effects on our inventory levels, sales and operating results.

Our sales are largely made on the basis of individual purchase orders rather than long-term purchase commitments. Our customers have the right to cancel or defer some purchase orders. We have experienced in the past cancellations or
deferrals of purchase orders, and additional cancellations and deferrals may occur from time to time. We have historically placed firm orders for products with our foundries approximately 16 weeks or more prior to the anticipated delivery date and
typically prior to receiving an order for the product. Therefore, our order volumes are based on our forecasts of demand from our customers. This process requires us to make multiple demand forecast assumptions, each of which may introduce error
into our estimates. If we overestimate customer demand or incorrectly estimate product mix, we may allocate resources to manufacturing products that we may not be able to sell when we expect or at all. As a result, we would have excess inventory,
which would harm our financial results. Conversely, if we underestimate customer demand or if insufficient manufacturing capacity is available, we would forego revenue opportunities, lose market share and damage our customer relationships. On
occasion, we have been unable to adequately respond to increases in customer purchase orders, and therefore, were unable to complete, or needed to delay, sales. We have in the past, and may in the future, allocate our supply among our customers.
Product allocation may result in the loss of current customers, and if we are unable to commit to provide specified quantities of products over a given period of time, we will not attract new customers. The failure to maintain customer relationships
would decrease our revenue and harm our business.

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 and increased expenses.

To remain competitive, we continually work to improve our chipsets and, in particular, our high-performance RF products, to be manufactured using
increasingly smaller geometries and to achieve higher levels of design integration. These ongoing efforts require us from time to time to modify the manufacturing processes for our products and to redesign some products. To remain competitive, our
chipset must be redesigned from time to time, which may result in delays in product deliveries. We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies to reduce our costs. In the
past, we have experienced some difficulties in shifting to smaller geometry process technologies or new manufacturing processes, which resulted in reduced manufacturing yields, delays in product deliveries and increased expenses. In addition, while
we purchase wafers from foundries, we also assume the yield risk related to manufacturing these wafers into die. We may face similar difficulties, delays and expenses in the future. We depend on our relationships with our foundries to transition to
smaller geometry processes successfully and cannot assure that our foundries will be able to effectively manage the transition. If our foundries, or we, experience significant delays in this transition or fail to efficiently implement these
transitions, our business, financial condition and results of operations could be adversely affected.



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We may not be able to consummate the acquisition of or successfully integrate ZyDAS
Technology Corporation or any other businesses that we may choose to acquire, and any acquisitions could harm our operating results and share price.

In April 2006, we entered into a definitive agreement to acquire ZyDAS Technology Corporation, a privately held Taiwan-based fabless IC design company, for a combination of cash and common stock, and we expect at some
point in the future that we may make additional acquisitions of, and investments in, businesses that may offer complementary products and technologies, augment our market segment coverage, or enhance our technological capabilities, if appropriate
opportunities arise. Risks arising from the ZyDAS acquisition or other acquisitions or investments that could have a material adverse effect on our business, results of operations or financial condition include among other things:



| |  |  | the difficulty or inability of completing the development and application of the acquired technology or products or of integrating that technology with our own,
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the difficulty of assimilating the operations and personnel of acquired businesses,
| | - |  | -----------------------------------------------------------------------------------



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



| |  |  | the distraction of management and employees from our business,
| | - |  | --------------------------------------------------------------



| |  |  | the risk of entering a geographic or business market in which we have little or no prior experience,
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | the difficulty of establishing and maintaining uniform standards, controls, policies and procedures,
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | the risk that there could be deficiencies in the internal control of any acquired company that could result in a material weakness in our overall internal control,
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the potential for unanticipated costs, expenditures and liabilities,
| | - |  | --------------------------------------------------------------------



| |  |  | the potential for incurring amortization expenses or impairment charges if an acquisition results in significant goodwill or other intangible assets,
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the potential for changing relationships with customers, suppliers or contractual, intellectual property or employment issues, including the potential loss of key employees, and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the potential for dilution if we pay for the transaction with equity securities.
| | - |  | --------------------------------------------------------------------------------

Any future acquisitions could result in additional dilutive issuances of equity securities, one-time charges, the incurrence of debt or contingent liabilities, adverse tax consequences, deferred compensation charges, dilution to future
earnings and amortization of amounts related to deferred compensation and certain purchased intangible assets and large and immediate write-offs, any of which could negatively impact our results of operations and could cause our stock price to
decline. We cannot assure that we will be able to identify suitable acquisition opportunities or that we will be able to consummate any such transactions or relationships on terms and conditions that are acceptable to us, that such transactions or
relationships will be successful or that we will achieve the anticipated benefits of the acquisition.

Changes to financial
accounting standards may affect our results of operations and could cause us to change our business practices.

We prepare our
financial statements to conform with generally accepted accounting principles, or GAAP, in the United States. These accounting principles are subject to interpretation by the American Institute of Certified Public Accountants, the Securities and
Exchange Commission and various bodies formed to interpret and create appropriate accounting rules and regulations. A change in those accounting rules can have a significant effect on our reported results and may affect our reporting of transactions
completed before a change is announced. Changes to those rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. For example, in December 2004, the Financial Accounting
Standards Board issued SFAS No. 123R, Share-Based Payment which required us, starting in our first quarter of 2006, to record a charge to earnings for employee stock option grants and other equity incentives. Since we historically
have used equity-related compensation as a component of our total employee compensation program, the accounting change could make the use of equity-related compensation less attractive to us and therefore make it more difficult to attract and retain
employees. However, because we believe that providing equity-related compensation for our employees is a competitive necessity, we will likely incur significant and ongoing accounting charges resulting from option grants and other equity incentive
expensing that could adversely affect our overall results of operations.



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Moreover, we implemented the requirements of SFAS 123R using the modified prospective method and accordingly we did not
restate prior period financial statements to reflect the historical impact of option grants. This may potentially cause readers of our financial statements to draw incorrect conclusions regarding our future operating performance since our financial
statements going forward, which will reflect stock-based compensation expense, will not be comparable to our prior period financial statements that exclude stock-based compensation expense.

Unanticipated changes in our effective tax rates could affect our future results.

Our future effective tax rate could be unfavorably affected by unanticipated changes in the valuation of our deferred tax assets and liabilities. In
addition, since we operate in different countries and are subject to taxation in different jurisdictions, our future effective tax rates could be impacted by changes in such countries tax laws or their interpretations. Both domestic and
international tax laws are subject to change as a result of changes in fiscal policy, changes in legislation, evolution of regulation and court rulings. The application of these tax laws and related regulations is subject to legal and factual
interpretation, judgment and uncertainty. Changes in our effective tax rate could have a material adverse impact on our results of operations.

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

We rely on a combination of patent, copyright, trademark and trade secret laws, confidentiality procedures and licensing arrangements to establish and
protect our proprietary rights. Our pending patent applications may not result in issued patents, and our existing and future patents may not be sufficiently broad to protect our proprietary technologies or may be held invalid or unenforceable in
court. Policing unauthorized use of our products is difficult and we cannot be certain that the steps we have taken will prevent the misappropriation or unauthorized use of our technologies, particularly in foreign countries where the laws may not
protect our proprietary rights as fully as United States law. Any patents we have obtained, or may obtain in the future, may not be adequate to protect our proprietary rights. Our competitors may independently develop or may have already developed
similar technology, duplicate our products or design around any patents issued to us or other intellectual property rights. In addition, we may be required to license our patents as a result of our participation in various standards organizations.

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

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

Intellectual property litigation, which is common in our industry, could be costly, harm our reputation, limit our ability to license or sell our proprietary technologies or products and divert the attention of management and
technical personnel.

The wireless communications market is characterized by frequent litigation regarding patent and other
intellectual property rights. In the last few years, we have received several written notices or offers from our competitors and others claiming to have patent and other intellectual property rights in certain technology and inviting us to license
this technology and related patents that apply to the IEEE family of wireless local area networking standards, including the 802.11a, 802.11b, 802.11e, 802.11g and draft 802.11n wireless standards as well as other technology and patents relevant to
our chips, software and system solutions. These notices or offers have been made directly to us and through our U.S. and foreign customers. We have certain indemnification obligations to customers with respect to any infringement of third-party
patents and intellectual property rights by our products. We have responded, or are in the process of responding, directly, or indirectly through our customers, to all of these notices, and continue to correspond regarding the offers with some of
the parties that have sent the notices. While at least two of our customers have been sued in the U.S.by the holders of patents related to 802.11a, 802.11b and 802.11g technology, neither that litigation nor any of these notices or offers to license
has, to date, resulted in litigation directly against us. Questions of infringement and misappropriation in the wireless communications market involve highly technical and subjective analyses. Litigation may be necessary in the future to enforce any
patents we may receive and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or misappropriation, and we may not
prevail in any future litigation. If litigation were to be filed against us in connection with an offer to license technology or claims of infringement, our business could be harmed. Litigation, whether or not determined in our favor or settled,
could be costly, could harm our reputation and could divert the efforts and attention of our management and technical personnel from normal business operations. In addition, adverse determinations in litigation could result in the loss of our
proprietary rights, subject us to significant liabilities, and require us



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to seek licenses from third parties or prevent us from licensing our technology or selling our products, any of which
could seriously harm our business. Any of these consequences could result from litigation whether initiated by our competitors or others, including those that have already sent notices or offers to us and our customers claiming patent rights and
offering licenses.

Any potential dispute involving our patents or other intellectual property could also include our industry
partners and customers, which could trigger our indemnification obligations to them and result in substantial expense to us.

In any
potential dispute involving our patents or other intellectual property, our customers or licensees could also become the target of litigation, and certain customers have received notices of written offers from our competitors and others claiming to
have patent rights in certain technology and inviting our customers to license this technology. At least two of our customers have been sued in the U.S. for allegedly infringing patents related to 802.11a, 802.11b and 802.11g technology. Because we
indemnify our customers for intellectual property claims made against them for products incorporating our technology, any litigation could trigger technical support and indemnification obligations in some of our license or sales agreements, which
could result in substantial expenses. In addition to the time and expense required for us to supply support or indemnification to our customers, any such litigation could severely disrupt or shut down the business of our customers, which in turn
could hurt our relations with our customers and cause the sale of our proprietary technologies and products to decrease.

We face
business, political, regulatory, operational, financial and economic risks because most of our operations and sales activities take place outside of the United States.

A significant portion of our products is sold to customers outside the United States and Canada. Sales to customers in Asia have accounted for
substantially all of our net revenue since 2003. Because most of our ODMs and our PAS customer are located in Asia, we anticipate that substantially all of our revenue will continue to be represented by sales to customers in that region. In
addition, we conduct research and development activities in India and China, and expect to conduct research and development activities in Taiwan through our expected acquisition of ZyDAS, and we have sales, marketing and support personnel in Japan,
Taiwan, Korea, Hong Kong, Macao and China. Our success depends upon continued expansion of our international operations. Our international business involves a number of risks, including:



| |  |  | multiple, conflicting and changing laws and regulations, tax laws, export and import restrictions, employment laws, regulatory requirements and other governmental approvals, permits
and licenses;
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| |  |  | difficulties in staffing and managing foreign operations as well as cultural differences;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | trade restrictions or higher tariffs that favor local competition in some countries;
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| |  |  | difficulties of managing sales representatives, especially because we expect to increase our sales through our sales representatives;
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| |  |  | inadequate local infrastructure and transportation delays;
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| |  |  | financial risks, such as longer payment cycles, greater difficulty collecting accounts receivable and exposure to foreign currency exchange rate fluctuations;
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| |  |  | failure by us or our customers to gain regulatory approval for use of our products; and
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | political and economic instability, including wars, terrorism, and political unrest, recurrence of the SARS, avian flu, or any other outbreak, boycotts, curtailment of trade and
other business restrictions.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Any of these factors could significantly harm our future international sales and operations,
consequently, our revenue and results of operations and business and financial condition.



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Our headquarters are located in California, and we have sales offices in Japan and elsewhere in
Asia, and research and development facilities in India and China. Our third-party foundries and subcontractors are concentrated in Asia and elsewhere in the Pacific Rim. These areas are subject to significant weather and earthquake-related risks.
Any disruption to the operations of these offices, foundries and subcontractors resulting from typhoons, earthquakes or other natural disasters could cause significant delays in the production, shipment and sales of our products.

TSMC and SMIC, which manufacture our chipsets and subcontractors which perform substantially all of our assembly and testing are located in Asia. In
addition, our headquarters are located in Northern California, and we have sales offices in Japan, Taiwan, Hong Kong, China and elsewhere in Asia, and research and development facilities in India and China. These areas are subject to typhoons, and
the risk of an earthquake or an earthquake-related disaster such as a tsunami in the Pacific Rim region or the Indian Ocean region, including Asia and Northern California, is significant due to the proximity of major earthquake fault lines. In the
past, major earthquakes in Taiwan have disrupted the facilities of several of these third-party contractors, as well as other providers of these services, and impaired their production capacity. In addition, a tsunami in December 2004 caused
widespread destruction and disruption of business in India and throughout the Indian Ocean coastal region. The occurrence of additional earthquakes or other natural disasters could result in the disruption of our foundry, assembly and test capacity
or research and development efforts, or our ability to market and sell our products. We may not be able to obtain alternate capacity on favorable terms, if at all and our research and development efforts could be slowed.

We rely upon third parties for technology that is integrated into some of our products, and if we are unable to continue to use this technology and
future technology or the technology fails to operate, our ability to sell technologically advanced products would be limited.

We
rely on third parties for technology that is integrated into some of our products. If we are unable to continue to use or license on reasonable terms third-party technologies used in some of our products or the technology fails to operate, we may
not be able to secure alternatives in a timely manner and our business would be harmed.

If our internal control over financial
reporting does not comply with the requirements of the Sarbanes-Oxley Act, investor perceptions of our company may be adversely affected and could cause a decline in the market price of our stock.

Section 404 of the Sarbanes-Oxley Act of 2002 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 an ongoing program to perform the system and process evaluation and testing necessary to comply with these requirements. This legislation is relatively new and neither
companies nor accounting firms have significant experience in complying with its requirements. As a result, we have incurred and expect to continue to incur increased expense and to devote additional management resources to Section 404
compliance. In the event that our chief executive officer, chief financial officer, chief accounting officer, or independent registered public accounting firm determine that our internal control over financial reporting is not effective as defined
under Section 404, investor perceptions of our company may be adversely affected and could cause a decline in the market price of our stock.

Changes in current laws or regulations or the imposition of new laws or regulations could impede the sale of our products or otherwise harm our business.

Wireless networks can only operate in the frequency bands, or spectrum, allowed by regulators and in accordance with rules governing how the spectrum can
be used. The Federal Communications Commission, or the FCC, in the United States, as well as regulators in foreign countries, have broad jurisdiction over the allocation of frequency bands for wireless networks. We therefore rely on the FCC and
international regulators to provide sufficient spectrum and usage rules. For example, countries such as China, Japan or Korea heavily regulate all aspects of their wireless communications industries, and may restrict spectrum allocation or usage, or
may impose requirements that render our products or our customers products unmarketable in these jurisdictions. If this were to occur, it would make it difficult for us to sell our products in that region. In addition, some of our chipsets
operate in the 5 GHz band, which is also used by government and commercial services such as military and commercial aviation. The FCC and European regulators have traditionally protected government uses of the 5 GHz bands by setting power limits and
indoor and outdoor designation and requiring that wireless local area networking devices not interfere with other users of the band such as government and civilian satellite services. Changes in current laws or regulations, reversal of usage rights,
or the imposition of new laws and regulations in the United States or elsewhere regarding the allocation and usage of the 5 GHz band on us, our customers or the industries in which we operate may materially and adversely impact the sale of our
products and our business, financial condition and results of operations.



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If our customers or the industries using wireless technology prefer to integrate wireless
capability into other products, we may not be able to compete effectively, we will lose customers, our revenue will decline and our business will be harmed.

We have adopted the strategy of maintaining wireless technology on a chipset that is separate from functionality contained on other chips within a product. Our customers or the industries using wireless technology may
prefer to integrate wireless capability into other products such as DSL modems, or determine that an integrated chip with multiple functionality results in products that perform better or are less expensive or more efficient to manufacture. If
wireless functionality becomes commonly integrated with other functionality, the market for our products may decline. Consequently, we may miss product cycles in order to redesign our products, and we may not be able to forge strategic relationships
necessary in order to design and arrange for the production of chips that include multiple functionality. If we miss product cycles, we will lose customers, our revenue will decline and our business will be harmed.

The proliferation of wireless devices may expand beyond the capacity of the channels available in the 2.4 GHz or 5 GHz bands, which may overload
the networks and result in decreased market demand for our products.

Wireless networks currently operate in the 2.4 GHz or 5 GHz
bands, within which there are a limited number of channels available for use. The increasing number of wireless devices and networks may overburden the frequency bands and overload the networks. Recent studies have predicted that congestion in the
2.4 GHz band could result from the increasing number of wireless devices using that band with limited channel availability. If this occurs, our customers or the industries in which we operate may be adversely affected because the networks become
inoperable or because only a limited number of devices will be able to access the networks. In turn, we may experience a decrease in market demand for our products that would adversely impact our business and results of operations.

We may experience a decrease in market demand due to uncertain economic conditions in the United States and in international markets, including as
a result of the concerns of terrorism, war, social and political instability, and rising oil prices.

Terrorist attacks in the
United States and elsewhere, the continued presence of United States military forces in Iraq, turmoil in the Middle East, and rising global oil prices have contributed to the uncertainty in the United States and global economy and may lead to a
decline in economic conditions, both domestically and internationally. Further terrorist acts, or other conflicts or wars, continued dramatic increases in oil prices, or a recession, or general economic slowdown in the U.S. or globally, could cause
a slowdown of the market demand for goods and services, including demand for our products, and could harm our operating results.

Because the NASDAQ National Market is likely to continue to experience extreme price and volume fluctuations, the price of our stock may decline.

Since we completed our initial public offering in February 2004, the market price of our shares has been and likely will continue to be highly volatile and could be subject to wide fluctuations in response to numerous
factors, including the following:



| |  |  | actual or anticipated variations in our quarterly operating results or those of our competitors;
| | - |  | ------------------------------------------------------------------------------------------------



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



| |  |  | introduction and adoption of new industry standards;
| | - |  | ----------------------------------------------------



| |  |  | changes in financial estimates or recommendations by securities analysts;
| | - |  | -------------------------------------------------------------------------



| |  |  | changes in the market valuations of our competitors;
| | - |  | ----------------------------------------------------



| |  |  | announcements by us or our competitors of significant acquisitions or partnerships; and
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | sales of our common stock.
| | - |  | --------------------------

Many of these factors are
beyond our control and may negatively impact the market price of our common stock, regardless of our performance. In addition, the stock market in general, and the market for technology and semiconductor companies in particular, have been highly
volatile. Our common stock may not trade at the same levels of shares as that of other semiconductor and technology companies, and shares of semiconductor and technology companies, in general, may not sustain their current market prices. In the
past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We may be the target of similar litigation in the future. Securities litigation could result in
substantial costs and divert managements attention and resources, which could seriously harm our business and operating results.



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Our ability to raise capital in the future may be limited and our failure to raise capital when
needed could prevent us from executing our growth strategy.

We believe that our existing cash and cash equivalents and existing
amounts available under our revolving credit facility will be sufficient to meet our anticipated cash needs for at least the next 12 months. The timing and amount of our working capital and capital expenditure requirements may vary significantly
depending on numerous factors, including:



| |  |  | market acceptance of our products;
| | - |  | ----------------------------------



| |  |  | the need to adapt to changing technologies and technical requirements;
| | - |  | ----------------------------------------------------------------------



| |  |  | the existence of opportunities for expansion; and
| | - |  | -------------------------------------------------



| |  |  | access to and availability of sufficient management, technical, marketing and financial personnel.
| | - |  | --------------------------------------------------------------------------------------------------

If our capital resources are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity securities or debt securities or
obtain debt financing. The sale of additional equity securities or convertible debt securities would result in additional dilution to our stockholders. Additional debt would result in increased expenses and could result in covenants that would
restrict our operations. We have not made arrangements to obtain additional financing and there is no assurance that financing, if required, will be available in amounts or on terms acceptable to us, if at all.

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

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



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



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



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



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



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



| |  |  | the ability of the board of directors to issue, without stockholder approval, up to 10,000,000 shares of preferred stock with terms set by the board of directors, which rights could
be senior to those of common stock;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law.
These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us. These provisions in our certificate of incorporation, bylaws and under Delaware law could
discourage potential takeover attempts and could reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than they would without these provisions.



34



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Item 6.Exhibits.



|              |     |  |                                                                                                                                                                                      
|------------- | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |     |  | Description                                                                                                                                                                          
|31.1          |     |  | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted pursuant to the Section 302 of the Sarbanes-Oxley Act of
2002.
|              |    
|31.2          |     |  | Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted pursuant to the Section 302 of the Sarbanes-Oxley Act of
2002.
|              |    
|32.1          | (1) |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                   
|              |    
|32.2          | (1) |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                   

---

|(1) | The material contained in Exhibit 32.1 and Exhibit 32.2 is not deemed filed with the SEC and is not to be incorporated by reference into any filing of the Company under
the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing, except to the extent that the registrant specifically
incorporates it by reference.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



35



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SIGNATURES

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

Date: May 10, 2006



|                                                                                                                  
|------------------------------------------------------------------------------------------------------------------
|ATHEROS COMMUNICATIONS, INC.                                                                                      
|                                                                                                                  
|/s/ Craig H. Barratt                                                                                              
|Craig H. Barratt Chief Executive Officer and President (Principal executive officer)                              
|                                                                                                                  
|/s/ Jack R. Lazar                                                                                                 
|Jack R. Lazar Vice President and Chief Financial Officer (Duly authorized officer and principal financial officer)
|                                                                                                                  
|/s/ David D. Torre                                                                                                
|David D. Torre Vice President and Chief Accounting Officer (Chief accounting officer)                             



36



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Exhibit Index



|              |     |  |                                                                                                                                                                                      
|------------- | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |     |  | Description                                                                                                                                                                          
|31.1          |     |  | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted pursuant to the Section 302 of the Sarbanes-Oxley Act of
2002.
|              |    
|31.2          |     |  | Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted pursuant to the Section 302 of the Sarbanes-Oxley Act of
2002.
|              |    
|32.1          | (1) |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                   
|              |    
|32.2          | (1) |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                   

---

|(1) | The material contained in Exhibit 32.1 and Exhibit 32.2 is not deemed filed with the SEC and is not to be incorporated by reference into any filing of the Company under
the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing, except to the extent that the registrant specifically
incorporates it by reference.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



37