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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 September 30, 2005



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)



---



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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x



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



As of November 8, 2005,
49,477,735 shares of Common Stock, par value $0.0005, were issued and outstanding.



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##### Table of Contents

Table of Contents



ATHEROS
COMMUNICATIONS, INC.



INDEX TO



QUARTERLY REPORT ON FORM 10-Q



FOR THE QUARTER ENDED SEPTEMBER 30, 2005



|                               |  |                                                                                       |  |     
|------------------------------ |  | ------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                       |  | 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 |  | 11  
|                               |  |                                                                                      
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 31  
|                               |  |                                                                                      
|Item 4.                        |  | Controls and Procedures                                                               |  | 32  
|                              
|PART II  OTHER INFORMATION   
|                               |  |                                                                                      
|Item 1.                        |  | Legal Proceedings                                                                     |  | 33  
|                               |  |                                                                                      
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 33  
|                               |  |                                                                                      
|Item 6.                        |  | Exhibits                                                                              |  | 34  
|                               | 
|Signatures                     |  | 35                                                                                   



2



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##### Table of Contents

PART I: FINANCIAL INFORMATION



Item 1.Financial Statements



ATHEROS COMMUNICATIONS, INC.



CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)



|                                           |  |                   |         |   |                  |   |         |  
|------------------------------------------ |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                           |  | September 30,2005 |         |   | December 31,2004 |  
|ASSETS                                     |  |                   |         |   |                  |   |         |  
|Current assets:                            |  |                   |         |   |                  |   |         |  
|Cash and cash equivalents                  |  | $                 | 63,410  |   |                  | $ | 32,971  |  
|Marketable securities                      |  |                   | 101,167 |   |                  |   | 121,514 |  
|Accounts receivable, net                   |  |                   | 29,522  |   |                  |   | 29,750  |  
|Inventory                                  |  |                   | 21,685  |   |                  |   | 15,215  |  
|Prepaid expenses and other current assets  |  |                   | 4,842   |   |                  |   | 3,611   |  
|                                           |  |                   |         |   |                  |   |         |  
|Total current assets                       |  |                   | 220,626 |   |                  |   | 203,061 |  
|Property and equipment, net                |  |                   | 5,260   |   |                  |   | 2,757   |  
|Other assets                               |  |                   | 583     |   |                  |   | 545     |  
|                                           |  |                   |         |   |                  |   |         |  
|Total assets                               |  | $                 | 226,469 |   |                  | $ | 206,363 |  
|                                           |  |                   |         |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY       |  |                   |         |   |                  |   |         |  
|Current liabilities:                       |  |                   |         |   |                  |   |         |  
|Accounts payable                           |  | $                 | 19,200  |   |                  | $ | 11,172  |  
|Deferred revenue                           |  |                   | 2,516   |   |                  |   | 1,224   |  
|Accrued liabilities                        |  |                   | 22,240  |   |                  |   | 20,626  |  
|                                           |  |                   |         |   |                  |   |         |  
|Total current liabilities                  |  |                   | 43,956  |   |                  |   | 33,022  |  
|                                           |  |                   |         |   |                  |   |         |  
|Other long-term liabilities                |  |                   | 1,139   |   |                  |   | 301     |  
|Commitments and contingencies              |  |                   |         |   |                  |   |         |  
|Stockholders equity:                      |  |                   |         |   |                  |   |         |  
|Common stock                               |  |                   | 253,347 |   |                  |   | 249,631 |  
|Deferred stock-based compensation          |  |                   | (1,281  | ) |                  |   | (2,484  | )
|Accumulated deficit                        |  |                   | (70,162 | ) |                  |   | (73,767 | )
|Accumulated other comprehensive loss       |  |                   | (530    | ) |                  |   | (340    | )
|                                           |  |                   |         |   |                  |   |         |  
|Total stockholders equity                 |  |                   | 181,374 |   |                  |   | 173,040 |  
|                                           |  |                   |         |   |                  |   |         |  
|Total liabilities and stockholders equity |  | $                 | 226,469 |   |                  | $ | 206,363 |  
|                                           |  |                   |         |   |                  |   |         |  



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



3



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##### Table of Contents

ATHEROS COMMUNICATIONS, INC.



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



|                                                      |  |                                 |        |                                |   |        |  |      |         |  |   |        
|----------------------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------- |  | - | -------
|                                                      |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                                                      |  | 2005                            |        | 2004                           |   | 2005   |  | 2004
|Net revenue                                           |  | $                               | 45,800 |                                | $ | 38,262 |  | $    | 130,407 |  | $ | 127,954
|Cost of goods sold (1)                                |  |                                 | 25,893 |                                |   | 20,800 |  |      | 74,089  |  |   | 68,215 
|                                                      |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Gross profit                                          |  |                                 | 19,907 |                                |   | 17,462 |  |      | 56,318  |  |   | 59,739 
|                                                      |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Operating expenses:                                   |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Research and development (1)                          |  |                                 | 11,657 |                                |   | 10,404 |  |      | 34,121  |  |   | 30,625 
|Sales and marketing (1)                               |  |                                 | 4,262  |                                |   | 3,824  |  |      | 12,715  |  |   | 11,484 
|General and administrative (1)                        |  |                                 | 2,627  |                                |   | 2,139  |  |      | 7,200   |  |   | 6,432  
|Stock-based compensation                              |  |                                 | 441    |                                |   | 918    |  |      | 1,512   |  |   | 3,058  
|                                                      |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Total operating expenses                              |  |                                 | 18,987 |                                |   | 17,285 |  |      | 55,548  |  |   | 51,599 
|                                                      |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Income from operations                                |  |                                 | 920    |                                |   | 177    |  |      | 770     |  |   | 8,140  
|Interest income, net                                  |  |                                 | 1,262  |                                |   | 658    |  |      | 3,360   |  |   | 1,281  
|                                                      |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Income before income taxes                            |  |                                 | 2,182  |                                |   | 835    |  |      | 4,130   |  |   | 9,421  
|Provision for income taxes                            |  |                                 | 30     |                                |   | 68     |  |      | 525     |  |   | 753    
|                                                      |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Net income                                            |  | $                               | 2,152  |                                | $ | 767    |  | $    | 3,605   |  | $ | 8,668  
|                                                      |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Basic net income per share                            |  | $                               | 0.04   |                                | $ | 0.02   |  | $    | 0.07    |  | $ | 0.21   
|                                                      |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Shares used in computing basic net income per share   |  |                                 | 48,984 |                                |   | 46,762 |  |      | 48,582  |  |   | 41,345 
|                                                      |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Diluted net income per share                          |  | $                               | 0.04   |                                | $ | 0.01   |  | $    | 0.07    |  | $ | 0.17   
|                                                      |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Shares used in computing diluted net income per share |  |                                 | 53,617 |                                |   | 52,428 |  |      | 53,499  |  |   | 51,486 
|                                                      |  |                                 |        |                                |   |        |  |      |         |  |   |        

---

|(1) | Amounts exclude stock-based compensation, as follows:
|--- | -----------------------------------------------------



|                           |  |   |     |  |   |     |  |   |       |  |   |      
|-------------------------- |  | - | --- |  | - | --- |  | - | ----- |  | - | -----
|Cost of goods sold         |  | $ | 20  |  | $ | 57  |  | $ | 69    |  | $ | 205  
|Research and development   |  |   | 286 |  |   | 296 |  |   | 885   |  |   | 1,016
|Sales and marketing        |  |   | 14  |  |   | 239 |  |   | 121   |  |   | 749  
|General and administrative |  |   | 121 |  |   | 326 |  |   | 437   |  |   | 1,088
|                           |  |   |     |  |   |     |  |   |       |  |   |      
|                           |  | $ | 441 |  | $ | 918 |  | $ | 1,512 |  | $ | 3,058
|                           |  |   |     |  |   |     |  |   |       |  |   |      



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



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ATHEROS COMMUNICATIONS, INC.



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                            |  |                                |         |   |      |   |          |  
|------------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | -------- | -
|                                                                                            |  | Nine Months EndedSeptember 30, |        
|                                                                                            |  | 2005                           |         |   | 2004 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                       |  |                                |         |   |      |   |          |  
|Net income                                                                                  |  | $                              | 3,605   |   |      | $ | 8,668    |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |                                |         |   |      |   |          |  
|Depreciation and amortization                                                               |  |                                | 1,281   |   |      |   | 1,455    |  
|Amortization of deferred stock-based compensation                                           |  |                                | 1,512   |   |      |   | 3,081    |  
|Tax benefit on employee stock transactions                                                  |  |                                | 88      |   |      |   |         |  
|Change in assets and liabilities:                                                           |  |                                |         |   |      |   |          |  
|Accounts receivable                                                                         |  |                                | 228     |   |      |   | (17,007  | )
|Inventory                                                                                   |  |                                | (6,470  | ) |      |   | (8,392   | )
|Prepaid expenses and other assets                                                           |  |                                | (1,137  | ) |      |   | (2,530   | )
|Accounts payable                                                                            |  |                                | 7,477   |   |      |   | (283     | )
|Deferred revenue                                                                            |  |                                | 1,042   |   |      |   | 830      |  
|Accrued and other liabilities                                                               |  |                                | 2,680   |   |      |   | 8,948    |  
|                                                                                            |  |                                |         |   |      |   |          |  
|Net cash provided by (used in) operating activities                                         |  |                                | 10,306  |   |      |   | (5,230   | )
|                                                                                            |  |                                |         |   |      |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                       |  |                                |         |   |      |   |          |  
|Purchase of property and equipment                                                          |  |                                | (3,156  | ) |      |   | (1,919   | )
|Purchase of marketable securities                                                           |  |                                | (62,504 | ) |      |   | (189,108 | )
|Maturities of marketable securities                                                         |  |                                | 82,661  |   |      |   | 89,975   |  
|Other assets                                                                                |  |                                | (129    | ) |      |   | 1,186    |  
|                                                                                            |  |                                |         |   |      |   |          |  
|Net cash provided by (used in) investing activities                                         |  |                                | 16,872  |   |      |   | (99,866  | )
|                                                                                            |  |                                |         |   |      |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                       |  |                                |         |   |      |   |          |  
|Issuance of common stock, net of repurchase                                                 |  |                                | 3,312   |   |      |   | 134,234  |  
|Repayment of short-term borrowings                                                          |  |                                |        |   |      |   | (4,000   | )
|Repayment of debt and capital lease obligations                                             |  |                                | (51     | ) |      |   | (2,483   | )
|                                                                                            |  |                                |         |   |      |   |          |  
|Net cash provided by financing activities                                                   |  |                                | 3,261   |   |      |   | 127,751  |  
|                                                                                            |  |                                |         |   |      |   |          |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                                   |  |                                | 30,439  |   |      |   | 22,655   |  
|CASH AND CASH EQUIVALENTS, Beginning of period                                              |  |                                | 32,971  |   |      |   | 13,615   |  
|                                                                                            |  |                                |         |   |      |   |          |  
|CASH AND CASH EQUIVALENTS, End of period                                                    |  | $                              | 63,410  |   |      | $ | 36,270   |  
|                                                                                            |  |                                |         |   |      |   |          |  



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



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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, 2004 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, 2004 included in its annual report on Form 10-K, as filed on March 11, 2005 with
the SEC. The results of operations for the three and nine months ended September 30, 2005 are not necessarily indicative of the results to be expected for any future periods.



2. Comprehensive Income



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



|                                         |  |                                 |       |                                |      |   |      |  |   |       |   |  |   |       |  
|---------------------------------------- |  | ------------------------------- | ----- | ------------------------------ | ---- | - | ---- |  | - | ----- | - |  | - | ----- | -
|                                         |  | Three Months EndedSeptember 30, |       | Nine Months EndedSeptember 30, |     
|                                         |  | 2005                            |       |                                | 2004 |   | 2005 |  |   | 2004  |  
|Net income                               |  | $                               | 2,152 |                                |      | $ | 767  |  | $ | 3,605 |   |  | $ | 8,668 |  
|Other comprehensive income (loss):       |  |                                 |       |                                |      |   |      |  |   |       |   |  |   |       |  
|Change in unrealized loss on investments |  |                                 | (72   | )                              |      |   | 36   |  |   | (190  | ) |  |   | (113  | )
|                                         |  |                                 |       |                                |      |   |      |  |   |       |   |  |   |       |  
|Total comprehensive income               |  | $                               | 2,080 |                                |      | $ | 803  |  | $ | 3,415 |   |  | $ | 8,555 |  
|                                         |  |                                 |       |                                |      |   |      |  |   |       |   |  |   |       |  



3. Significant Accounting Policies



The Companys significant accounting policies are
disclosed in its audited consolidated financial statements for the year ended December 31, 2004. The Companys significant accounting policies have not changed during the three and nine month periods ended September 30, 2005.



Stock-Based Compensation  The Company accounts for stock-based
compensation to employees in accordance with the provisions of Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and complies with the disclosure provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosures. The Company accounts for equity
instruments issued to nonemployees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force (EITF) No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
or in Connection with Selling, Goods or Services, which requires that the fair value of such instruments be recognized as an expense over the period in which the related services are provided. Such expenses are measured using the value of the
equity instruments issued, as this is more readily determinable than the fair value of the services received.



The Company amortizes 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 provides for vesting of portions of the overall awards at interim dates and results in accelerated vesting as compared to the straight-line method. Had compensation expense been determined based on



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



the fair value at the grant date for all employee awards, consistent with the provisions of SFAS No. 123, the Companys pro forma net income (loss) and net
income (loss) per share would have been as follows (in thousands, except per share data):



|                                                                                                 |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------ |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                 |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                                                                 |  | 2005                            |        |   | 2004                           |   |        | 2005 |  |   | 2004   |  
|Net income as reported                                                                           |  | $                               | 2,152  |   |                                | $ | 767    |      |  | $ | 3,605  |   |  | $ | 8,668  |  
|Add: total stock-based employee compensation included in reported net income                     |  |                                 | 441    |   |                                |   | 918    |      |  |   | 1,512  |   |  |   | 3,058  |  
|Less: total stock-based compensation determined under the fair value based method for all awards |  |                                 | (2,611 | ) |                                |   | (2,414 | )    |  |   | (7,445 | ) |  |   | (6,309 | )
|                                                                                                 |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Pro forma net income (loss)                                                                      |  | $                               | (18    | ) |                                | $ | (729   | )    |  | $ | (2,328 | ) |  | $ | 5,417  |  
|                                                                                                 |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Basic net income per share as reported                                                           |  | $                               | 0.04   |   |                                | $ | 0.02   |      |  | $ | 0.07   |   |  | $ | 0.21   |  
|                                                                                                 |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Diluted net income per share as reported                                                         |  | $                               | 0.04   |   |                                | $ | 0.01   |      |  | $ | 0.07   |   |  | $ | 0.17   |  
|                                                                                                 |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Pro forma basic net income (loss) per share                                                      |  | $                               | 0.00   |   |                                | $ | (0.02  | )    |  | $ | (0.05  | ) |  | $ | 0.13   |  
|                                                                                                 |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Pro forma diluted net income (loss) per share                                                    |  | $                               | 0.00   |   |                                | $ | (0.02  | )    |  | $ | (0.05  | ) |  | $ | 0.11   |  
|                                                                                                 |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  



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 subsequent to November 26, 2003 were valued using the Black-Scholes valuation model, with volatility assumptions as discussed below. The fair value of the Companys stock-based awards to
employees was estimated using the following weighted-average assumptions:



|                          |  |                                 |   |  |                                |   |  |      |   |  |      |  
|------------------------- |  | ------------------------------- | - |  | ------------------------------ | - |  | ---- | - |  | ---- | -
|                          |  | Three Months EndedSeptember 30, |   |  | Nine Months EndedSeptember 30, |  
|                          |  | 2005                            |   |  | 2004                           |   |  | 2005 |   |  | 2004 |  
|Estimated life (in years) |  | 4.0                             |   |  | 4.5                            |   |  | 4.0  |   |  | 4.6  |  
|Risk-free interest rate   |  | 4.1                             | % |  | 3.4                            | % |  | 3.9  | % |  | 3.4  | %
|Expected dividends        |  |                                |   |  |                               |   |  |     |   |  |     |  
|Volatility                |  | 60                              | % |  | 80                             | % |  | 61   | % |  | 80   | %



Due to the subjective
nature of the assumptions used in the Black-Scholes model, the pro forma net income (loss) and net income per share disclosures may not reflect the associated fair value of the outstanding options.



Because the Companys common stock had recently become publicly traded,
its historical data on the volatility of its common stock as of September 30, 2004 was limited. Therefore, the Company estimated volatility based on the average volatilities of similar entities. For the period ended September 30, 2005, the
Company estimated volatility based on considerations of the implied volatility of similar options to purchase the Companys common stock traded on the open market and the average volatilities of similar entities.



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):



|                                                      |  |                                |       |   |      |   |       |  
|----------------------------------------------------- |  | ------------------------------ | ----- | - | ---- | - | ----- | -
|                                                      |  | Nine Months EndedSeptember 30, |      
|                                                      |  | 2005                           |       |   | 2004 |  
|Beginning balance                                     |  | $                              | 1,023 |   |      | $ | 578   |  
|Additions related to current period sales             |  |                                | 1,118 |   |      |   | 960   |  
|Warranty costs incurred in the current period         |  |                                | (261  | ) |      |   | (153  | )
|Adjustments to accruals related to prior period sales |  |                                | (587  | ) |      |   | (367  | )
|                                                      |  |                                |       |   |      |   |       |  
|Ending balance                                        |  | $                              | 1,293 |   |      | $ | 1,018 |  
|                                                      |  |                                |       |   |      |   |       |  



7



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



4. Inventory



Inventory consists of (in thousands):



|                |  |                   |        |                  |   |       
|--------------- |  | ----------------- | ------ | ---------------- | - | ------
|                |  | September 30,2005 |        | December 31,2004
|Finished goods  |  | $                 | 10,660 |                  | $ | 4,442 
|Work-in-process |  |                   | 8,950  |                  |   | 8,283 
|Raw materials   |  |                   | 2,075  |                  |   | 2,490 
|                |  |                   |        |                  |   |       
|Total           |  | $                 | 21,685 |                  | $ | 15,215
|                |  |                   |        |                  |   |       



5. Accrued Liabilities



Accrued liabilities consist of (in thousands):



|                                  |  |                   |        |                  |   |       
|--------------------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                                  |  | September 30,2005 |        | December 31,2004
|Accrued customer incentives       |  | $                 | 9,024  |                  | $ | 10,388
|Accrued compensation and benefits |  |                   | 4,608  |                  |   | 3,923 
|Other accrued liabilities         |  |                   | 8,608  |                  |   | 6,315 
|                                  |  |                   |        |                  |   |       
|Total                             |  | $                 | 22,240 |                  | $ | 20,626
|                                  |  |                   |        |                  |   |       



6. Short and Long-Term Debt



Bank Loan and Security Agreement



In March 2005, the Company amended its existing loan
agreement (the Agreement) with a bank. The Agreement allows the Company to finance up to $10,000,000 of working capital requirements. Borrowings under the Agreement are secured by all of the tangible assets of the Company. The Agreement
contains financial covenants related to cash and cash equivalents and marketable securities on hand, as well as other non-financial covenants. Interest on borrowings under the working capital line is payable monthly and is calculated at the
banks prime rate (6.75% at September 30, 2005). Borrowings under the line are due in March 2006, or earlier as required by borrowing limits defined in the Agreement. No balances were outstanding as of September 30, 2005 under the
Agreement.



7. Net Income Per Share



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



|                                                      |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                      |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                      |  | 2005                            |        |   | 2004                           |   |        | 2005 |  |   | 2004   |  
|Net income (numerator)                                |  | $                               | 2,152  |   |                                | $ | 767    |      |  | $ | 3,605  |   |  | $ | 8,668  |  
|                                                      |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Denominator for basic net income per share:           |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Weighted average shares outstanding                   |  |                                 | 49,160 |   |                                |   | 47,040 |      |  |   | 48,759 |   |  |   | 41,724 |  
|Weighted average shares subject to repurchase         |  |                                 | (176   | ) |                                |   | (278   | )    |  |   | (177   | ) |  |   | (379   | )
|                                                      |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Shares used to calculate basic net income per share   |  |                                 | 48,984 |   |                                |   | 46,762 |      |  |   | 48,582 |   |  |   | 41,345 |  
|Effect of dilutive securities:                        |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Common stock options and warrants                     |  |                                 | 4,457  |   |                                |   | 5,388  |      |  |   | 4,740  |   |  |   | 6,213  |  
|Shares subject to repurchase                          |  |                                 | 176    |   |                                |   | 278    |      |  |   | 177    |   |  |   | 379    |  
|Convertible preferred stock                           |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   | 3,549  |  
|                                                      |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Shares used to calculate diluted net income per share |  |                                 | 53,617 |   |                                |   | 52,428 |      |  |   | 53,499 |   |  |   | 51,486 |  
|                                                      |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Basic net income per share                            |  | $                               | 0.04   |   |                                | $ | 0.02   |      |  | $ | 0.07   |   |  | $ | 0.21   |  
|                                                      |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Diluted net income per share                          |  | $                               | 0.04   |   |                                | $ | 0.01   |      |  | $ | 0.07   |   |  | $ | 0.17   |  
|                                                      |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



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 and warrants to purchase 1,260,000 and 1,041,000 shares of the Companys common stock were excluded from the net income per share calculation in the three month periods
ended September 30, 2005 and 2004, respectively, as their effect would have been antidilutive. The common stock equivalents related to options and warrants to purchase 1,255,000 and 422,000 shares of the Companys common stock were
excluded from the net income per share calculation in the nine month periods ended September 30, 2005 and 2004, respectively, as their effect would have been antidilutive.



8. 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



Long-lived assets outside of the United States are insignificant. Net revenue consists of sales to customers in the following countries:



|              |  |                                 |   |  |                                |   |  |      |   |  |      |  
|------------- |  | ------------------------------- | - |  | ------------------------------ | - |  | ---- | - |  | ---- | -
|              |  | Three Months EndedSeptember 30, |   |  | Nine Months EndedSeptember 30, |  
|              |  | 2005                            |   |  | 2004                           |   |  | 2005 |   |  | 2004 |  
|Taiwan        |  | 70                              | % |  | 81                             | % |  | 74   | % |  | 86   | %
|China         |  | 13                              |   |  | 1                              |   |  | 8    |   |  |     |  
|United States |  | 1                               |   |  | 1                              |   |  | 4    |   |  | 1    |  
|Other         |  | 16                              |   |  | 17                             |   |  | 14   |   |  | 13   |  



Significant
Customers



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



|                                                                 |  |                                 |   |  |                                |   |  |      |   |  |      |  
|---------------------------------------------------------------- |  | ------------------------------- | - |  | ------------------------------ | - |  | ---- | - |  | ---- | -
|                                                                 |  | Three Months EndedSeptember 30, |   |  | Nine Months EndedSeptember 30, |  
|                                                                 |  | 2005                            |   |  | 2004                           |   |  | 2005 |   |  | 2004 |  
|Hon-Hai Precision Industry                                       |  | 15                              | % |  | 12                             | % |  | 15   | % |  | 26   | %
|Alpha Networks, Inc.                                             |  | 15                              |   |  | 11                             |   |  | 15   |   |  | *    |  
|Askey Computer Corporation                                       |  | 12                              |   |  | 15                             |   |  | 11   |   |  | 16   |  
|Gemtek Technology Co. Ltd                                        |  | *                               |   |  | 15                             |   |  | *    |   |  | *    |  
|Cameo Communications, Inc. (formerly Global Sun Technology Inc.) |  | *                               |   |  | 13                             |   |  | 14   |   |  | 12   |  



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



|                                                                 |  |                   |   |  |                  |  
|---------------------------------------------------------------- |  | ----------------- | - |  | ---------------- | -
|                                                                 |  | September 30,2005 |   |  | December 31,2004 |  
|Hon-Hai Precision Industry                                       |  | 15                | % |  | 13               | %
|Alpha Networks, Inc.                                             |  | 15                |   |  | 12               |  
|Askey Computer Corporation                                       |  | 13                |   |  | 25               |  
|Gemtek Technology Co. Ltd                                        |  | *                 |   |  | 19               |  
|Cameo Communications, Inc. (formerly Global Sun Technology Inc.) |  | *                 |   |  | 18               |  

---

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



9. Lease Commitments



In April 2005, the Company entered into an operating lease agreement related to its corporate headquarters facility located in Santa Clara, California.
The initial term of the lease is 61 months commencing July 2005. Future minimum lease payments under the operating lease are $5.8 million.



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##### Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



10. Recent Accounting Pronouncements



In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 151,
Inventory Costs - an amendment to ARB No. 43, Chapter 4 (SFAS 151). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricingto clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage) by requiring these items to be recognized as current-period charges. The provisions of this Statement are effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. The Company does not believe adoption of SFAS 151 would have a material effect on its consolidated financial position or results of operations.



In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153,Exchanges of Nonmonetary
Assets  An Amendment of APB Opinion No. 29(SFAS 153).APB Opinion No. 29, Accounting For Nonmonetary Transactions(APB 29), is based on the opinion that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged. SFAS 153 amends APB 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary
assets whose results are not expected to significantly change the future cash flows of the entity. The provisions of this Statement are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The
adoption of SFAS 153 did not have a material impact on the Companys consolidated financial condition or results of operations.



The Company accounts for stock-based compensation awards issued to employees using the intrinsic value measurement provisions of APB Opinion No. 25,
Accounting for Stock Issued to Employees(APB 25). Accordingly, no compensation expense has been recorded for stock options granted with exercise prices greater than or equal to the fair value of the underlying common stock at the
option grant date. On December 16, 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment(SFAS 123(R)). SFAS 123(R) eliminates the alternative of applying the
intrinsic value measurement provisions of APB 25 to stock compensation awards issued to employees. Rather, the new standard requires enterprises to measure the cost of employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period.



The Company has not yet quantified the effects of the adoption of SFAS
123(R), but it is expected that the new standard will result in significant stock-based compensation expense. The pro forma effects on net results of operations and earnings per share if the Company had applied the fair value recognition provisions
of the original SFAS 123 on stock compensation awards (rather than applying the intrinsic value measurement provisions of APB 25) are disclosed above in Note 3. Although such pro forma effects of applying original SFAS 123 may be indicative of the
effects of adopting SFAS 123(R), these pro forma effects should not be relied upon in determining the effects on net results of operations of adopting SFAS 123(R) as the provisions of these two statements differ in some important respects. The
actual effects of adopting SFAS 123(R) will be dependent on numerous factors including, but not limited to, the valuation model chosen by us to value stock-based awards; the assumed award forfeiture rate; the accounting policies adopted concerning
the method of recognizing the fair value of awards over the requisite service period; and the transition method chosen for adopting SFAS 123(R).



In April 2005, the SEC issued a new rule requiring that SFAS 123(R) be effective for annual periods, as opposed to interim periods, beginning after
June 15, 2005. The Company is required to adopt SFAS 123(R) beginning in the first quarter of 2006. SFAS 123(R) allows for two transition alternatives, the Modified Prospective Application Method and the Retrospective Application Method of
recognition of compensation expense related to share-based payments. The Company is currently evaluating these transition alternatives.



In March 2005, the SEC issued Staff Accounting Bulletin No. 107, Share-Based Payment (SAB 107). SAB 107 includes
interpretive guidance for the implementation of SFAS No. 123(R). The Company will apply the principles of SAB 107 in conjunction with its adoption of SFAS No. 123(R).



In June 2005, the FASB issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements(SFAS 154). SFAS 154 changes the requirements for the
accounting for and reporting of a change in accounting principle. Previously, most voluntary changes in accounting principles required recognition of a cumulative effect adjustment within net income of the period of the change. SFAS 154 requires
retrospective application to prior periods financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 is effective for accounting changes made in fiscal
years beginning after December 15, 2005; however, the new standard does not change the transition provisions of any existing accounting pronouncements. The Companys consolidated financial position and results of operations would only be
impacted following the adoption of SFAS 154 if the Company implements changes in accounting principles that are addressed by the standard or corrects accounting errors in future periods.



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##### Table of Contents

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, demand for our products, the market for our products and our market share, our strategy regarding new markets, acquisitions or investments, our customer concentration,
our participation in wireless standards bodies and the effects of the adoption of standards, our products compliance with industry standards, product development, our development efforts for new and existing markets and to expand our revenue
base, our revenue and sources of revenue, our sales and revenue to customers in Asia, our expenses and cost of goods sold, 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, the adequacy of our internal controls, our intellectual property, fluctuations in foreign currency exchange rates, market risk sensitive instruments, our dependence on key
personnel, potential legal proceedings, our critical accounting policies and estimates, 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, 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 Managements Discussion and Analysis of Financial Condition and Results of Operations  Factors That May Affect Our Results 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. 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, 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.



Net Revenue. Our revenue is derived primarily from the sale of WLAN chipset products and PAS chip solutions and, to a much 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 client card products. Some OEMs directly purchase chipsets 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 may provide products based on 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.



11



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##### Table of Contents

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 nine months ended September 30, 2005, Hon-Hai Precision Industry, Alpha Networks, Inc., Cameo Communications, Inc. (formerly Global Sun Technology Inc) and Askey Computer Corporation accounted for 15%, 15%, 14% and 11% of our
net revenue, respectively. In the nine months ended September 30, 2004, Hon-Hai Precision Industry, Askey Computer Corporation and Cameo Communications, Inc. accounted for 26%, 16% and 12% of our net revenue, respectively. We expect to continue
to have major concentrations of sales to a relatively small list of ODM customers.



Substantially all of our sales are to customers outside the United States and Canada. Sales to customers in Asia accounted for 97% and 98% of net revenue for the nine months ended September 30, 2005 and 2004,
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
adjustments 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 costs are subject to changes based on the cyclical demand for semiconductors. In addition, after we purchase wafers from foundries, we are subject to 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 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 and to comply with the requirements of the Sarbanes-Oxley Act of 2002.



Stock-Based Compensation. In connection with the grant of stock options and the issuance of restricted stock, we have
recorded an aggregate of $9.7 million in stock-based compensation through September 30, 2005. These awards were considered compensatory because the fair market value of our stock on the date of grant was greater than the exercise price. As of
September 30, 2005, we had an aggregate of $1.3 million in stock-based compensation remaining to be amortized. We are amortizing deferred stock-based compensation over the vesting period of the related options and restricted stock, which is
generally four to five years using the graded vesting method. This deferred stock-based compensation balance will be amortized as follows, assuming no forfeiture of awards: $344,000 during the last quarter of 2005; $764,000 during 2006; $162,000
during 2007; and $11,000 during 2008.



Interest Income, Net.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 and equipment loans.



Provision for Income Taxes. Provision for income tax relates primarily
to US alternative minimum tax due to the utilization of net operating loss carryforwards and non-US foreign taxes on our income.



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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 accounting principles generally accepted in the United States of America. 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;
| | - |  | --------------------------------------------------------



| |  |  | our licensed software and technical documentation; and
| | - |  | ------------------------------------------------------



| |  |  | service and support revenue.
| | - |  | ----------------------------



We recognize revenue in accordance with SEC Staff Accounting Bulletin (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. 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 Options. We have 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 do not record any compensation expense for stock options we grant to our employees where the exercise price equals 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 are fixed. We comply 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 (loss) and net income (loss) per common share as if we had expensed the fair value of the options. In calculating such fair value, there are certain assumptions
that we use, as disclosed in note 3 of our unaudited condensed financial statements.



Accounts Receivable Allowance. 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.



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Product Warranty Accrual.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 provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. We record a valuation allowance to reduce our 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, expectations and risks associated with estimates of future taxable income and ongoing prudent and practical tax
planning strategies. Because of the uncertainty of their realizability, we have recorded a full valuation allowance against our deferred tax assets, consisting primarily of net operating loss and credit carryforwards. Realization of our deferred tax
assets is dependent primarily upon future U.S. taxable income. Our judgments regarding future probability 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.



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 EndedSeptember 30, |   |  | Nine Months EndedSeptember 30, |  
|                                            |  | 2005                            |   |  | 2004                           |   |  | 2005 |   |  | 2004 |  
|Consolidated Statements of Operations Data: |  |                                 |   |  |                                |   |  |      |   |  |      |  
|Net revenue                                 |  | 100                             | % |  | 100                            | % |  | 100  | % |  | 100  | %
|Cost of goods sold                          |  | 57                              |   |  | 54                             |   |  | 57   |   |  | 53   |  
|                                            |  |                                 |   |  |                                |   |  |      |   |  |      |  
|Gross profit                                |  | 43                              |   |  | 46                             |   |  | 43   |   |  | 47   |  
|Operating expenses:                         |  |                                 |   |  |                                |   |  |      |   |  |      |  
|Research and development                    |  | 25                              |   |  | 27                             |   |  | 26   |   |  | 24   |  
|Sales and marketing                         |  | 9                               |   |  | 10                             |   |  | 10   |   |  | 9    |  
|General and administrative                  |  | 6                               |   |  | 6                              |   |  | 6    |   |  | 5    |  
|Stock-based compensation                    |  | 1                               |   |  | 2                              |   |  | 1    |   |  | 2    |  
|                                            |  |                                 |   |  |                                |   |  |      |   |  |      |  
|Total operating expenses                    |  | 41                              |   |  | 45                             |   |  | 43   |   |  | 40   |  
|                                            |  |                                 |   |  |                                |   |  |      |   |  |      |  
|Income from operations                      |  | 2                               |   |  | 1                              |   |  | 0    |   |  | 7    |  
|Interest income, net                        |  | 3                               |   |  | 2                              |   |  | 3    |   |  | 1    |  
|Provision for income taxes                  |  | 0                               |   |  | (1                             | ) |  | 0    |   |  | (1   | )
|                                            |  |                                 |   |  |                                |   |  |      |   |  |      |  
|Net income                                  |  | 5                               | % |  | 2                              | % |  | 3    | % |  | 7    | %
|                                            |  |                                 |   |  |                                |   |  |      |   |  |      |  



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Comparison of Three and Nine Months Ended September 30, 2005 and 2004

(tables presented in thousands, except percentage amounts)



Net Revenue



|            |  |                                 |        |      |   |          |                                |    |      |  |      |         |          |   |         |  |   |  
|----------- |  | ------------------------------- | ------ | ---- | - | -------- | ------------------------------ | -- | ---- |  | ---- | ------- | -------- | - | ------- |  | - | -
|            |  | Three Months EndedSeptember 30, |        |      |   |          | Nine Months EndedSeptember 30, |    |      | 
|            |  | 2005                            |        | 2004 |   | % Change |                                |    | 2005 |  | 2004 |         | % Change |  
|Net revenue |  | $                               | 45,800 |      | $ | 38,262   |                                | 20 | %    |  | $    | 130,407 |          | $ | 127,954 |  | 2 | %



The increase in net
revenue for each of the three and nine months ended September 30, 2005 as compared to the same periods in 2004 resulted from the increased acceptance of our wireless chipset products, including our single chip solutions, and our PAS cellular
solutions which we began shipping in the second quarter of 2005. The total number of chipsets shipped increased to approximately 6.3 million from approximately 3.6 million in the three months ended September 30, 2005 and 2004,
respectively, and increased to approximately 16.7 million from approximately 10.7 million for the nine months ended September 30, 2005 and 2004, respectively. 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 are generally priced lower than the combined average selling prices of our multi-chip solutions. Single
chip solutions represented 68% and 16% of total chipset units shipped for the three months ended September 30, 2005 and 2004, respectively, and 57% and 7% of total chipset units shipped for the nine months ended September 30, 2005 and
2004, respectively.



Gross Profit



|                 |  |                                 |        |   |      |   |        |                                |  |    |      |  |   |        |   |  |          |        |   |  |    |   
|---------------- |  | ------------------------------- | ------ | - | ---- | - | ------ | ------------------------------ |  | -- | ---- |  | - | ------ | - |  | -------- | ------ | - |  | -- | --
|                 |  | Three Months EndedSeptember 30, |        |   |      |   |        | Nine Months EndedSeptember 30, |  |    |      | 
|                 |  | 2005                            |        |   | 2004 |   |        | % Change                       |  |    | 2005 |  |   | 2004   |   |  | % Change |       
|Gross profit     |  | $                               | 19,907 |   |      | $ | 17,462 |                                |  | 14 | %    |  | $ | 56,318 |   |  | $        | 59,739 |   |  | (6 | )%
|% of net revenue |  |                                 | 43     | % |      |   | 46     | %                              |  |    |      |  |   | 43     | % |  |          | 47     | % |  |    |   



Gross profit as a
percentage of revenue in each of the three and nine months ended September 30, 2005 decreased as compared to gross profit as a percentage of revenue in the comparable periods of 2004, primarily due to a decline in overall blended average
selling prices of our products from $10.50 to $7.28 for the respective three month periods and from $12.00 to $7.82 for the respective nine month periods, partially offset by a decrease in our product costs over the respective periods.



Research and Development



|                         |  |                                 |        |   |      |   |        |                                |  |    |      |  |   |        |   |  |          |        |   |  |    |  
|------------------------ |  | ------------------------------- | ------ | - | ---- | - | ------ | ------------------------------ |  | -- | ---- |  | - | ------ | - |  | -------- | ------ | - |  | -- | -
|                         |  | Three Months EndedSeptember 30, |        |   |      |   |        | Nine Months EndedSeptember 30, |  |    |      | 
|                         |  | 2005                            |        |   | 2004 |   |        | % Change                       |  |    | 2005 |  |   | 2004   |   |  | % Change |       
|Research and development |  | $                               | 11,657 |   |      | $ | 10,404 |                                |  | 12 | %    |  | $ | 34,121 |   |  | $        | 30,625 |   |  | 11 | %
|% of net revenue         |  |                                 | 25     | % |      |   | 27     | %                              |  |    |      |  |   | 26     | % |  |          | 24     | % |  |    |  



The increase in
research and development expenses during the three months ended September 30, 2005, as compared to the three months ended September 30, 2004 was primarily due to increased payroll related costs of $1.1 million to support a 19% increase in
the number of research and development personnel over the respective periods.



The increase in research and development expenses during the nine months ended September 30, 2005, as compared to the nine months ended September 30, 2004 was primarily due to increased payroll related costs
of $2.6 million to support a 19% increase in the number of research and development personnel over the respective periods. Additionally, mask sets and reticles, software and IP costs, equipment and consulting expenses increased $908,000 in the nine
months ended September 30, 2005 over the same period in 2004, primarily resulting from increased chip development efforts for new and existing markets and to further expand our revenue base in future periods.



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##### Table of Contents

Sales and Marketing



|                    |  |                                 |       |   |      |   |       |                                |  |    |      |  |   |        |   |  |          |        |   |  |    |  
|------------------- |  | ------------------------------- | ----- | - | ---- | - | ----- | ------------------------------ |  | -- | ---- |  | - | ------ | - |  | -------- | ------ | - |  | -- | -
|                    |  | Three Months EndedSeptember 30, |       |   |      |   |       | Nine Months EndedSeptember 30, |  |    |      | 
|                    |  | 2005                            |       |   | 2004 |   |       | % Change                       |  |    | 2005 |  |   | 2004   |   |  | % Change |       
|Sales and marketing |  | $                               | 4,262 |   |      | $ | 3,824 |                                |  | 11 | %    |  | $ | 12,715 |   |  | $        | 11,484 |   |  | 11 | %
|% of net revenue    |  |                                 | 9     | % |      |   | 10    | %                              |  |    |      |  |   | 10     | % |  |          | 9      | % |  |    |  



The increase in sales
and marketing expenses during the three months ended September 30, 2005 as compared to the same period in 2004 was primarily due to an increase in payroll related costs of $766,000 related to a 26% increase in the number of sales and marketing
personnel over the respective periods. Additionally, consulting and recruiting costs increased $133,000. The increases were partially offset by a $408,000 decrease in commissions to independent sales representatives.



The increase in sales and marketing expenses during the nine months ended
September 30, 2005 as compared to the same period in 2004 was primarily due to an increase in payroll related costs of $1.4 million related to a 26% increase in the number of sales and marketing personnel over the respective periods.
Additionally, consulting and recruiting costs increased $386,000. The increases were partially offset by a $473,000 decrease in commissions to independent sales representatives.



General and Administrative



|                           |  |                                 |       |   |      |   |       |                                |  |    |      |  |   |       |   |  |          |       |   |  |    |  
|-------------------------- |  | ------------------------------- | ----- | - | ---- | - | ----- | ------------------------------ |  | -- | ---- |  | - | ----- | - |  | -------- | ----- | - |  | -- | -
|                           |  | Three Months EndedSeptember 30, |       |   |      |   |       | Nine Months EndedSeptember 30, |  |    |      | 
|                           |  | 2005                            |       |   | 2004 |   |       | % Change                       |  |    | 2005 |  |   | 2004  |   |  | % Change |      
|General and administrative |  | $                               | 2,627 |   |      | $ | 2,139 |                                |  | 23 | %    |  | $ | 7,200 |   |  | $        | 6,432 |   |  | 12 | %
|% of net revenue           |  |                                 | 6     | % |      |   | 6     | %                              |  |    |      |  |   | 6     | % |  |          | 5     | % |  |    |  



The increase in
general and administrative expenses during the three months ended September 30, 2005 as compared to the same period in 2004 was due to an increase in payroll related costs of $270,000 related to a 39% increase in the number of general and
administrative personnel over the respective periods. Additionally, consulting and professional fees increased $364,000, primarily due to compliance requirements of the Sarbanes Oxley Act of 2002, partially offset by a decrease in bad debt expense
of $206,000, as a result of a smaller increase to the allowance for doubtful accounts compared with the corresponding prior period, and a decrease in bank fees of $70,000 in the three months ended September 30, 2005 as compared to the same
period in 2004.



The increase in general and administrative
expenses during the nine months ended September 30, 2005 as compared to the same period in 2004 was due to an increase in payroll related costs of $626,000 related to a 39% increase in the number of general and administrative personnel over the
respective periods and increased consulting and professional fees of $648,000, partially offset by a decrease in bad debt expense of $324,000, as a result of a smaller increase to the allowance for doubtful accounts compared with the corresponding
prior period, and a decrease in bank fees of $262,000 in the nine months ended September 30, 2005 as compared to the same period in 2004.



Stock-Based Compensation



|                         |  |                                 |     |   |      |   |     |                                |  |     |      |  |   |       |   |  |          |       |   |  |     |   
|------------------------ |  | ------------------------------- | --- | - | ---- | - | --- | ------------------------------ |  | --- | ---- |  | - | ----- | - |  | -------- | ----- | - |  | --- | --
|                         |  | Three Months EndedSeptember 30, |     |   |      |   |     | Nine Months EndedSeptember 30, |  |     |      | 
|                         |  | 2005                            |     |   | 2004 |   |     | % Change                       |  |     | 2005 |  |   | 2004  |   |  | % Change |      
|Stock-based compensation |  | $                               | 441 |   |      | $ | 918 |                                |  | (52 | )%   |  | $ | 1,512 |   |  | $        | 3,058 |   |  | (51 | )%
|% of net revenue         |  |                                 | 1   | % |      |   | 2   | %                              |  |     |      |  |   | 1     | % |  |          | 2     | % |  |     |   



We have recorded
deferred stock-based compensation in connection with the grant of stock options and restricted stock to our employees and directors. At September 30, 2005, we had $1.3 million of deferred stock-based compensation remaining to be amortized.



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Interest Income, Net



|                     |  |                                 |       |   |      |   |     |                                |  |    |      |  |   |       |   |  |          |       |   |  |     |  
|-------------------- |  | ------------------------------- | ----- | - | ---- | - | --- | ------------------------------ |  | -- | ---- |  | - | ----- | - |  | -------- | ----- | - |  | --- | -
|                     |  | Three Months EndedSeptember 30, |       |   |      |   |     | Nine Months EndedSeptember 30, |  |    |      | 
|                     |  | 2005                            |       |   | 2004 |   |     | % Change                       |  |    | 2005 |  |   | 2004  |   |  | % Change |      
|Interest income, net |  | $                               | 1,262 |   |      | $ | 658 |                                |  | 92 | %    |  | $ | 3,360 |   |  | $        | 1,281 |   |  | 162 | %
|% of net revenue     |  |                                 | 3     | % |      |   | 2   | %                              |  |    |      |  |   | 3     | % |  |          | 1     | % |  |     |  



During the three and
nine months ended September 30, 2005 we experienced increased interest income as compared to the same periods in 2004, primarily due to increased cash, cash equivalents and marketable securities, resulting from our initial public offering in
February 2004 and cash generated from operations. In addition, yields achieved on our investment portfolio have increased in the three and nine months ended September 30, 2005 as compared to the similar periods within 2004.



Provision for Income Taxes



|                           |  |                                 |    |   |      |   |    |                                |  |     |      |  |   |      |   |  |          |     |   |  |     |   
|-------------------------- |  | ------------------------------- | -- | - | ---- | - | -- | ------------------------------ |  | --- | ---- |  | - | ---- | - |  | -------- | --- | - |  | --- | --
|                           |  | Three Months EndedSeptember 30, |    |   |      |   |    | Nine Months EndedSeptember 30, |  |     |      | 
|                           |  | 2005                            |    |   | 2004 |   |    | % Change                       |  |     | 2005 |  |   | 2004 |   |  | % Change |    
|Provision for income taxes |  | $                               | 30 |   |      | $ | 68 |                                |  | (56 | )%   |  | $ | 525  |   |  | $        | 753 |   |  | (30 | )%
|% of net revenue           |  |                                 | 0  | % |      |   | 1  | %                              |  |     |      |  |   | 0    | % |  |          | 1   | % |  |     |   



The provision for
income taxes during the three and nine months ended September 30, 2005 and 2004 consisted primarily of U.S. alternative minimum tax and non-U.S. income taxes. The decrease in the tax provision over the comparative three month periods was
primarily due to a tax benefit as a result of actual tax liabilities on 2004 tax returns being lower than previously estimated. The decrease in the tax provision over the comparative nine month periods was primarily due to a decrease in pre-tax
income.



Liquidity and Capital Resources



Our principal sources of liquidity as of September 30, 2005, consisted
of cash, cash equivalents and marketable securities of $164.6 million, and our revolving credit facility, under which $10 million was available to borrow.



Operating Activities: Our operating activities provided $10.3 million of cash for the nine months ended September 30, 2005 as compared to $5.2
million used in the nine months ended September 30, 2004. Cash flow from operating activities for the nine months ended September 30, 2005 resulted from net income of $3.6 million, an increase in our accounts payable balance of $7.5
million due to the timing of payments for inventory, an increase in accrued and other liabilities of $2.7 million due to increased accrued compensation and benefits, amortization of deferred stock-based compensation of $1.5 million and depreciation
and amortization expense of $1.3 million, and an increase in deferred revenue of $1.0 million due to additional customer agreements signed during the period requiring partial upfront payment, partially offset by an increase in our inventory by $6.5
million as we built inventory to meet the increased anticipated future demand for our products. Cash utilized in operating activities for the nine months ended September 30, 2004 resulted from an increase in accounts receivable of $17.0 million
due to the timing of collections from our customers, an increase in inventory of $8.4 million as we built inventory to meet the increased anticipated future demand for our products, an increase in prepaid expenses and other assets of $2.5 million as
we licensed additional computer aided design software tools to support our incremental headcount and product development, partially offset by net income of $8.7 million, an increase in accrued and other liabilities of $8.9 million due to an increase
in accrued marketing development funds associated with increased revenues, amortization of deferred stock compensation of $3.1 million, and depreciation and amortization expense of $1.5 million.



Investing Activities. Our investing activities provided $16.9 million
in the nine months ended September 30, 2005, and used cash of $99.9 million in the nine months ended September 30, 2004. Our investing activities primarily consisted of the purchase and maturities of marketable securities and purchases of
property and equipment. During the nine months ended September 30, 2004 we also received the refund of a deposit from a loan agreement included in the change in other assets.



Capital expenditures were $3.2 million and $1.9 million for the nine months ended September 30, 2005 and 2004,
respectively. The capital expenditures within the nine month period ended September 30, 2005, primarily consisted of leasehold improvements for our new corporate headquarters and computer and test equipment purchases. The capital expenditures
within the nine month period ended September 30, 2004, primarily consisted of computer and test equipment purchases. We anticipate that further capital expenditures will be required to support our future growth.



Financing Activities. Our financing activities provided cash of $3.3
million and $127.8 million in the nine months ended September 30, 2005 and 2004, respectively. The cash provided in 2005 primarily related to the issuance of common stock under our



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employee stock option and employee stock purchase plans. The cash provided in 2004 related to the net proceeds from our initial public offering of $133.2
million, partially offset by the repayment of $5.8 million in outstanding balances on our revolving credit facilities.



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. Although we are currently not a party to any agreement or letter of intent with respect to potential investments in, or acquisitions of, complementary businesses,
products or technologies, we may enter into these types of arrangements in the future, which could also require us to seek additional equity or debt financing. The sale of additional equity securities or convertible debt securities would result in
additional dilution to our stockholders. Additional debt would result in increased interest 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 long-term debt payments, operating lease payments and capital lease payments is provided in Managements Discussion
and Analysis of Results of Operations and Financial Condition of our Annual Report on Form 10-K for the year ended December 31, 2004, filed with the SEC on March 11, 2005.



In April 2005, we entered into an operating lease agreement related to our corporate headquarters facility located in Santa
Clara, California. The initial term of the lease is 61 months commencing July 2005. Future minimum lease payments under the operating lease are $5.8 million.



As of September 30, 2005, we have no off-balance sheet arrangements as defined in Item 303(a)(4) of the SECs Regulation S-K.



Recent Accounting Pronouncements



In November 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No. 151, Inventory Costs - an amendment to ARB No. 43, Chapter 4 (SFAS 151). SFAS 151 amends the guidance in ARB No. 43, Chapter 4,
Inventory Pricing to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) by requiring these items to be recognized as current-period charges. The provisions
of this Statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not believe adoption of SFAS 151 would have a material effect on our consolidated financial position or results of operations.



In December 2004, the FASB issued Statement of Financial
Accounting Standards No. 153,Exchanges of Nonmonetary Assets  An Amendment of APB Opinion No. 29(SFAS 153). APB Opinion No. 29, Accounting For Nonmonetary Transaction(APB 29), is based on
the opinion that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. SFAS 153 amends APB 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets whose results are not expected to significantly change the future cash flows of the entity. The provisions of this Statement are effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. The adoption of SFAS 153 did not have a material impact on our consolidated financial condition or results of operations.



We account for stock-based compensation awards issued to employees using the intrinsic value measurement provisions of APB
Opinion No. 25, Accounting for Stock Issued to Employees(APB 25). Accordingly, no compensation expense has been recorded for stock options granted with exercise prices greater than or equal to the fair value of the
underlying common stock at the option grant date. On December 16, 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment,(SFAS 123(R)). SFAS 123(R) eliminates the
alternative of applying the intrinsic value measurement



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provisions of APB 25 to stock compensation awards issued to employees. Rather, the new standard requires enterprises to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide services in exchange for the award, known as the
requisite service period.



We have not yet quantified the
effects of the adoption of SFAS 123(R), but it is expected that the new standard will result in significant stock-based compensation expense. The pro forma effects on net results of operations and earnings per share if we had applied the fair value
recognition provisions of the original SFAS 123 on stock compensation awards (rather than applying the intrinsic value measurement provisions of APB 25) are disclosed in Note 3 to our condensed consolidated financial statements in Item 1 of
this report. Although such pro forma effects of applying original SFAS 123 may be indicative of the effects of adopting SFAS 123(R), these pro forma effects should not be relied upon in determining the effects on net results of operations of
adopting SFAS 123(R) as the provisions of these two statements differ in some important respects. The actual effects of adopting SFAS 123(R) will be dependent on numerous factors including, but not limited to, the valuation model chosen by us to
value stock-based awards; the assumed award forfeiture rate; the accounting policies adopted concerning the method of recognizing the fair value of awards over the requisite service period; and the transition method chosen for adopting SFAS 123(R).



In April 2005, the SEC issued a new rule requiring that SFAS
123(R) be effective for annual periods, as opposed to interim periods, beginning after June 15, 2005. We are required to adopt SFAS 123(R) beginning in the first quarter of 2006. SFAS 123(R) allows for two transition alternatives, the Modified
Prospective Application Method and the Retrospective Application Method of recognition of compensation expense related to share-based payments. We are currently evaluating these transition alternatives.



In March 2005, the SEC issued Staff Accounting Bulletin No. 107,
Share-Based Payment (SAB 107). SAB 107 includes interpretive guidance for the implementation of FAS 123(R). We will apply the principles of SAB 107 in conjunction with our adoption of FAS 123(R).



In June 2005, the FASB issued Statement of Financial Accounting Standards
No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements(SFAS 154).
SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle. Previously, most voluntary changes in accounting principles required recognition of a cumulative effect adjustment within net income of the
period of the change. SFAS 154 requires retrospective application to prior periods financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 is effective
for accounting changes made in fiscal years beginning after December 15, 2005; however, the new standard does not change the transition provisions of any existing accounting pronouncements. Our consolidated financial position and results of
operations would only be impacted following the adoption of SFAS 154 if we implement changes in accounting principles that are addressed by the standard or correct accounting errors in future periods.



FACTORS THAT MAY AFFECT OUR RESULTS



Risks Related to Our Business



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.



Although we achieved profitability in past quarters, including the most recently completed third quarter, 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 in the future to sustain profitability.



At September 30, 2005, we had an accumulated deficit of approximately
$70.2 million. During the nine month period ended September 30, 2005, we incurred $55.5 million in operating expenses and generated net income of $3.6 million. During 2004, we incurred operating expenses of $51.6 million and generated net
income of $8.7 million. 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



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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 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.



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. The markets for our products are characterized by frequent introduction of next generation and
new products, short product life cycles and significant price competition. If we or our customers 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.



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.



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 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.



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, 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. For example, Intel markets its Centrino mobile technology brand and we believe they provide a substantial marketing development fund incentive for buyers of a
combination of its microprocessor, related chipsets and wireless networking module that use the brand. Intel or other large competitors may also be able to discourage OEMs from placing our brand on their products, which could substantially harm our
marketing efforts.



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We do not expect 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 $22.2 million in 2002, to $87.4 million in 2003 and $169.6 million in 2004. We do not expect similar revenue growth rates for 2005 or in future periods. Growth and expansion of our
operations may 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.



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 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 exploit 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.



We have and 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 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



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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 networking, 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 and the competitiveness of our products. 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 new product for the PAS cellular market is not successful, 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 is newly 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 UT Starcom for sales of our new product. If these providers, and in particular UT Starcom, 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 UT Starcoms schedule for launching its
products. Any delay by UT Starcom would delay revenues for our PAS products and could adversely affect our quarterly operating results. 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 likely be limited and our future results harmed.



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 nine month period ended September 30, 2005, Hon-Hai Precision Industry, Alpha Networks, Inc., Cameo Communications, Inc. (formerly Global Sun Technology Inc.), and Askey Computer Corporation accounted for
15%, 15%, 14% and 11% of our net revenue, respectively. In the year ended December 31, 2004, Hon-Hai Precision Industry, Askey Computer Corporation, Cameo Communications, Inc. (formerly Global Sun Technology Inc.) and Alpha Networks, Inc.
accounted for 23%, 17%, 11% and 10% of our net revenue, respectively. Some of our original equipment manufacturer customers are also original design manufacturer 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 original design manufacturers. Sales to our largest customers have fluctuated significantly from period to period
primarily due to original equipment manufacturers that incorporate our products changing their designated original design manufacturer and the continued diversification of our original equipment manufacturer 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 original equipment manufacturers, who
include our chipsets in their products, and to original design manufacturers, who include our chipsets in the products they supply to original equipment manufacturers. Our products are generally incorporated into our customers products at the
design stage. As a result, we rely on original equipment manufacturers 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 original equipment manufacturer will select our product for design into its own product. Once an original equipment manufacturer 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 original equipment manufacturer
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 up to approximately 16 weeks 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 radio frequency 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 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 and Semiconductor Manufacturing International Corporation in Shanghai, China 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 in Singapore to ship 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:



| |  |  | 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;
| | - |  | ------------------------------------------------------------------------------



| |  |  | shortages of materials that foundries use to manufacture products;
| | - |  | ------------------------------------------------------------------



| |  |  | capacity shortages; 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. 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.



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



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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 radio frequency circuits using standard, complementary metal-oxide semiconductor processes is difficult and can result in unsatisfactory yields. Because we 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.



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 to
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. 123(R), Share-Based Payment which will require us, starting in our first quarter of 2006, to record a charge to earnings for employee stock option grants and other equity incentives. We may have significant and ongoing
accounting charges resulting from option grants and other equity incentive expensing that could adversely affect our overall results of operations. In addition, 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.



We may not be able to consummate or successfully integrate any
businesses that we may choose to acquire and any future acquisitions could harm our operating results and share price.



We expect at some point in the future that we may make 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 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.
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Any future acquisitions could result in 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.



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 received several written notices or offers from our competitors and others claiming to have patent
rights in certain technology and inviting us to license this technology and related patents that apply to the Institute of Electrical and Electronics Engineers, or IEEE, family of wireless local area networking standards, including the 802.11b,
802.11g and 802.11a wireless standards as well as other technology and patents relevant to other standards related 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 one of our customers has been sued by the holder of a patent related to
802.11b, 802.11g and 802.11a technology, none of these notices or offers to license has resulted in litigation against us.



Questions of infringement 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 invalidity,
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 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.



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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 one customer has been sued outside the
U.S. for allegedly infringing a patent related to 802.11b, 802.11g and 802.11a 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 many of our original design manufacturer customers 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 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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | difficulties in staffing and managing foreign operations as well as cultural differences;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | trade restrictions or higher tariffs that favor local competition in some countries;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | difficulties of managing sales representatives, especially because we expect to increase our sales through our sales representatives;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | inadequate local infrastructure and transportation delays;
| | - |  | ----------------------------------------------------------



| |  |  | financial risks, such as longer payment cycles, greater difficulty collecting accounts receivable and exposure to foreign currency exchange rate fluctuations;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.



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.



Taiwan Semiconductor Manufacturing Corporation and Semiconductor
Manufacturing International Corporation, 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



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and Northern California, is significant due to the proximity of major earthquake fault lines. In September 1999, a major earthquake in Taiwan affected the
facilities of several of these third-party contractors, as well as other providers of these services. As a result of this earthquake, these contractors suffered power outages and disruptions that 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 or assembly and test capacity, or our ability to market and sell our products. We may not be able to obtain alternate capacity on favorable terms, if at all.



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 expect 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 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.



Risks Related to Our Industry



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.



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 gigahertz, or 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 5GHz, 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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Rapidly changing standards could make our products obsolete, which would cause our operating
results to 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 has initiated working group proceedings directed at promulgating a new
wireless local area networking standard, called 802.11n, that may be, or may be perceived by customers as being, superior to the standards with which our current products comply. We are a member of a consortium, named the Enhanced Wireless
Consortium, or EWC, promoting a proposed specification for the 802.11n standard and are working to develop products based on this specification. If the IEEE does not adopt the 802.11n standard based substantially on the EWC specification or if we
are unable to timely complete development of products based on the specification, we will lose customers and revenue and our business will be harmed.



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 2.4GHz 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, which has been further exacerbated by the concerns of terrorism, war and social and political instability.



Economic growth in the United States and international markets has slowed significantly and the United States economy has
recently been in a recession. The timing of a full economic recovery is uncertain. In addition, the terrorist attacks in the United States and elsewhere, the continued presence of United States military forces in Iraq, and turmoil in the Middle East
have contributed to the uncertainty in the United States economy and may lead to a decline in economic conditions, both domestically and internationally. Further terrorist acts and similar events, or additional wars in general, could contribute
further to a slowdown of the market demand for goods and services, including demand for our products. If the economy declines as a result of the recent economic, political and social turmoil, or if there are further terrorist attacks in the United
States or elsewhere, we may experience decreases in the demand for our products and services, which may harm our operating results.



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Risks related to the market for our common stock



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.



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.



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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.



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
September 30, 2005, our investments were in money market funds, commercial paper, corporate notes, 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 September 30, 2005, 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.



To date, our international customer agreements have been denominated solely
in U.S. dollars, and accordingly, we have not been exposed to foreign currency exchange rate fluctuations related to customer agreements, and do not currently engage in foreign currency hedging transactions. However, the functional currency of our
international operations is the U.S. dollar and as the local expenditures are denominated in the respective local currencies, we are subject to foreign currency exchange rate fluctuations associated with both remeasurement to U.S dollars and
reimbursement of local expenditures in U.S. dollars. We do not believe that a hypothetical change of 10% in the foreign currency exchange rates would have a material impact on our consolidated financial position or results of operations.



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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, and management believes that they meet, 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, subject to the limitations noted above, our disclosure controls and procedures were effective to ensure that material information relating to
us, including our consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which this quarterly report on Form 10-Q was being prepared.



(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 2.Unregistered Sales of Equity Securities and Use of Proceeds.



(a) Not applicable



(b) Not applicable



(c) The following table provides information with respect to purchases made by us or on our behalf or on behalf of any affiliated purchaser,
as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, of shares of our common stock during each of the three months ended September 30, 2005:



|                         |  |                                     |     |  |                                 |      |                                                                                 |   |                                                                                                            |  
|------------------------ |  | ----------------------------------- | --- |  | ------------------------------- | ---- | ------------------------------------------------------------------------------- | - | ---------------------------------------------------------------------------------------------------------- | -
|Period                   |  | (a) Total Number ofShares Purchased |     |  | (b) Average PricePaid per Share |      | (c) Total Number ofSharesPurchased as Part ofPubliclyAnnounced Plans orPrograms |   | (d) MaximumNumber (orApproximateDollar Value) ofShares that MayYet Be
PurchasedUnder the Plans or Programs
|Month #1: July 1-31      |  | 2,111                               | (1) |  | $                               | 1.72 |                                                                                 |  |                                                                                                            | 
|Month #2: August 1-31    |  | 1,038                               | (1) |  | $                               | 1.94 |                                                                                 |  |                                                                                                            | 
|Month #3: September 1-30 |  |                                    |     |  |                                 |     |                                                                                 |  |                                                                                                            | 
|Total                    |  | 3,149                               | (1) |  | $                               | 1.79 |                                                                                 |  |                                                                                                            | 

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|(1) | These shares had been purchased from us by employees pursuant to the exercise of stock options and were unvested shares under the terms of the stock option agreements between us and
the employees. We repurchased the shares from the employees upon the employees termination of employment with us pursuant to our right to repurchase unvested shares at the original exercise price under our 1998 Stock Incentive Plan and the
stock option agreement.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Item 6.Exhibits.



|               |  |                                                                                                                                                                                                                                    
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                        
|10.1           |  | Offer letter, dated July 4, 2005, by and between the Registrant and Todd Antes (filed as Exhibit 10.2 to the Registrants Quarterly Report on Form 10-Q for the quarter ended June 30, 2005,
and incorporated herein by reference).
|               | 
|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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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: November 10, 2005



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



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Exhibit Index



|               |  |                                                                                                                                                                                                                                    
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                        
|10.1           |  | Offer letter, dated July 4, 2005, by and between the Registrant and Todd Antes (filed as Exhibit 10.2 to the Registrants Quarterly Report on Form 10-Q for the quarter ended June 30,
2005, and incorporated herein by reference).
|               | 
|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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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