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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(Mark One)



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

For the quarterly period ended March 31, 2007

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.    Yes  þ    No ̈

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

Large accelerated filer  þ            Accelerated filer ̈Non-accelerated filer ̈

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

As of April 30, 2007, 55,267,069 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 MARCH 31, 2007



|                               |  |                                                                                       |  |     
|------------------------------ |  | ------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                       |  | Page
|                               | 
|PART I  FINANCIAL INFORMATION |  |                                                                                      
|                               |  |                                                                                      
|Item 1.                        |  | Financial Statements (Unaudited)                                                      |  | 3   
|                               |  |                                                                                      
|                               |  | Condensed Consolidated Balance Sheets                                                 |  | 3   
|                               |  |                                                                                      
|                               |  | Condensed Consolidated Statements of Operations                                       |  | 4   
|                               |  |                                                                                      
|                               |  | Condensed Consolidated Statements of Cash Flows                                       |  | 5   
|                               |  |                                                                                      
|                               |  | Notes to Condensed Consolidated Financial Statements                                  |  | 6   
|                               |  |                                                                                      
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 12  
|                               |  |                                                                                      
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 19  
|                               |  |                                                                                      
|Item 4.                        |  | Controls and Procedures                                                               |  | 19  
|                               | 
|PART II  OTHER INFORMATION    |  |                                                                                      
|                               |  |                                                                                      
|Item 1.                        |  | Legal Proceedings                                                                     |  | 20  
|                               |  |                                                                                      
|Item 1A.                       |  | Risk Factors                                                                          |  | 20  
|                               |  |                                                                                      
|Item 6.                        |  | Exhibits                                                                              |  | 20  
|                               | 
|Signatures                     |  | 21                                                                                   



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PART I: FINANCIAL INFORMATION



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

ATHEROS COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)



|                                                                 |  |               |         |   |                  |   |         |  
|---------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                 |  | March 31,2007 |         |   | December 31,2006 |  
|ASSETS                                                           |  |               |         |   |                  |   |         |  
|Current assets:                                                  |  |               |         |   |                  |   |         |  
|Cash and cash equivalents                                        |  | $             | 97,882  |   |                  | $ | 98,383  |  
|Marketable securities                                            |  |               | 108,518 |   |                  |   | 87,523  |  
|Accounts receivable, net                                         |  |               | 53,467  |   |                  |   | 46,016  |  
|Inventory                                                        |  |               | 31,326  |   |                  |   | 25,879  |  
|Prepaid expenses, deferred income taxes and other current assets |  |               | 12,495  |   |                  |   | 10,645  |  
|                                                                 |  |               |         |   |                  |   |         |  
|Total current assets                                             |  |               | 303,688 |   |                  |   | 268,446 |  
|Property and equipment, net                                      |  |               | 9,548   |   |                  |   | 8,994   |  
|Goodwill                                                         |  |               | 59,083  |   |                  |   | 58,272  |  
|Acquired intangible assets, net                                  |  |               | 21,315  |   |                  |   | 23,445  |  
|Deferred income taxes and other assets                           |  |               | 11,579  |   |                  |   | 4,901   |  
|                                                                 |  |               |         |   |                  |   |         |  
|Total assets                                                     |  | $             | 405,213 |   |                  | $ | 364,058 |  
|                                                                 |  |               |         |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                             |  |               |         |   |                  |   |         |  
|Current liabilities:                                             |  |               |         |   |                  |   |         |  
|Accounts payable                                                 |  | $             | 34,197  |   |                  | $ | 17,123  |  
|Accrued and other current liabilities                            |  |               | 43,072  |   |                  |   | 46,858  |  
|                                                                 |  |               |         |   |                  |   |         |  
|Total current liabilities                                        |  |               | 77,269  |   |                  |   | 63,981  |  
|                                                                 |  |               |         |   |                  |   |         |  
|Deferred income taxes and other long-term liabilities            |  |               | 35,931  |   |                  |   | 19,135  |  
|Commitments and contingencies                                    |  |               |         |   |                  |   |         |  
|Stockholders equity:                                            |  |               |         |   |                  |   |         |  
|Common stock                                                     |  |               | 323,172 |   |                  |   | 319,424 |  
|Accumulated other comprehensive loss                             |  |               | (15     | ) |                  |   | (81     | )
|Accumulated deficit                                              |  |               | (31,144 | ) |                  |   | (38,401 | )
|                                                                 |  |               |         |   |                  |   |         |  
|Total stockholders equity                                       |  |               | 292,013 |   |                  |   | 280,942 |  
|                                                                 |  |               |         |   |                  |   |         |  
|Total liabilities and stockholders equity                       |  | $             | 405,213 |   |                  | $ | 364,058 |  
|                                                                 |  |               |         |   |                  |   |         |  

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



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ATHEROS COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



|                                                      |  |                             |        |      |   |       
|----------------------------------------------------- |  | --------------------------- | ------ | ---- | - | ------
|                                                      |  | Three Months EndedMarch 31,
|                                                      |  | 2007                        |        | 2006
|Net revenue                                           |  | $                           | 95,518 |      | $ | 61,084
|Cost of goods sold                                    |  |                             | 49,916 |      |   | 31,666
|                                                      |  |                             |        |      |   |       
|Gross profit                                          |  |                             | 45,602 |      |   | 29,418
|                                                      |  |                             |        |      |   |       
|Operating expenses:                                   |  |                             |        |      |   |       
|Research and development                              |  |                             | 23,606 |      |   | 15,529
|Sales and marketing                                   |  |                             | 8,422  |      |   | 5,649 
|General and administrative                            |  |                             | 4,727  |      |   | 2,896 
|Amortization of acquired intangible assets            |  |                             | 1,779  |      |   |      
|                                                      |  |                             |        |      |   |       
|Total operating expenses                              |  |                             | 38,534 |      |   | 24,074
|                                                      |  |                             |        |      |   |       
|Income from operations                                |  |                             | 7,068  |      |   | 5,344 
|Interest income, net                                  |  |                             | 2,492  |      |   | 1,816 
|                                                      |  |                             |        |      |   |       
|Income before income taxes                            |  |                             | 9,560  |      |   | 7,160 
|Income tax provision                                  |  |                             | 1,961  |      |   | 346   
|                                                      |  |                             |        |      |   |       
|Net income                                            |  | $                           | 7,599  |      | $ | 6,814 
|                                                      |  |                             |        |      |   |       
|                                                      |  |                            
|Basic net income per share                            |  | $                           | 0.14   |      | $ | 0.14  
|                                                      |  |                             |        |      |   |       
|Shares used in computing basic net income per share   |  |                             | 54,681 |      |   | 50,445
|                                                      |  |                             |        |      |   |       
|Diluted net income per share                          |  | $                           | 0.13   |      | $ | 0.13  
|                                                      |  |                             |        |      |   |       
|Shares used in computing diluted net income per share |  |                             | 58,310 |      |   | 54,472
|                                                      |  |                             |        |      |   |       

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)



|                                                                                  |  |                             |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Three Months EndedMarch 31, |        
|                                                                                  |  | 2007                        |         |   | 2006 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |  |                             |         |   |      |   |         |  
|Net income                                                                        |  | $                           | 7,599   |   |      | $ | 6,814   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                             |         |   |      |   |         |  
|Depreciation and amortization                                                     |  |                             | 1,065   |   |      |   | 635     |  
|Stock-based compensation                                                          |  |                             | 4,758   |   |      |   | 2,973   |  
|Amortization of acquired intangible assets                                        |  |                             | 1,938   |   |      |   |        |  
|Loss on disposal of property and equipment                                        |  |                             | 248     |   |      |   |        |  
|Deferred income taxes                                                             |  |                             | 2,307   |   |      |   | (1,657  | )
|Tax benefit from employee stock-based awards                                      |  |                             | 713     |   |      |   | 885     |  
|Excess tax benefit from employee stock-based awards                               |  |                             | (585    | ) |      |   | (760    | )
|Change in assets and liabilities, net of impact of acquisitions:                  |  |                             |         |   |      |   |         |  
|Accounts receivable                                                               |  |                             | (7,431  | ) |      |   | (2,074  | )
|Inventory                                                                         |  |                             | (5,473  | ) |      |   | (4,131  | )
|Prepaid expenses and other current assets                                         |  |                             | (1,831  | ) |      |   | (1,617  | )
|Accounts payable                                                                  |  |                             | 16,683  |   |      |   | 6,587   |  
|Other accrued liabilities                                                         |  |                             | (4,207  | ) |      |   | 1       |  
|                                                                                  |  |                             |         |   |      |   |         |  
|Net cash provided by operating activities                                         |  |                             | 15,784  |   |      |   | 7,656   |  
|                                                                                  |  |                             |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |  |                             |         |   |      |   |         |  
|Purchase of property and equipment, net                                           |  |                             | (1,281  | ) |      |   | (522    | )
|Purchase of marketable securities                                                 |  |                             | (54,687 | ) |      |   | (22,437 | )
|Maturities of marketable securities                                               |  |                             | 33,758  |   |      |   | 17,703  |  
|Proceeds from disposal of assets held for sale from acquisitions                  |  |                             | 1,400   |   |      |   |        |  
|Other assets                                                                      |  |                             | (114    | ) |      |   |        |  
|                                                                                  |  |                             |         |   |      |   |         |  
|Net cash used in investing activities                                             |  |                             | (20,924 | ) |      |   | (5,256  | )
|                                                                                  |  |                             |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |  |                             |         |   |      |   |         |  
|Issuance of common stock                                                          |  |                             | 4,054   |   |      |   | 4,110   |  
|                                                                                  |  |                            
|Excess tax benefits from employee stock-based awards                              |  |                             | 585     |   |      |   | 760     |  
|                                                                                  |  |                             |         |   |      |   |         |  
|Net cash provided by financing activities                                         |  |                             | 4,639   |   |      |   | 4,870   |  
|                                                                                  |  |                             |         |   |      |   |         |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                              |  |                             | (501    | ) |      |   | 7,270   |  
|CASH AND CASH EQUIVALENTS, Beginning of period                                    |  |                             | 98,383  |   |      |   | 75,425  |  
|                                                                                  |  |                             |         |   |      |   |         |  
|CASH AND CASH EQUIVALENTS, End of period                                          |  | $                           | 97,882  |   |      | $ | 82,695  |  
|                                                                                  |  |                             |         |   |      |   |         |  

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 communications products.

Basis of PresentationThe accompanying 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
(SEC) rules and regulations. Accordingly, they do not include all the information and footnotes required by US GAAP for complete financial statements. This 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, 2006 balance sheet was derived from the
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, 2006 included in its annual report on Form 10-K, as filed on
March 1, 2007 with the SEC. The results of operations for the three months ended March 31, 2007 are not necessarily indicative of the results to be expected for any future periods.

2. Significant Accounting Policies

The
Companys significant accounting policies are disclosed in its audited consolidated financial statements for the year ended December 31, 2006.

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 actual
return rates and/or repair and replacement costs differ significantly from these estimates, adjustments to recognize additional cost of sales may be required in future periods. Components of the accrual for warranty costs are as follows (in
thousands):



|                                                      |  |                             |       |   |      |   |       |  
|----------------------------------------------------- |  | --------------------------- | ----- | - | ---- | - | ----- | -
|                                                      |  | Three Months EndedMarch 31, |      
|                                                      |  | 2007                        |       |   | 2006 |  
|Beginning balance                                     |  | $                           | 1,258 |   |      | $ | 1,161 |  
|Additions related to current period sales             |  |                             | 1,021 |   |      |   | 396   |  
|Warranty costs incurred in the current period         |  |                             | (132  | ) |      |   | (107  | )
|Adjustments to accruals related to prior period sales |  |                             | (337  | ) |      |   | (278  | )
|                                                      |  |                             |       |   |      |   |       |  
|Ending balance                                        |  | $                           | 1,810 |   |      | $ | 1,172 |  
|                                                      |  |                             |       |   |      |   |       |  

Income TaxesEffective January 1, 2007, the Company adopted Financial
Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainties in Income Taxes  An Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition of tax benefits, classification on the balance sheet,
interest and penalties, accounting in interim periods, disclosure, and transition. The Company has classified interest and penalties as a component of tax expense. As a result of the implementation of FIN 48 effective January 1, 2007, the
Company recognized a $342,000 increase in liability for unrecognized tax benefits, which was accounted for as an increase in the January 1, 2007 balance of accumulated deficit.

Recent Accounting PronouncementsIn February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159) which permits an entity to measure certain financial assets and financial liabilities at fair value requiring that unrealized gains and losses be
reported in earnings at each



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subsequent reporting date. The provisions of SFAS No. 159 will be effective for the Company on January 1, 2008. The Company is currently evaluating
the effect that the adoption of SFAS No. 159 will have on its consolidated financial statements.

3. Inventory

Inventory consists of (in thousands):



|                |  |               |        |                  |   |       
|--------------- |  | ------------- | ------ | ---------------- | - | ------
|                |  | March 31,2007 |        | December 31,2006
|Finished goods  |  | $             | 14,916 |                  | $ | 11,392
|Work-in-process |  |               | 12,194 |                  |   | 10,234
|Raw materials   |  |               | 4,216  |                  |   | 4,253 
|                |  |               |        |                  |   |       
|Total           |  | $             | 31,326 |                  | $ | 25,879
|                |  |               |        |                  |   |       

4. Goodwill and Acquired Intangible Assets

The Company added goodwill of $811,000 and $58,272,000 in the three months ended March 31, 2007 and the year ended December 31, 2006,
respectively, related to the acquisitions of Attansic Technology Corporation and ZyDAS Technology Corporation. The carrying amounts of the acquired intangible assets are as follows (in thousands):



|                        |  |                    |        |                         |   |        |                   |  |                     |        |                          |   |        |                    |   |        |   |  |   |       
|----------------------- |  | ------------------ | ------ | ----------------------- | - | ------ | ----------------- |  | ------------------- | ------ | ------------------------ | - | ------ | ------------------ | - | ------ | - |  | - | ------
|                        |  | March 31, 2007     |        | December 31, 2006      
|                        |  | GrossCarryingValue |        | AccumulatedAmortization |   |        | NetCarryingAmount |  | Gross CarryingValue |        | Accumulated Amortization |   |        | Net CarryingAmount
|Developed technology    |  | $                  | 21,110 |                         | $ | (2,591 | )                 |  | $                   | 18,519 |                          | $ | 21,110 |                    | $ | (1,106 | ) |  | $ | 20,004
|Customer relationships  |  |                    | 2,091  |                         |   | (365   | )                 |  |                     | 1,726  |                          |   | 2,442  |                    |   | (176   | ) |  |   | 2,266 
|Covenant not-to-compete |  |                    | 1,277  |                         |   | (207   | )                 |  |                     | 1,070  |                          |   | 1,277  |                    |   | (102   | ) |  |   | 1,175 
|Backlog                 |  |                    | 100    |                         |   | (100   | )                 |  |                     |       |                          |   | 100    |                    |   | (100   | ) |  |   |      
|                        |  |                    |        |                         |   |        |                   |  |                     |        |                          |   |        |                    |   |        |   |  |   |       
|Total                   |  | $                  | 24,578 |                         | $ | (3,263 | )                 |  | $                   | 21,315 |                          | $ | 24,929 |                    | $ | (1,484 | ) |  | $ | 23,445
|                        |  |                    |        |                         |   |        |                   |  |                     |        |                          |   |        |                    |   |        |   |  |   |       

Amortization expense for intangible assets for the three months ended March 31, 2007 was $1,779,000. The
Company had no amortization expense for intangible assets for the three months ended March 31, 2006. At March 31, 2007 estimated amortization expense for the remainder of fiscal 2007, and years thereafter are as follows (in thousands):



|                 |  |                              |       
|---------------- |  | ---------------------------- | ------
|                 |  | EstimatedAmortizationExpense
|2007 (remainder) |  | $                            | 5,346 
|2008             |  |                              | 6,919 
|2009             |  |                              | 5,864 
|2010             |  |                              | 3,186 
|                 |  |                              |       
|Total            |  | $                            | 21,315
|                 |  |                              |       

5. Accrued Liabilities

Accrued liabilities consist of (in thousands):



|                                  |  |               |        |                  |   |       
|--------------------------------- |  | ------------- | ------ | ---------------- | - | ------
|                                  |  | March 31,2007 |        | December 31,2006
|Accrued customer incentives       |  | $             | 22,023 |                  | $ | 23,073
|Accrued compensation and benefits |  |               | 7,554  |                  |   | 9,060 
|Other liabilities                 |  |               | 13,495 |                  |   | 14,725
|                                  |  |               |        |                  |   |       
|Total                             |  | $             | 43,072 |                  | $ | 46,858
|                                  |  |               |        |                  |   |       

6. Stock-Based Compensation

Stock-Based Compensation Plans

The Companys 1998 Plan, 2004 Plan and ESPP are described
in the Companys 2006 annual report on Form 10-K filed on March 1, 2007.



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Stock Based Compensation

Effective January 1, 2006, the Company adopted SFAS 123R using the modified prospective application method. Accordingly, results for prior periods
have not been restated. Under the modified prospective application method, stock-based compensation expense for the three months ended March 31, 2007 and 2006 include compensation expense for stock-based awards granted by the Company as a
public company prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provision of SFAS 123. For stock-based awards granted before November 26, 2003 (the date on
which the Company filed its registration statement for its initial public offering), the Company continues to amortize deferred stock compensation expense following the provisions of Accounting Principles Board Opinion 25, Accounting for Stock
Issued to Employees (APB 25). The Company recognizes these compensation costs for stock awards granted prior to January 1, 2006 using the graded vesting method, and for stock awards granted after December 31, 2005 on a
straight-line basis, over the requisite service period of the awards, which is generally the option vesting term of four to five years. The graded vesting method provides for vesting of portions of the overall awards at interim dates and results in
accelerated expense recognition compared to the straight-line method. Stock-based compensation expense for all stock-based compensation awards granted after December 31, 2005 is based on the grant-date fair value in accordance with the
provisions of SFAS 123R.

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

The cost of restricted stock units granted under the 2004 Plan, determined based on the fair market value of the shares at the date of grant, is expensed
on a straight-line basis for those grants issued after December 31, 2005. There were no restricted stock unit grants prior to January 1, 2006.

Determining Fair Value

Valuation methodThe Company estimates the fair value of
stock options granted using the Black-Scholes valuation model.

Expected TermThe expected term represents the period that the
Companys stock-based awards are expected to be outstanding. As the Company does not have sufficient historical experience for determining the expected term of the stock option awards granted, the Company has based its expected term on the
expected terms used by similar entities.

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

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

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

The fair value of the Companys stock-based awards to employees was estimated using the following weighted-average assumptions for the grants made
in the three months ended March 31, 2007 and 2006:



|                                       |  |                             |       |   |      |   |      |  
|-------------------------------------- |  | --------------------------- | ----- | - | ---- | - | ---- | -
|                                       |  | Three Months EndedMarch 31, |      
|                                       |  | 2007                        |       |   | 2006 |  
|Option Plan Shares                     |  |                             |       |   |      |   |      |  
|Estimated life (in years)              |  |                             | 4.8   |   |      |   | 4.0  |  
|Expected volatility                    |  |                             | 51.3  | % |      |   | 42   | %
|Risk-free interest rate                |  |                             | 4.7   | % |      |   | 4.4  | %
|Expected dividends                     |  |                             |      |   |      |   |     |  
|Weighted average grant-date fair value |  | $                           | 11.85 |   |      | $ | 6.06 |  



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##### Table of Contents

During the three months ended March 31, 2007 and 2006 there were no purchases under the Employee
Stock Purchase Plan.

Stock-based Compensation Expense

The following table shows total stock-based compensation expense included in the Condensed Consolidated Statements of Operations for the three months
ended March 31, 2007 and 2006 (in thousands):



|                           |  |                             |       |      |   |      
|-------------------------- |  | --------------------------- | ----- | ---- | - | -----
|                           |  | Three Months EndedMarch 31,
|                           |  | 2007                        |       | 2006
|Cost of sales              |  | $                           | 125   |      | $ | 118  
|Research and development   |  |                             | 2,996 |      |   | 1,690
|Sales and marketing        |  |                             | 1,041 |      |   | 677  
|General and administrative |  |                             | 698   |      |   | 488  
|                           |  |                             |       |      |   |      
|                           |  | $                           | 4,860 |      | $ | 2,973
|                           |  |                             |       |      |   |      

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

At March 31, 2007, the total compensation cost related to
unvested stock-based awards granted to employees under the Companys stock incentive plans but not yet recognized was approximately $42,164,000, net of estimated forfeitures. This cost will be amortized on a graded vesting basis for awards
granted prior to January 1, 2006 and on a straight-line basis for awards granted after December 31, 2005 over a weighted-average period of approximately 3.2 years and will be adjusted for subsequent changes in estimated forfeitures. Future
option grants will increase the amount of compensation expense to be recorded in these periods.

Stock Options and Awards Activity

The following is a summary of option activity for the Companys Stock Incentive Plans for the three months ended
March 31, 2007 (in thousands, except per share amounts):



|                                              |  |                 |   |  |                              |       |                                                 |      |                         |   |        
|--------------------------------------------- |  | --------------- | - |  | ---------------------------- | ----- | ----------------------------------------------- | ---- | ----------------------- | - | -------
|                                              |  | Number ofShares |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualLife (Years) |      | AggregateIntrinsicValue
|Outstanding at January 1, 2007                |  | 9,551           |   |  | $                            | 9.54  |                                                 |      |                         |   |        
|Granted                                       |  | 919             |   |  |                              | 24.23 |                                                 |      |                         |   |        
|Exercised                                     |  | (721            | ) |  |                              | 5.62  |                                                 |      |                         |   |        
|Forfeitures and cancellations                 |  | (58             | ) |  |                              | 11.97 |                                                 |      |                         |   |        
|                                              |  |                 |   |  |                              |       |                                                 |      |                         |   |        
|Outstanding at March 31, 2007                 |  | 9,691           |   |  | $                            | 11.21 |                                                 | 6.44 |                         | $ | 124,365
|                                              |  |                 |   |  |                              |       |                                                 |      |                         |   |        
|Vested and expected to vest at March 31, 2007 |  | 8,637           |   |  | $                            | 10.76 |                                                 | 6.38 |                         | $ | 114,581
|                                              |  |                 |   |  |                              |       |                                                 |      |                         |   |        
|Exercisable at March 31, 2007                 |  | 4,143           |   |  | $                            | 6.35  |                                                 | 5.80 |                         | $ | 72,869 
|                                              |  |                 |   |  |                              |       |                                                 |      |                         |   |        

The aggregate intrinsic value is calculated as the difference between the exercise price of the
underlying awards and the quoted price of our common stock for the 8,570,000 options that were in-the-money at March 31, 2007. During the three month periods ended March 31, 2007, the aggregate intrinsic value of options exercised under
the Companys stock incentive plans was $14,029,000 determined as of the date of option exercise. As of March 31, 2007, we had 2,388,000 authorized shares available for future issuance under all of our stock option plans.



9



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##### Table of Contents

The following table summarizes the Companys restricted stock award activity for the three months
ended March 31, 2007 (in thousands, except per share amounts):



|                                   |  |                         |   |                        |                                       |       |                 |       |   |                                       |   |      
|---------------------------------- |  | ----------------------- | - | ---------------------- | ------------------------------------- | ----- | --------------- | ----- | - | ------------------------------------- | - | -----
|                                   |  | Restricted Stock Awards |   | Restricted Stock Units
|                                   |  | Numberof Shares         |   |                        | WeightedAverage Grant Date Fair
Value |       | Number ofShares |       |   | WeightedAverage Grant Date Fair
Value
|Nonvested stock at January 1, 2007 |  | 63                      |   |                        | $                                     | 17.22 |                 | 989   |   |                                       | $ | 19.35
|Granted                            |  |                        |   |                        |                                       |      |                 | 76    |   |                                       |   | 24.43
|Vested                             |  | (20                     | ) |                        |                                       | 13.14 |                 | (40   | ) |                                       |   | 17.93
|Forfeited                          |  |                        |   |                        |                                       |      |                 | (12   | ) |                                       |   | 18.81
|                                   |  |                         |   |                        |                                       |       |                 |       |   |                                       |   |      
|Nonvested stock at March 31, 2007  |  | 43                      |   |                        | $                                     | 17.70 |                 | 1,013 |   |                                       | $ | 19.80
|                                   |  |                         |   |                        |                                       |       |                 |       |   |                                       |   |      

7. Income Taxes

Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, which requires that the Company recognize the financial statement effects of a tax position when it is more likely than not, based
on the technical merits, that the position will be sustained upon examination. As a result of the implementation of FIN 48, the Company recognized a $342,000 increase in liability for unrecognized tax benefits, which was accounted for as an increase
in the January 1, 2007 balance of accumulated deficit.

As of January 1, 2007, the Company had approximately $21,181,000 of
unrecognized tax benefits, substantially all of which would, if recognized, affect its tax expense. The Company has elected to include interest and penalties as a component of tax expense. The Company does not anticipate that the amount of
unrecognized tax benefits relating to tax positions existing at December 31, 2006 will significantly increase or decrease within the next 12 months. Because of net operating loss carryforwards, substantially all of the Companys tax years,
dating to inception in 1998, remain open to federal tax examination. Most states and foreign jurisdictions have 3 to 10 open tax years at any point in time. The Companys 2007 effective tax rate differs from the U.S. statutory rate due to
profits earned in jurisdictions where the tax rate is lower than the U.S. tax rate and due to certain discrete tax benefits received from employee stock incentive and stock purchase plans during the first quarter of 2007.

8. Net Income Per Share

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



|                                                      |  |                             |        |   |      |   |        |  
|----------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                      |  | Three Months EndedMarch 31, |       
|                                                      |  | 2007                        |        |   | 2006 |  
|Net income (numerator)                                |  | $                           | 7,599  |   |      | $ | 6,814  |  
|                                                      |  |                             |        |   |      |   |        |  
|Denominator for basic net income per share:           |  |                             |        |   |      |   |        |  
|Weighted average shares outstanding                   |  |                             | 54,755 |   |      |   | 50,557 |  
|Weighted average shares subject to repurchase         |  |                             | (74    | ) |      |   | (112   | )
|                                                      |  |                             |        |   |      |   |        |  
|Shares used to calculate basic net income per share   |  |                             | 54,681 |   |      |   | 50,445 |  
|Effect of dilutive securities:                        |  |                             |        |   |      |   |        |  
|Common stock options and warrants                     |  |                             | 3,555  |   |      |   | 3,915  |  
|Shares subject to repurchase                          |  |                             | 74     |   |      |   | 112    |  
|                                                      |  |                             |        |   |      |   |        |  
|Shares used to calculate diluted net income per share |  |                             | 58,310 |   |      |   | 54,472 |  
|                                                      |  |                             |        |   |      |   |        |  
|Basic net income per share                            |  | $                           | 0.14   |   |      | $ | 0.14   |  
|                                                      |  |                             |        |   |      |   |        |  
|Diluted net income per share                          |  | $                           | 0.13   |   |      | $ | 0.13   |  
|                                                      |  |                             |        |   |      |   |        |  

The Company excludes potentially dilutive securities from its diluted net income per share
calculation when their effect would be antidilutive to net income per share amounts. The common stock equivalents related to options to purchase 1,601,000 and 81,000 shares of the Companys common stock were excluded from the net income per
share calculation in the three months ended March 31, 2007 and 2006, respectively, as their effect would have been antidilutive.



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9. Comprehensive Income

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



|                                         |  |                             |       |      |   |      
|---------------------------------------- |  | --------------------------- | ----- | ---- | - | -----
|                                         |  | Three Months EndedMarch 31,
|                                         |  | 2007                        |       | 2006
|Net income                               |  | $                           | 7,599 |      | $ | 6,814
|Other comprehensive income:              |  |                             |       |      |   |      
|Change in unrealized loss on investments |  |                             | 66    |      |   | 64   
|                                         |  |                             |       |      |   |      
|Total comprehensive income               |  | $                           | 7,665 |      | $ | 6,878
|                                         |  |                             |       |      |   |      

10. 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 communications industry. The Companys
Chief Operating Decision Maker is the CEO.

Geographic Information

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



|              |  |                             |   |  |      |  
|------------- |  | --------------------------- | - |  | ---- | -
|              |  | Three Months EndedMarch 31, |  
|              |  | 2007                        |   |  | 2006 |  
|Taiwan        |  | 52                          | % |  | 56   | %
|China         |  | 40                          |   |  | 32   |  
|United States |  | 1                           |   |  | 1    |  
|Other         |  | 7                           |   |  | 11   |  
|              |  |                             |   |  |      |  
|Total         |  | 100                         | % |  | 100  | %
|              |  |                             |   |  |      |  

Significant Customers

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



|                                     |  |                             |   |  |      |  
|------------------------------------ |  | --------------------------- | - |  | ---- | -
|                                     |  | Three Months EndedMarch 31, |  
|                                     |  | 2007                        |   |  | 2006 |  
|Hon Hai Precision Industry Co., Ltd. |  | 25                          | % |  | 15   | %
|UTStarcom, Inc.                      |  | *                           |   |  | 13   |  
|Alpha Networks, Inc.                 |  | *                           |   |  | 12   |  
|Askey Computer Corporation           |  | *                           |   |  | 11   |  

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



|                                     |  |               |   |  |                  |  
|------------------------------------ |  | ------------- | - |  | ---------------- | -
|                                     |  | March 31,2007 |   |  | December 31,2006 |  
|Hon Hai Precision Industry Co., Ltd. |  | 30            | % |  | 36               | %
|Flextronics Technology, Ltd.         |  | *             |   |  | 11               |  



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



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##### Table of Contents

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

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

Overview

We are a leading developer of highly integrated semiconductor system solutions for communications products. We
combine our systems expertise with high-performance radio frequency (RF) mixed signal and digital semiconductor design skills to provide highly integrated chipset solutions that are manufacturable on low-cost, standard complementary metal-oxide
semiconductor (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 (IEEE) family of wireless local area networking (WLAN) standards, including the 802.11b, 802.11g and 802.11a standards and the draft 802.11n standard. We have a broad base of leading personal computer original
equipment manufacturer (PC OEM) customers, including Acer, Apple, ASUSTek, NEC, Sony and Toshiba and networking equipment manufacturers, including 2Wire, 3COM, Belkin, Buffalo, Cisco Systems, D-Link, FON, Linksys, NEC AT, NETGEAR, Siemens and
TP-Link, as well as other consumer electronics customers.

In 2005, we introduced our solution for the Personal Access System (PAS)
cellular market. Our highly integrated PAS solution is used in both handset and base station products sold primarily in the China market. Our solution consists 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 (TDMA-TDD) technology operating at 1.9
gigahertz (GHz) providing high quality voice, advanced data services and long battery life. Our unique, highly integrated single chip solution for PAS products provides full support for the PAS networking standard and a robust set of product
features at a competitive price. Our primary customer for our PAS products is UTStarcom.

In August 2006, we began shipping our low-cost,
universal serial bus (USB) solution for WLAN which we obtained through our acquisition of ZyDAS Technology Corporation. ZyDAS was a privately held, Taiwan-based integrated circuit design company specializing in high-performance WLAN semiconductor
and software solutions and in conjunction with the acquisition, they became the Atheros Taiwan Development Center. Under the terms of the share purchase agreement, we paid an aggregate of approximately $26.0 million in cash and stock at closing and
agreed to pay additional consideration upon attaining certain defined milestones. The results of operations of ZyDAS have been included in our consolidated statements of operations since the date of acquisition.

In December 2006, we acquired 87.7% of the outstanding shares of Attansic Technology Corporation, a privately held Taiwan-based fabless integrated
circuit design company, specializing in gigabit and fast Ethernet integrated circuit solutions, as well as power management products. Under the terms of the share purchase agreement, we paid an aggregate of approximately $62.4 million in cash and
stock. We intend to acquire the remainder of Attansics capital stock as soon as practicable for approximately $8.7 million. In



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December 2006, we began shipping the Ethernet solutions acquired from Attansic for personal computers applications. Our Ethernet solutions are integrated
into personal computer LAN-on-motherboards (LOM), by supplying Gigabit Ethernet network interface card (NIC) and physical layer (PHY) products for LOMs. In January 2007, we sold certain assets related to the legacy power management business of
Attansic to a third party. The results of operations for Attansic have been included in our consolidated statements of operations since the date of acquisition.

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

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

In the three months ended March 31, 2007, Hon-Hai Precision Industry Co., Ltd. accounted for 25% of our net revenue. In the
three months ended March 31, 2006, Hon-Hai Precision Industry Co., Ltd. UTStarcom, Inc., Alpha Networks, Inc. and Askey Computer Corporation accounted for 15%, 13%, 12% and 11% of our net revenue, respectively. We expect to continue to have
major concentrations of sales to a relatively small number of ODM and OEM customers.

Substantially all of our sales are to customers
outside the United States and Canada. Sales to customers in Asia accounted for 98% of net revenue in both the three months ended March 31, 2007 and 2006. Because many of our ODM customers are located in Asia, we anticipate that a majority of
our revenue will continue to come from sales to customers in that region. Although a large percentage of our sales are made to customers in Asia, we believe that a significant number of the systems designed by these customers are then sold through
to OEMs outside of Asia. All of our sales are denominated in United States dollars.

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

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

Sales and Marketing. Sales and marketing expense relates primarily to compensation and associated costs for marketing and sales personnel,
sales commissions to independent sales representatives, public relations, promotional and other marketing expenses, travel, trade shows, depreciation 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



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##### Table of Contents

allocated occupancy costs. We expect that general and administrative expenses will increase in absolute dollars as we hire personnel and incur costs related
to the anticipated growth of our business.

Amortization of Acquired Intangible Assets. Amortization of acquired intangible
assets relates to the amortization of intangible assets acquired in the ZyDAS and Attansic acquisitions. Acquisition-related identified intangibles are amortized on a straight-line basis over the estimated economic lives of three to five years for
purchased technology, two to three years for customer relationships and two to four years for covenants-not-to-compete.

Interest Income
and Expense. Interest income consists of interest earned on cash and cash equivalents and marketable securities balances.

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

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition
and the results of operations are based on our financial statements which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenue and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting
policies are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 and there have been no material changes with the exception of our income tax policy discussed below.

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

Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-An
Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with SFAS No. 109, Accounting for Income
Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 requires significant judgment in determining what constitutes an individual tax position,
as well as assessing the outcome of each tax position. Changes in judgment as to recognition or measurement of tax positions can materially affect the estimate of the effective tax rate and consequently, affect our operating results.



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##### Table of Contents

Results of Operations

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



|                                            |  |                             |   |  |      |  
|------------------------------------------- |  | --------------------------- | - |  | ---- | -
|                                            |  | Three Months EndedMarch 31, |  
|                                            |  | 2007                        |   |  | 2006 |  
|Consolidated Statements of Operations Data: |  |                             |   |  |      |  
|                                            |  |                            
|Net revenue                                 |  | 100                         | % |  | 100  | %
|Cost of goods sold                          |  | 52                          |   |  | 52   |  
|                                            |  |                             |   |  |      |  
|Gross profit                                |  | 48                          |   |  | 48   |  
|Operating expenses:                         |  |                             |   |  |      |  
|Research and development                    |  | 25                          |   |  | 25   |  
|Sales and marketing                         |  | 9                           |   |  | 9    |  
|General and administrative                  |  | 5                           |   |  | 5    |  
|Amortization of acquired intangible assets  |  | 2                           |   |  |     |  
|                                            |  |                             |   |  |      |  
|Total operating expenses                    |  | 41                          |   |  | 39   |  
|                                            |  |                             |   |  |      |  
|Income from operations                      |  | 7                           |   |  | 9    |  
|Interest income, net                        |  | 3                           |   |  | 3    |  
|Provision for income taxes                  |  | (2                          | ) |  | (1   | )
|                                            |  |                             |   |  |      |  
|Net income                                  |  | 8                           | % |  | 11   | %
|                                            |  |                             |   |  |      |  

Comparison of Three Months Ended March 31, 2007 and 2006

(tables presented in thousands, except percentage amounts)

Net Revenue



|            |  |                             |        |         |   |        |  |    |  
|----------- |  | --------------------------- | ------ | ------- | - | ------ |  | -- | -
|            |  | Three Months EndedMarch 31, |        | %Change |  
|            |  | 2007                        |        | 2006    |  
|Net revenue |  | $                           | 95,518 |         | $ | 61,084 |  | 56 | %

The increase in net revenue for the three months ended March 31, 2007 compared to the three
months ended March 31, 2006 was due to the increased volume of chipsets shipped as a result of further acceptance of our wireless chipset products, additional market demand for wireless networking products and the introduction of our Ethernet
products. As a result, the total number of chipsets shipped more than doubled in the first quarter of 2007 compared to the first quarter of 2006. The increase in chipsets shipped was partially offset by a decrease in the average selling price as we
introduced products with lower average selling price and competitively priced our existing chipsets to aggressively pursue market share. In addition, the acquisitions we made in 2006 added products to our portfolio with lower average selling prices
than our other products and provided incremental revenue in the first quarter of 2007.



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Gross Profit



|                 |  |                             |        |   |         |   |        |   |  |    |  
|---------------- |  | --------------------------- | ------ | - | ------- | - | ------ | - |  | -- | -
|                 |  | Three Months EndedMarch 31, |        |   | %Change |  
|                 |  | 2007                        |        |   | 2006    |   |       
|Gross profit     |  | $                           | 45,602 |   |         | $ | 29,418 |   |  | 55 | %
|% of net revenue |  |                             | 48     | % |         |   | 48     | % |  |    |  

Gross profit as a percentage of revenue in the three months ended March 31, 2007 was in line
with gross profit as a percentage of revenue in the comparable period of 2006. We had a greater concentration of higher margin products as a percentage of our total product mix in the first quarter of 2007, partially offset by a decline in the
overall blended average selling prices of our comparable chips from the first quarter of 2006. We expect our gross margins to decrease in the second fiscal quarter of 2007 based on anticipated changes in the product mix and lower average selling
prices.

Research and Development



|                         |  |                              |        |   |         |   |        |   |  |    |  
|------------------------ |  | ---------------------------- | ------ | - | ------- | - | ------ | - |  | -- | -
|                         |  | Three Months Ended March 31, |        |   | %Change |  
|                         |  | 2007                         |        |   | 2006    |   |       
|Research and development |  | $                            | 23,606 |   |         | $ | 15,529 |   |  | 52 | %
|% of net revenue         |  |                              | 25     | % |         |   | 25     | % |  |    |  

The increase in research and development expenses during the three months ended March 31,
2007, compared to the three months ended March 31, 2006, was primarily due to an increase in compensation-related costs of $6.0 million, related to a 108% increase in the number of employees engaged in research and development activities,
including those employees added through the ZyDAS and Attansic acquisitions. In addition, there were increases in outside services and consulting fees of $572,000, software expense of $412,000, and depreciation expense of $357,000, primarily due to
increased chip development efforts for new and existing markets.

Sales and Marketing



|                    |  |                              |       |   |         |   |       |   |  |    |  
|------------------- |  | ---------------------------- | ----- | - | ------- | - | ----- | - |  | -- | -
|                    |  | Three Months Ended March 31, |       |   | %Change |  
|                    |  | 2007                         |       |   | 2006    |   |      
|Sales and marketing |  | $                            | 8,422 |   |         | $ | 5,649 |   |  | 49 | %
|% of net revenue    |  |                              | 9     | % |         |   | 9     | % |  |    |  

The increase in sales and marketing expenses during the three months ended March 31, 2007,
compared to the corresponding period in 2006, was partly due to an increase in compensation-related costs of $2.0 million, attributable to a 66% increase in the number of employees engaged in sales and marketing activities, including those employees
added through the ZyDAS and Attansic acquisitions. In addition, there was an increase in travel expenses of $184,000 resulting from the increase in the number of sales and marketing employees and trade show related expenses of $164,000 as we
increased efforts to raise awareness of our product portfolio.

General and Administrative



|                           |  |                              |       |   |         |   |       |   |  |    |  
|-------------------------- |  | ---------------------------- | ----- | - | ------- | - | ----- | - |  | -- | -
|                           |  | Three Months Ended March 31, |       |   | %Change |  
|                           |  | 2007                         |       |   | 2006    |   |      
|General and administrative |  | $                            | 4,727 |   |         | $ | 2,896 |   |  | 63 | %
|% of net revenue           |  |                              | 5     | % |         |   | 5     | % |  |    |  



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The increase in general and administrative expenses during the three months ended March 31, 2007,
compared to the corresponding period in 2006, was partly due to an increase in compensation-related costs of $746,000, primarily attributable to a 67% increase in the number of employees engaged in general and administrative activities, including
those employees added through the ZyDAS and Attansic acquisitions. In addition, professional fees and consulting expenses increased by $593,000, due to increased audit fees, legal costs for patent-related matters and consulting expenses associated
with our income tax compliance requirements.

Amortization of Acquired Intangible Assets

During the three months ended March 31, 2007, we recorded $1. 8 million in charges related to the amortization of acquired intangible assets
from the ZyDAS and Attansic acquisitions, which occurred in 2006. Acquisition-related identified intangibles are amortized on a straight-line basis over the estimated economic lives of three to four years for purchased technology, two to three years
for customer relationships and two to four years for covenants not-to-compete.

Interest Income, Net



|                     |  |                              |       |   |         |   |       |   |  |    |  
|-------------------- |  | ---------------------------- | ----- | - | ------- | - | ----- | - |  | -- | -
|                     |  | Three Months Ended March 31, |       |   | %Change |  
|                     |  | 2007                         |       |   | 2006    |   |      
|Interest income, net |  | $                            | 2,492 |   |         | $ | 1,816 |   |  | 37 | %
|% of net revenue     |  |                              | 3     | % |         |   | 3     | % |  |    |  

During the three months ended March 31, 2007 we experienced increased interest income,
compared to the three months ended March 31, 2006, primarily due to a $20.7 million increase in cash, cash equivalents and marketable securities, resulting from the generation of working capital from operations and the exercise of employee
stock options. In addition, yields achieved on our investment portfolio have increased in the three months ended March 31, 2007 over the same period in 2006.

Provision for Income Taxes



|                           |  |                              |       |   |         |   |     |   |  |     |  
|-------------------------- |  | ---------------------------- | ----- | - | ------- | - | --- | - |  | --- | -
|                           |  | Three Months Ended March 31, |       |   | %Change |  
|                           |  | 2007                         |       |   | 2006    |   |    
|Provision for income taxes |  | $                            | 1,961 |   |         | $ | 346 |   |  | 467 | %
|% of net revenue           |  |                              | 2     | % |         |   | 1   | % |  |     |  

Our effective tax rate is 20.5% for the three months ended March 31, 2007, compared to 4.8%
for the three months ended March 31, 2006. The effective tax rate for the first quarter of 2006 is lower than the rate for the comparable quarter in 2007 due to the reversal of the valuation allowance against $1.4 million of deferred tax assets
in the first quarter of 2006. Our 2007 effective tax rate differs from the U.S. statutory rate due to profits earned in jurisdictions where the tax rate is lower than the U.S. tax rate and due to certain discrete tax benefits received from employee
stock incentive and stock purchase plans during the first quarter of 2007.

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

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

Liquidity and Capital Resources

Our principal sources of liquidity as of March 31, 2007, consisted of cash, cash equivalents and marketable securities of $206.4 million, and our revolving credit facility, under which $8.6 million was available
to borrow. In 2006, we issued a standby letter of credit for $1.4 million to secure an operating lease for equipment which reduced the amount available to borrow under this credit facility from $10.0 million to $8.6 million. The revolving credit
facility was renewed in March 2007 and expires on March 27, 2008.



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##### Table of Contents

Operating Activities. Our operating activities provided $15.8 million of cash for the three months
ended March 31, 2007 compared to $7.7 million for the three months ended March 31, 2006. Cash flow from operating activities for the three months ended March 31, 2007 resulted primarily from net income of $7.6 million, an increase in
accounts payable of $16.7 million, related to increases in inventory and the timing of payments to vendors, non-cash stock-based compensation expense of $4.8 million, increases in our net deferred tax liabilities of $2.3 million and amortization of
intangible assets acquired in the ZyDAS and Attansic acquisitions of $1.9 million. These changes were partially offset by an increase in accounts receivable of $7.4 million related to increased revenue and the timing of customer payments, an
increase in inventory of $5.5 million to support increased demand for our products and a decrease in other accrued liabilities of $4.2 million, primarily related to the timing of payments of customer rebates and 2006 employee incentive compensation.

Cash flow from operations for the three months ended March 31, 2006 resulted from net income of $6.8 million, an increase in accounts
payable of $6.6 million related to increases in inventory, partially offset by an increase in inventory of $4.1 million due to an inventory rise to meet increased future demand and an increase in accounts receivable of $2.1 million due to increased
revenue and timing of customer payments.

Investing Activities. Our investing activities used $20.9 million in the three months
ended March 31, 2007, and $5.3 million in the three months ended March 31, 2006. Our investing activities primarily consisted of the purchase and maturities of marketable securities, purchases of property and equipment and the sale of
assets held for sale from acquisitions.

Capital expenditures were $1.3 million and $522,000 for the three months ended March 31, 2007
and 2006, respectively. The capital expenditures within the three months period ended March 31, 2007 primarily consisted of tenant improvements for new leased facilities in Santa Clara, California, Taiwan and India, and computer and test
equipment purchases. The capital expenditures during the three months period ended March 31, 2006 primarily consisted of computer and test equipment purchases. We anticipate that further capital expenditures will be required to support future
growth.

Financing Activities. Our financing activities provided cash of $4.6 million and $4.9 million in the three months ended
March 31, 2007 and 2006, respectively. The cash provided in these periods primarily related to the issuance of common stock resulting from the exercise of employee stock options and the estimated tax benefits arising from stock compensation in
2007 pursuant to our adoption of SFAS No. 123R.

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 research and development is essential
to expanding our core technologies and product offerings. Our research and development expenses were $23.6 million in the three months ended March 31, 2007, and $71.1 million, $47.8 million and $42.7 million in the years ended December 31,
2006, 2005 and 2004, respectively. These expenditures resulted in enhancement of our product offerings, technological know-how and inventions that have yielded numerous issued and pending U.S. patents. We expect to continue to incur significant
research and development expenses and intend to fund these expenses with operating cash flows, cash and cash equivalents and marketable securities.

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.

In
August 2006, we acquired ZyDAS for an aggregate of approximately $26.0 million in cash and stock at closing and agreed to pay additional consideration upon attaining certain defined milestones. In December 2006, we acquired 87.7% of Attansic. Under
the terms of the agreement, the acquisition price is $62.4 million consisting of $37.6 million in cash and $24.8 million in our common stock. We intend to acquire the remainder of Attansic capital stock as soon as practicable for approximately $8.7
million. We may enter into arrangements in the future with respect to potential investments in, or acquisitions of, complementary businesses, products or technologies, which could require us to seek additional equity or debt financing. The sale of
additional equity securities or convertible debt securities would result in additional dilution to our stockholders. Additional debt would result in increased interest expense and could result in covenants that would restrict our operations. We have
not made arrangements to obtain additional financing and there is no assurance that such financing, if required, will be available in amounts or on terms acceptable to us, if at all.



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##### Table of Contents

Contractual Obligations and Off-Balance Sheet Arrangements

Information regarding our contractual obligations is provided in Managements Discussion and Analysis of Results of Operations and Financial
Condition of our Annual Report on Form 10-K for the year ended December 31, 2006, filed with the SEC on March 1, 2007. Due to the adoption of FIN 48, a $14.2 million liability was recorded in the first quarter of 2007. We do not
expect this liability to be satisfied within the next twelve months.

As of March 31, 2007, we have no off-balance sheet arrangements
as defined in Item 303(a)(4) of the SECs Regulation S-K.

Recent Accounting Pronouncement

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which permits an entity to measure
certain financial assets and financial liabilities at fair value requiring that unrealized gains and losses be reported in earnings at each subsequent reporting date. The provisions of SFAS No. 159 will be effective for us on January 1,
2008. We are currently evaluating the effect that the adoption of SFAS No. 159 will have on our consolidated financial statements.



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

The primary objectives of our investment activity are, in order of importance, to preserve principal, provide liquidity and maximize the income without significantly increasing the risk. Some of the securities we
invest in are subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk, we maintain our portfolio of cash equivalents and short-term
investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities and certificates of deposit. The risk associated with fluctuating interest rates is limited to our investment
portfolio and we do not believe that a 10% change in interest rates will have a significant impact on the fair value of our investment portfolio or on our interest income. As of March 31, 2007, our investments were in money market funds,
commercial paper, corporate notes, corporate bonds, market auction preferred stock and U.S. government securities.

Our exposure to market
risk also relates to the increase or decrease in the amount of interest we must pay on our outstanding debt instruments, primarily certain borrowings under the revolving credit facility. Our revolving credit facility provides financing up to $10.0
million for working capital requirements of which $8.4 million is currently available. The line of credit bears interest at the banks prime rate. We do not believe that a 10% change in the prime rate would have a significant impact on our
interest expense.

We do not currently engage in foreign currency hedging transactions, nor do we believe that we have a material exposure
to foreign currency exchange rate risk.



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

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

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

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



19



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##### Table of Contents

PART II - OTHER INFORMATION



|Item 1. | Legal Proceedings.
|------- | ------------------

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



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

This Report
contains forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, the risk factors set forth in
our Annual Report on Form 10-K for the year ended December 31, 2006, filed with the SEC, and this Report should be read in conjunction with such risk factors. The risks and uncertainties described in the Form 10-K are not the only ones we face.
Additional risks and uncertainties not presently known to us or that we currently believe are immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs and have material adverse effects on
Atheros, our business, financial condition and results of operations could be seriously harmed.



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



|               |  |                                                                                                                                                                                                                                       
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                           
|10.1           |  | Form of Assumed Attansic Technology Corporation Option Agreement (filed as Exhibit 99.1 to the Registrants Registration Statement on Form S-8 (File No. 333-140392), filed on February 1,
2007 and incorporated herein by reference).
|               | 
|31.1           |  | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-15(e) and (f) and 15d-15(e) and (f), 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 (f) and 15d-15(e) and (f), 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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##### Table of Contents

SIGNATURES

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

Date: May 10, 2007



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



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##### Table of Contents

Exhibit Index



|               |  |                                                                                                                                                                                                                                       
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                           
|10.1           |  | Form of Assumed Attansic Technology Corporation Option Agreement (filed as Exhibit 99.1 to the Registrants Registration Statement on Form S-8 (File No. 333-140392), filed on February 1,
2007 and incorporated herein by reference).
|               | 
|31.1           |  | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-15(e) and (f) and 15d-15(e) and (f), 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 (f) and 15d-15(e) and (f), 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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



22