##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q







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

For the quarterly period ended October 4, 2009



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

For the transition period from              to
             .

Commission File Number 333-153362





GIGOPTIX, INC.

(Exact Name of Registrant as Specified in Its Charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 26-2439072                          
|(State or Other Jurisdiction of Incorporation or organization) |  | (I.R.S. Employer Identification No.)

2400 Geng Road, Suite 100, Palo Alto, CA 94303

(Address of Principal Executive Offices)

(650) 424-1937

(Registrants telephone number, including area code)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

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



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  |  ̈
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  | x

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

As of November 13, 2009, 8,855,374 shares of the Companys common stock, $0.001 par value, were outstanding.









---

##### Table of Contents

|                                                                                                                            |  |     
|--------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                            |  | Page
|PART I                                                                                                                      |  |     
|                                                                                                                            | 
|FINANCIAL INFORMATION                                                                                                       |  |     
|                                                                                                                            | 
|Item 1 - Financial Statements (unaudited)                                                                                   |  |     
|Condensed Consolidated Balance Sheets as of October 4, 2009 and December 31, 2008                                           |  | 3   
|Condensed Consolidated Statements of Operations for the three and nine months ended October 4, 2009 and September 
26, 2008 |  | 4   
|Condensed Consolidated Statements of Cash Flows for the nine months ended October 4, 2009 and September 26,
2008            |  | 5   
|Notes to Condensed Consolidated Financial Statements                                                                        |  | 6   
|Item 2 - Managements Discussion and Analysis of Financial Condition and Results of Operations                              |  | 18  
|Item 4T - Controls and Procedures                                                                                           |  | 25  
|                                                                                                                            | 
|PART II                                                                                                                     |  |     
|                                                                                                                            | 
|OTHER INFORMATION                                                                                                           |  |     
|Item 1 - Legal Proceedings                                                                                                  |  | 25  
|Item 1A - Risk Factors                                                                                                      |  | 25  
|Item 5 - Other Information                                                                                                  |  | 35  
|Item 6 - Exhibits                                                                                                           |  | 36  



2



---

##### Table of Contents

PART I

FINANCIAL INFORMATION



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

GIGOPTIX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)



|                                                                                                                                                                                                    |  |                |         |   |                  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                                    |  | October 4,2009 |         |   | December 31,2008 |  
|ASSETS                                                                                                                                                                                              | 
|Current assets:                                                                                                                                                                                     |  |                |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                                                           |  | $              | 2,814   |   |                  | $ | 6,871   |  
|Accounts receivable, net                                                                                                                                                                            |  |                | 2,990   |   |                  |   | 2,475   |  
|Inventories                                                                                                                                                                                         |  |                | 997     |   |                  |   | 1,019   |  
|Prepaid and other current assets                                                                                                                                                                    |  |                | 970     |   |                  |   | 1,043   |  
|                                                                                                                                                                                                    |  |                |         |   |                  |   |         |  
|Total current assets                                                                                                                                                                                |  |                | 7,771   |   |                  |   | 11,408  |  
|Property and equipment, net                                                                                                                                                                         |  |                | 898     |   |                  |   | 771     |  
|Intangible assets, net                                                                                                                                                                              |  |                | 859     |   |                  |   | 1,231   |  
|Restricted cash                                                                                                                                                                                     |  |                | 749     |   |                  |   | 749     |  
|Other assets                                                                                                                                                                                        |  |                | 354     |   |                  |   | 712     |  
|                                                                                                                                                                                                    |  |                |         |   |                  |   |         |  
|Total assets                                                                                                                                                                                        |  | $              | 10,631  |   |                  | $ | 14,871  |  
|                                                                                                                                                                                                    |  |                |         |   |                  |   |         |  
|                                                                                                                                                                                                   
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                | 
|                                                                                                                                                                                                    |  |               
|Current liabilities:                                                                                                                                                                                |  |                |         |   |                  |   |         |  
|Accounts payable                                                                                                                                                                                    |  | $              | 1,529   |   |                  | $ | 1,496   |  
|Accrued and other current liabilities                                                                                                                                                               |  |                | 1,312   |   |                  |   | 2,472   |  
|Line of credit                                                                                                                                                                                      |  |                |        |   |                  |   | 800     |  
|                                                                                                                                                                                                    |  |                |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                                                           |  |                | 2,841   |   |                  |   | 4,768   |  
|Pension liabilities                                                                                                                                                                                 |  |                | 176     |   |                  |   | 173     |  
|Deferred tax liabilities                                                                                                                                                                            |  |                | 35      |   |                  |   | 118     |  
|                                                                                                                                                                                                    |  |                |         |   |                  |   |         |  
|Total liabilities                                                                                                                                                                                   |  |                | 3,052   |   |                  |   | 5,059   |  
|                                                                                                                                                                                                    |  |               
|Commitments and contingencies (Note 10)                                                                                                                                                             |  |                |         |   |                  |   |         |  
|                                                                                                                                                                                                    |  |               
|Stockholders Equity                                                                                                                                                                                |  |                |         |   |                  |   |         |  
|Common stock, $0.001 par value; 50,000,000 shares authorized as of October 4, 2009; 2009; 5,309,461 and 5,173,223 issued and
outstanding as of October 4, 2009 and December 31, 2008, respectively. |  |                | 5       |   |                  |   | 5       |  
|Additional paid-in capital                                                                                                                                                                          |  |                | 69,170  |   |                  |   | 68,576  |  
|Accumulated deficit                                                                                                                                                                                 |  |                | (61,773 | ) |                  |   | (58,952 | )
|Accumulated other comprehensive income                                                                                                                                                              |  |                | 177     |   |                  |   | 183     |  
|                                                                                                                                                                                                    |  |                |         |   |                  |   |         |  
|Total stockholders equity                                                                                                                                                                          |  |                | 7,579   |   |                  |   | 9,812   |  
|                                                                                                                                                                                                    |  |                |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                          |  | $              | 10,631  |   |                  | $ | 14,871  |  
|                                                                                                                                                                                                    |  |                |         |   |                  |   |         |  

See accompanying notes to condensed consolidated financial statements.



3



---

##### Table of Contents

GIGOPTIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)



|                                                                                     |  |                    |        |   |                   |   |        |                |  |   |                   |   |  |   |        |  
|------------------------------------------------------------------------------------ |  | ------------------ | ------ | - | ----------------- | - | ------ | -------------- |  | - | ----------------- | - |  | - | ------ | -
|                                                                                     |  | Three months ended |        |   | Nine months ended |  
|                                                                                     |  | October 4,2009     |        |   | September 26,2008 |   |        | October 4,2009 |  |   | September 26,2008 |  
|Revenue                                                                              |  |                    |        |   |                   |   |        |                |  |   |                   |   |  |   |        |  
|Product                                                                              |  | $                  | 2,142  |   |                   | $ | 2,460  |                |  | $ | 7,582             |   |  | $ | 6,389  |  
|Government contract                                                                  |  |                    | 1,005  |   |                   |   |       |                |  |   | 4,108             |   |  |   |       |  
|                                                                                     |  |                    |        |   |                   |   |        |                |  |   |                   |   |  |   |        |  
|Total revenue                                                                        |  |                    | 3,147  |   |                   |   | 2,460  |                |  |   | 11,690            |   |  |   | 6,389  |  
|Cost of revenue                                                                      |  |                    |        |   |                   |   |        |                |  |   |                   |   |  |   |        |  
|Product                                                                              |  |                    | 964    |   |                   |   | 533    |                |  |   | 3,100             |   |  |   | 2,522  |  
|Government contract                                                                  |  |                    | 367    |   |                   |   |       |                |  |   | 1,765             |   |  |   |       |  
|                                                                                     |  |                    |        |   |                   |   |        |                |  |   |                   |   |  |   |        |  
|Total cost of revenue                                                                |  |                    | 1,331  |   |                   |   | 533    |                |  |   | 4,865             |   |  |   | 2,522  |  
|                                                                                     |  |                    |        |   |                   |   |        |                |  |   |                   |   |  |   |        |  
|Gross profit                                                                         |  |                    | 1,816  |   |                   |   | 1,927  |                |  |   | 6,825             |   |  |   | 3,867  |  
|                                                                                     |  |                    |        |   |                   |   |        |                |  |   |                   |   |  |   |        |  
|Research and development expense                                                     |  |                    | 1,255  |   |                   |   | 1,109  |                |  |   | 3,919             |   |  |   | 3,019  |  
|Selling, general and administrative expense                                          |  |                    | 1,744  |   |                   |   | 2,553  |                |  |   | 6,170             |   |  |   | 5,662  |  
|Acquired in-process research and development                                         |  |                    |       |   |                   |   |       |                |  |   |                  |   |  |   | 319    |  
|                                                                                     |  |                    |        |   |                   |   |        |                |  |   |                   |   |  |   |        |  
|Total operating expenses                                                             |  |                    | 2,999  |   |                   |   | 3,662  |                |  |   | 10,089            |   |  |   | 9,000  |  
|                                                                                     |  |                    |        |   |                   |   |        |                |  |   |                   |   |  |   |        |  
|Loss from operations                                                                 |  |                    | (1,183 | ) |                   |   | (1,735 | )              |  |   | (3,264            | ) |  |   | (5,133 | )
|Interest expense, net                                                                |  |                    |       |   |                   |   | (78    | )              |  |   | (2                | ) |  |   | (287   | )
|Other income (expense), net                                                          |  |                    | 8      |   |                   |   | 79     |                |  |   | 338               |   |  |   | (119   | )
|                                                                                     |  |                    |        |   |                   |   |        |                |  |   |                   |   |  |   |        |  
|Loss before provision for (benefit from) income taxes                                |  |                    | (1,175 | ) |                   |   | (1,734 | )              |  |   | (2,928            | ) |  |   | (5,539 | )
|Provision for (benefit from) income taxes                                            |  |                    | 22     |   |                   |   | (93    | )              |  |   | (107              | ) |  |   | (198   | )
|                                                                                     |  |                    |        |   |                   |   |        |                |  |   |                   |   |  |   |        |  
|Net loss                                                                             |  | $                  | (1,197 | ) |                   | $ | (1,641 | )              |  | $ | (2,821            | ) |  | $ | (5,341 | )
|                                                                                     |  |                    |        |   |                   |   |        |                |  |   |                   |   |  |   |        |  
|Net loss per share - basic and diluted                                               |  | $                  | (0.23  | ) |                   | $ | (1.40  | )              |  | $ | (0.54             | ) |  | $ | (6.01  | )
|                                                                                     |  |                    |        |   |                   |   |        |                |  |   |                   |   |  |   |        |  
|Weighted average number of shares used in per share calculations - basic and diluted |  |                    | 5,229  |   |                   |   | 1,173  |                |  |   | 5,193             |   |  |   | 888    |  
|                                                                                     |  |                    |        |   |                   |   |        |                |  |   |                   |   |  |   |        |  

See accompanying notes to condensed consolidated financial statements.



4



---

##### Table of Contents

GIGOPTIX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                            |  |                   |        |   |                   |   |        |  
|--------------------------------------------------------------------------- |  | ----------------- | ------ | - | ----------------- | - | ------ | -
|                                                                            |  | Nine months ended |       
|                                                                            |  | October 4,2009    |        |   | September 26,2008 |  
|Cash flows from operating activities                                        |  |                   |        |   |                   |   |        |  
|Net loss                                                                    |  | $                 | (2,821 | ) |                   | $ | (5,341 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                   |        |   |                   |   |        |  
|Depreciation and amortization                                               |  |                   | 685    |   |                   |   | 655    |  
|Stock-based compensation                                                    |  |                   | 577    |   |                   |   | 106    |  
|Acquired in-process research and development                                |  |                   |       |   |                   |   | 319    |  
|Deferred taxes                                                              |  |                   | (83    | ) |                   |   | (117   | )
|Amortization of acquisition-related payment                                 |  |                   | 525    |   |                   |   | 525    |  
|Gain on sale of assets                                                      |  |                   | (300   | ) |                   |   |       |  
|Changes in operating assets and liabilities, net of effect of acquisitions: |  |                   |        |   |                   |   |        |  
|Accounts receivable, net                                                    |  |                   | (516   | ) |                   |   | (571   | )
|Inventories                                                                 |  |                   | 24     |   |                   |   | (467   | )
|Prepaid and other current assets                                            |  |                   | (2     | ) |                   |   | (661   | )
|Other assets                                                                |  |                   | (118   | ) |                   |   | (2,096 | )
|Accounts payable                                                            |  |                   | 34     |   |                   |   | 82     |  
|Accrued and other current liabilities                                       |  |                   | (1,163 | ) |                   |   | 633    |  
|                                                                            |  |                   |        |   |                   |   |        |  
|Net cash used in operating activities                                       |  |                   | (3,158 | ) |                   |   | (6,933 | )
|                                                                            |  |                   |        |   |                   |   |        |  
|Cash flows from investing activities                                        |  |                   |        |   |                   |   |        |  
|Purchases of property and equipment                                         |  |                   | (427   | ) |                   |   | (15    | )
|Cash paid for acquistion of Helix, net of cash acquired                     |  |                   |       |   |                   |   | (1,671 | )
|Proceeds from sale of assets                                                |  |                   | 300    |   |                   |   |       |  
|                                                                            |  |                   |        |   |                   |   |        |  
|Net cash used in investing activities                                       |  |                   | (127   | ) |                   |   | (1,686 | )
|                                                                            |  |                   |        |   |                   |   |        |  
|Cash flows from financing activities                                        |  |                   |        |   |                   |   |        |  
|Proceeds from issuance of common stock                                      |  |                   | 17     |   |                   |   | 850    |  
|Proceeds from notes payable to stockholders                                 |  |                   |       |   |                   |   | 8,600  |  
|Repayment of notes payable to stockholders                                  |  |                   |       |   |                   |   | (700   | )
|Proceeds from line of credit                                                |  |                   | 792    |   |                   |   | 2,750  |  
|Repayment of line of credit                                                 |  |                   | (1,592 | ) |                   |   | (2,629 | )
|                                                                            |  |                   |        |   |                   |   |        |  
|Net cash provided by (used in) financing activities                         |  |                   | (783   | ) |                   |   | 8,871  |  
|                                                                            |  |                   |        |   |                   |   |        |  
|Effect of exchange rates on cash and cash equivalents                       |  |                   | 11     |   |                   |   | 9      |  
|Net increase (decrease) in cash and cash equivalents                        |  |                   | (4,057 | ) |                   |   | 261    |  
|Cash and cash equivalents at beginning of period                            |  |                   | 6,871  |   |                   |   | 525    |  
|                                                                            |  |                   |        |   |                   |   |        |  
|Cash and cash equivalents at end of period                                  |  | $                 | 2,814  |   |                   | $ | 786    |  
|                                                                            |  |                   |        |   |                   |   |        |  
|Supplemental disclosure of cash flow information                            |  |                   |        |   |                   |   |        |  
|Interest paid                                                               |  | $                 | 29     |   |                   | $ | 19     |  
|                                                                            |  |                   |        |   |                   |   |        |  

See accompanying notes to condensed consolidated financial statements.



5



---

##### Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1  ORGANIZATION AND BASIS OF PRESENTATION

Organization

GigOptix, Inc. (GigOptix or the
Company) is a leading provider of electronic engines for the optically connected digital world and other advanced RF applications. GigOptix was formed in March 2008 as a wholly-owned subsidiary of Lumera Corporation (Lumera) to
facilitate a combination between GigOptix LLC and Lumera. Before the combination, which was effected by two mergers, collectively referred to as the merger, GigOptix had no operations or material assets. As a result of the transaction
set forth in the Agreement and Plan of Merger, dated as of March 27, 2008, among Lumera, GigOptix LLC, Galileo Merger Sub G, LLC and Galileo Merger Sub L, Inc., on December 9, 2008, the merger was completed and Lumera and GigOptix LLC
became wholly owned subsidiaries of GigOptix. GigOptix is the successor public registrant to Lumera.

At the time of the
merger, Lumera was a developer of high performance proprietary electro-optic polymer materials and products based on these materials for various electro-optic applications and GigOptix LLC was a fabless semiconductor company specializing in the
specification, design, development and sale of integrated circuits and electronic multi-chip module solutions.

Prior to the
merger, GigOptix LLC was an Idaho limited liability company, headquartered in Palo Alto, California. GigOptix LLC was the successor company of iTerra Communications LLC, or iTerra, which was founded in 2000. In July 2007, as part of a reorganization
plan, iTerra formed GigOptix LLC, a wholly-owned subsidiary. All of the assets and liabilities of iTerra, with the exception of the $45.8 million of debt and accrued interest due to iTerras primary member, were transferred to GigOptix LLC,
along with all of iTerras operations and intellectual property.

In August 2007, GigOptix LLC implemented a
restructuring plan to consolidate the research and development operations of its wholly-owned subsidiary, iTerra Communications SRL, based in Rome, Italy to its corporate headquarters in Palo Alto, California.

In January 2008, GigOptix LLC acquired Helix Semiconductor AG, or Helix, a company based in Switzerland, which designed and sold optical
receiver transmitter array products consisting of driver and receiver arrays for 4-channel and 12-channel modules running at 3Gbps to 10Gbps per channel. The acquisition of Helix enabled GigOptix LLC to expand its product offering into short
reach devices and systems.

Going Concern

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation
of liabilities in the normal course of business. The Company has incurred significant losses since inception, attributable to its efforts to design and commercialize its products. During the first nine months of fiscal year 2009, the Company
incurred a loss of approximately $2.8 million; cash outflows from operations of $3.2 million and at October 4, 2009 had an accumulated deficit of $61.8 million. For the years ended December 31, 2008 and 2007, the Company incurred net
losses of $7.7 million and $6.5 million, respectively, and cash outflows from operations of $6.7 million and $4.8 million, respectively. The Company has managed its liquidity during this time through a series of cost reduction initiatives and
borrowings under its line of credit with Silicon Valley Bank. In April 2009, the Company terminated and fully repaid amounts outstanding under this line of credit.

The Companys ability to continue as a going concern is dependent on many events outside of its direct control, including, among other things; obtaining additional financing either privately or
through public markets and consumers purchasing its products in substantially higher volumes. The Companys significant recent operating losses and negative cash flows, among other factors, raise substantial doubt as to its ability to
continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis of Presentation

In the opinion of
management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (including normal recurring adjustments) necessary to present fairly the financial position and results of operations of the Company. You
should not expect interim results of operations necessarily to be indicative of the results for the full fiscal year. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the amounts reported in these unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. This report should be read in
conjunction with the Consolidated Financial Statements and accompanying notes included in the Companys annual report on Form 10-K for the fiscal year ended December 31, 2008.



6



---

##### Table of Contents

The Companys fiscal year ends on December 31. For quarterly reporting, the
Company employs a four-week, four-week, five-week reporting period. The current three-month period ended on Sunday, October 4, 2009. The third quarter of fiscal 2008 ended on September 26, 2008. The condensed consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

The condensed consolidated financial statements of the Company for the periods prior to December 9, 2008, presented herein, are the historical financial statements of GigOptix LLC.

Merger Conversion

On
December 9, 2008, the effective time of merger, GigOptix LLC membership units were converted into common stock of GigOptix, Inc. at a conversion ratio of 0.1375. All shares and per share amounts, including all common stock equivalents (stock
options, warrants and restricted stock) have been adjusted in the condensed consolidated financial statements and in the notes to the condensed consolidated financial statements for all periods presented to reflect the merger conversion.

Use of Estimates

The
preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in United States requires management to make estimates, judgments and assumptions that affect the reported amount of assets,
liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to allowances for doubtful accounts, inventory write-downs, valuation
of long-lived assets, including property and equipment and identified intangible assets, valuation of deferred taxes and contingencies. In addition, the Company uses assumptions when employing the Black-Scholes option valuation model to calculate
the fair value of stock granted. The Company bases its estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, when these
carrying values are not readily available from other sources. Actual results could differ from these estimates.

NOTE 2  SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

Revenue from sales of optical modulator drivers and receivers, MCMS, and other products is recognized when persuasive evidence of a sales
arrangement exists, transfer of title and acceptance, where applicable, occurs, the sales price is fixed or determinable and collection of the resulting receivable is reasonably assured. Revenue for product shipments is recognized upon acceptance of
the product by the customer or expiration of the contractual acceptance period, after which there are no rights of return. Provisions are made for warranties at the time revenue is recorded.

Customer purchase orders are generally used to determine the existence of an arrangement. Transfer of title and risk of ownership occur
based on defined terms in customer purchase orders, and generally pass to the customer upon shipment, at which point goods are delivered to a carrier. There are no formal customer acceptance terms or further obligations, outside of the
Companys standard product warranty. The Company assesses whether the sales price is fixed or determinable based on the payment terms associated with the transaction. Collectability is assessed based primarily on the credit worthiness of the
customer as determined through ongoing credit evaluations of the customers financial condition, as well as consideration of the customers payment history.

Revenue generated from engineering product development projects and the research and development cost reimbursement contracts, cost plus fixed fee type contracts, for the United States government is
recorded using the percentage of completion method measured on a cost-incurred basis. Changes in contract performance, contract conditions, and estimated profitability, including those arising from contract penalty provisions and final contract
settlements, may result in revisions to costs and revenues and are recognized in the period in which the revisions are determined. Profit incentives are included in revenue when realization is assured. Losses, if any, are recognized in full as soon
as identified. Losses occur when the estimated direct and indirect costs to complete the contract exceed the unrecognized revenue on the contract. The Company evaluates the reserve for contract losses on a contract-by-contract basis. No losses have
been incurred on any contracts to date.

Unbilled accounts receivables, included as a component of accounts receivable on the
balance sheet, comprises amounts of revenue recognized on contracts that the Company has not yet billed to a customer because the amounts were not contractually billable at the balance sheet date.



Business Risks and Credit Concentration

The Company operates in the intensely competitive semiconductor industry, which has been characterized by price erosion, rapid technological
changes, short product life cycles, cyclical market patterns, and heightened international and domestic competition. Significant technological changes in the industry could adversely affect operating results.



7



---

##### Table of Contents

For the three months ended October 4, 2009, three customers accounted for 28%, 23% and
11% of total revenue. For the three months ended September 26, 2008, two customers accounted for 29% and 12% of total revenue. For the nine months ended October 4, 2009, four customers accounted for 23%, 15%, 12% and 11% of total revenue.
For the nine months ended September 26, 2008, one customer accounted for 34% of total revenue. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and accounts
receivable. The Company maintains cash with various financial institutions that management believes to be of high credit quality. At any time, amounts held at any single financial institution may exceed federally insured limits. The Company believes
that the concentration of credit risk in its accounts receivable is substantially mitigated by the Companys credit evaluation process, and the high level of credit worthiness of its customers. The Company performs ongoing credit evaluations of
its customers financial condition and limits the amount of credit extended when deemed necessary but generally requires no collateral.

At October 4, 2009, four customers accounted for 25%, 15%, 13% and 11% of total accounts receivable. At December 31, 2008, four customers accounted for 17%, 16%, 12% and 10% of total accounts
receivable.

Comprehensive Loss

Comprehensive loss includes net loss and foreign currency translation adjustments arising from the consolidation of the Companys foreign subsidiary. The components of comprehensive loss are as
follows (in thousands):



|                                         |  |                    |        |   |                   |   |        |                |  |   |                   |   |  |   |        |  
|---------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | -------------- |  | - | ----------------- | - |  | - | ------ | -
|                                         |  | Three months ended |        |   | Nine months ended |  
|                                         |  | October 4,2009     |        |   | September 26,2008 |   |        | October 4,2009 |  |   | September 26,2008 |  
|Net loss                                 |  | $                  | (1,197 | ) |                   | $ | (1,641 | )              |  | $ | (2,821            | ) |  | $ | (5,341 | )
|Foreign currency translation adjustments |  |                    | 60     |   |                   |   | (82    | )              |  |   | (5                | ) |  |   | 48     |  
|                                         |  |                    |        |   |                   |   |        |                |  |   |                   |   |  |   |        |  
|Comprehensive loss                       |  | $                  | (1,137 | ) |                   | $ | (1,723 | )              |  | $ | (2,826            | ) |  | $ | (5,293 | )
|                                         |  |                    |        |   |                   |   |        |                |  |   |                   |   |  |   |        |  

Income Taxes

The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to
occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result
from differences between the financial and tax basis of the Companys assets and liabilities and are adjusted for changes in tax rates and tax laws. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not
that a tax benefit will not be realized.

The Company has not provided for U.S. income taxes and foreign withholding taxes on
undistributed earnings of its subsidiary in Switzerland as of October 4, 2009. The Company intends to reinvest these earnings indefinitely in operations outside the United States.

The calculation of tax liabilities involves dealing with uncertainties in the application of complex global tax regulations. The Company
recognizes potential liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on its estimate of whether, and the extent to which, additional taxes will be due. If payment of these amounts ultimately proves to be
unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when the Company determines the liabilities are no longer necessary. If the estimate of tax liabilities proves to be less than the ultimate
assessment, a further charge to tax provision would result.

The Company adopted the guidance related to accounting for
uncertain tax positions, effective December 9, 2008, the date of the merger with Lumera, resulting in no cumulative effect of accounting change. There were no significant adjustments during the periods ended October 4, 2009 and
December 31, 2008 related to the Companys adoption of FIN 48.

NOTE 3  RECENT ACCOUNTING PRONOUNCEMENTS

In June 2009, the Financial Accounting Standards Board (FASB) issued the
FASB Accounting Standards Codification(the Codification), the authoritative guidance for GAAP. The Codification, which changes the referencing of financial standards, became effective for interim and annual periods ending on or
after September 15, 2009. The Codification is now the single official source of authoritative U.S. GAAP (other than guidance issued by the SEC), superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues
Task Force (EITF), and related literature. Only one level of authoritative U.S. GAAP now exists. All other literature is considered non-authoritative. The Codification does not change U.S. GAAP. The Company adopted the
Codification during the quarter ended October 4, 2009. The adoption of the Codification did not have any substantive impact on the Companys condensed consolidated financial statements or related footnotes.



8



---

##### Table of Contents

In May 2009, the FASB issued authoritative guidance for subsequent events, which establishes
general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The guidance sets forth the circumstances under which an entity
should recognize events or transactions occurring after the balance sheet date in its financial statements. The guidance also requires the disclosure of the date through which an entity has evaluated subsequent events and whether that date
represents the date the financial statements were issued or were available to be issued. During the quarter ended July 5, 2009, the Company adopted the guidance. The adoption of the guidance did not have a significant impact on the
Companys condensed consolidated financial statements or related footnotes. See Note 14  Subsequent Events to the condensed consolidated financial statements.

In April 2009, the FASB issued guidance on determining fair value when the volume and level of activity for an asset or liability has significantly decreased, and in identifying transactions that are
not orderly. Based on the guidance, if an entity determines that the level of activity for an asset or liability has significantly decreased and that a transaction is not orderly, further analysis of transactions or quoted prices is needed, and a
significant adjustment to the transaction or quoted prices may be necessary to estimate fair value. The guidance was effective on a prospective basis for interim and annual periods ending after June 15, 2009. The Company adopted this guidance
in the quarter ended July 5, 2009, and there was no material impact on the Companys condensed consolidated financial statements. See Note 12  Fair Value Measurements to the condensed consolidated financial statements.

In April 2009, the FASB issued guidance on the recognition and presentation of other-than-temporary impairments on investments in debt
securities. If an entitys management asserts that it does not have the intent to sell a debt security and it is more likely than not that it will not have to sell the security before recovery of its cost basis, then an entity may separate
other-than-temporary impairments into two components: 1) the amount related to credit losses (recorded in earnings) and 2) all other amounts (recorded in other comprehensive income). This guidance was effective on a prospective basis for interim and
annual periods ending after June 15, 2009. The Company adopted this guidance for the quarter ended July 5, 2009, and there was no material impact on the Companys condensed consolidated financial statements.

NOTE 4  BALANCE SHEET COMPONENTS

The following tables provide details of selected balance sheet items (in thousands):

Accounts
receivable, net



|                                |  |                |       |   |                  |   |       |  
|------------------------------- |  | -------------- | ----- | - | ---------------- | - | ----- | -
|                                |  | October 4,2009 |       |   | December 31,2008 |  
|Billed accounts receivable      |  | $              | 2,470 |   |                  | $ | 2,014 |  
|Unbilled accounts receivable    |  |                | 548   |   |                  |   | 469   |  
|Allowance for doubtful accounts |  |                | (28   | ) |                  |   | (8    | )
|                                |  |                |       |   |                  |   |       |  
|Total                           |  | $              | 2,990 |   |                  | $ | 2,475 |  
|                                |  |                |       |   |                  |   |       |  

Inventories



|                |  |                |     |                  |   |      
|--------------- |  | -------------- | --- | ---------------- | - | -----
|                |  | October 4,2009 |     | December 31,2008
|Raw materials   |  | $              | 559 |                  | $ | 670  
|Work in process |  |                | 95  |                  |   | 147  
|Finished Goods  |  |                | 343 |                  |   | 202  
|                |  |                |     |                  |   |      
|Total           |  | $              | 997 |                  | $ | 1,019
|                |  |                |     |                  |   |      

Prepaid and other current assets



|                                                  |  |                |     |                  |   |      
|------------------------------------------------- |  | -------------- | --- | ---------------- | - | -----
|                                                  |  | October 4,2009 |     | December 31,2008
|Prepaid expenses                                  |  | $              | 306 |                  | $ |     
|Escrowed payments related to continued employment |  |                | 625 |                  |   | 700  
|Other                                             |  |                | 39  |                  |   | 343  
|                                                  |  |                |     |                  |   |      
|Total                                             |  | $              | 970 |                  | $ | 1,043
|                                                  |  |                |     |                  |   |      



9



---

##### Table of Contents

Property and equipment, net

Property and equipment are stated at original cost or the acquired value. Depreciation is computed over the estimated useful lives of the
assets (two to five years) using the straight-line method. Leasehold improvements are depreciated over the shorter of estimated useful lives or the initial lease term. When fixed assets are sold or otherwise disposed of, the cost and related
accumulated depreciation are removed from the respective accounts and the resulting gains or losses are included in income from operations.



|                                 |  |                |        |   |                  |   |        |  
|-------------------------------- |  | -------------- | ------ | - | ---------------- | - | ------ | -
|                                 |  | October 4,2009 |        |   | December 31,2008 |  
|Network and laboratory equipment |  | $              | 4,187  |   |                  | $ | 3,910  |  
|Computer software equipment      |  |                | 287    |   |                  |   | 272    |  
|Furniture and fixtures           |  |                | 183    |   |                  |   | 185    |  
|Leasehold improvements           |  |                | 44     |   |                  |   | 38     |  
|Construction-in-progress         |  |                | 155    |   |                  |   | 13     |  
|                                 |  |                |        |   |                  |   |        |  
|                                 |  |                | 4,856  |   |                  |   | 4,418  |  
|Accumulated depreciation         |  |                | (3,958 | ) |                  |   | (3,647 | )
|                                 |  |                |        |   |                  |   |        |  
|Property, and equipment, net     |  | $              | 898    |   |                  | $ | 771    |  
|                                 |  |                |        |   |                  |   |        |  

Depreciation expense related to property and equipment was approximately $98,000 and
$56,000 for the three months ended October 4, 2009 and September 26, 2008, respectively. Depreciation expense related to property and equipment was approximately $312,000 and $171,000 for the nine months ended October 4, 2009 and
September 26, 2008, respectively.

Intangible assets, net

Identifiable intangible assets are recorded at cost, less accumulated amortization. Identifiable intangible assets as of October 4, 2009
and December 31, 2008 consist of the following:



|                       |  |                 |       |                         |   |      |     |  |       |     |                         |   |       |     |   |      |   |  |   |      
|---------------------- |  | --------------- | ----- | ----------------------- | - | ---- | --- |  | ----- | --- | ----------------------- | - | ----- | --- | - | ---- | - |  | - | -----
|                       |  | October 4, 2009 |       | December 31, 2008      
|                       |  | Gross           |       | AccumulatedAmortization |   |      | Net |  | Gross |     | AccumulatedAmortization |   |       | Net
|Existing technology    |  | $               | 1,170 |                         | $ | (681 | )   |  | $     | 489 |                         | $ | 1,167 |     | $ | (396 | ) |  | $ | 771  
|Order backlog          |  |                 | 167   |                         |   | (167 | )   |  |       |    |                         |   | 167   |     |   | (167 | ) |  |   |     
|Customer relationships |  |                 | 130   |                         |   | (76  | )   |  |       | 54  |                         |   | 130   |     |   | (44  | ) |  |   | 86   
|Patents                |  |                 | 377   |                         |   | (61  | )   |  |       | 316 |                         |   | 377   |     |   | (3   | ) |  |   | 374  
|                       |  |                 |       |                         |   |      |     |  |       |     |                         |   |       |     |   |      |   |  |   |      
|Total                  |  | $               | 1,844 |                         | $ | (985 | )   |  | $     | 859 |                         | $ | 1,841 |     | $ | (610 | ) |  | $ | 1,231
|                       |  |                 |       |                         |   |      |     |  |       |     |                         |   |       |     |   |      |   |  |   |      

The amortization of identifiable intangibles is computed using the straight-line
method. Estimated lives of identifiable intangibles range from five to ten years. Total amortization expense for the three months ended October 4, 2009 and September 26, 2008 was approximately $131,000 and $143,000, respectively. Total
amortization expense for the nine months ended October 4, 2009 and September 26, 2008 was approximately $375,000 and $429,000, respectively.

The estimated future amortization expense as of October 4, 2009 is as follows:



|                              |  |        |    
|----------------------------- |  | ------ | ---
|Years ending December 31,     |  | Amount
|2009 (remaining three months) |  | $      | 126
|2010                          |  |        | 512
|2011                          |  |        | 75 
|2012                          |  |        | 75 
|2013                          |  |        | 71 
|                              |  |        |    
|Total                         |  | $      | 859
|                              |  |        |    



10



---

##### Table of Contents

Accrued and other current liabilities



|                                        |  |                |       |                  |   |      
|--------------------------------------- |  | -------------- | ----- | ---------------- | - | -----
|                                        |  | October 4,2009 |       | December 31,2008
|Accrued legal and professional services |  | $              | 235   |                  | $ | 1,043
|Accrued compensation and related taxes  |  |                | 563   |                  |   | 536  
|Sales and use tax payable               |  |                | 185   |                  |   | 380  
|Warranty accrual                        |  |                | 44    |                  |   | 120  
|Other                                   |  |                | 285   |                  |   | 393  
|                                        |  |                |       |                  |   |      
|Total                                   |  | $              | 1,312 |                  | $ | 2,472
|                                        |  |                |       |                  |   |      

NOTE 5  LINE OF CREDIT

In April 2009, the Company terminated its line of credit with final payment of $500,000, which had been available through April 15,
2009. Borrowings under this line of credit was based on net eligible accounts receivable, bore interest at the banks prime rate plus 1.25% and was collateralized by a security interest in all of the Companys assets.

NOTE 6  STOCKHOLDERS EQUITY

Common and Preferred Stock

In December 2008, the Companys stockholders approved an amendment to the
Certificate of Incorporation to authorize 50,000,000 shares of common stock of par value $0.001 per share. In addition, the Company is authorized to issue 1,000,000 shares of undesignated preferred stock of $0.001 par value per share, for which the
Board of Directors is authorized to fix the designation, powers, preferences and rights. As of October 4, 2009, there were no shares of preferred stock issued or outstanding.

Warrants

As of October 4, 2009, the Company had a total of 1,450,336
warrants to purchase shares of common stock outstanding under all warrant arrangements, including the 83,925 warrants outstanding under the Companys stock option plans.

Equity Incentive Plan

As of October 4, 2009, there were 2,866,393
options, 50,092 unvested shares of restricted stock and 83,925 warrants outstanding under all stock option plans.

2007 Equity Incentive
Plan

In August 2007, GigOptix LLC adopted the GigOptix LLC Equity Incentive Plan (the 2007 Plan). The 2007
Plan provides for grants of options to purchase stock units, stock awards and restricted stock to employees, officers and non-employee directors. The 2007 Plan provides for grants of up to 632,500 shares of stock. Vesting periods are determined by
the Companys Board of Directors and generally provide for stock options to vest over a four-year period and expire ten years from date of grant. Vesting for certain stock unit grants are contingent upon both service and performance criteria.
The 2007 Plan was terminated upon the completion of the merger with Lumera on December 9, 2008 and the remaining 864 stock options not granted under the 2007 Plan were cancelled. No shares of the Companys common stock remain reserved for
issuance under the 2007 Plan other than for satisfying exercises of stock options granted under this plan prior to its termination.

At October 4, 2009, options to purchase a total of 544,249 shares of common stock, 50,092 shares of unvested restricted stock and 83,925 warrants to purchase common stock were outstanding.

2008 Equity Incentive Plan

In December 2008, the Company adopted the 2008 Equity Incentive Plan, (the 2008 Plan), for directors, employees, consultants and advisors to the Company or its affiliates. Under
the 2008 Plan, 2,500,000 shares of common stock were reserved for issuance upon the completion of merger with Lumera on December 9, 2008. On January 1 of each year, starting in 2009, the aggregate number of shares reserved for issuance
under the 2008 Plan increase automatically by the lesser of (i) 5% of the number of shares of common stock outstanding as of the Companys immediately preceding fiscal year, or (ii) a number of shares determined by the Board of
Directors. On January 1, 2009, the number of shares reserved for issuance under the 2008 Plan was 2,758,661. The maximum number of shares of common stock to be granted is up to 21,000,000 shares respectively. Forfeited options or awards generally
become available for future awards.

Awards under the 2008 Plan may be granted through
June 30, 2018. Under the 2008 Plan, the exercise price of (i) an award is at least 100% of the stocks fair market value on the date of grant, and (ii) an incentive stock option granted to a 10% stockholder is at least 110% of
the stocks fair market value on the date of grant. Vesting periods for awards are determined by the chief executive officer and generally provide for stock options to vest over a four-year period and have a maximum life of ten years from the
date of grant. At October 4, 2009, 2,112,067 options to purchase common stock were outstanding.



11



---

##### Table of Contents

Lumera 2000 and 2004 Stock Option Plan

In December 2008, in connection with the merger with Lumera, the Company assumed the existing Lumera Corporation 2000 Equity Incentive Plan,
and the Lumera Corporation 2004 Stock Option Plan (the Lumera Plan). All unvested options granted under the Lumera Plan were assumed by the Company as part of the merger. All contractual terms of the assumed options remain the same,
except for the converted number of shares and exercise price based on merger conversion ratio of 0.125. As of October 4, 2009, no additional options can be granted under the Lumera Plan and options to purchase a total of 210,077 shares of
common stock were outstanding.

NOTE 7  STOCK-BASED COMPENSATION

The following table summarizes the classification of stock-based compensation expense related to employee and non-employee stock option and
restricted stock grants, including the impact of expected forfeitures recorded in the three and nine months ended October 4, 2009 and September 26, 2008 (in thousands):



|                                            |  |                    |     |                   |   |                |  |                   |     |  |   |    
|------------------------------------------- |  | ------------------ | --- | ----------------- | - | -------------- |  | ----------------- | --- |  | - | ---
|                                            |  | Three months ended |     | Nine months ended
|                                            |  | October 4,2009     |     | September 26,2008 |   | October 4,2009 |  | September 26,2008
|Cost of revenue                             |  | $                  | 3   |                   | $ | 7              |  | $                 | 5   |  | $ | 10 
|Research and development expense            |  |                    | 55  |                   |   | 10             |  |                   | 154 |  |   | 22 
|Selling, general and administrative expense |  |                    | 157 |                   |   | 34             |  |                   | 418 |  |   | 74 
|                                            |  |                    |     |                   |   |                |  |                   |     |  |   |    
|                                            |  | $                  | 215 |                   | $ | 51             |  | $                 | 577 |  | $ | 106
|                                            |  |                    |     |                   |   |                |  |                   |     |  |   |    

No tax benefit was recognized related to stock-based compensation expense since the
Company has never reported taxable income and has established a full valuation allowance to offset all of the potential tax benefits associated with its U.S. deferred tax assets. Additionally, no stock-based compensation costs were capitalized
during the periods presented.

Valuation assumptions The Company uses the Black-Scholes option pricing model in
determining the fair value of employee stock options, employing the following key assumptions during each respective period:



|                            |  |                    |         |   |                   |   |         |                |  |   |                   |   |  |   |         |  
|--------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -------------- |  | - | ----------------- | - |  | - | ------- | -
|                            |  | Three months ended |         |   | Nine months ended |  
|                            |  | October 4,2009     |         |   | September 26,2008 |   |         | October 4,2009 |  |   | September 26,2008 |  
|Expected life               |  |                    | 5 years |   |                   |   | 5 years |                |  |   | 5 years           |   |  |   | 5 years |  
|Expected volatility         |  |                    | 75      | % |                   |   | 54      | %              |  |   | 75                | % |  |   | 54      | %
|Risk free interest rate     |  |                    | 2.2     | % |                   |   | 3.0     | %              |  |   | 2.2               | % |  |   | 3.0     | %
|Expected dividends          |  |                    |        |   |                   |   |        |                |  |   |                  |   |  |   |        |  
|Weighted-average fair value |  | $                  | 2.46    |   |                   | $ | 0.36    |                |  | $ | 0.85              |   |  | $ | 0.36    |  

The risk-free rate is based on the U.S. Treasury yield in effect at the time of
grant. The Company does not anticipate declaring dividends in the foreseeable future. The expected term is based on terms used by comparable peer companies. Expected volatility is determined by blending the annualized daily historical volatility of
the Companys stock price commensurate with the expected life of the option with volatility measures used by comparable peer companies. The Companys stock price volatility and option lives involve managements best estimates at the
time of grant, both of which impact the fair value of the options calculated under the Black-Scholes methodology and, ultimately, the expense that will be recognized over the life of the options. The Company evaluates the need to update these
assumptions on a quarterly basis.



12



---

##### Table of Contents

The following table summarizes the activity for employees under the Companys stock
option plans for the nine months ended October 4, 2009:



|                               |  |        |           |   |                               |   |                                          |  |     
|------------------------------ |  | ------ | --------- | - | ----------------------------- | - | ---------------------------------------- |  | ----
|                               |  | Shares |           |   | Weighted-AverageExercisePrice |   | Weighted-AverageRemainingContractualTerm
|Outstanding, December 31, 2008 |  |        | 2,827,470 |   |                               | $ | 3.91                                     |  |     
|Granted                        |  |        | 329,996   |   |                               |   | 1.38                                     |  |     
|Forfeited/Expired              |  |        | (237,832  | ) |                               |   | 4.47                                     |  |     
|Exercised                      |  |        | (53,241   | ) |                               |   | 0.93                                     |  |     
|                               |  |        |           |   |                               |   |                                          |  |     
|Outstanding, October 4, 2009   |  | $      | 2,866,393 |   |                               | $ | 3.63                                     |  | 8.77
|                               |  |        |           |   |                               |   |                                          |  |     
|Exercisable, October 4, 2009   |  | $      | 1,166,470 |   |                               | $ | 6.25                                     |  | 8.10
|                               |  |        |           |   |                               |   |                                          |  |     

The weighted-average grant date fair value of options granted was $2.46 and $0.36 per
share during the three months ended October 4, 2009 and September 26, 2008, respectively. The weighted-average grant date fair value of options granted was $0.85 and $0.36 per share during the nine months ended October 4, 2009 and
September 26, 2008, respectively. The aggregate intrinsic value of employee stock options outstanding as of October 4, 2009 was approximately $6.1 million.

As of October 4, 2009, there was approximately $1.2 million, net of estimated forfeitures, of total unrecognized compensation expense, the majority of which will be recognized over a remaining
requisite service period of weighted average 3.3 years.

Restricted Stock

The fair value of the Companys restricted stock is calculated based upon the fair market value of the Companys underlying stock
at the date of grant. As of October 4, 2009, there were 50,092 shares of restricted stock outstanding with an unrecognized stock-based compensation expense of approximately $74,000 to be recognized as compensation expense over a weighted
average-period of three months.

NOTE 8  INCOME TAXES

The provision for income taxes was approximately $22,000 for the three months ended October 4, 2009 and the benefit from income taxes
was approximately $93,000 for the three months ended September 26, 2008. The benefit from income taxes was approximately $107,000 and $198,000 for the nine months ended October 4, 2009 and September 26, 2008, respectively. The
effective tax rate was 1.9% and (5.4)% for the three months ended October 4, 2009 and September 26, 2008, respectively. The effective tax rate was (3.7)% and (3.6)% for the nine months ended October 4, 2009 and September 26,
2008, respectively. The provision for income taxes for the three months ended October 4, 2009 primarily relates to a tax liability at the Companys now dissolved entity in Italy, offset by a benefit related to the amortization of a
deferred tax liability, established upon the acquisition of the Companys Swiss subsidiary in 2008. The benefit from income taxes for the nine months ended October 4, 2009 and the three and nine months ended September 26, 2008
primarily relates to the amortization of a deferred tax liability, established upon the acquisition of the Companys Swiss subsidiary in 2008.

The Companys net deferred tax liabilities at October 4, 2009 relate to the Companys subsidiary in Switzerland. All U.S. deferred tax assets have a full valuation allowance at
October 4, 2009. The net deferred tax liabilities decreased due to the amortization of the Helix amortizable intangibles in the three and nine months ended October 4, 2009.

The Company had approximately $69.7 million of federal net operating losses carryforwards at December 31, 2008. The net operating
losses expire through year 2021. Utilization of a portion of the net operating losses and credit carryforwards are subject to an annual limitation due to the ownership change provisions of the Internal Revenue Code of 1986, as amended, and similar
state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.

Any interest and penalties incurred on the settlement of outstanding tax positions would be recorded as a component of interest expense. The Company had no related accrued interest or penalties as of October 4, 2009.

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. The Companys federal and state
tax returns may be subject to examination.



NOTE 9 
SEGMENT AND GEOGRAPHY INFORMATION

The Company has determined that it operates as a single operating and reportable
segment. The following tables reflect the results of the Companys reportable segment consistent with the management system used by the Companys chief operating decision maker.



13



---

##### Table of Contents

The following table summarizes revenue by geographic region (in thousands):



|              |  |                    |       |                   |   |            |  |               |        |  |   |      
|------------- |  | ------------------ | ----- | ----------------- | - | ---------- |  | ------------- | ------ |  | - | -----
|              |  | Three months ended |       | Nine months ended
|              |  | October 4,         |       | September 26,     |   | October 4, |  | September 26,
|              |  | 2009               |       | 2008              |   | 2009       |  | 2008         
|Asia          |  | $                  | 711   |                   | $ | 570        |  | $             | 2,554  |  | $ | 1,486
|Europe        |  |                    | 1,007 |                   |   | 1,015      |  |               | 3,224  |  |   | 3,276
|United States |  |                    | 1,429 |                   |   | 875        |  |               | 5,912  |  |   | 1,627
|              |  |                    |       |                   |   |            |  |               |        |  |   |      
|              |  | $                  | 3,147 |                   | $ | 2,460      |  | $             | 11,690 |  | $ | 6,389
|              |  |                    |       |                   |   |            |  |               |        |  |   |      

The Company determines the geographic location of its revenue based upon the
destination of shipment of its products or location of contract services.

The following table summarizes long-lived assets by
country (in thousands):



|              |  |            |       |              |   |      
|------------- |  | ---------- | ----- | ------------ | - | -----
|              |  | October 4, |       | December 31,
|              |  | 2009       |       | 2008        
|Switzerland   |  | $          | 1,150 |              | $ | 1,710
|United States |  |            | 854   |              |   | 1,004
|              |  |            |       |              |   |      
|              |  | $          | 2,004 |              | $ | 2,714
|              |  |            |       |              |   |      

Long-lived assets, including property and equipment, intangible assets and other
assets (excluding deferred tax assets), are reported based on the location of the assets at the end of each reporting period.

NOTE 10
 COMMITMENTS AND CONTINGENCIES

Commitments

Leases

The Company leases its domestic and foreign sales offices under
non-cancelable operating leases. These leases contain various expiration dates and renewal options. In January 2009, the Company renewed its lease for its office facility located at Palo Alto, California. The new lease term will expire in December
2013. The Company also leases certain software licenses under operating leases. Total rental expense for the three months ended October 4, 2009 and September 26, 2008 was $282,000 and $93,000, respectively, and $837,000 and $278,000 for
the nine months ended October 4, 2009 and September 26, 2008, respectively.

Aggregate non-cancelable future minimum
rental payments under operating leases are as follows (in thousands):



|                              |  |        |      
|----------------------------- |  | ------ | -----
|Years ending December 31,     |  | Amount
|2009 (remaining three months) |  | $      | 228  
|2010                          |  |        | 830  
|2011                          |  |        | 324  
|2012                          |  |        | 203  
|2013                          |  |        | 224  
|                              |  |        |      
|                              |  | $      | 1,809
|                              |  |        |      

Contingencies

Tax Contingencies

In 2008, the Franchise Tax Board (FTB)
completed its audit of the Companys qualifying sales and use activity for 2004 through 2007 and has proposed an amount due. The Company received a notice from the FTB and was assessed $0.3 million, which represents principal and estimated
interest and penalties. As a result, in the fourth quarter of 2008, the Company accrued $0.3 million in relation to the sales and use tax due for the period 2004 through 2007, and in June 2009, the Company paid approximately $0.2 million to the FTB.
As of October 4, 2009, the Company has accrued the estimated sales and use tax payable relating to 2008 and the first nine months of 2009.

The Companys income tax calculations are based on application of the respective U.S. Federal, state or foreign tax law. The Companys tax filings, however, are subject to audit
by the respective tax authorities. Accordingly, the Company recognizes tax liabilities based upon its estimate of whether, and the extent to which, additional taxes will be due.



14



---

##### Table of Contents

Product Warranties

The Companys products typically carry a standard warranty period of one year. The table below summarizes the movement in the warranty accrual which is included as a component of accrued and other
current liabilities for the three and nine months ended October 4, 2009 and September 26, 2008 (in thousands):



|                                              |  |                    |     |                   |               |   |            |  |   |               |   |  |   |     |  
|--------------------------------------------- |  | ------------------ | --- | ----------------- | ------------- | - | ---------- |  | - | ------------- | - |  | - | --- | -
|                                              |  | Three months ended |     | Nine months ended |              
|                                              |  | October 4,         |     |                   | September 26, |   | October 4, |  |   | September 26, |  
|                                              |  | 2009               |     |                   | 2008          |   | 2009       |  |   | 2008          |  
|Beginning balance                             |  | $                  | 61  |                   |               | $ | 120        |  | $ | 120           |   |  | $ | 140 |  
|Accrual for warranties issued during the year |  |                    |    |                   |               |   |           |  |   |              |   |  |   | 36  |  
|Settlements made                              |  |                    | (17 | )                 |               |   |           |  |   | (76           | ) |  |   | (56 | )
|                                              |  |                    |     |                   |               |   |            |  |   |               |   |  |   |     |  
|Ending balance                                |  | $                  | 44  |                   |               | $ | 120        |  | $ | 44            |   |  | $ | 120 |  
|                                              |  |                    |     |                   |               |   |            |  |   |               |   |  |   |     |  

NOTE 11  RELATED PARTY TRANSACTION

Historically, GigOptix LLC and iTerra funded their operations from the proceeds of promissory notes issued to Stellar Technologies LLC, the
primary member. Beginning in 2002, various promissory notes were issued by iTerra Communications LLC, the predecessor company of GigOptix, to Stellar. Borrowings under the notes bore interest at a fixed rate of 11% per annum and were
collateralized by all of iTerras assets. The outstanding principal balance of such notes, including accrued interest, were classified as additional paid-in capital as part of a reorganization plan for iTerra in June 2007. In July 2007 and
January 2008, GigOptix LLC issued convertible promissory notes to Stellar, which bore interest at a rate of 6% per annum. In August 2008, such convertible notes were converted into membership units of GigOptix LLC.

NOTE 12  FAIR VALUE MEASUREMENTS

Effective January 1, 2009, the Company fully adopted the authoritative guidance for fair value measurements and disclosures for all assets and liabilities within the scope of this guidance, including
all non-financial assets and non-financial liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis. The guidance clarifies that fair value is an exit price, representing the amount that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would
use in pricing an asset or liability. As a basis for considering such assumptions, the guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as
quoted prices in active markets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which requires the
Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, the Company measures certain
financial assets and liabilities at fair value, which consist of cash equivalents and marketable securities.

The
Companys assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. The
Companys money market securities of $1.4 million and $3.9 million as of October 4, 2009 and December 31, 2008, respectively, are classified within Level 1 as cash and cash equivalents on the condensed consolidated balance
sheets.

NOTE 13  ACQUISITION OF HELIX SEMICONDUCTOR AG

In January 2008, GigOptix LLC completed the acquisition of Helix Semiconductor AG, a private company registered in Zurich, Switzerland. Helix
designs and sells optoelectronic integrated circuits and vertical cavity surface emitting laser drivers. The aggregate purchase consideration for this acquisition was approximately $2.5 million, which includes direct transaction costs.

In addition, the agreement calls for contingent payments totaling $2.0 million to be made to a former Helix employee and stockholder,
contingent upon his continued employment with GigOptix LLC through the third anniversary of the acquisition close date. Any payments are automatically forfeited if the employment contingency is not met. The payments made are recorded as compensation
expense, with $525,000 being recorded as a research and development expense in the statements of operations for the nine months ended October 4, 2009. At October 4, 2009, the Company had deposited the remaining $775,000 in an escrow
account, which represents the maximum contingent payment due under the agreement, of which $625,000 and $150,000 were classified within prepaid and other current assets and other assets in the condensed consolidated balance
sheet, respectively.



15



---

##### Table of Contents

The operating results of Helix have been included in GigOptixs consolidated financial
results since the January 15, 2008 acquisition close date. The components of the purchase price consideration were as follows (in thousands):



|                             |  |   |      
|---------------------------- |  | - | -----
|Cash paid                    |  | $ | 2,400
|Direct acquisition costs     |  |   | 143  
|                             |  |   |      
|Total purchase consideration |  | $ | 2,543
|                             |  |   |      

The acquisition was accounted for using the purchase method of accounting. The
purchase price was allocated based on the estimated fair values of tangible and identifiable intangible assets acquired and liabilities assumed in the acquisition. The estimated fair value of tangible and identifiable intangible assets acquired and
liabilities assumed was in excess of the purchase price resulting in negative goodwill. Negative goodwill of approximately $790,000 has been allocated to the fair values of acquired long-lived assets, including acquired in-process research and
development, or IPR&D, on a pro-rata basis, resulting in a reduction of their recorded amounts. The total purchase price was allocated to the assets acquired and liabilities assumed as follows (in thousands):



|                                             |  |   |       |  
|-------------------------------------------- |  | - | ----- | -
|Net tangible assets acquired:                |  |   |       |  
|Cash                                         |  | $ | 872   |  
|Restricted cash                              |  |   | 45    |  
|Accounts receivable                          |  |   | 139   |  
|Inventories                                  |  |   | 195   |  
|Other current assets                         |  |   | 155   |  
|Property and equipment                       |  |   | 20    |  
|Other current liabilities                    |  |   | (198  | )
|Pension liabilities                          |  |   | (123  | )
|                                             |  |   |       |  
|                                             |  |   | 1,105 |  
|Net deferred tax liabilities                 |  |   | (278  | )
|Intangible assets acquired:                  |  |   |       |  
|Existing technology                          |  |   | 1,116 |  
|Order backlog                                |  |   | 157   |  
|Customer relationships                       |  |   | 124   |  
|Acquired in-process research and development |  |   | 319   |  
|                                             |  |   |       |  
|Total purchase price                         |  | $ | 2,543 |  
|                                             |  |   |       |  

Intangible assets consist of existing technology, order backlog and customer
relationships. Existing technology relates to Helixs product portfolio of laser drivers, and limiting amplifiers which have reached technological feasibility and are currently generating revenue. Accordingly, the associated amortization
expense is presented as a component of cost of revenue.

Acquired IPR&D relates to projects under development associated
with Helixs 10Gbps VCSEL driver chip and 4-channel TIAs. The preliminary value assigned to acquire IPR&D was determined by considering the importance of products under development to the overall development plan, estimating costs to
develop the purchased technology into commercially viable products, estimating resulting net cash flows from the projects when completed and discounting net cash flows to present value. The fair value of acquired IPR&D was determined using the
income approach, which discounts expected cash flows to present value. At the date of acquisition, the projects under development were determined to be approximately 30% complete, with net cash flows from the projects expected to commence in 2009.
At October 4, 2009, the projects under development were determined to be approximately 90% complete. In connection with the acquisition, approximately $319,000 of acquired IPR&D was expensed in the quarter ended March 28, 2008.

Pro Forma Financial Information (Unaudited)

The results of Helixs operations have been included in the Companys consolidated statements of operations since its acquisition date. Pro forma information for 2008 is not presented, as the
acquisition occurred on January 15, 2008, which is sufficiently close to the beginning of the period that the results of Helix are reflected in the condensed consolidated statement of operations for the nine months ended September 26,
2008.



16



---

##### Table of Contents

NOTE 14  SUBSEQUENT EVENTS

The Company evaluated events and transactions that occurred through November 17, 2009, the date the Company filed its Quarterly Report on
Form 10-Q for the quarter ended October 4, 2009.

On November 9, 2009, the Company completed an acquisition of
ChipX, Incorporated, a privately-held fabless supplier of analog and mixed signal custom Application Specific Integrated Circuits (ASICs). Under terms of the merger, ChipX stockholders received, in aggregate, 3,540,946 shares of GigOptix common
stock.

Upon the closing of the merger, GigOptix assumed approximately $2.0 million in debt outstanding under a loan and
security agreement between ChipX and Bridge Bank, N.A. On November 12, 2009, the Company entered into a loan and security agreement with ChipX and Bridge Bank pursuant to which the Company will be entitled to borrow up to $4.0 million on a
revolving accounts receivable credit line from Bridge Bank. In connection with this amendment, the Company issued a warrant for approximately 59,000 shares of common stock, with an exercise price of $3.38 per share and which expires on November 12,
2016.



17



---

##### Table of Contents

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

The following Managements Discussion and Analysis of Financial Condition and Results of Operations, which should be read in
conjunction with our unaudited condensed consolidated financial statements and notes thereto contained in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and the notes there to contained in the Annual Report on
Form 10-K filed with the Securities and Exchange Commission on March 31, 2009.

This Quarterly Report on Form 10-Q
includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the
Exchange Act), and is subject to the safe harbor created by that section. The words believe, expect, will, anticipate, estimate, project, plan, and
similar expressions identify forward-looking statements. Such statements may also include, but are not limited to, statements regarding the impact of recent accounting announcements; our expectation that net flows from Helix projects will commence
in 2009; plans for future financings or lines of credit; our expectations regarding the amount of cash necessary to fund future operations; estimates regarding the amount of periodic pension costs in 2009; our expectation that development, sales and
other operating expenses will increase in the future as we expand our business; our expectation that we will not generate the cash needed to finance our anticipated operations for the foreseeable future; our continued dependence on third parties to
manufacture, assemble or package our products; our intention not to purchase key person life insurance in the foreseeable future; our intention to compete for government contracts and our expectation that the contracts will account for a large
percentage of our revenue for the foreseeable future; our intentions regarding the payment of dividends and the retention of available funds and future earnings; our expectation that domestic and international competition will increase in our
industry; our intention to grow through strategic operations; our expectations of projected expense reductions; our ability to integrate the ChipX team; and our expectations with respect to sources of revenues. Our expectations, beliefs,
anticipations, objectives, intentions, plans and strategies regarding the future are not guarantees of future performance and are subject risks and uncertainties that could cause actual results to differ materially from those projected or implied.
Factors that could cause results to differ materially from those projected or implied in the forward-looking statements include, but are not limited to trends and fluctuations in our industry; changes in demand and purchasing volume of our
customers; advances in technology; unpredictability of suppliers; increased production or labor costs; our ability to attract and retain qualified personnel; pricing pressures and other competitive factors; and our ability to establish and protect
our intellectual property; competition; litigation; financial community perceptions of the company; changes in laws and regulations, including increased taxes; economic, credit and capital market conditions; and the effects of war, terrorist or
similar activity. The forward-looking statements in this Quarterly Report on Form 10-Q are subject to additional risks and uncertainties, including those set forth in Part II, Item 1A under the caption Risk Factors and as disclosed
in other current and periodic reports filed or furnished from time to time with the SEC. The forward-looking statements are made as of the date hereof, and we undertake no obligation to update or revise any of them, except as required by law.

Overview

GigOptix, Inc. (GigOptix or the Company) is a leading provider of electronic engines for the optically connected digital world and other advanced RF applications. GigOptix was formed in March 2008 as a wholly-owned
subsidiary of Lumera to facilitate a combination between GigOptix LLC and Lumera. Before the combination, which was affected by two mergers collectively referred to as the merger, GigOptix had no operations or material assets. As a
result of the transaction set forth in the Agreement and Plan of Merger, dated as of March 27, 2008, among Lumera, GigOptix LLC, Galileo Merger Sub G, LLC and Galileo Merger Sub L, Inc., on December 9, 2008, the merger was completed and
Lumera and GigOptix LLC became wholly owned subsidiaries of GigOptix, GigOptix is the successor public registrant to Lumera. GigOptix focuses on the specification, design, development and sale of analog semiconductor integrated circuits, or ICs,
multi-chip module solutions, or MCMs, and polymer modulators. GigOptix believes it is an industry leader in the fast growing market for electronic solutions that enable high-bandwidth optical connections found in telecommunications (telecom)
systems, data communications (datacom) and storage systems, and, increasingly, in consumer electronics and computing systems.

GigOptixs products fall into the following main categories:



| |  |  | Laser and modulator Driver ICs and MCMs;
| | - |  | ----------------------------------------



| |  |  | Transimpedance and Limiting Amplifier ICs;
| | - |  | ------------------------------------------



| |  |  | Optical Modulators; and
| | - |  | -----------------------



| |  |  | Broadband RF Amplifiers.
| | - |  | ------------------------

These products are capable of performing in various applications demanding a wide range of data processing speeds, from consumer electronics which perform at data processing speeds of 3Gbps to 10Gbps to
sophisticated ultra-long haul submarine telecommunications systems which require performance at data processing speeds from 10Gbps and 40Gbps to 100Gbps.



18



---

##### Table of Contents

Prior to the merger, GigOptix LLC was an Idaho limited liability company, headquartered in
Palo Alto, California. GigOptix LLC was the successor company of iTerra Communications LLC, (iTerra), which was founded in 2000. In July 2007, as part of a reorganization plan, iTerra formed GigOptix LLC, a wholly-owned subsidiary. All
of the assets and liabilities of iTerra, with the exception of the $45.8 million of debt and accrued interest due to iTerras primary member, were transferred to GigOptix LLC along with all of iTerras operations and intellectual property.

In August 2007, GigOptix LLC implemented a restructuring plan to consolidate the research and development operations of its
wholly-owned subsidiary, iTerra Communications SRL, based in Rome, Italy to its corporate headquarters in Palo Alto, California. In January 2008, GigOptix LLC acquired Helix Semiconductor AG (Helix), a company based in Switzerland, which
designed and sold optical receiver transmitter array products consisting of driver and receiver arrays for 4-channel and 12-channel modules running at 3Gbps to 10Gbps per channel. GigOptix LLCs acquisition of Helix enabled GigOptix LLC to
expand its product offering into short reach devices and systems.

We have incurred negative cash flows from operations since
inception. For the nine months ended October 4, 2009 and September 26, 2008 we incurred net losses of $2.8 million and $5.3 million respectively, and cash outflows from operations of $3.2 million and $6.9 million respectively. As of
October 4, 2009 and December 31, 2008, we had an accumulated deficit of $61.8 million and $59.0 million, respectively. There can be no assurance that in the event we require additional financing, such financing will be available at all or
on terms which are favorable to us. Failure to generate sufficient cash flows from operations, raise additional capital or reduce certain discretionary spending could have a material adverse effect on our ability to achieve its intended business
objectives.

Our fiscal year ends on December 31. For quarterly reporting, we employ a four-week, four-week, five-week
reporting period. The current three-month period ended on Sunday, October 4, 2009. The third quarter of fiscal 2008 ended on September 26, 2008. The condensed consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Our consolidated
financial statements for the periods prior to December 9, 2008, presented in our Annual Report on Form 10-K, are the historical financial statements of GigOptix LLC, as GigOptix LLC was determined to be the accounting acquirer in the merger
with Lumera.

On November 9, 2009, we completed the acquisition of ChipX, Inc., a manufacturer of high speed analog
semiconductors.

Critical Accounting Policies and Estimates

Managements Discussion and Analysis of Financial Condition and Results of Operations discusses our condensed consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of these financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments,
including those related to product returns, customer incentives, bad debts, inventories, asset impairments, deferred tax assets, warranty reserves, contingencies and litigation. Management bases its estimates and judgments on historical experience
and on various other factors that are believed 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.

An accounting policy is deemed to
be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting
estimate that are reasonably likely to occur could materially change the financial statements. GigOptix also has other key accounting policies that are less subjective, and therefore, their application would not have a material impact on GigOptix
reported results of operations. There have been no significant changes to our critical accounting policies which were disclosed in Part II, Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operation of our Annual Report on Form 10-K filed with the SEC on March 31, 2009.

Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (FASB) issued the FASB Accounting Standards Codification(the Codification), the authoritative guidance for GAAP. The Codification, which changes the referencing of financial standards, became effective for interim and annual periods ending on or after September 15, 2009. The
Codification is now the single official



19



---

##### Table of Contents

source of authoritative U.S. GAAP (other than guidance issued by the SEC), superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force
(EITF), and related literature. Only one level of authoritative U.S. GAAP now exists. All other literature is considered non-authoritative. The Codification does not change U.S. GAAP. We adopted the Codification during the
quarter ended October 4, 2009. The adoption of the Codification did not have any substantive impact on our condensed consolidated financial statements or related footnotes.

In May 2009, the FASB issued authoritative guidance for subsequent events, which establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The guidance sets forth the circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements. The guidance also requires the disclosure of the date through which an entity has evaluated subsequent events and whether that date represents the date the financial statements were
issued or were available to be issued. During the quarter ended July 5, 2009, we adopted the guidance. The adoption of the guidance did not have a significant impact on our condensed consolidated financial statements or related footnotes.
See Note 14  Subsequent Events to our condensed consolidated financial statements.

In April 2009, the FASB issued
guidance on determining fair value when the volume and level of activity for an asset or liability has significantly decreased, and in identifying transactions that are not orderly. Based on the guidance, if an entity determines that the level of
activity for an asset or liability has significantly decreased and that a transaction is not orderly, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transaction or quoted prices may be necessary to
estimate fair value. The guidance was effective on a prospective basis for interim and annual periods ending after June 15, 2009. We adopted this guidance in the quarter ended July 5, 2009, and there was no material impact on our condensed
consolidated financial statements. See Note 12  Fair Value Measurements to our condensed consolidated financial statements.

In April 2009, the FASB issued guidance on the recognition and presentation of other-than-temporary impairments on investments in debt securities. If an entitys management asserts that it does not have the intent to sell a debt
security and it is more likely than not that it will not have to sell the security before recovery of its cost basis, then an entity may separate other-than-temporary impairments into two components: 1) the amount related to credit losses (recorded
in earnings) and 2) all other amounts (recorded in other comprehensive income). This guidance was effective on a prospective basis for interim and annual periods ending after June 15, 2009. We adopted this guidance for the quarter ended
July 5, 2009, and there was no material impact on our condensed consolidated financial statements.

Results of Operations

Revenue

Revenue
for the periods reported was as follows (in thousands, except percentages):



|                                        |  |                    |       |                   |               |   |            |  |   |               |   |  |   |      
|--------------------------------------- |  | ------------------ | ----- | ----------------- | ------------- | - | ---------- |  | - | ------------- | - |  | - | -----
|                                        |  | Three months ended |       | Nine months ended
|                                        |  | October 4,         |       |                   | September 26, |   | October 4, |  |   | September 26,
|                                        |  | 2009               |       |                   | 2008          |   | 2009       |  |   | 2008         
|Product                                 |  | $                  | 2,142 |                   |               | $ | 2,460      |  | $ | 7,582         |   |  | $ | 6,389
|Government contract                     |  |                    | 1,005 |                   |               |   |           |  |   | 4,108         |   |  |   |     
|                                        |  |                    |       |                   |               |   |            |  |   |               |   |  |   |      
|Total revenue                           |  | $                  | 3,147 |                   |               | $ | 2,460      |  | $ | 11,690        |   |  | $ | 6,389
|Increase period over period             |  | $                  | 687   |                   |               |   |            |  | $ | 5,301         |   |  |   |      
|Percentage increase, period over period |  |                    | 28    | %                 |               |   |            |  |   | 83            | % |  |   |      

Revenue for the three months ended October 4, 2009 was $3.1 million, an increase
of $0.7 million or 28% compared to $2.5 million for the three months ended September 26, 2008. The increase in revenue is primarily the result of our merger with Lumera Corporation in December 2008, which accounted for approximately $1.0
million of revenue increase, a large majority of which came from an increase in government contract revenue, which was offset by a decrease of $0.3 million in various product revenues. The decrease in revenue of $0.3 million during the third quarter
is a result of a dip in sales of HX products for datacom systems as a consequence of the slower than forecast transition from 3Gb/s to 10Gb/s products. The 3Gb/s HX2 series was discontinued at the end of 2008 and replacement revenues from the new
10Gb/s HX4 series were delayed. This was mainly due to the market slow down which delayed acceptance of the new 10G standard as well as the lengthy customer qualification process. In addition, sales of the 12-channel 5Gb/s parts were strong in the
three months ended September 26, 2008 due to a large order, which was not replicated in the three months ended October 4, 2009.

Revenue for the nine months ended October 4, 2009 was $11.7 million, an increase of $5.3 million or 83% compared to $6.4 million for the nine months ended September 26, 2008. The increase in
revenue is primarily the result of our merger with Lumera Corporation in December 2008, which accounted for approximately $4.5 million of the increase, of which $0.4 million came from



20



---

##### Table of Contents

modulator and polymer product sales with the remainder from an increase in government contract revenue. An additional increase in revenue of $0.8 million is a result of organic growth in our
telecom and broadband businesses which have more than offset the reduction in HX line revenues from the datacom market as mentioned above. Design-wins captured in 2008 contributed to new business in the GX6 series of drivers for long haul and metro
networks with the majority of growth coming from new customers in Asia. A portion of the additional revenue was related to various product solutions having transitioned from the research and development stage to the commercialization stage. These
included drivers for shorter reach applications and the new GX3 series of receiver products which started to contribute revenues in the third quarter of 2009. We experienced major growth in our revenue from product sales to Asia which more than
doubled over the period led by customers in Japan and China.

Gross Profit

Gross profit consists of revenue, less cost of revenue, which includes amortization of certain identified intangible assets. Cost of revenue
related to product revenue consists primarily of the manufacture of saleable chips multi-chip modules and modulators, including outsourced wafer fabrication and testing. Amortization expense of identified intangible assets, namely existing
technology, is presented within product cost of revenue, as the intangible assets were determined to be directly attributable to product revenue generating activities. Cost of revenue related to government contracts consists primarily of labor,
materials, chemicals, and outside services.

Cost of revenue and gross profit for the periods presented was as follows (in
thousands, except percentages):

Cost of Revenue



|                                                   |  |                    |       |   |                   |   |       |                |  |   |                   |   |  |   |       |  
|-------------------------------------------------- |  | ------------------ | ----- | - | ----------------- | - | ----- | -------------- |  | - | ----------------- | - |  | - | ----- | -
|                                                   |  | Three months ended |       |   | Nine months ended |  
|                                                   |  | October 4,2009     |       |   | September 26,2008 |   |       | October 4,2009 |  |   | September 26,2008 |  
|Product                                            |  | $                  | 964   |   |                   | $ | 533   |                |  | $ | 3,100             |   |  | $ | 2,522 |  
|Government contract                                |  |                    | 367   |   |                   |   |      |                |  |   | 1,765             |   |  |   |      |  
|                                                   |  |                    |       |   |                   |   |       |                |  |   |                   |   |  |   |       |  
|Total cost of revenue                              |  | $                  | 1,331 |   |                   | $ | 533   |                |  | $ | 4,865             |   |  | $ | 2,522 |  
|Percentage of revenue                              |  |                    | 42    | % |                   |   | 22    | %              |  |   | 42                | % |  |   | 39    | %
|Increase period over period                        |  | $                  | 798   |   |                   |   |       |                |  | $ | 2,343             |   |  |   |       |  
|Percentage increase, period over period            |  |                    | 150   | % |                   |   |       |                |  |   | 93                | % |  |   |       |  
|                                                   |  |                    |       |  
|Gross Profit                                       |  |                    |       |   |                   |   |       |                |  |   |                   |   |  |   |       |  
|                                                   |  |                   
|                                                   |  | Three months ended |       |   | Nine months ended |  
|                                                   |  | October 4,2009     |       |   | September 26,2008 |   |       | October 4,2009 |  |   | September 26,2008 |  
|Product                                            |  | $                  | 1,178 |   |                   | $ | 1,927 |                |  | $ | 4,482             |   |  | $ | 3,867 |  
|Government contract                                |  |                    | 638   |   |                   |   |      |                |  |   | 2,343             |   |  |   |      |  
|                                                   |  |                    |       |   |                   |   |       |                |  |   |                   |   |  |   |       |  
|Total gross profit                                 |  | $                  | 1,816 |   |                   | $ | 1,927 |                |  | $ | 6,825             |   |  | $ | 3,867 |  
|Gross margin                                       |  |                    | 58    | % |                   |   | 78    | %              |  |   | 58                | % |  |   | 61    | %
|Increase (decrease), period over period            |  | $                  | (111  | ) |                   |   |       |                |  | $ | 2,958             |   |  |   |       |  
|Percentage increase (decrease), period over period |  |                    | -6    | % |                   |   |       |                |  |   | 76                | % |  |   |       |  

Gross profit for the three months ended October 4, 2009 was $1.8 million, or 58%
of revenue, a decrease of $0.1 million or 6% as compared to a gross profit of $1.9 million, or 78% of revenue, for the three months ended September 26, 2008. The lower gross profit compared to the prior period is primarily attributable to lower
utilization of manufacturing capacity as a result of decreased revenue in the three months ended October 4, 2009. The lower gross profit compared to the prior period is primarily attributable to lower utilization of manufacturing capacity as a
result of decreased revenue in the three months ended October 4, 2009 in addition to unusually high sales of previously reserved inventory in the three months ended September 26, 2008. Our internal operations have significant fixed costs
that cannot be reduced as quickly as our shipment levels. Our internal operations have significant fixed costs that cannot be reduced as quickly as our shipment levels.

Gross profit for the nine months ended October 4, 2009 was $6.8 million, or 58% of revenue, an increase of $3.0 million or 76% as compared to a gross profit of $3.9 million, or 61% of revenue, for
the nine months ended September 26, 2008. The reduction in gross margin percentage compared to the prior period is attributable to the impact of lower gross margin associated with our government contract revenue and lower utilization of
manufacturing capacity as a result of decreased revenue in the nine months ended October 4, 2009.

Our gross margin as a
percentage of revenues fluctuates, depending on product mix, utilization of manufacturing capacity, and average selling prices, among other factors.



21



---

##### Table of Contents

Research and Development Expense

Research and development (R&D) costs are expensed as incurred. R&D expense consists primarily of consulting and
engineering design, non-capitalized tools and equipment, equipment depreciation and employee compensation.

R&D expense
for the periods presented was as follows (in thousands, except percentages):



|                                       |  |                    |       |   |                   |   |       |                |  |   |                   |   |  |   |       |  
|-------------------------------------- |  | ------------------ | ----- | - | ----------------- | - | ----- | -------------- |  | - | ----------------- | - |  | - | ----- | -
|                                       |  | Three months ended |       |   | Nine months ended |  
|                                       |  | October 4,2009     |       |   | September 26,2008 |   |       | October 4,2009 |  |   | September 26,2008 |  
|Research and development expense       |  | $                  | 1,255 |   |                   | $ | 1,109 |                |  | $ | 3,919             |   |  | $ | 3,019 |  
|Percentage of revenue                  |  |                    | 40    | % |                   |   | 45    | %              |  |   | 34                | % |  |   | 47    | %
|Increase, period over period           |  | $                  | 146   |   |                   |   |       |                |  | $ | 900               |   |  |   |       |  
|Percentage increase period over period |  |                    | 13    | % |                   |   |       |                |  |   | 30                | % |  |   |       |  

R&D expense for the three months ended October 4, 2009 was $1.3 million
compared to $1.1 million for the three months ended September 26, 2008, an increase of $0.1 million or 13%. R&D expense for the nine months ended October 4, 2009 was $3.9 million compared to $3.0 million for the nine months ended
September 26, 2008, an increase of $0.9 million or 30%. The increase in R&D expense primarily resulted from increased headcount and the associated compensation costs related to the merger with Lumera in December 2008. We anticipate
increased investment in research and development in the near future to remain competitive. As a result, we expect research and development costs to increase in absolute dollars, but to decline as a percentage of revenues.

Selling, General and Administrative Expense

Selling, general and administrative (SG&A) expense consists primarily of salaries and benefits for management, marketing and administration personnel, as well as fees for consultants.

SG&A expense for the periods presented was as follows (in thousands, except percentages):



|                                                   |  |                    |       |   |                   |   |       |                |  |   |                   |   |  |   |       |  
|-------------------------------------------------- |  | ------------------ | ----- | - | ----------------- | - | ----- | -------------- |  | - | ----------------- | - |  | - | ----- | -
|                                                   |  | Three months ended |       |   | Nine months ended |  
|                                                   |  | October 4,2009     |       |   | September 26,2008 |   |       | October 4,2009 |  |   | September 26,2008 |  
|Selling, general and administrative expense        |  | $                  | 1,744 |   |                   | $ | 2,553 |                |  | $ | 6,170             |   |  | $ | 5,662 |  
|Percentage of revenue                              |  |                    | 55    | % |                   |   | 104   | %              |  |   | 53                | % |  |   | 89    | %
|Increase (decrease) period over period             |  | $                  | (809  | ) |                   |   |       |                |  | $ | 508               |   |  |   |       |  
|Percentage increase (decrease), period over period |  |                    | -32   | % |                   |   |       |                |  |   | 9                 | % |  |   |       |  

SG&A expense for the three months ended October 4, 2009 was $1.7 million
compared to $2.6 million for the three months ended September 26, 2008, a decrease of $0.8 million or 32%. SG&A expense for the nine months ended October 4, 2009 was $6.2 million compared to $5.7 million for the nine months ended
September 26, 2008, an increase of $0.5 million or 9%. The decrease for the three months ended October 4, 2009 compared to the three months ended September 26, 2008 was attributable primarily due to lower spending for professional
fees; 2008 professional fees were concentrated in the three months ended September 26, 2008 due to the Lumera merger which occurred in the fourth quarter of 2008. The increase for the nine months ended October 4, 2009 compared to the nine
months ended September 26, 2008 was primarily due to increased spending for professional fees, including legal, accounting and auditing services, associated with being a public company and the merger with Lumera.

Acquired In-Process Research and Development

Acquired in-process research and development expense for the periods presented was as follows (in thousands, except percentages):



|                                             |  |                    |   |                   |   |                |  |                   |   |  |   |    
|-------------------------------------------- |  | ------------------ | - | ----------------- | - | -------------- |  | ----------------- | - |  | - | ---
|                                             |  | Three months ended |   | Nine months ended
|                                             |  | October 4,2009     |   | September 26,2008 |   | October 4,2009 |  | September 26,2008
|Acquired in-process research and development |  | $                  |  |                   | $ |               |  | $                 |  |  | $ | 319



22



---

##### Table of Contents

In connection with the acquisition of Helix in January 2008, we allocated approximately
$319,000 of the purchase price to acquired in-process research and development expense (IPR&D). The amount allocated to IPR&D was immediately expensed in the period the acquisition was completed, as the associated project had not
yet reached technological feasibility and no future alternative uses existed for the technology. Acquired IPR&D relates to projects under development associated with the Helix 10Gbps VCSEL driver chip and 4-channel Transimpedance Amplifiers
(TIAs). The preliminary value assigned to acquired IPR&D was determined by considering the importance of products under development to the overall development plan, estimating costs to develop the purchased technology into commercially viable
products, estimating resulting net cash flows from the projects when completed and discounting net cash flows to present value. The fair value of acquired IPR&D was determined using the income approach, which discounts expected cash flows to
present value. At the date of acquisition, the projects under development were determined to be 90% complete, with net cash flows from the projects expected to commence in 2009.

We did not recognize any expense related to IPR&D during the three and nine months ended October 4, 2009.

Interest Expense, Net and Other Income (Expense), Net

Interest expense, net and other income (expense), net for the periods presented were as follows (in thousands, except percentages):



|                            |  |                    |   |                   |                   |     |                |  |   |                   |   |  |   |      |  
|--------------------------- |  | ------------------ | - | ----------------- | ----------------- | --- | -------------- |  | - | ----------------- | - |  | - | ---- | -
|                            |  | Three months ended |   |                   | Nine months ended |    
|                            |  | October 4,2009     |   | September 26,2008 |                   |     | October 4,2009 |  |   | September 26,2008 |  
|Interest expense, net       |  | $                  |  |                   | $                 | (78 | )              |  | $ | (2                | ) |  | $ | (287 | )
|Other income (expense), net |  |                    | 8 |                   |                   | 79  |                |  |   | 338               |   |  |   | (119 | )
|                            |  |                    |   |                   |                   |     |                |  |   |                   |   |  |   |      |  
|Total                       |  | $                  | 8 |                   | $                 | 1   |                |  | $ | 336               |   |  | $ | (406 | )
|                            |  |                    |   |                   |                   |     |                |  |   |                   |   |  |   |      |  

The fluctuation in interest expense, net for the three months ended October 4,
2009 as compared to September 26, 2008 was insignificant.

Interest expense, net for the nine months ended
October 4, 2009 decreased by $0.3 million as compared to the nine months ended September 26, 2008 primarily due to conversion of the convertible promissory notes payable to Stellar Technologies LLC, which were converted in August 2008. The
remaining decrease is attributed to the termination of the line of credit with Silicon Valley Bank during the quarter ended July 5, 2009.

The fluctuation in other income (expense), net for the three months ended October 4, 2009 as compared to September 26, 2008 was insignificant. Other income (expense), net for the nine months
ended October 4, 2009 increased by $0.5 million as compared to the nine months ended September 26, 2008. The increase is primarily due to the sale of the assets of our Plexera Bioscience LLC subsidiary (Plexera), including all
patents and trademarks related to the Plexera business in February 2009. The assets were sold as is to Plexera, LLC, a newly formed company, for $0.3 million, which was recorded as a gain of $0.3 million in the statements of operations.
We do not expect to receive any further consideration for the Plexera business.

Provision for (benefit from) Income Taxes

The provision for income taxes was approximately $22,000 for the three months ended October 4, 2009 compared to a
benefit from income taxes of approximately $93,000 for the three months ended September 26, 2008. The benefit from income taxes was approximately $107,000 and $198,000 for the nine months ended October 4, 2009 and September 26, 2008,
respectively. The effective tax rate was 1.9% and (5.4)% for the three months ended October 4, 2009 and September 26, 2008, respectively. The effective tax rate was (3.7)% and (3.6)% for the nine months ended October 4, 2009 and
September 26, 2008, respectively. The provision for income taxes for the three months ended October 4, 2009 primarily relates to a tax liability at our now dissolved entity in Italy, offset by a benefit related to the amortization of a
deferred tax liability, established upon the acquisition of our Swiss subsidiary in 2008. The benefit from income taxes for the nine months ended October 4, 2009 and the three and nine months ended September 26, 2008 primarily relates to
the amortization of a deferred tax liability, established upon the acquisition of our Swiss subsidiary in 2008.

Liquidity and Capital
Resources

Cash and cash equivalents and cash flow data for the periods presented were as follows (in thousands):



|                          |  |                |       |                  |   |      
|------------------------- |  | -------------- | ----- | ---------------- | - | -----
|                          |  | October 4,2009 |       | December 31,2008
|Cash and cash equivalents |  | $              | 2,814 |                  | $ | 6,871



23



---

##### Table of Contents

Cash Flow data



|                                                    |  |                   |        |   |                   |   |        |  
|--------------------------------------------------- |  | ----------------- | ------ | - | ----------------- | - | ------ | -
|                                                    |  | Nine months ended |       
|                                                    |  | October 4,2009    |        |   | September 26,2008 |  
|Net cash used in operating activities               |  | $                 | (3,158 | ) |                   | $ | (6,933 | )
|Net cash used in investing activities               |  | $                 | (127   | ) |                   | $ | (1,686 | )
|Net cash provided by (used in) financing activities |  | $                 | (783   | ) |                   | $ | 8,871  |  

Operating Activities.

Net cash used in operations of $3.2 million during the nine months ended October 4, 2009, was primarily due to a net loss of $2.8
million, an increase in accounts receivable of $0.5 million, a decrease in accrued and other current liabilities of $1.2 million and a gain on the sale of Plexera assets of $0.3 million, partially offset by non-cash charges of $1.8 million. The $0.5
million increase in accounts receivable balance was due to higher billed accounts receivable, resulting from higher revenue in 2009. The decrease in accrued and other current liabilities of $1.2 million was due to lower accrued legal and
professional services. Non-cash charges of $1.8 million primarily consisted of $0.7 million of depreciation and amortization charges, $0.6 million of stock-based compensation, and $0.5 million related to amortization of acquisition related costs.

Cash used in operating activities of $6.9 million during the nine months ended September 26, 2008 was primarily made up
of a net loss of $5.3 million, an increase in other assets of $2.1 million, an increase in prepaid and other current assets of $0.7 million, an increase in accounts receivable of $0.6 million and an increase in inventories of $0.5 million, partially
offset by non-cash charges of $1.6 million consisting and an increase in accrued and other current liabilities $0.6 million. Non-cash charges of $1.6 million primarily consisted of $0.7 million of depreciation and amortization charges, $0.3 million
of acquired in-process research, development, $0.5 million related to amortization of acquisition related costs and $0.1 million of stock-based compensation. Operating cash flows in 2008 was also impacted by a one-time payment of $2.0 million made
to an escrow account for the benefit of a former Helix employee, receipt of which by the employee is contingent upon his continued employment with the Company through the third anniversary of the acquisition close date.

Investing Activities.

Net
cash used in investing activities during the nine months ended October 4, 2009 was $0.1 million, primarily comprised of $0.4 million in purchases of network and laboratory equipment, offset by proceeds from the sale of Plexera assets of $0.3
million.

Net cash used in investing activities during the nine months ended September 26, 2008 was $1.7 million,
primarily resulted from the payment of $1.7 million, net of cash acquired, in connection with the Companys acquisition of Helix.

Financing Activities.

Net cash used in financing activities during the nine months ended October 4, 2009
was $0.8 million, primarily comprised of repayment of borrowings under the line of credit with Silicon Valley Bank.

Net cash
provided by financing activities during the nine months ended September 26, 2008 was $8.9 million, primarily resulted from proceeds of $7.9 million from convertible notes payable to stockholders, proceeds of $0.9 million from the issuance of
common stock and net borrowings of $0.1 million under the line of credit.

We have incurred significant losses since
inception, attributable to our efforts to design and commercialize our products. We have managed our liquidity during this time through a series of cost reduction initiatives and prior to its termination in the second quarter of 2009, a line of
credit with Silicon Valley Bank. Our ability to continue as a going concern is dependent on many events outside of our direct control, including, among other things; obtaining additional financing either privately or through public markets and
consumers purchasing our products in substantially higher volumes. Such financing may not be available to us in the amounts or on terms acceptable to it. If we are unable to raise financing to continue to fund operations, we may have to
further reduce or discontinue certain operations, which would have an adverse effect on our business. The significant recent operating losses and negative cash flows, among other factors, raise substantial doubt as to our ability to continue as a
going concern.

On November 9, 2009, we completed an acquisition of ChipX, Incorporated, a privately-held fabless
supplier of analog and mixed signal custom Application Specific Integrated Circuits (ASICs). Under terms of the merger, ChipX stockholders received, in aggregate, 3,540,946 shares of our common stock. In connection with this amendment, we issued a
warrant for approximately 59,000 shares of common stock with an exercise price of $3.38 per share and which expires on November 12, 2016.



24



---

##### Table of Contents

Upon the closing of the merger, we assumed approximately $2.0 million in debt outstanding
under a loan and security agreement between ChipX and Bridge Bank, N.A. On November 12, 2009, we entered into a loan and security agreement with ChipX and Bridge Bank pursuant to which we will be entitled to borrow up to $4.0 million on a
revolving accounts receivable credit line from Bridge Bank.



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

Evaluation of disclosure controls and procedures  Based on an evaluation under the supervision and with the participation of the Companys management, our Chief Executive Officer and Acting Chief Financial Officer
have concluded that, due to the material weaknesses disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008 that remain unremediated, the Companys disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) were not effective as of October 4, 2009. As a result of this conclusion, the financial statements for the periods covered by this report
were prepared with particular attention to the material weaknesses previously disclosed. Accordingly, management believes that the condensed consolidated financial statements included in this Quarterly Report fairly present, in all material
respects, our financial condition, results of operations and cash flows as of and for the periods presented.

Changes in
Internal Control  During the nine-month period ended October 4, 2009, we continued to implement our remediation plan in response to the material weaknesses discussed in our annual report on Form 10-K for the year ended
December 31, 2008. We have hired additional accounting staff and have engaged a consultant regarding the implementation of additional internal controls, including an upgrade and companywide integration of our enterprise resource planning
system. While our effort to remediate our material weakness is ongoing and has progressed, we are in the initial stages of executing our remediation plan. Accordingly, we do not believe that our material weaknesses have been fully
remediated, or that the changes made to our internal control over financial reporting during the nine-month period ended October 4, 2009 have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.

PART II

OTHER INFORMATION



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

From
time to time, we are a party to litigation arising in the ordinary course of our business. We are not currently a party to any litigation that we believe could reasonably be expected to have a material adverse effect on our results of operations,
financial condition or cash flows.



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

We have
revised the risk factors that relate to our business, as set forth below. These risks include any material changes to and supersede the risks previously disclosed in Part I , Item 1A in our Annual Report on Form 10-K for the year ended
December 31, 2008. We encourage investors to review the risk factors and uncertainties relating to our business disclosed in that Form 10-K, as well as those contained in Part 1, Item 2, Managements Discussion and Analysis of
Financial Condition and Results of Operations, above.

Our common stock is quoted on the OTC Bulletin Board, which may reduce the
liquidity of our common stock and negatively affect our stock price.

Since the completion of the merger with Lumera
on December 9, 2008, our common stock has been quoted on the OTC Bulletin Board. This may reduce the liquidity of our common stock, may cause investors not to trade in our stock and may result in a lower stock price. In addition, investors may
find it more difficult to obtain accurate quotations of the share price of our common stock.

We and our predecessors have incurred
substantial operating losses in the past and we may incur operating losses for the foreseeable future.

For the nine
months ended October 4, 2009, GigOptix has incurred net losses of $2.8 million. Prior to our December 9, 2008 merger with Lumera and GigOptix LLC, each of them or their predecessors incurred net losses of $86.0 million and $56.2 million,
respectively, as of September 30, 2008 and September 26, 2008, respectively. We expect development, sales and other operating expenses to increase in the future as we expand our business. If our revenue does not grow to offset these
expected increased expenses, we may not be profitable. In fact, in future quarters, we may not have any revenue growth and our revenues could decline. Furthermore, if our operating expenses exceed our expectations, our financial performance will be
adversely affected and we may continue to incur significant losses in the future.

In addition, we acquired ChipX in November
2009. ChipX has incurred net losses of $58.3 million from inception through December 31, 2008.



25



---

##### Table of Contents

We may fail to realize the anticipated benefits of our recent mergers with ChipX and Lumera.

Our future success will depend in significant part on our ability to realize the cost savings, operating efficiencies and new
revenue opportunities that are expected to result from the integration of the GigOptix, Lumera and ChipX businesses. Our Companys operating results and financial condition will be adversely affected if we are unable to integrate successfully
the operations of GigOptix, Lumera and ChipX, fail to achieve or achieve on a timely basis such cost savings, operating efficiencies and new revenue opportunities, or incur unforeseen costs and expenses or experiences unexpected operating
difficulties that offset anticipated cost savings. In particular, the integration of GigOptix, Lumera and ChipX may involve, among other matters, integration of sales, marketing, billing, accounting, quality control, management, personnel, payroll,
regulatory compliance, network infrastructure and other systems and operating hardware and software, some of which may be incompatible and therefore may need to be replaced.

Any estimates of cost savings are based upon assumptions by the managements of GigOptix and ChipX concerning a number of factors, including
operating efficiencies, the consolidation of functions, and the integration of operations, systems, marketing methods and procedures. These assumptions are uncertain and are subject to significant business, economic and competitive conditions that
are difficult to predict and often beyond the control of management.

Integrating the GigOptix and ChipX businesses may divert
managements attention away from our operations.

Successful integration of the operations, products and
personnel of GigOptix and ChipX may place a significant burden on our management and internal resources. The diversion of managements attention and any difficulties encountered in the transition and integration process could otherwise harm our
Companys business, financial condition and operating results. The integration will require efforts from each company, including the coordination of their general and administrative functions. For example, integration of administrative
functions includes coordinating employee benefits, payroll, financial reporting, purchasing and disclosure functions. Delays in successfully integrating and managing employee benefits could lead to dissatisfaction and employee turnover. Problems in
integrating purchasing and financial reporting could result in control issues, including unplanned costs. In addition, the combination of the GigOptix and ChipX organizations may result in greater competition for resources and elimination of product
development programs that might otherwise be successfully completed.

Our strategy of growth through acquisition could harm our
Companys business.

It is our intent to continue to grow through strategic acquisitions. Successful integration
of newly acquired target companies may place a significant burden on our management and internal resources. The diversion of managements attention and any difficulties encountered in the transition and integration processes could harm our
Companys business, financial condition and operating results. In addition, we may be unable to execute our acquisition strategy, resulting in wasted resources and a failure to achieve anticipated growth.

We will require additional capital to continue to fund our operations. If we do not obtain additional capital, we may be required to substantially
limit operations.

We do not expect to generate the cash needed to finance our anticipated operations for the
foreseeable future from such operations. Accordingly, we may need to seek funding through public or private financings, including equity financings, and through other arrangements including collaborations. We could require additional financings
sooner than expected if we have poor financial results, unanticipated expenses, unanticipated drop in projected revenues, or unanticipated opportunities. Such financing may be unavailable when needed or may not be available on acceptable terms. If
we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our current stockholders will be reduced, and these securities may have rights superior to those of our common stock. If adequate funds are not
available to satisfy either short-term or long-term capital requirements, or if planned revenues are not generated, we may be required to limit our operations substantially. These limitations of operations may include a possible sale or shutdown of
portions of the business, reductions in capital expenditures and reductions in staff and discretionary costs.

We currently have a
material weakness in our internal control over financial reporting. If we fail to remedy our material weakness or otherwise fail to maintain effective internal control over financial reporting, the accuracy and timing of our financial reporting may
be adversely affected.

In connection with the audit of our consolidated financial statements for the years ended
December 31, 2008 and 2007, material weaknesses in our internal controls over financial reporting, as defined in rules established by the Public Company Accounting Oversight Board, were identified. A material weakness is a
deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements would not be prevented or detected on
a timely basis. The material weakness was attributed to us not maintaining a sufficient complement of personnel with an appropriate level of accounting knowledge, experience and training in the application of generally accepted accounting principles
commensurate with our financial reporting requirements. Specifically, this deficiency resulted in audit adjustments related to the completeness and accuracy of our stock-based compensation accounts, capitalized acquisition costs and intangible
assets acquired in a business combination, and disclosures in the consolidated financial statements for the year ended December 31, 2008. While we have adopted a remediation plan, we are only in the initial stage of executing this plan and we
do not believe that all material weaknesses have been fully remediated as of October 4, 2009.

In addition, other
material weaknesses or significant deficiencies in our internal control over financial reporting may be identified in the future. If we fail to remediate any such material weakness or fail to implement required new or improved controls, or encounter
difficulties in their implementation, it could harm our operating results, cause failure to meet our SEC reporting obligations on a timely basis or result in material misstatements in our annual or interim financial statements.

If we are unable to effectively implement or maintain a system of internal control over financial reporting, we may not be able to accurately or
timely report our financial results and our stock price could be adversely affected.

Section 404 of the
Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal control over financial reporting as of the end of each fiscal year, and to include a management report assessing the effectiveness of our internal control over
financial reporting in our annual report on Form 10-K for that fiscal year. Our ability to comply with the annual internal control report requirements will depend on the effectiveness of our financial reporting and data systems and controls across
our company. We expect these systems and controls to involve significant expenditures and to become increasingly complex as our business grows and to the extent that we make and integrate acquisitions. To effectively manage this complexity, we will
need to continue to improve our operational, financial and management controls and our reporting systems and procedures. Any failure to implement required new or improved controls, or difficulties encountered in the implementation or operation of
these controls, could harm our operating results and cause us to fail to meet our financial reporting obligations, which could adversely affect our business and reduce our stock price.



26



---

##### Table of Contents

We derive a significant portion of our revenue from a small number of customers and the loss of one or
more of these key customers, the diminished demand for our products from a key customer, or the failure to obtain certifications from a key customer or its distribution channel could significantly reduce our revenue and profits.

A relatively small number of customers account for a significant portion of our revenue in any particular period. For instance, one and
four customers accounted for 33% and 61% of revenues for the fiscal year ended 2008 and the nine months ended October 4, 2009, respectively. One or more of our key customers may discontinue operations as a result of consolidation, liquidation or
otherwise, or reduce significantly its business with us due to the current economic conditions. Reductions, delays and cancellation of orders from our key customers or the loss of one or more key customers could significantly further reduce our
revenue and profits. There is no assurance that our current customers will continue to place orders with us, that orders from existing customers will continue at current or historical levels or that we will be able to obtain orders from new
customers.

Our quarter-to-quarter performance may vary substantially, and this variance, as well as general market conditions, may
cause our stock price to fluctuate greatly and potentially expose us to litigation.

Our revenues for our product
lines and quarterly operating results may vary significantly based on many factors, including:



| |  |  | reductions or delays in funding of development programs involving new polymer materials technologies by the U.S. government;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | additions of new customers;
| | - |  | ---------------------------



| |  |  | fluctuating demand for our products and technologies;
| | - |  | -----------------------------------------------------



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



| |  |  | the status of particular development programs and the timing of performance under specific development agreements;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | timing and amounts relating to the expansion of operations;
| | - |  | -----------------------------------------------------------



| |  |  | costs related to possible future acquisitions of technologies or businesses;
| | - |  | ----------------------------------------------------------------------------



| |  |  | communications, information technology and semiconductor industry conditions;
| | - |  | -----------------------------------------------------------------------------



| |  |  | fluctuations in the timing and amount of customer requests for product shipments;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | the reduction, rescheduling or cancellation of orders by customers, including as a result of slowing demand for our products or our customers
products;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in the mix of products that our customers buy;
| | - |  | ------------------------------------------------------



| |  |  | competitive pressures on selling prices;
| | - |  | ----------------------------------------



| |  |  | the ability of our customers to obtain components from their other suppliers;
| | - |  | -----------------------------------------------------------------------------



| |  |  | fluctuations in manufacturing output, yields or other problems or delays in the fabrication, assembly, testing or delivery of our products or our
customers products; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increases in the costs of products or discontinuance of products by suppliers.
| | - |  | ------------------------------------------------------------------------------

We base our current and future expense estimates, in large part, on estimates of future revenue, which are difficult to predict. We expect
to continue to make significant operating and capital expenditures in the area of research and development and to invest in and expand production, sales, marketing and administrative systems and processes. We may be unable to, or may elect not to,
adjust spending quickly enough to offset any unexpected revenue shortfall. If our increased expenses are not accompanied by increased revenue in the same quarter, our quarterly operating results would be harmed.

In one or more future quarters, our results of operations may fall below the expectations of investors and the trading price of our common
stock may decline as a consequence. We believe that quarter-to-quarter comparisons of our operating results will not be a good indication of future performance and should not be relied upon to predict the future performance of our stock price. In
the past, companies that have experienced volatility in the market price of their stock have often been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation could result
in substantial costs and divert managements attention from other business concerns, which could seriously harm our business.

Dependence on third-party manufacturing and supply relationships increases the risk that we will not have an adequate supply of products to meet demand or that the cost of materials will be higher than expected.



We depend upon third parties to
manufacture, assemble or package our products. As a result, we will be subject to risks associated with these third parties, including:



| |  |  | reduced control over delivery schedules and quality;
| | - |  | ----------------------------------------------------



27



---

##### Table of Contents

| |  |  | inadequate manufacturing yields and excessive costs;
| | - |  | ----------------------------------------------------



| |  |  | difficulties selecting and integrating new subcontractors;
| | - |  | ----------------------------------------------------------



| |  |  | potential lack of adequate capacity during periods of excess demand;
| | - |  | --------------------------------------------------------------------



| |  |  | limited warranties on products supplied to us;
| | - |  | ----------------------------------------------



| |  |  | potential lack of control over the timely resolution of product quality issues which may impact our ability to ship product;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | potential increases in prices;
| | - |  | ------------------------------



| |  |  | potential instability in countries where third-party manufacturers are located; and
| | - |  | -----------------------------------------------------------------------------------



| |  |  | potential misappropriation of our intellectual property.
| | - |  | --------------------------------------------------------

Outside foundries generally manufacture products on a purchase order basis, and we have very few long-term supply arrangements with these
suppliers. We have less control over delivery schedules, manufacturing yields and costs than competitors with their own fabrication facilities. A manufacturing disruption experienced by one or more of the outside foundries or a disruption of our
relationship with an outside foundry, including discontinuance of our products by that foundry, would negatively impact the production of certain of our products for a substantial period of time.

Our future success depends in part on the continued service of our key senior management, design engineering, sales, marketing, and technical
personnel and our ability to identify, hire and retain additional, qualified personnel.

Our future success depends to
a significant extent upon the continued service of our senior management personnel, including our Chief Executive Officer, Dr. Avi Katz and our Chief Technical Officer, Andrea Betti-Berutto. We do not maintain key person life insurance on any
of our executive officers and do not intend to purchase any in the future. The loss of key senior executives could have a material adverse effect on our business. There is intense competition for qualified personnel in the semiconductor and polymer
industries, and we may not be able to continue to attract and retain engineers or other qualified personnel necessary for the development of our business, or to replace engineers or other qualified personnel who may leave our employment in the
future. There may be significant costs associated with recruiting, hiring and retaining personnel. Periods of contraction in our business may inhibit our ability to attract and retain our personnel. Loss of the services of, or failure to recruit,
key design engineers or other technical and management personnel could be significantly detrimental to our product development or other aspects of our business.



28



---

##### Table of Contents

Provisions in our amended and restated certificate of incorporation and our amended and restated
bylaws may prevent takeover attempts that could be beneficial to our stockholders.

Provisions of our certificate of
incorporation and bylaws could discourage a takeover of the Company even if a change of control would be beneficial to the interests of our stockholders. These charter provisions include the following:



| |  |  | a requirement that our board of directors be divided into three classes, with approximately one-third of the directors to be elected each year; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | supermajority voting requirements (two-thirds of outstanding shares) applicable to the approval of any merger or other change of control transaction
that is not approved by our continuing directors. The continuing directors are all of the directors as of the effective time of a merger or who are elected to the board upon the recommendation of a majority of the continuing directors.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We will be subject to the risks frequently experienced by early stage companies.

The likelihood of our success must be considered in light of the risks frequently encountered by early stage companies, especially those
formed to develop and market new technologies. These risks include our potential inability to:



| |  |  | establish product sales and marketing capabilities;
| | - |  | ---------------------------------------------------



| |  |  | establish and maintain markets for our potential products;
| | - |  | ----------------------------------------------------------



| |  |  | identify, attract, retain and motivate qualified personnel;
| | - |  | -----------------------------------------------------------



| |  |  | continue to develop and upgrade our technologies to keep pace with changes in technology and the growth of markets using semiconductors and polymer
materials;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | develop expanded production facilities and outside contractor relationships;
| | - |  | ----------------------------------------------------------------------------



| |  |  | maintain our reputation and build trust with customers;
| | - |  | -------------------------------------------------------



| |  |  | improve existing and implement new transaction-processing, operational and financial systems;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | scale up from small pilot or prototype quantities to large quantities of product on a consistent basis;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | contract for or develop the internal skills needed to master large volume production of our products; and
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | fund the capital expenditures required to develop volume production due to the limits of available financial resources.
| | - |  | -----------------------------------------------------------------------------------------------------------------------

Our future growth will suffer if we do not achieve sufficient market acceptance of our products.

Our success depends, in part, upon our ability to maintain and gain market acceptance of our products. To be accepted, these products must
meet the quality, technical and performance requirements of our customers and potential customers. The optical communications industry is currently fragmented with many competitors developing different technologies. Some of these technologies may
not gain market acceptance. Our products, including products based on polymer materials, may not be accepted by OEMs and systems integrators of optical communications networks and consumer electronics. In addition, even if we achieve some degree of
market acceptance for our potential products in one industry, we may not achieve market acceptance in other industries for which we are developing products.

Many of our current products, particularly those based on polymer technology, are either in the development stage or are being tested by potential customers. We cannot be assured that our development
efforts or customer tests will be successful or that they will result in actual material sales or that such products will be commercially viable.

Achieving market acceptance for our products will require marketing efforts and the expenditure of financial and other resources to create product awareness and demand by customers. It will also require
the ability to provide excellent customer service. We may be unable to offer products that compete effectively due to our limited resources and operating history. Also, certain large corporations may be predisposed against doing business with a
company of our limited size and operating history. Failure to achieve broad acceptance of our products by customers and to compete effectively would harm our operating results.



29



---

##### Table of Contents

Successful commercialization of current and future products will require us to maintain a high level
of technical expertise.

Technology in our target markets is undergoing rapid change. To succeed in these target
markets, we will have to establish and maintain a leadership position in the technology supporting those markets. Accordingly, our success will depend on our ability to:



| |  |  | accurately predict the needs of target customers and develop, in a timely manner, the technology required to support those needs;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide products that are not only technologically sophisticated but are also available at a price acceptable to customers and competitive with
comparable products;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | establish and effectively defend our intellectual property; and
| | - |  | ---------------------------------------------------------------



| |  |  | enter into relationships with other companies that have developed complementary technology into which our products may be integrated.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------

We cannot assure you that we will be able to achieve any of these objectives.

Many of our products will have long sales cycles, which may cause us to expend resources without an acceptable financial return and which makes it
difficult to plan our expenses and forecast our revenues.

Many of our products will have long sales cycles that
involve numerous steps, including initial customer contacts, specification writing, engineering design, prototype fabrication, pilot testing, regulatory approvals (if needed), sales and marketing and commercial manufacture. During this time, we may
expend substantial financial resources and management time and effort without any assurance that product sales will result. The anticipated long sales cycle for some of our products makes it difficult to predict the quarter in which sales may occur.
Delays in sales may cause us to expend resources without an acceptable financial return and make it difficult to plan expenses and forecast revenues.

We rely on a small number of development contracts with the U.S. Department of Defense and government contractors for a large portion of our revenue. The termination or non-renewal of one or more of these contracts could reduce our
future revenue.

Approximately 35% of our revenue for the nine months ended October 4, 2009 was derived from
performance on a limited number of development contracts with various agencies within the U.S. government. Any failure by us to continue these relationships or significant disruption or deterioration of our relationship with the Department of
Defense may reduce revenues. Government programs must compete with programs managed by other contractors for limited amounts and uncertain levels of funding. The total amount and levels of funding are susceptible to significant fluctuations on a
year-to-year basis. Our competitors frequently engage in efforts to expand their business relationships with the government and are likely to continue these efforts in the future. In addition, our development contracts with government agencies are
subject to potential profit and cost limitations and standard provisions that allow the U.S. government to terminate such contracts at any time at its convenience. Termination of these development contracts, a shift in government spending to other
programs in which we are not involved, or a reduction in government spending generally or defense spending specifically could severely harm our business. We intend to continue to compete for government contracts and expect such contracts will be a
large percentage of our revenue in the foreseeable future. The development contracts in place with various agencies within the U.S. Department of Defense require ongoing compliance with applicable federal procurement regulations. Violations of these
regulations can result in civil, criminal or administrative proceedings involving fines, compensatory and punitive damages, restitution and forfeitures, as well as suspensions or prohibitions from entering into such development contracts. Also, the
reporting and appropriateness of costs and expenses under these development contracts are subject to extensive regulation and audit by the Defense Contract Audit Agency, an agency of the U.S. Department of Defense. Any failure to comply with
applicable government regulations could jeopardize our development contracts and otherwise harm our business.

Most of our products are
directed at the telecommunications and networking markets, which continue to be subject to overcapacity.

The
technology equipment industry is cyclical and has experienced significant and extended downturns in the past, often in connection with, or in anticipation of, maturing product cycles, and capital spending cycles and declines in general economic
conditions. The cyclical nature of these markets has led to significant imbalances in demand, inventory levels and production capacity. It has also accelerated the decrease of average selling prices per unit. We may experience periodic fluctuations
in our financial results because of these or other industry-wide conditions, because we intend to derive revenues from sales to the telecommunications and networking markets over the next several years. Developments that adversely affect the
telecommunications or



30



---

##### Table of Contents

networking markets, including delays in traffic growth and changes in U.S. government regulation, could halt our efforts to generate revenue or cause revenue growth to be slower than anticipated
from sales of electro-optic modulators, semi-conductors and related products. Reduced spending and technology investment by telecommunications companies may make it more difficult for our products to gain market acceptance. Our potential customers
may be less willing to purchase new technology such as our technology or invest in new technology development when they have reduced capital expenditure budgets.

The failure to compete successfully could harm our business.

We
face competitive pressures from a variety of companies in our target markets. The telecom, datacom and consumer opto-electronics markets are highly competitive and we expect that domestic and international competition will increase in these markets,
due in part to deregulation, rapid technological advances, price erosion, changing customer preferences and evolving industry standards. Increased competition could result in significant price competition, reduced revenues or lower profit margins.
Many of our competitors and potential competitors have or may have substantially greater research and product development capabilities, financial, scientific, marketing, and manufacturing and human resources, name recognition and experience than us.
As a result, these competitors may:



| |  |  | succeed in developing products that are equal to or superior to our products or that will achieve greater market acceptance than our products;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | devote greater resources to developing, marketing or selling their products;
| | - |  | ----------------------------------------------------------------------------



| |  |  | respond more quickly to new or emerging technologies or scientific advances and changes in customer requirements, which could render our technologies
or potential products obsolete;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | introduce products that make the continued development of our potential products uneconomical;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | obtain patents that block or otherwise inhibit our ability to develop and commercialize our potential products;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | withstand price competition more successfully than we can;
| | - |  | ----------------------------------------------------------



| |  |  | establish cooperative relationships among themselves or with third parties that enhance their ability to address the needs of prospective customers
better than we; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | take advantage of acquisitions or other opportunities more readily than we can.
| | - |  | -------------------------------------------------------------------------------

Competitors may offer enhancements to existing products, or offer new products based on new technologies, industry standards or customer
requirements that are available to customers on a timelier basis than comparable products from us or that have the potential to replace or provide lower cost alternatives to our products. The introduction of enhancements or new products by
competitors could render our existing and future products obsolete or unmarketable. Each of these factors could have a material adverse effect on our business, financial condition and results of operations.

Our strategy of growth through acquisition could harm our business.

It is our intent to continue to grow through strategic acquisitions. Successful integration of newly acquired target companies may place a
significant burden on our management and internal resources. The diversion of managements attention and any difficulties encountered in the transition and integration processes could harm our business, financial condition and operating
results. In addition, we may be unable to execute our acquisition strategy, resulting in wasted resources and a failure to achieve anticipated growth.

We may be unable to obtain effective intellectual property protection for our potential products and technology.

Any intellectual property that we have or may acquire, license or develop in the future may not provide meaningful competitive advantages. Our patents and patent applications, including those we license,
may be challenged by competitors, and the rights granted under such patents or patent applications may not provide meaningful proprietary protection. For example, there are patents held by third parties that relate to polymer materials and
electro-optic devices. These patents could be used as a basis to challenge the validity or limit the scope of our patents or patent applications. A successful challenge to the validity or limitation of the scope of our patents or patent applications
could limit our ability to commercialize the technology and, consequently, reduce revenues.

Moreover, competitors may
infringe our patents or those that we license, or successfully avoid these patents through design innovation. To combat infringement or unauthorized use, we may need to resort to litigation, which can be expensive and time-consuming and may not
succeed in protecting our proprietary rights. In addition, in an infringement proceeding, a court may decide



31



---

##### Table of Contents

that our patents or other intellectual property rights are not valid or are unenforceable, or may refuse to stop the other party from using the intellectual property at issue on the ground that
it is non-infringing. Policing unauthorized use of our intellectual property is difficult and expensive, and we may not be able to, or have the resources to, prevent misappropriation of our proprietary rights, particularly in countries where the
laws may not protect these rights as fully as the laws of the United States.

We also rely on the law of trade secrets to
protect unpatented technology and know-how. We try to protect this technology and know-how by limiting access to those employees, contractors and strategic partners with a need to know this information and by entering into confidentiality agreements
with these parties. Any of these parties could breach the agreements and disclose our trade secrets or confidential information to competitors, or such competitors might learn of the information in other ways. Disclosure of any trade secret not
protected by a patent could materially harm our business.

We may be subject to patent infringement claims, which could result in
substantial costs and liability and prevent us from commercializing potential products.

Third parties may claim that
our potential products or related technologies infringe their patents. Any patent infringement claims brought against us may cause us to incur significant expenses, divert the attention of management and key personnel from other business concerns
and, if successfully asserted, require us to pay substantial damages. In addition, as a result of a patent infringement suit, we may be forced to stop or delay developing, manufacturing or selling potential products that are claimed to infringe a
patent covering a third partys intellectual property unless that party grants us rights to use its intellectual property. We may be unable to obtain these rights on acceptable terms, if at all. Even if we are able to obtain rights to a third
partys patented intellectual property, these rights may be non-exclusive, and therefore competitors may obtain access to the same intellectual property. Ultimately, we may be unable to commercialize our potential products or may have to cease
some of our business operations as a result of patent infringement claims, which could severely harm our business.

If our
potential products infringe the intellectual property rights of others, we may be required to indemnify customers for any damages they suffer. Third parties may assert infringement claims against our current or potential customers. These claims may
require us to initiate or defend protracted and costly litigation on behalf of customers, regardless of the merits of these claims. If any of these claims succeed, we may be forced to pay damages on behalf of these customers or may be required to
obtain licenses for the products they use. If we cannot obtain all necessary licenses on commercially reasonable terms, we may be unable to continue selling such products.

The technology that we license from various third parties may be subject to government rights and retained rights of the originating research institution.

We license technology from various companies or research institutions, such as the University of Washington. Many of these partners and
licensors have obligations to government agencies or universities. Under their agreements, a government agency or university may obtain certain rights over the technology that we have developed and licensed, including the right to require that a
compulsory license be granted to one or more third parties selected by the government agency.

In addition, our partners often
retain certain rights under their licensing agreements, including the right to use the technology for noncommercial academic and research use, to publish general scientific findings from research related to the technology, and to make customary
scientific and scholarly disclosures of information relating to the technology. It is difficult to monitor whether such partners limit their use of the technology to these uses, and we could incur substantial expenses to enforce our rights to our
licensed technology in the event of misuse.

If we fail to develop and maintain the quality of our manufacturing processes, our
operating results would be harmed.

The manufacture of our products is a multi-stage process that requires the use of
high-quality materials and advanced manufacturing technologies. With respect to our polymer-based products, polymer-related device development and manufacturing must occur in a highly controlled, clean environment to minimize particles and other
yield- and quality-limiting contaminants. In spite of stringent quality controls, weaknesses in process control or minute impurities in materials may cause a substantial percentage of a product in a lot to be defective. If we are not able to develop
and continue to improve on our manufacturing processes or to maintain stringent quality controls, or if contamination problems arise, our operating results would be harmed.

The complexity of our products may lead to errors, defects and bugs, which could result in the necessity to redesign products and could negatively impact our reputation with customers.

Products as complex as ours may contain errors, defects and bugs when first
introduced or as new versions are released. Delivery of products with production defects or reliability, quality or compatibility problems could significantly delay or hinder market acceptance of the products or result in a costly recall and could
damage our reputation and adversely affect our ability to retain existing customers and to attract new customers. In particular, certain products are customized or designed for integration into specific network systems. If, our products experience
defects, we may need to undertake a redesign of the product, a process which may result in significant additional expenses.



32



---

##### Table of Contents

We may also be required to make significant expenditures of capital and resources to resolve
such problems. There is no assurance that problems will not be found in new products after commencement of commercial production, despite testing by us, our suppliers or our customers.

We could be exposed to significant product liability claims that could be time-consuming and costly and impair our ability to obtain and maintain insurance coverage.

We may be subject to product liability claims if any of our products are alleged to be defective or harmful. Product liability claims or
other claims related to our potential products, regardless of their outcome, could require us to spend significant time and money in litigation, divert managements time and attention from other business concerns, require us to pay significant
damages, harm our reputation or hinder acceptance of our products. Any successful product liability claim may prevent us from obtaining adequate product liability insurance in the future on commercially reasonable terms. Any inability to obtain
sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could impair our ability to commercialize our products. In addition, certain of our products are sold under warranties. The
failure of our products to meet the standards set forth in such warranties could result in significant expenses to us.

If we fail to
effectively manage our growth, and effectively transition the Company from its focus on research and development activities to commercially successful products, our business could suffer.

Failure to manage growth of our operations could harm our business. To date, a large number of our activities and resources have been
directed at the research and development of our technologies and development of potential related products. The transition from research and development to a vendor of products requires effective planning and management. Additionally, growth arising
from the expected synergies from the merger with ChipX will require effective planning and management. Future expansion will be expensive and will likely strain management and other resources.

In order to effectively manage growth, we must:



| |  |  | continue to develop an effective planning and management process to implement our business strategy;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | hire, train and integrate new personnel in all areas of our business; and
| | - |  | -------------------------------------------------------------------------



| |  |  | expand our facilities and increase capital investments.
| | - |  | -------------------------------------------------------

There is no assurance that we will be able to accomplish these tasks effectively or otherwise effectively manage our growth.

We are subject to regulatory compliance related to our operations.

We are subject to various U.S. governmental regulations related to occupational safety and health, labor and business practices. Failure to
comply with current or future regulations could result in the imposition of substantial fines, suspension of production, alterations of our production processes, cessation of operations, or other actions, which could harm our business.

We may be unable to export some of our potential products or technology to other countries, convey information about our technology to citizens of
other countries or sell certain products commercially, if the products or technology are subject to United States export or other regulations.

We are developing certain products that we believe the United States government and other governments may be interested in using for military and information gathering or antiterrorism activities. United
States government export regulations may restrict us from selling or exporting these potential products into other countries, exporting our technology to those countries, conveying information about our technology to citizens of other countries or
selling these potential products to commercial customers. We may be unable to obtain export licenses for products or technology if necessary. We currently cannot assess whether national security concerns would affect our potential products and, if
so, what procedures and policies we would have to adopt to comply with applicable existing or future regulations.

Our business may
incur liability arising from our use of hazardous materials.

Our business and our facilities are subject to a number
of federal, state and local laws and regulations relating to the generation, handling, treatment, storage and disposal of certain toxic or hazardous materials and waste products that are used or generated in our operations. Many of these
environmental laws and regulations subject current or previous owners or occupiers of land to liability for the costs of investigation, removal or remediation of hazardous materials. In addition, these laws and regulations typically impose liability
regardless of whether the owner or occupier knew of, or were responsible for, the presence of any



33



---

##### Table of Contents

hazardous materials and regardless of whether the actions that led to the presence were taken in compliance with the law. Our domestic facilities use various chemicals in manufacturing processes
which may be toxic and covered by various environmental controls. These hazardous materials may be stored on site. The waste created by use of these materials is transported off-site by an unaffiliated waste hauler. Many environmental laws and
regulations require generators of waste to take remedial actions at an off-site disposal location even if the disposal was conducted lawfully. The requirements of these laws and regulations are complex, change frequently and could become more
stringent in the future. Failure to comply with current or future environmental laws and regulations could result in the imposition of substantial fines, suspension of production, alteration of production processes, cessation of operations or other
actions, which could severely harm our business.

Our business, financial condition and operating results would be harmed if we do not
achieve anticipated revenues.

From time to time, in response to anticipated long lead times to obtain inventory and
materials from outside contract manufacturers, suppliers and foundries, we may need to order materials in advance of anticipated customer demand. This advance ordering may result in excess inventory levels or unanticipated inventory write-downs if
expected orders fail to materialize, or other factors render our products less marketable. If we are forced to hold excess inventory or incur unanticipated inventory write-downs, our financial condition and operating results could be materially
harmed.

Our expense levels are relatively fixed and are based on our expectations of future revenues. We will have limited
ability to reduce expenses quickly in response to any revenue shortfalls. Changes to production volumes and impact of overhead absorption may result in a decline in our financial condition or liquidity.

We could suffer unrecoverable losses on our customers accounts receivable which would adversely affect our financial results.

Our operating cash flows are dependent on the continued collection of receivables. We could suffer losses if a
customer is unable to pay. A significant loss of accounts receivable would have an adverse impact on our business and financial results.

The industry and markets in which we compete are subject to consolidation, which may result in stronger competitors, fewer customers and reduced demand.

There has been industry consolidation among communications IC companies, network equipment companies and telecommunications companies in the
past. This consolidation is expected to continue as companies attempt to strengthen or hold their positions in evolving markets. Consolidation may result in stronger competitors, fewer customers and reduced demand, which in turn could have a
material adverse effect on our business, operating results, and financial condition.

Our operating results are subject to fluctuations
because we have international sales.

International sales account for a large portion of our revenues and may account
for an increasing portion of future revenues. The revenues derived from international sales may be subject to certain risks, including:



| |  |  | foreign currency exchange fluctuations;
| | - |  | ---------------------------------------



| |  |  | changes in regulatory requirements;
| | - |  | -----------------------------------



| |  |  | tariffs and other barriers;
| | - |  | ---------------------------



| |  |  | timing and availability of export licenses;
| | - |  | -------------------------------------------



| |  |  | political and economic instability;
| | - |  | -----------------------------------



| |  |  | difficulties in accounts receivable collections;
| | - |  | ------------------------------------------------



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



| |  |  | difficulties in managing distributors;
| | - |  | --------------------------------------



| |  |  | difficulties in obtaining governmental approvals for communications and other products;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | reduced or uncertain protection for intellectual property rights in some countries;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | longer payment cycles to collect accounts receivable in some countries;
| | - |  | -----------------------------------------------------------------------



| |  |  | the burden of complying with a wide variety of complex foreign laws and treaties; and
| | - |  | -------------------------------------------------------------------------------------



| |  |  | potentially adverse tax consequences.
| | - |  | -------------------------------------



34



---

##### Table of Contents

We are subject to risks associated with the imposition of legislation and regulations relating to the
import or export of high technology products. We cannot predict whether quotas, duties, taxes or other charges or restrictions upon the importation or exportation of our products will be implemented by the United States or other countries.

Various laws and regulations potentially affect the impact and export of our products, including export control, tax and
customs laws. Furthermore, some customer purchase orders and agreements are governed by foreign laws, which may differ significantly from laws in the United States. As a result, our ability to enforce our rights under such agreements may be limited
compared with our ability to enforce our rights under agreements governed by laws in the United States.

Our business is subject to
foreign currency risk.

In fiscal 2008 and the first nine months of fiscal 2009, approximately 49% and 75%,
respectively, of our revenues originated outside the United States. Because sales of our Companys products have been denominated to date primarily in United States dollars, increases in the value of the United States dollar could increase the
price of our Companys products so that they become relatively more expensive to customers in the local currency of a particular country, leading to a reduction in sales and profitability in that country. Future international activity may
result in increased foreign currency denominated sales. Gains and losses on the conversion to United States dollars of accounts receivable, accounts payable and other monetary assets and liabilities arising from international operations may
contribute to fluctuations in our results of operations. We currently do not have hedging or other programs in place to protect against adverse changes in the value of the U.S. dollar as compared to other currencies to minimize potential adverse
effects.

Our international operations may be adversely affected by instability in the countries in which we operate.

We currently have subsidiaries or offices in Israel, Switzerland and Japan. In addition, a growing portion of our IP
is being developed in development centers located in Israel and Switzerland. Israel continues to face an increased level of violence and terror, and continued unrest there and throughout the Middle East may negatively impact the investments our
worldwide customers make in these geographic regions. Furthermore, continued and heightened unrest in areas of the world in which we operate may adversely affect our business in a number of ways, including the following:



| |  |  | changes in the political or economic conditions in countries in which we do business, such as fluctuations in exchange rates, changes in laws
protecting IP, the imposition of currency transfer restrictions or limitations, or the adoption of burdensome trade or tax policies, procedures, rules, regulations or tariffs, could adversely affect our ability to develop new products, to take
advantage of the cost savings associated with our international operations, and to otherwise conduct business effectively in other countries;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to continue conducting business in Israel and other countries in the normal course may be adversely affected by increased risk of social
and political instability and our employees working and visiting in Israel may be affected by terrorist attacks; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our Israeli customers demand for our products may be adversely affected because of negative economic consequences associated with reduced levels
of safety and security in Israel.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We have never paid dividends on our capital stock, and we do not anticipate paying
cash dividends for at least the foreseeable future.

We have never declared or paid cash dividends on our capital
stock. We do not anticipate paying any cash dividends on our common stock for at least the foreseeable future. We currently intend to retain all available funds and future earnings, if any, to fund the development and growth of our business. As a
result, capital appreciation, if any, of our common stock will be our stockholders sole source of potential gain for at least the foreseeable future.

Restrictive covenants under our credit facility with Bridge Bank may adversely affect our operations.

Our credit agreement with Bridge Bank contains a number of restrictive covenants that will impose significant operating and financial restrictions on our ability to, without prior written approval from
Bridge Bank:



| |  |  | Merge or consolidate, or permit any of our subsidiaries to merge or consolidate, with or into any other business organization, or acquire, or permit
any of our subsidiaries to acquire, all or substantially all of the capital stock or property of another person;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Create, incur, assume any indebtedness, other than certain indebtedness permitted under the credit agreement with Bridge Bank; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | Make dividends or distributions or repurchase capital stock in excess of $500,000 per fiscal year.
| | - |  | --------------------------------------------------------------------------------------------------

In addition, at any time that loans under the credit agreement are outstanding, we are required to maintain an Asset Coverage
Ratio of (a) cash maintained at Bridge Bank plus 80% of our accounts receivable under 90 days from invoice date to (b) indebtedness owed to Bridge Bank of not more than 1.75 to 1.00, measured as at the end of each month. Further, we must
maintain certain levels of maximum loss and minimum GAAP profit. Pursuant to the terms of the credit agreement, in the quarter ended December 31, 2009, we must not incur a loss greater than $4,600,000. For the quarter ending March 31, 2010, we must
not incur a loss greater than $750,000 and for all quarters thereafter, we must maintain a minimum profit of $1.00.

If we
experience sufficient declines in sales for which we cannot compensate, we may have difficulty complying with the financial covenants under this credit facility. A failure to comply with the covenants contained in our credit facility could result in
an event of default under the facilities or the existing agreements which, if not cured or waived, could have a material adverse affect on our business, financial condition and results of operations.



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

None



35



---

##### Table of Contents

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



|(a) | Exhibits
|--- | --------



|               |  |                                                                                                                                                                                                                                                                                                                   
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                       
|3.1            |  | Form of Amended and Restated Certificate of Incorporation of the Registrant. Filed previously as Annex C to the Registrants Registration Statement on Form S-4 filed on
September 8, 2008, SEC File No. 333-153362 and is incorporated herein by reference.                                                      
|               | 
|3.2            |  | Amended and Restated Bylaws of the Registrant. Filed previously as Annex D Exhibit 3.1 to the Registrants Registration Statement Current Report on Form 8-K filed on June 4,
2009 and is incorporated herein by reference.                                                                                       
|               | 
|4.1            |  | Warrant issued to Silicon Valley Bank on January 21, 2009. Filed previously as Exhibit 4.1 to the Registrants Current Report on Form 8-K filed on January 29, 2008, and is
incorporated herein by reference.                                                                                                     
|               | 
|10.1*          |  | Employment Agreement by and between the Company and Dr. Katz, dated as of January 26, 2009. Filed previously as Exhibit 10.1 to the Registrants Current Report on Form 8-K
filed on February 2, 2009 and is incorporated herein by reference.                                                                    
|               | 
|10.2*          |  | Form of Employment Agreement to be entered into between the Company and its executive officers. Filed previously as Exhibit 10.1 to the Registrants Current Report on 8-K filed
on February 11, 2009 and is incorporated herein by reference.                                                                    
|               | 
|10.3*          |  | Form of Incentive Stock Option Award Agreement. Filed previously as Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on March 17, 2009 and is incorporated
herein by reference.                                                                                                                  
|               | 
|10.4*          |  | Form of Nonstatutory Stock Option Award Agreement. Filed previously as Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on March 17, 2009 and is incorporated
herein by reference.                                                                                                               
|               | 
|10.5           |  | Unconditional Guaranty between the Company and Silicon Valley Bank, dated as of January 21, 2009. Filed previously as Exhibit 10.1 to the Registrants Current Report on Form
8-K filed on January 29, 2009 and is incorporated herein by reference.                                                              
|               | 
|10.6           |  | Default Waiver and Fourth Amendment to Loan and Security Agreement between GigOptix LLC and Silicon Valley Bank, effective as of December 31, 2008. Filed previously as Exhibit 10.2
to the Registrants Current Report on             Form 8-K filed on January 29, 2009 and is incorporated herein by reference.
|               | 
|10.7           |  | Loan and Security Agreement, dated as of October 5, 2007, by and between GigOptix LLC and Silicon Valley Bank. Filed previously as Exhibit 10.3 to Registrants Current Report
on Form 8-K filed on January 29, 2009 and is incorporated herein by reference.                                                     
|               | 
|10.8           |  | First Amendment to Loan and Security Agreement, dated as of August 21, 2008, by and between GigOptix LLC and Silicon Valley Bank. Filed previously as Exhibit 10.4 to the
Registrants Current Report on Form 8-K filed on               January 29, 2009 and is incorporated herein by reference.                
|               | 
|10.9           |  | Default Waiver and Second Amendment to Loan and Security Agreement, dated as of September 26, 2008, by and between GigOptix LLC and Silicon Valley Bank. Filed previously as Exhibit
10.5 to the Registrants Current Report on Form 8-K filed on January 29, 2009 and is incorporated herein by reference.       
|               | 
|10.10          |  | Third Amendment to Loan and Security Agreement, dated as of October 27, 2008, by and between GigOptix LLC and Silicon Valley Bank. Filed previously as Exhibit 10.6 to the
Registrants Current Report on Form 8-K filed on January 29, 2009 and is incorporated herein by reference.                             
|               | 
|10.11          |  | Plexera Asset Purchase Agreement, dated as of February 17, 2009. Previously filed as Exhibit 10.37 to the Registrants Annual Report on Form 10-K filed on March 31, 2009, and
is incorporated herein by reference.                                                                                               
|               | 
|10.12          |  | Fifth Amendment to Loan and Security Agreement between GigOptix LLC and Silicon Valley Bank, dated as of February 28, 2009. Previously filed as Exhibit 10.38 to the
Registrants Annual Report on Form 10-K filed on                 March 31, 2009, and is incorporated herein by reference.                    
|               | 
|31.1           |  | Chief Executive Officer Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.                                                                                                                                       
|               | 
|31.2           |  | Acting Chief Financial Officer Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 Of the Sarbanes-Oxley Act of 2002.                                                                                                                                
|               | 
|32.1           |  | Chief Executive Officer Certification pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                 
|               | 
|32.2           |  | Acting Chief Financial Officer Certification pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                                                                                                          



|* | Denotes management contract or compensatory plan or arrangement.
|- | ----------------------------------------------------------------



36



---

##### Table of Contents

SIGNATURES

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



|                        |  |  |  |  |  |                                                                          
|----------------------- |  |  |  |  |  | -------------------------------------------------------------------------
|                        |  |  |  |  |  | GIGOPTIX, INC.                                                           
|                        |  |  | 
|Date: November 18, 2009 |  |  |  |  |  | /s/    AVISHAY
KATZ                                                      
|                        |  |  |  |  |  | Dr. Avi (Avishay) Katz                                                   
|                        |  |  |  |  |  | President, Chief Executive Officer and Chairman of the Board of Directors
|                        |  |  | 
|Date: November 18, 2009 |  |  |  |  |  | /s/    DAWN
CASTERSON                                                    
|                        |  |  |  |  |  | Dawn Casterson                                                           
|                        |  |  |  |  |  | Acting Chief Financial Officer                                           



37



---

##### Table of Contents

EXHIBIT INDEX

The following documents are filed:



|               |  |                                                                                                                                                                                         
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                             
|31.1           |  | Chief Executive Officer Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.             
|               | 
|31.2           |  | Acting Chief Financial Officer Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.      
|               | 
|32.1           |  | Chief Executive Officer Certification pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.       
|               | 
|32.2           |  | Acting Chief Financial Officer Certification pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.



38