DuringTable July 2009, we granted a total of 3,150 non-qualified stock options to new employees at an exercise price of $5.72 per share, which is equal to the closing sales price for our common stock as quoted on the NASDAQ Global Market on the date of grant. Contents

We haveTable operating expenses in foreign currencies, predominantly Canadian dollars but also Pounds Sterling and Euros that are converted to U.S. dollars for financial reporting. If these foreign currencies strengthen against the U.S. dollar, this increases our reported operating expenses. These currencies weakened against the U.S. dollar for the first six months of 2009 compared to the year ago period. As a result, our operating expenses were approximately $0.7 million lower during the six months ended June 30, 2009 relative to the six months ended June 30, 2008. In addition, these currencies began strengthening against the U.S. dollar in June 2009. As a result, our operating expenses would have been approximately $0.1 million higher during the six month period ended June 30, 2009 had currencies remained at the June 2009 exchange rates. Contents

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DuringTable July 2009, we granted a total of 3,150 non-qualified stock options to new employees at an exercise price of $5.72 per share, which is equal to the closing sales price for our common stock as quoted on the NASDAQ Global Market on the date of grant. Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~June~~September 30, 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~~001-~~144520~~33879

INTELLON CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		59-2744155
(State of Incorporation)		(I.R.S. Employer Identification Number)

5955 T. G. Lee Boulevard, Suite 600, Orlando, FL 32822

(Address of principal executive offices)

(407) 428-2800

(Registrant’s telephone number, including area code)

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

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

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

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 ~~August~~October 323, 2009, there were 31,~~343~~368,946 shares of the registrant’s $0.0001 par value common stock outstanding.

INTELLON CORPORATION

INDEX

	~~Page~~	Page
~~PART I. FINANCIAL INFORMATION~~	PART I. FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements	3
Item 1.	Unaudited Financial Statements	3
~~Condensed Consolidated Balance Sheets~~	3Condensed Consolidated Balance Sheets	3
~~Condensed Consolidated Statements of Operations~~	4Condensed Consolidated Statements of Operations	4
~~Condensed Consolidated Statements of Cash Flows~~	5Condensed Consolidated Statements of Cash Flows	5
~~Notes to Condensed Consolidated Financial Statements~~	6Notes to Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3. Quantitative and Qualitative Disclosures about Market Risk	29
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30
Item 4. Controls and Procedures	29
Item 4.	Controls and Procedures	31
~~PART II. OTHER INFORMATION~~	PART II. OTHER INFORMATION
Item 1. Legal Proceedings	29
Item 1.	Legal Proceedings	31
Item 1A. Risk Factors	30
Item 1A.	Risk Factors	31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 3. Defaults Upon Senior Securities	49
Item 3.	Defaults Upon Senior Securities	54
Item 4. Submission of Matters to a Vote of Security Holders	49
Item 4.	Submission of Matters to a Vote of Security Holders	54
Item 5. Other Information	49
Item 5.	Other Information	54
Item 6. Exhibits	49
Item 6.	Exhibits	54
Signature	51	56

PART I. FINANCIAL INFORMATION

ITEM 1.

UNAUDITED FINANCIAL STATEMENTS

INTELLON CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

	June 30,2009			December 31,2008 *
	September 30,2009			December 31,2008 *
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	3725,~~104~~285		$	35,375
Short-term investments		2536,~~005~~967			20,230
Accounts receivable		911,~~482~~231			11,532
Inventory, net		56,~~709~~354			8,029
Prepaid expenses		1,~~307~~301			961
Other current assets		~~192~~155			350
Total current assets		7881,~~799~~293			76,477
Property and equipment, net		2,~~362~~407			2,241
Intangible assets, net		2,~~571~~695			2,403
Other assets		100			100
Total assets	$	8386,~~832~~495		$	81,221
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	710,~~693~~157		$	6,843
Accrued expenses		2,~~507~~200			2,166
Total current liabilities		1012,~~200~~357			9,009
Deferred income		200			—
Shareholders’ equity:
Common stock		3			3
Additional paid in capital-common		~~208~~209,~~978~~713			207,890
Accumulated deficit		(135,~~349~~778	)		(135,681	)
Total shareholders’ equity		73,~~632~~938			72,212
Total liabilities and shareholders’ equity	$	8386,~~832~~495		$	81,221

*	Information derived from the audited Consolidated Financial Statements

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

INTELLON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three Months EndedJune 30,						Six Months EndedJune 30,
	Three Months EndedSeptember 30,						Nine Months EndedSeptember 30,
	2009			2008			2009			2008
	(in thousands, except per share amounts)
Revenue	$	1719,~~475~~933		$	1820,~~137~~112		$	3252,~~983~~916		$	3454,~~442~~554
Cost of revenue		89,~~667~~860			1011,~~310~~917			1626,~~268~~128			1931,~~280~~197
Gross profit		810,~~808~~073			78,~~827~~195			1626,~~715~~788			1523,~~162~~357
Cost of operations:
Research and development		34,~~981~~423			34,~~935~~038			712,~~588~~011			812,~~379~~417
Sales and marketing		2,~~239~~042			21,~~095~~979			46,~~569~~611			46,~~274~~253
General and administrative		24,~~302~~003			2,~~202~~010			48,~~331~~334			46,~~271~~281
Operating income (loss)		~~286~~(395	)		~~(405~~168	)		~~227~~(168	)		(1,~~762~~594	)
Other income (expense):
Interest income		3037			~~252~~283			93130			~~695~~978
Other expense		(2046	)		(3231	)		(4894	)		(6394	)
Total other income		10			220			45			632
Total other income (expense)		(9	)		252			36			884
Income (loss) before income tax (benefit) expense		296			(185	)		272			(1,130	)
Income (loss) before income taxes		(404	)		420			(132	)		(710	)
Income tax (benefit) expense		(31	)		57			(60	)		57
Income tax expense (benefit)		25			(61	)		(35	)		(4	)
Net income (loss)	$	~~327~~(429	)	$	~~(242~~481	)	$	~~332~~(97	)	$	(~~1,187~~706	)
Net income (loss) per common share:
Basic	$	(0.01	)	$	(0.0102	)	$	(0.0100	)	$	(0.0402	)
Diluted	$	(0.01	)	$	(0.0102	)	$	(0.0100	)	$	(0.0402	)
Weighted-average number of shares used in per share calculations:
Basic		31,~~095~~150			30,~~878~~939			31,~~071~~098			30,~~761~~821
Diluted		31,~~391~~150			3031,~~878~~175			31,~~256~~098			30,~~761~~821

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

INTELLON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Six Months EndedJune 30,
	Nine Months EndedSeptember 30,
	2009			2008
	(in thousands)
Operating activities
Net income (loss)	$	332		$	(1,187	)
Net loss	$	(97	)	$	(706	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Adjustments to reconcile net loss to net cash provided by operating activities:
Stock-based compensation		1,~~084~~721			~~809~~1,260
Depreciation		~~588~~909			~~524~~774
Amortization of intangible assets		3756			2648
Accretion of discount on investment securities		(6183	)		—(172	)
Other		—			2
Changes in operating assets and liabilities:
Accounts receivable		~~2,050~~301			~~542~~(3,252	)
Inventory		21,~~320~~675			~~263~~(1,695	)
Prepaid expenses and other assets		(~~369~~432	)		7328
Income tax refund		~~181~~287			75
Accounts payable and accrued expenses		13,~~191~~348			13,~~424~~838
Net cash provided by operating activities		7,353			2,549
Deferred income		200			—
Net cash provided by operating activities		7,885			200
Investing activities
Purchase of property and equipment		(~~709~~1,075	)		(~~788~~1,011	)
Purchase of short-term investments		(2449,~~964~~404	)		—(37,461	)
Proceeds from maturities of short-term investments		20,250			—
Proceeds from maturity of short-term investments		32,750			—
Purchase of intangible assets, net		(~~205~~348	)		(~~426~~565	)
Net cash (used in) investing activities		(518,~~628~~077	)		(139,~~214~~037	)
Financing activities
Proceeds from issuance of common stock, net of issuance costs		—			5,~~550~~548
Proceeds from exercise of stock options		4102			—6
Net cash provided by financing activities		4102			5,~~550~~554
Net increase in cash and cash equivalents		1,729			6,885
Net decrease in cash and cash equivalents		(10,090	)		(33,283	)
Cash and cash equivalents, beginning of period		35,375			52,074
Cash and cash equivalents, end of period	$	3725,~~104~~285		$	5818,~~959~~791

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

INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~JUNE~~SEPTEMBER 30, 2009 (Unaudited)

1. The Company and Summary of Significant Accounting Policies

Description of Company

Intellon Corporation designs, develops, manufactures and markets integrated circuits (ICs) for powerline communications, or high-speed communications over existing electrical wiring. We provide HomePlug^®-based and other powerline ICs for home networking, networked entertainment, broadband over powerline access, Ethernet-over-Coax (EoC), smart grid management and other commercial applications. We believe our company is a leader in powerline networking technology, IC sales and product enablement. We also believe we are well positioned to capitalize on the growth in home networking, audio and video connectivity and the convergence of the personal computer and consumer electronics environments. We operate in one segment: the design, license and marketing of integrated circuits.

Initial Public Offering

We commenced our initial public offering (IPO) of common stock on December 14, 2007, and the offering was completed on December 19, 2007. We sold and issued 7,500,000 shares of our common stock in our IPO at an issue price of $6.00 per share. We raised approximately $39.0 million in net proceeds after deducting underwriting discounts and commissions of $3.2 million and other offering costs of $2.8 million, which were received on December 19, 2007. Upon the closing of the IPO, all shares of our redeemable convertible preferred stock outstanding automatically converted into 16,205,496 shares of common stock and the cumulative dividends that accrued on our redeemable convertible preferred stock in an amount of $15.9 million converted into 3,584,522 shares of common stock.

During January 2008, the underwriters for our IPO exercised their option to purchase an additional 1,010,000 shares of our common stock to cover over-allotments at a price of $6.00 per share, less the underwriting discount. The net proceeds from the exercise of the over-allotment option were $5.5 million, after deducting underwriting discounts, commissions and other offering costs.

Proposed Merger

On September 8, 2009, we entered into a definitive merger agreement with Atheros Communications, Inc. (Atheros) pursuant to which Atheros will acquire us in a stock and cash transaction. As a result of the merger, each outstanding share of our common stock will be automatically converted into the right to receive Atheros common stock and equivalents (including the assumption of our outstanding restricted stock units and stock options) representing between 45 and 55 percent of the total consideration in the merger and with the remainder being paid in cash, providing an overall value of $7.30 per share based on the five-day average closing price of Atheros common stock as of September 4, 2009. Completion of the merger is subject to customary closing conditions, including approval of the merger by our stockholders. If the merger is not completed, under some circumstances, we may have to pay a termination fee to Atheros in the amount of $8.5 million.

Basis of Presentation

These interim condensed consolidated financial statements are unaudited but reflect, in the opinion of management, all adjustments, consisting of normal recurring adjustments and accruals, necessary to present fairly our financial position and the financial position of our subsidiaries in conformity with U.S. generally accepted accounting principles (GAAP) as of ~~June~~ September 30, 2009, our results of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2009 and 2008 and cash flows for the ~~six~~nine months ended ~~June~~September 30, 2009 and 2008. The condensed consolidated financial statements include Intellon and our wholly owned subsidiaries, Intellon Canada, Inc., Intellon Taiwan Ltd., Intellon Hong Kong Limited and Intellon Korea, Ltd. All significant intercompany accounts and transactions have been eliminated. We have evaluated all subsequent events through ~~August~~October 522, 2009, the date the financial statements were issued. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission (SEC).

These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our 2008 Annual Report on Form 10-K (Annual Report) as filed on March 13, 2009 with the SEC. The results of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2009 are not necessarily indicative of the results to be expected for the entire fiscal year.

INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

SEPTEMBER 30, 2009 (Unaudited)

Use of Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to pricing, product returns, doubtful accounts, inventory valuation reserves, investments, intangible assets, income taxes and related valuation allowances and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and reported amounts of revenue and expenses that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.

Recent Accounting Pronouncements

With the exception of those stated below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the ~~six~~nine months ended ~~June~~September 30, 2009, compared to the recent accounting pronouncements described in the Annual Report, that are of material significance, or have potential material significance, to us.

6Effective July 1, 2009, we adopted the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 105-10, Generally Accepted Accounting Principles – Overall (ASC 105-10). ASC 105-10 establishes the FASB Accounting Standards Codification (the Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority. The Codification superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative. The FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (ASUs). The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification. References made to FASB guidance throughout this document have been updated for the Codification.

Effective January 1, 2009, we adopted FASB ASC 805, Business Combinations (ASC 805). ACS 805 establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. ASC 805 also provides guidance for recognizing changes in an acquirer’s existing income tax valuation allowances and tax uncertainty accruals that result from a business combination transaction as adjustments to income tax expense. The adoption of ASC 805 did not have a material impact on our financial position, consolidated results of operations, cash flows or disclosures.

In April 2009, the FASB issued updated guidance related to business combinations, which is included in the Codification in ASC 805-20, Business Combinations - Identifiable Assets and Liabilities, and Any Noncontrolling Interest (ASC 805-20). ASC 805-20 amends and clarifies ASC 805 to address application issues regarding initial recognition and measurement, subsequent measurement and accounting and disclosure of assets and liabilities arising from contingencies in a business combination. In circumstances where the acquisition-date fair value for a contingency cannot be determined during the measurement period and it is concluded that it is probable that an asset or liability exists as of the acquisition date and the amount can be reasonably estimated, a contingency is recognized as of the acquisition date based on the estimated amount. ASC 805-20 is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of ASC 805-20 did not have a material impact on our financial position, consolidated results of operations, cash flows or disclosures.

Effective January 1, 2008, we adopted FASB ASC 820-10, Fair Value Measurements and Disclosures - Overall (ASC 820-10), with respect to our financial assets and liabilities. In February 2008, the FASB issued updated guidance related to fair value measurements, which is included in the Codification in ASC 820-10-55, Fair Value Measurements and Disclosures – Overall – Implementation Guidance and Illustrations (ASC 820-10-55). The updated guidance provided a one year deferral of the effective date of ASC 820-10 for non-financial assets and non-financial liabilities, except those that are

INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

~~JUNE~~SEPTEMBER 30, 2009 (Unaudited)

~~continued…~~ recognized or disclosed in the financial statements at fair value at least annually. Therefore, we adopted the provisions of ASC 820-10 for non-financial assets and non-financial liabilities effective January 1, 2009, and such adoption did not have a material impact on our financial position, consolidated results of operations, cash flows or disclosures.

Effective ~~January~~April 1, 2009, we adopted ~~the~~FASB ~~Financial~~ASC ~~Accounting~~320-10-65, ~~Standards~~Investments ~~Board~~– Debt and Equity Securities – Overall – Transition and Open Effective Date Information (~~FASB~~ASC 320-10-65). ~~Statement~~ASC of320-10-65 ~~Financial~~amends ~~Accounting~~the ~~Standards~~other-than-temporary impairment (~~SFAS~~OTTI) Noguidance in U. ~~141R,~~S. ~~Business~~GAAP ~~Combinations~~to ~~(SFAS~~make ~~141R).~~the ~~SFAS 141R~~guidance ~~establishes~~more ~~principles~~operational and ~~requirements~~to ~~for~~improve ~~how~~ the ~~acquirer~~presentation of aother-than-temporary ~~business~~impairments ~~recognizes~~in ~~and~~the ~~measures~~financial statements. Prior to ASC 320-10-65, if OTTI had been determined to exist, we would have recognized an OTTI charge into earnings in an amount equal to the difference between the investment’s amortized cost basis and its ~~financial~~fair ~~statements~~value as of the balance sheet date of the reporting period. ~~identifiable~~Under ~~assets~~ASC ~~acquired~~320-10-65, ~~the~~if ~~liabilities~~OTTI ~~assumed~~has been incurred, and ~~any~~it ~~non~~is more-~~controlling~~likely-than-not ~~interest~~that inwe will not sell the ~~acquiree.~~investment ~~The~~security ~~statement~~before ~~also~~the ~~provides~~recovery ~~guidance~~of ~~for~~its ~~recognizing~~amortized ~~and~~cost ~~measuring~~basis, then the ~~goodwill~~OTTI ~~acquired~~is inseparated into (a) the ~~business~~amount ~~combination~~representing the credit loss and ~~determines~~(b) the ~~what information~~amount related to ~~disclose~~all toother ~~enable~~factors. ~~users~~The amount of the ~~financial~~total ~~statement~~OTTI related to ~~evaluate~~ the ~~nature~~credit ~~and~~loss ~~financial~~is ~~effects~~recognized in earnings. The amount of the ~~business~~total ~~combination.~~OTTI ~~SFAS~~related ~~141R~~to ~~also~~other ~~provides~~factors ~~guidance~~would ~~for~~be ~~recognizing~~recognized ~~changes~~ in anaccumulated ~~acquirer’s~~other comprehensive ~~existing~~ income ~~tax~~(AOCI). ~~valuation allowances~~The total OTTI, which would include both credit and ~~tax~~non-credit ~~uncertainty~~losses, ~~accruals~~would ~~that~~be ~~result~~presented ~~from~~gross ain ~~business~~our ~~combination~~statements ~~transaction~~of asoperations ~~adjustments~~and towould ~~income~~be ~~tax~~reduced ~~expense.~~by ~~The~~the ~~adoption~~non-credit loss amount of ~~SFAS~~the ~~141R~~total ~~did~~OTTI ~~not~~recognized ~~have~~in aAOCI. There ~~material~~was ~~impact~~no oninitial ~~our~~effect ~~financial~~of ~~position,~~our ~~results~~adoption of ~~operations~~ASC 320-10-65 on April 1, ~~cash~~2009 ~~flows~~ as we have no securities that have previously been or ~~disclosures~~are currently deemed as other-than-temporarily impaired.

InEffective April 1, 2009, ~~the~~we ~~FASB~~adopted ~~issued~~ASC ~~Staff Position (FSP) No. 141R~~820-110-65, ~~Accounting~~Fair ~~for~~Value ~~Assets~~Measurements and ~~Liabilities~~Disclosures-Overall-Transition ~~Assumed~~and inOpen aEffective ~~Business~~Date ~~Combination~~of ~~That~~Information ~~Arise From Contingencies~~ (~~FSP~~ASC ~~FAS 141R~~820-110-65). ~~FSP~~ASC ~~FAS 141R~~820-110-65 ~~amends~~provides ~~and~~additional ~~clarifies~~guidance ~~SFAS~~for ~~141R~~estimating tofair ~~address~~value ~~application~~in ~~issues~~accordance ~~regarding~~with ~~initial~~ASC ~~recognition~~820-10 ~~and~~when ~~measurement,~~the ~~subsequent~~volume ~~measurement~~ and ~~accounting~~level ~~and disclosure~~ of ~~assets~~activity ~~and~~for ~~liabilities~~an ~~arising~~asset ~~from~~or ~~contingencies~~liability inhave asignificantly ~~business combination~~decreased. ~~FSP~~ASC ~~FAS 141R~~820-110-65 also isincludes ~~effective~~guidance ~~for~~on ~~assets~~identifying orcircumstances ~~liabilities~~that ~~arising~~indicate ~~from~~a ~~contingencies~~transaction ~~in business combinations for which the acquisition date~~ is onnot ~~or after the beginning of the first annual reporting period beginning on or after December 15, 2008~~orderly. The adoption of ~~FSP~~ASC ~~FAS 141R~~820-110-65 did not have a material impact on our financial position, consolidated results of operations, cash flows or disclosures.

Effective ~~January~~April 1, ~~2008~~2009, we adopted ~~SFAS~~FASB ~~No. 157,~~ASC ~~Fair Value Measurements (SFAS 157)~~825-10-65, ~~with~~Financial ~~respect~~Instruments to– ~~our~~Overall ~~financial~~– ~~assets~~Transition and ~~liabilities.~~Open InEffective ~~February~~Date ~~2008,~~Information ~~the~~(ASC ~~FASB issued FSP No~~825-10-65). ~~FAS~~ASC ~~157~~825-2,10-65 ~~Effective~~amends ~~Date~~ASC of825-10 ~~FASB~~to ~~Statement~~require ~~No. 157,~~disclosures ~~which~~about ~~provided~~fair avalue ~~one year deferral~~ of ~~the~~financial ~~effective~~instruments ~~date~~in ofinterim ~~SFAS 157 for non-~~financial ~~assets~~statements ~~and~~as ~~non-financial~~well ~~liabilities, except~~as ~~those that are recognized or disclosed~~ in ~~the~~annual financial statements atand ~~fair~~also ~~value~~amends atASC 270-10, ~~least~~Interim ~~annually.~~Reporting ~~Therefore,~~– weOverall ~~adopted~~(ASC ~~the~~270-10), ~~provisions~~to ofrequire ~~SFAS~~those ~~157~~disclosures ~~for~~in ~~non-financial~~all ~~assets~~interim ~~and non-~~financial ~~liabilities~~statements. ~~effective~~The ~~January 1,~~adoption ~~2009,~~of ~~and such~~ASC ~~adoption~~825-10-65 did not have a material impact on our financial position, results of operations, cash flows or disclosures. See Note 2 for additional disclosures included in accordance with ASC 825-10-65.

Effective ~~April~~ January 1, 2009, we adopted ~~FSP~~FASB ~~FAS~~ASC ~~115~~350-230, ~~and~~Intangibles ~~FAS~~– ~~124-2,~~Goodwill ~~Recognition~~ and ~~Presentation of~~ Other -~~Than-Temporary~~ ~~Impairments~~General ~~(FSP~~Intangibles ~~FAS~~other ~~115-2).~~than ~~FSP~~Goodwill ~~FAS~~(ASC ~~115~~350-230) which amends the ~~other-than-temporary impairment (OTTI)~~ guidance in ~~U.S.~~ASC ~~GAAP~~350, toIntangibles ~~make~~– ~~the guidance~~Goodwill ~~more operational~~ and toOther ~~improve~~(ASC ~~the~~350) ~~presentation~~about ofestimating ~~other-than-temporary impairments in~~ the useful ~~financial~~lives ~~statements.~~of ~~Prior to FSP FAS 115-2, if OTTI had been determined to exist, we would have~~ recognized anintangible ~~OTTI~~assets ~~charge~~and ~~into~~requires ~~earnings~~additional indisclosures ~~an amount~~related ~~equal~~ to ~~the~~renewing ~~difference~~or ~~between~~extending the ~~investment’s~~terms ~~amortized cost basis and its fair value as~~ of ~~the~~recognized ~~balance~~intangible ~~sheet~~assets ~~date~~under ofASC ~~the reporting period~~350. ~~Under~~ASC ~~FSP FAS 115~~350-2,30 ifis ~~OTTI~~effective ~~has~~for ~~been~~financial ~~incurred,~~statements ~~and~~issued itfor ~~is more-likely-than-not that we will~~fiscal ~~not~~years, ~~sell~~and ~~the~~interim ~~investment~~periods ~~security~~within ~~before~~those ~~the~~fiscal ~~recovery of its amortized cost basis~~years, ~~then~~beginning ~~the~~after ~~OTTI is separated into (a)~~December ~~the~~15, ~~amount representing the credit loss and (b) the amount related to all other factors~~2008. The ~~amount~~adoption of ~~the~~ASC ~~total~~350-30 ~~OTTI related~~did tonot ~~the~~have ~~credit~~a ~~loss~~material isimpact ~~recognized~~on inour ~~earnings.~~financial ~~The amount of the total OTTI related to other factors would be recognized in accumulated other comprehensive income (AOCI). The total OTTI~~position, ~~which~~consolidated ~~would~~results ~~include both credit and non-credit losses, would be presented gross in our statements~~ of operations ~~and would be reduced by the non-credit loss amount of the total OTTI recognized in AOCI. There was no initial effect of our adoption of FSP FAS 115-2 on April 1~~, ~~2009~~cash asflows ~~we have no securities that have previously been~~ or ~~are currently deemed as other-than-temporarily impaired~~disclosures.

Effective April 1, 2009, we adopted ~~FSP~~ ~~FAS~~FASB ~~157~~ASC 855-410, ~~Determining~~Subsequent ~~Fair~~Events ~~Value~~- ~~When~~Overall ~~the~~(ASC ~~Volume~~855-10). ~~and~~ASC ~~Level~~855-10 establishes general standards of ~~Activity~~accounting for ~~the~~and ~~Asset~~disclosure orof ~~Liability~~events ~~Have~~that ~~Significantly~~occur ~~Decreased~~after ~~and~~the ~~Identifying~~balance ~~Transactions~~sheet ~~That~~date ~~Are~~but ~~Not~~before ~~Orderly~~financial ~~(FSP~~statements ~~FAS~~are ~~157-4)~~issued or are available to be issued. It ~~FSP~~requires ~~FAS~~the ~~157-4~~disclosure ~~provides~~of ~~additional~~the ~~guidance~~date through which an ~~for~~entity ~~estimating~~has ~~fair~~evaluated ~~value~~subsequent inevents ~~accordance~~and ~~with~~the ~~SFAS~~basis ~~157~~for ~~when~~that ~~the~~date ~~volume~~- ~~and~~that ~~level~~is, ofwhether ~~activity~~that ~~for~~date anrepresents ~~asset~~the date the financial statements were issued or ~~liability~~were ~~have~~available ~~significantly~~to ~~decreased~~be issued. This ~~FSP~~disclosure ~~FAS~~should ~~157-4~~alert ~~also~~all ~~includes~~users ~~guidance~~of onfinancial statements ~~identifying~~that ~~circumstances~~an ~~that~~entity ~~indicate~~has anot ~~transaction~~evaluated issubsequent ~~not orderly.~~events ~~The~~after ~~adoption~~that date in the set of ~~FSP~~financial ~~FAS~~statements ~~157~~being presented. Adoption of ASC 855-410 did not have a material impact on our financial position, consolidated results of operations, cash flows or disclosures.

Effective ~~April~~July 1, 2009, we adopted ~~FSP~~FASB ~~FAS~~ASU ~~107~~2009-105, ~~and~~Fair ~~Accounting~~Value ~~Principles~~Measurements ~~Board~~and Disclosures (~~APB~~Topic 820) 28(ASU 2009-1,05). ~~Interim~~ASU ~~Disclosures~~2009-05 ~~About~~provided ~~Fair~~amendments ~~Value~~to ofASC ~~Financial~~820-10 ~~Instruments~~pertaining ~~(FSP~~to ~~FAS~~the ~~107-1).~~fair ~~FSP~~value ~~FAS~~measurement ~~107~~of liabilities. ASU 2009-105 ~~amends~~provides ~~SFAS~~clarification ~~No. 107,~~that ~~Disclosures~~in circumstances in which a quoted price in an active market ~~about~~for ~~Fair~~the ~~Value~~identical ofliability ~~Financial~~is ~~Instruments~~not available, a reporting entity is required to ~~require~~measure ~~disclosures~~fair ~~about~~value using certain techniques. ASU 2009-05 also clarifies that when estimating the fair value of ~~financial~~a ~~instruments~~liability, ina ~~interim~~reporting ~~financial~~entity ~~statements~~is asnot ~~well~~required asto ininclude a ~~annual~~separate ~~financial~~input ~~statements~~or ~~and~~adjustment ~~also~~to ~~amends~~other ~~APB~~inputs ~~Opinion~~relating Noto the existence of a restriction that prevents the transfer of a liability. ~~28,~~ ~~Interim~~ASU ~~Financial~~2009-05 also clarifies that both a quoted price in an active market for the identical liability at the ~~Reporting,~~measurement todate ~~require~~and ~~those~~the ~~disclosures~~quoted price for the identical liability when traded as an asset in ~~all~~an ~~interim~~active ~~financial~~market ~~statements.~~when ~~The~~no ~~adoption~~adjustments to the quoted price of ~~FSP~~the ~~FAS~~asset ~~107~~are required are level one fair value measurements. Adoption of ASU 2009-105 did not have a material impact on our financial position, results of operations, cash flows or disclosures.

~~Effective~~8 January 1, 2009, we adopted FSP FAS No. 142-3, Determination of the Useful Life of Intangible Assets (FSP FAS 142-3), which amends the guidance about estimating the useful lives of recognized intangible assets and requires additional disclosures related to renewing or extending the terms of recognized intangible assets under SFAS No. 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008. The adoption of FSP FAS 142-3 did not have a material impact on our financial position, results of operations, cash flows or disclosures.

INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

~~JUNE~~SEPTEMBER 30, 2009 (Unaudited)

continued…..

Effective April 1, 2009, we adopted FASB Statement No. 165, Subsequent Events (SFAS 165). SFAS 165 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. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. Adoption of SFAS 165 did not have a material impact on our financial position, results of operations, cash flows or disclosures.

In June 2009, the FASB issued Statement No. 168, The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles (SFAS 168). SFAS 168 establishes the FASB Accounting Standards Codification (the Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification will supersede all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative. Following SFAS 168, the FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates. The FASB will not consider Accounting Standards Updates as authoritative in their own right. Accounting Standards Updates will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification. We will update our disclosures to conform to the Codification in our Quarterly Report on Form 10-Q for the third quarter of 2009.

2. Short-Term Investments

As part of our cash management program, we maintain a portfolio of marketable securities, which we classify as held-to-maturity. These investments are categorized as held-to-maturity because our management has the intent and ability to hold these securities to maturity. Held-to-maturity investments are stated at amortized cost, which approximates fair value. Interest income is accrued as earned. We do not have any investments classified as available-for-sale or trading.

Our marketable securities consist of a laddered portfolio of investment grade debt instruments consisting of obligations of the U.S. Treasury and U.S. Federal Home Loan Bank System. None of our held-to-maturity investments had maturities beyond 275 days as of ~~June~~ September 30, 2009. In addition, none of our held-to-maturity investments had maturities beyond 364 days at the time of purchase.

InThe ~~accordance with SFAS 157, the~~ following table represents the fair value (based on level one inputs) of our held-to-maturity investments, all of which were included in short-term investments, as of ~~June~~September 30, 2009 (in thousands):

	AmortizedCost		GrossUnrealizedHoldingGains		GrossUnrealizedHoldingLosses		AccruedInterest		FairValue
U.S. Treasury securities	$	1224,~~499~~457	$	1—	$	—10	$	—	$	1224,~~500~~447
U.S. Federal Home Loan Bank System securities		12,~~506~~510		3125		—		2142		12,~~558~~577
Total short-term investments	$	2536,~~005~~967	$	3225	$	—10	$	2142	$	2537,~~058~~024

Accrued interest relates to a U.S. Federal Home Loan Bank System security which has a coupon rate of 3.75%. Interest is payable to us on October 1, 2009 and April 1, 2010.

As of ~~June~~September 30, 2009, we did not have liabilities or non-financial assets that are measured on a fair value basis on a recurring basis.

As of ~~June~~ September 30, 2009, the weighted average maturities for the U.S. Treasury securities and the U.S. Federal Home Loan Bank System securities were 05.30 months and 63.98 months, respectively. As of ~~June~~September 30, 2009, the weighted average maturity for total short-term investments was 34.6 months.

INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009 (Unaudited)

continued…..

3. Balance Sheet Components

Inventory

Inventory consisted of the following (in thousands):

	June 30,2009		December 31,2008
	September 30,2009		December 31,2008
Finished goods	$	23,~~521~~083	$	3,103
Work-in-process		3,~~496~~584		5,186
Raw materials		9186		104
		6,108		8,393
		6,753		8,393
Less: inventory reserves for obsolescence and excess inventory		399		364
Inventory, net	$	56,~~709~~354	$	8,029

The following table summarizes the activity in the inventory reserves for obsolescence and excess inventory for the stated periods (in thousands):

Balance, December 31, 2008	$	364
Additions charged to costs		43
Deductions		(8	)
Balance, June 30, 2009	$	399
Balance, September 30, 2009	$	399

Intangible Assets

Intangible assets consisted of the following (in thousands):

	June 30,2009		December 31,2008
Patents	$	2,898	$	2,696
Trademarks		69		66
Trademarks not subject to amortization		9		9
		2,976		2,771
Less: accumulated amortization		405		368
Intangible assets, net	$	2,571	$	2,403

Amortization expense for intangible assets for the three months ended June 30, 2009 and 2008 was approximately $19,000 and $14,000, respectively. Amortization expense for intangible assets for the six months ended June 30, 2009 and 2008 was approximately $37,000 and $26,000, respectively. At June 30, 2009, estimated amortization expense for the remainder of 2009 and years thereafter is as follows (in thousands):

	Estimatedamortizationexpense
2009 (remaining six months)	$	38
2010		174
2011		170
2012		168
2013		167
Thereafter		1,845
Total expected amortization expense	$	2,562

INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

~~JUNE~~SEPTEMBER 30, 2009 (Unaudited)

~~continued…..~~Intangible Assets

Intangible assets consisted of the following (in thousands):


	September 30, 2009		December 31, 2008
Patents	$	3,002	$	2,696
Trademarks		72		66
Trademarks not subject to amortization		9		9

		3,083		2,771
Less: accumulated amortization		388		368

Intangible assets, net	$	2,695	$	2,403

Amortization expense for intangible assets for the three months ended September 30, 2009 and 2008 was approximately $19,000 and $22,000, respectively. Amortization expense for intangible assets for the nine months ended September 30, 2009 and 2008 was approximately $56,000 and $48,000, respectively. At September 30, 2009, estimated amortization expense for the remainder of 2009 and years thereafter is as follows (in thousands):


	Estimated amortization expense
2009 (remaining three months)	$	20
2010		182
2011		179
2012		177
2013		176
Thereafter		1,952

Total expected amortization expense	$	2,686

Accrued Expenses

Accrued expenses consisted of the following (in thousands):

	June 30,2009		December 31,2008
	September 30,2009		December 31,2008
Accrued employee incentives/bonuses	$	~~1,071~~589	$	927
Accrued vacation		~~766~~813		610
Other		~~670~~798		629
Total accrued expenses	$	2,~~507~~200	$	2,166

4. Net Income (Loss)

The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts):

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			~~2008~~	2008		2009			~~2008~~	2008
Numerator: Net income (loss)	$	~~327~~(429	)	$	~~(242~~$	)481	$	~~332~~(97	)	$	~~(1,187~~$	)(706	)
Denominator: Weighted average shares outstanding		31,~~340~~350			~~31,338~~	31,338		31,~~340~~343			~~31,258~~	31,285
Less: Unvested common shares outstanding		~~245~~200			~~460~~	399		~~269~~245			~~497~~	464
Denominator for basic net income (loss) per share		31,~~095~~150			~~30,878~~	30,939		31,~~071~~098			~~30,761~~	30,821
Effect of dilutive securities:
Incremental common shares attributable to unvested restricted stock and restricted stock units		~~246~~—			—	212		~~163~~—			—	—
Incremental common shares attributable to outstanding stock options		50—			—	24		22—			—	—
Denominator for diluted net income (loss) per share		31,~~391~~150			~~30,878~~	31,175		31,~~256~~098			~~30,761~~	30,821
Basic net income (loss) per share	$	(0.01	)	$	~~(0.01~~$	)0.02	$	(0.0100	)	$	~~(0.04~~$	)(0.02	)
Diluted net income (loss) per share	$	(0.01	)	$	~~(0.01~~$	)0.02	$	(0.0100	)	$	~~(0.04~~$	)(0.02	)

Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of vested common shares outstanding during the period. Diluted net income per common share is computed by using the weighted-average number of vested common shares outstanding during the period and, when dilutive, potential dilutive common shares, including options, restricted common stock and restricted stock units (RSUs). For the three and six months ended June 30, 2009, diluted net income per common share includes the dilutive effects of stock options, restricted common stock and RSUs. Because we reported a net loss for the three and six months ended June 30, 2008, all potential dilutive common shares have been excluded from the computation of the diluted net loss per share for that period because the effect would have been antidilutive. The excluded potential common shares for the periods presented consist of the following (weighted average in thousands):

INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

~~JUNE~~SEPTEMBER 30, 2009 (Unaudited)

~~continued…~~Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of vested common shares outstanding during the period. Diluted net income per common share is computed by using the weighted-average number of vested common shares outstanding during the period and, when dilutive, potential dilutive common shares, including options, restricted common stock and restricted stock units (RSUs). For the three months ended September 30, 2008, diluted net income per common share includes the dilutive effects of stock options and restricted common stock. Because we reported a net loss for the three and nine months ended September 30, 2009, and the nine months ended September 30, 2008, all potential dilutive common shares have been excluded from the computation of the diluted net loss per share for that period because the effect would have been antidilutive. The excluded potential common shares for the periods presented consist of the following (weighted average in thousands):

	Three Months Ended June 30,		Six Months Ended June 30,
	Three Months Ended September 30,		Nine Months Ended September 30,
	2009	2008	2009	2008
Restricted common stock	—	366	—	403
Restricted common stock and RSUs	908	—	647	370
Contingent restricted common stock	94	94	94	94
Options to purchase common stock	2,~~466~~847	2,~~669~~646	3,~~176~~091	2,~~278~~431
Total	23,~~560~~849	32,~~129~~740	3,~~270~~832	2,~~775~~895

5. Stock-Based Compensation

Stock-Based Compensation Plans

We currently award equity incentive compensation under one stock-based compensation plan, the Intellon Corporation 2007 Equity Incentive Plan (2007 Plan), which became effective upon our IPO in December 2007. The 2007 Plan allows for the grant of incentive and non-qualified stock options, as well as restricted common stock, RSUs, stock appreciation rights, performance units and performance shares to employees, directors, and consultants and any parent and subsidiary corporations’ employees and consultants. Our 2007 Plan provides for annual increases in the number of shares available for issuance thereunder on January 1 of each year, beginning with our 2009 fiscal year, equal to the least of (a) 4% of the outstanding shares of our common stock on the immediately preceding December 31, (b) 2,000,000 shares, or (c) such other amount as our board of directors may determine.

On January 1, 2009, the number of shares available for future grant under the 2007 Plan increased by approximately 1.3 million shares to 1.9 million shares pursuant to this provision. As of ~~June~~September 30, 2009, approximately 1.10 million shares were available for future grant under the 2007 Plan.

Stock-Based Compensation Expense

The fair value of the stock options granted to employees and officers for the periods presented was estimated using the following weighted average assumptions (excluding stock options granted in connection with the Tender Offer, see below):

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
Dividend yields		None			None			None			None
Expected volatility		6657.03	%		4962.60	%		64.86	%		5051.30	%
Risk-free interest rate		32.14	%		23.62	%		2.2	%		2.4	%
Expected lives (in years)		75.81			26.26			5.4			3.13
Weighted average fair value at grant date	$	23.6250		$	12.3226		$	1.3437		$	2.0507

INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

~~JUNE~~SEPTEMBER 30, 2009 (Unaudited)

~~continued…..~~The following table summarizes the stock-based compensation expense related to stock option, restricted common stock and RSU grants for the periods presented, which was allocated as follows (in thousands):

The following table summarizes the stock-based compensation expense related to stock option, restricted common stock and RSU grants under SFAS 123 (revised 2004), Share-Based Payment (SFAS 123(R), for the periods presented, which was allocated as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2009		2008		2009		2008
Stock-based compensation expense by caption:
Research and development	$	178	$	136	$	503	$	374
Sales and marketing		143		109		397		294
General and administrative		317		206		821		592


Total stock-based compensation expense	$	638	$	451	$	1,721	$	1,260


	Three Months Ended September 30,				Nine Months Ended September 30,
	2009		2008		2009		2008
Stock-based compensation expense by type of award:
Stock options	$	433	$	408	$	1,324	$	1,113
Restricted common stock and RSUs		205		43		397		147


Total stock-based compensation expense	$	638	$	451	$	1,721	$	1,260

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
Stock-based compensation expense by caption:
Research and development	$	178	$	138	$	325	$	238
Sales and marketing		141		109		254		185
General and administrative		278		206		505		386
Total stock-based compensation expense	$	597	$	453	$	1,084	$	809

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
Stock-based compensation expense by type of award:
Stock options	$	465	$	406	$	892	$	705
Restricted common stock and RSUs		132		47		192		104
Total stock-based compensation expense	$	597	$	453	$	1,084	$	809

No tax benefit has been recognized on the stock-based compensation expense for either period presented. We do not expect to recognize any income tax benefits relating to stock-based compensation expense until we determine that such tax benefits are more likely than not to be realized.

Stock Option Activity

The exercise price of options granted under our 2007 Plan must at least be equal to the fair market value of our common stock on the date of grant. The term of an incentive stock option may not exceed ten years, except that with respect to any participant who owns over 10% of the voting power of all classes of our outstanding stock as of the grant date, the term of an incentive stock option must not exceed five years and the exercise price must equal at least 110% of the fair market value on the grant date. Grants and awards under the 2007 Plan generally vest as follows: 25% of the shares will vest on the first anniversary of the vesting commencement date and the remaining 75% will vest proportionately each quarter thereafter over the next twelve quarters of continued service.

On May 1, 2009, we announced a stock option exchange program (Tender Offer) under which we offered all employees, officers and directors the opportunity to tender any outstanding stock options issued under the 2007 Plan with an exercise price equal to or greater than $5.50 per share (Eligible Options) in exchange for a lesser number of either new non-qualified stock options or RSUs, depending on the participant’s election. A participant who elected to receive new stock options was entitled to receive one new stock option for each 1.10 Eligible Options tendered for exchange. A participant who elected to receive RSUs was entitled to receive one new RSU for each 2.03 Eligible Options tendered for exchange.

The Tender Offer expired on May 29, 2009. We accepted for exchange Eligible Options to purchase 1,482,195 shares of our common stock from 93 eligible participants, representing 99% of the total Eligible Options. On June 1, 2009, under the terms and subject to the conditions set forth in the Tender Offer, we issued new non-qualified stock options to purchase 644,466 shares of our common stock at an exercise price of $3.75 per share and new RSUs for 380,898 shares of our common stock in exchange for the tendered Eligible Options.

The new stock options and RSUs issued to employees and officers will vest on a three-and-one-half-year schedule, with 25% of the shares vesting on the six-month anniversary of the grant date and the remaining 75% vesting proportionately each quarter thereafter over the next twelve quarters of continued service. The new stock options and RSUs issued to non-employee directors will vest on a two-year schedule, with 50% of the shares vesting on each of the one- and two-year anniversaries of the grant date. The new stock options will remain exercisable for a maximum term of seven years from the grant date.

INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

~~JUNE~~SEPTEMBER 30, 2009 (Unaudited)

~~continued…~~ fair value of the RSUs immediately after the exchange was equal to the closing price of our common stock as reported on the NASDAQ Global Market on June 1, 2009. There was no incremental compensation cost associated with the Tender Offer. The total unrecognized compensation costs of the tendered Eligible Options will be recognized over a weighted-average period of 2.7 years.

~~thereafter over the next twelve quarters of continued service.~~ The ~~new~~following ~~stock~~table ~~options~~summarizes ~~and~~option ~~RSUs~~activity ~~issued~~for tothe ~~non-employee~~nine ~~directors~~month ~~will~~period ~~vest~~ended ~~on a two-year schedule~~September 30, ~~with~~2009 ~~50%~~for ofall ~~the shares vesting on each~~ of ~~the~~our ~~one- and two-year anniversaries of the grant date. The new~~ stock options ~~will remain exercisable for a maximum term of seven years from the grant date.~~ :

The fair value for the tendered Eligible Options immediately prior to the exchange was estimated using the Black-Scholes valuation model with the following weighted-average assumptions: dividend yield of 0.0%; expected volatility of 60.3%; risk-free interest rate of 3.1%; and expected life of 6.8 years. The fair value for the new stock options immediately after the exchange was estimated using the Black-Scholes valuation model with the following weighted-average assumptions: dividend yield of 0.0%; expected volatility of 60.3%; risk-free interest rate of 2.3%; and expected life of 4.6 years. The weighted average fair value of the tendered Eligible Options immediately prior to the exchange was $1.95 per stock option and the weighted average fair value of the new stock options immediately after the exchange was $1.88 per stock option. The fair value of the RSUs immediately after the exchange was equal to the closing price of our common stock as reported on the NASDAQ Global Market on June 1, 2009. There was no incremental compensation cost associated with the Tender Offer. The total unrecognized compensation costs of the tendered Eligible Options will be recognized over a weighted-average period of 2.7 years.


	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value
	(in thousands, except exercise price and contractual term)
Options outstanding at December 31, 2008	2,778		$	6.22	9.1	$	60
Granted (1)	1,655			2.91
Exercised	(30	)		3.41
Cancelled/forfeited (1)	(1,566	)		5.68

Options outstanding at September 30, 2009	2,837			4.62	8.1		8,357

Options vested and expected to vest after September 30, 2009 (2)	2,773			4.62	8.1		8,160

Options exercisable at September 30, 2009	565			6.85	7.7		758

(1) The ~~following~~number ~~table~~of ~~summarizes option~~options ~~activity~~granted ~~for~~and ~~the~~cancelled/forfeited ~~six~~includes ~~month~~options ~~period~~granted ~~ended~~and ~~June 30,~~cancelled ~~2009~~in ~~for~~connection ~~all~~with ofthe ~~our~~Tender ~~stock options:~~ Offer.

	Shares		WeightedAverageExercisePrice		WeightedAverageRemainingContractualTerm (years)	AggregateIntrinsic Value
	(in thousands, except exercise price and contractual term)
Options outstanding at December 31, 2008	2,778		$	6.22	9.1	$	60
Granted (1)	1,640			2.87
Exercised	(4	)		1.04
Canceled/forfeited (1)	(1,558	)		5.68
Options outstanding at June 30, 2009	2,856			4.60	8.4		2,556
Options vested and expected to vest after June 30, 2009 (2)	2,790			4.60	8.4		2,495
Options exercisable at June 30, 2009	498			6.80	7.9		133

(1) The number of options granted and canceled/forfeited includes options granted and canceled in connection with the Tender Offer.

(2)	Options expected to vest reflect an estimated forfeiture rate.

At ~~June~~September 30, 2009, the total unrecognized stock-based compensation related to options granted under our share-based compensation plans ~~accounted for under SFAS 123(R)~~ was approximately $43.17 million. These options had a ~~remaining~~ remaining weighted-average period of 2.75 years over which the expense is expected to be recognized.

Restricted Common Stock Activity

Restricted common stock grants typically vest over a four-year period. Restricted common stock (all of which are shares of our common stock) is subject to forfeiture if employment terminates prior to vesting. The cost of these awards is determined using the fair value of our common stock on the date of the grant, and compensation expense is recognized on a straight-line basis over the requisite vesting period.

The following table summarizes restricted stock activity for the nine month period ended September 30, 2009 for all of our restricted stock:


	Restricted Common Stock Awards Outstanding		Weighted-Average Grant Date Fair Value
	(in thousands)
Balance, December 31, 2008	315		$	1.50
Granted	—			—
Vested	(138	)		0.93
Forfeited	(2	)		0.20

Balance, September 30, 2009	175			1.97

The total unrecognized stock-based compensation expense for restricted stock was approximately $324,000 as of September 30, 2009. The total unrecognized stock-based compensation expense related to restricted stock awards subject to a four year vesting schedule was approximately $137,000 as of September 30, 2009. These unvested restricted common stock awards will vest on a weighted-average basis over a period of 0.9 years from September 30, 2009. The total unrecognized stock-based compensation expense related to awards which vest upon either the consummation of a change in control as defined in the executive’s employment agreement or the consummation of an underwritten initial public offering of our equity securities, in either case that meets a certain valuation requirement, was approximately $187,000 as of September 30, 2009.

INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

~~JUNE~~SEPTEMBER 30, 2009 (Unaudited)

continued…..

The following table summarizes restricted stock activity for the six month period ended June 30, 2009 for all of our restricted stock:

	RestrictedCommonStock AwardsOutstanding		Weighted-AverageGrant Date FairValue
	(in thousands)
Balance, December 31, 2008	315		$	1.50
Granted	—			—
Vested	(92	)		0.93
Forfeited	(3	)		0.20
Balance, June 30, 2009	220			1.76

The total unrecognized stock-based compensation expense for restricted stock was approximately $365,000 as of June 30, 2009. The total unrecognized stock-based compensation expense related to restricted stock awards subject to a four year vesting schedule was approximately $178,000 as of June 30, 2009. These unvested restricted common stock awards will vest on a weighted-average basis over a period of 0.9 years from June 30, 2009. The total unrecognized stock-based compensation expense related to awards which vest upon either the consummation of a change in control as defined in the executive’s employment agreement or the consummation of an underwritten initial public offering of our equity securities, in either case that meets a certain valuation requirement, was approximately $187,000 as of June 30, 2009.

Restricted Stock Unit Activity

We began granting RSUs under the 2007 Plan during the first quarter of 2009. RSUs will convert into shares of our common stock upon vesting on a one-for-one basis. Our RSU grants typically vest as follows: 25% of the shares will vest on the first anniversary of the vesting commencement date and the remaining 75% will vest proportionately each quarter thereafter over the next twelve quarters of continued service. RSUs are subject to forfeiture if employment terminates prior to vesting. The cost of these awards is determined using the fair value of our common stock on the date of the grant, and compensation expense is recognized on a straight-line basis over the requisite vesting period.

The following table summarizes RSU activity under the 2007 Plan for the ~~six~~nine month period ended ~~June~~September 30, 2009 for all of our RSUs:

	RestrictedStock UnitsOutstanding		Weighted-AverageGrant Date FairValue
	(in thousands)
Balance, December 31, 2008	—		$	—
Granted (1)	805			2.97
Vested	—			—
Forfeited	(3	)		2.88
Balance, June 30, 2009	802			2.97
Balance, September 30, 2009	802			2.97

(1)	The number of RSUs includes RSUs granted in connection with the Tender Offer.

The total unrecognized stock-based compensation expense for RSUs was approximately $21.08 million as of ~~June~~September 30, 2009. The unvested RSUs will vest on a weighted-average basis over a period of 3.52 years from ~~June~~ September 30, 2009.

6. Commitments

Lease Commitments

We lease all of our facilities and certain of our equipment under non-cancelable terms that expire at various dates through ~~2013~~2016. Rent expense for our leased facilities was approximately $~~221~~233,000 and $~~206~~234,000 for the three months ended ~~June~~September 30, 2009 and 2008, respectively. Rent expense for our leased facilities was approximately $~~435~~668,000 and $~~386~~620,000 for the ~~six~~nine months ended ~~June~~September 30, 2009 and 2008, respectively. In March 2009, we entered into an amendment to our operating lease for a sales office in San Jose, California, which extended the term of the lease through March 31, 2010 and reduced the area leased from approximately 4,300 square feet to 2,824 square feet. In September 2009, we entered into an operating lease for approximately 24,502 square feet of office space in Ocala, Florida for a seven year lease term (subject to our option to terminate the lease after five years). We intend to move our current Ocala research and production facility to the new premises.

INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009 (Unaudited)

continued…..

Legal Proceedings

We are not currently a party to any legal proceedings that we believe would have a material adverse effect on our consolidated financial position, results of operations or cash flows.

7. Segment and Geographic Information and Significant Customers

We have determined that we are organized as, and operate in, one reportable segment: the design, license and marketing of integrated circuits. Our chief operating decision maker is our Chief Executive Officer.

Revenue by geographic area is presented based upon the country of destination. Export sales were $1615.24 million ~~for~~and ~~each~~$18.8 ofmillion for the three months ended ~~June~~September 30, 2009 and 2008, respectively, and $3046.40 million and $3049.20 million for the ~~six~~nine months ended ~~June~~September 30, 2009 and 2008, respectively. Export sales were primarily attributable to customers located in Asia and Europe. We believe a substantial portion of the products sold to distributors and original equipment manufacturers (OEMs) in Asia is ultimately shipped to end-markets in the Americas and Europe. Although a significant portion of our revenue is from customers located outside of the U.S., all sales are denominated in U.S. dollars.

INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

SEPTEMBER 30, 2009 (Unaudited)

A change in or loss of one or more of our customers could adversely affect results of operations. The following table illustrates the concentration of revenue for customers that individually accounted for 10% or more of total revenue.

	Three Months Ended June 30,				Six Months Ended June 30,
	Three Months Ended September 30,				Nine Months Ended September 30,
	2009		2008		2009		2008
devolo AG (OEM)	24	%	17	%	24	%	18	%
Free (Service Provider)	21	%	18	%	22	%	19	%
Free (Service Provider)	21	%	20	%	22	%	19	%
devolo AG (OEM)	15		20		21		19
Chenmtech Co Ltd (Distributor)	14	%	*10		1213	%	*
Lumax International Corporation (Distributor)	*		12	%	*		14	%
EchoStar (Service Provider)	13		*		*		*
Aztech Systems Ltd (OEM)	*		11	%	*		*
Jabil Circuit India Pvt Ltd (ODM)	*		12		*		*
Lumax International Corporation (Distributor)	*		12		*		13

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

Three customers accounted for a total of 6461.38% and 57.4% of accounts receivable at ~~June~~September 30, 2009 and December 31, 2008 , respectively.

8. Income Taxes

During the three and ~~six~~ nine months ended ~~June~~September 30, 2009, we recognized approximately $4420,000 and $90110,000, respectively, of income tax benefit related to our Canadian subsidiary and approximately $1345,000 and $3075,000, respectively, in U.S. Federal income tax expense. Our practice is to recognize interest and penalties related to income tax matters as a component of income tax expense. As of ~~June~~September 30, 2009, we had no accrued interest or any penalty associated with any unrecognized tax benefits, nor was any interest expense recognized during the three and ~~six~~nine months ended ~~June~~September 30, 2009.

We recognize deferred tax assets and liabilities on differences between the book and tax basis of assets and liabilities using currently effective tax rates. Further, deferred tax assets are recognized for the expected realization of available net operating loss carryforwards. A valuation allowance is recorded to reduce a deferred tax asset to an amount that we expect to realize in the future. At ~~June~~September 30, 2009, we had recorded a full valuation allowance against the net deferred tax asset, based on our belief that available objective evidence created sufficient uncertainty regarding the realizability of our deferred tax assets. We review the adequacy of the valuation allowance on an ongoing basis and recognize these benefits if a reassessment indicates that it is more likely than not that these benefits will be realized. In addition, we evaluate our tax contingencies on an ongoing basis and recognize a liability when we believe that it is probable that a liability exists.

INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2009 (Unaudited)

continued…..

9. Option Exchange

On April 28, 2009, our Board of Directors approved an offer to exchange outstanding stock options to purchase 1,504,195 shares of our common stock.

Under the terms of the stock option exchange program, we offered each of our employees, executive officers and directors the opportunity to tender any outstanding stock options issued under our 2007 Plan with an exercise price equal to or greater than $5.50 per share in exchange for a lesser number of either new non-qualified stock options or stock-settled RSUs, depending on the participant’s election. A participant who elected to receive new stock options received one new stock option for each 1.10 stock options tendered for exchange. A participant who elected to receive RSUs received one new RSU for each 2.03 stock options tendered for exchange. Each new stock option or new RSU granted to our employees ~~will~~vests ~~vest~~ on a three-and-one-half-year schedule, with 25% of the shares subject to the new stock option or new RSU vesting on the six-month anniversary of the grant date of the new award, and the remaining unvested portion vesting ratably on a quarterly basis over the succeeding twelve quarters. Each new stock option or new RSU granted to our non-employee directors ~~will~~vests ~~vest~~ on a two-year schedule, with 50% of the shares subject to the new stock option or new RSU vesting on each of the one- and two-year anniversaries of the grant date of the new award. The new stock options will remain exercisable for a maximum term of seven years from the grant date of the new stock options. The exercise price of the new stock options was $3.75, the closing price of our common stock as reported on the NASDAQ Global Market on the date the new stock options were granted. The offer expired on May 29, 2009 and the new stock options and RSUs were granted on June 1, 2009.

This stock option exchange program was intended to provide additional incentive and retention value for participants and better align the participants’ interests with those of our stockholders. The stock option exchange program was designed with the goal that the current fair value of the stock options surrendered would be approximately the same as the fair value of the new stock options or RSUs received. This goal was achieved. No incremental compensation cost was incurred as a result of the stock option exchange program.

The terms and conditions of the stock option exchange program are contained in a Tender Offer Statement on Schedule TO that we filed with the ~~Securities and~~SEC ~~Exchange Commission~~ on April 30, 2009.

~~10.~~15 ~~Subsequent Events~~

~~During~~INTELLON ~~August~~CORPORATION 2009, the compensation committee of our board of directors approved awards of approximately $899,900 to be paid to our executive officers and employees under our Annual Cash Incentive Plan for performance during the first half of 2009.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

SEPTEMBER 30, 2009 (Unaudited)

10. Proposed Merger with Atheros

On September 8, 2009, we entered into a definitive merger agreement with Atheros pursuant to which Atheros will acquire us in a stock and cash transaction. Under the merger agreement, and subject to the satisfaction or waiver of certain conditions set forth in the merger agreement, a wholly-owned subsidiary of Atheros (Merger Sub 1) will merge with and into us, and we will continue as the surviving entity and a wholly-owned subsidiary of Atheros. Immediately after this merger, we will then be merged with and into another wholly-owned subsidiary of Atheros (Merger Sub 2) with Merger Sub 2 continuing as the surviving entity, and we would no longer be a separate company.

In the event the merger is consummated, on the closing, each outstanding share of our common stock will be automatically converted into the right to receive Atheros common stock and equivalents (including the assumption of our outstanding restricted stock units and stock options) representing between 45 and 55 percent of the total consideration in the merger and with the remainder being paid in cash, providing an overall value of $7.30 per share based on the five-day average closing price of Atheros as of September 4, 2009. Our stockholders may elect to receive, for each share of our common stock, either: (i) a combination of approximately 0.135 shares of Atheros common stock and $3.60 in cash; (ii) up to $7.30 in cash, with any portion not paid in cash paid in stock; or (iii) up to 0.267 shares of Atheros common stock, with any portion not paid in stock paid in cash; provided, however, that each of the aforementioned elections will be subject to adjustment and proration provisions as described in the merger agreement.

Also in connection with the merger: (i) all outstanding options to purchase our common stock granted pursuant to one of our stock-based compensation plans will be converted into options to acquire, on substantially identical terms and conditions, a number of shares of Atheros common stock determined by multiplying the number of shares of our common stock subject to such stock options immediately prior to the closing of the merger by the Option Exchange Ratio (as such term is defined in the merger agreement); provided, however, that certain options held by persons who are not our employees or consultants, including non-employee members of our board of directors, will be cancelled and automatically converted into the right to receive an amount in cash equal to the product of (A) the number of shares of our common stock that were issuable upon exercise or settlement of such options immediately prior to the closing and (B) $7.30, less the per share exercise price of such options; (ii) all outstanding awards of our restricted stock units will be converted, on substantially identical terms and conditions, into restricted stock units of Atheros common stock, except that such restricted stock units will represent the right to receive, upon vesting, 0.267 shares of Atheros common stock; and (iii) each outstanding award of our restricted common stock shall be converted, on substantially identical terms and conditions, into the number of shares of restricted Atheros common stock and/or cash, as the case may be, as elected by each holder of our restricted common stock pursuant to such stockholder’s election described above.

The merger is subject to customary closing conditions, including, among others: (i) the approval of the merger by our stockholders; (ii) having an effective registration statement on Form S-4 with respect to the Atheros common stock to be issued in connection with the merger; (iii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; and (iv) our entry into a license agreement with an affiliate of Atheros. The merger is intended to qualify as a tax-free reorganization for federal income tax purposes. The merger agreement includes a number of customary representations, warranties, covenants and agreements. Our board of directors has, subject to certain exceptions, agreed to recommend the adoption and approval of the merger agreement and approval of the merger and has agreed, among other things, to refrain from soliciting, initiating or taking any action to knowingly facilitate or knowingly encourage any inquires or indications of interest regarding an alternative business combination transaction to the merger. The merger agreement also places certain restrictions on us during the period prior to the transaction closing. The merger agreement may be terminated by mutual agreement of Atheros and us or by either Atheros or us under certain circumstances, and we may, under certain specified circumstances, be required to pay Atheros a termination fee of $8.5 million.

In connection with the execution of the merger agreement, our executive officers, each of the members of our board of directors and certain of our stockholders have entered into a support agreement pursuant to which, among other things, each of such persons has agreed (i) to vote his, her or its shares of our common stock (A) in favor of the merger, the merger agreement and the transaction contemplated thereby and (B) against approval of any proposal made in opposition to the consummation of the merger; and (ii) subject to certain exceptions, to refrain from disposing of his, her or its shares of our common stock or soliciting alternative acquisition proposals to the merger. We expect to distribute to our stockholders a definitive proxy statement/prospectus related to a special meeting of stockholders to consider and vote on a proposal to approve and adopt the merger agreement with Atheros and approve the merger. The acquisition is expected to close during the fourth quarter of 2009. However, factors outside of management’s control could delay or prevent completion of the proposed merger.

In the third quarter of 2009, we incurred merger related expenses of approximately $1.8 million.

The foregoing description of the merger agreement is qualified in its entirety by reference to the full text of the merger agreement, a copy of which was filed as Exhibit 2.1 to the Current Report on Form 8-K that we filed with the SEC on September 9, 2009. A detailed description of the terms of the merger agreement and other relevant information is also provided in the registration statement on Form S-4 filed with the SEC by Atheros.

INTELLON CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

SEPTEMBER 30, 2009 (Unaudited)

11. Subsequent Events

During October 2009, we granted a total of 2,000 non-qualified stock options to new employees at an exercise price of $7.49 per share, which is equal to the closing sales price for our common stock as quoted on the NASDAQ Global Market on the date of grant.

Additional Information

In connection with the proposed acquisition of us by Atheros, Atheros has filed a registration statement on Form S-4 containing a proxy statement/prospectus and other documents concerning the proposed acquisition with the SEC. Investors and security holders are urged to read the proxy statement/prospectus and any amendments thereto when they become available and other relevant documents filed with the SEC regarding the proposed transaction because they will contain important information. Investors and security holders may obtain a free copy of the proxy statement/prospectus, as amended (when it is available), and other documents filed by Atheros and us with the SEC at the SEC’s website at www.sec.gov. The proxy statement/prospectus, as amended (when available) and other documents filed with the SEC may also be obtained for free by contacting Atheros Investor Relations by e-mail at ir@atheros.com or by telephone at (408) 830-5762 or by contacting Intellon Investors Relations by email at Suzanne@blueshirtgroup.com or by telephone at (415) 217-4962. Investors may also obtain free copies of the documents filed with the SEC on Atheros’ website at www.atheros.com or our website at www.intellon.com.

We, Atheros, and our respective directors, executive officers and certain members of management and certain employees may be deemed to be participants in the solicitation of proxies from our stockholders in connection with the transaction. Additional information concerning our directors and executive officers is set forth in our proxy statement for our 2009 Annual Meeting of Stockholders, which was filed with the SEC on April 28, 2009. These documents are available free of charge at the SEC’s website at www.sec.gov or by going to, respectively, Atheros’ Investors page on its corporate website at www.atheros.com and our Investor Relations page on our corporate website at www.intellon.com. Additional information regarding the persons who may, under the rules of the SEC, be deemed participants in the solicitation of proxies in connection with the proposed transaction, and a description of their direct and indirect interests in the proposed transaction, which may differ from the interests of the our stockholders and Atheros stockholders generally, is set forth in the proxy statement/prospectus that is contained in the registration statement on Form S-4, as amended (when it is available) that was filed by Atheros with the SEC, which is available free of charge at the SEC’s web site at www.sec.gov or our website at www.intellon.com.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements contained in this Quarterly Report, including those in this section entitled Management’s Discussion and Analysis of Financial Condition and Results of Operation that are not historical facts, such as statements regarding our planned merger with Atheros, constitute “forward-looking statements”. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “will,” “may,” “might,” “can,” variations of such words, and other similar expressions are predictions of, or indicate, future events and trends, and typically are intended to identify forward-looking statements. Such statements are subject to a number of risks and uncertainties which could cause actual results to differ materially from those projected, including those set forth under “Part II. Item 1A. Risk Factors” in this Quarterly Report. Given these uncertainties, you are cautioned not to place undue reliance on such statements. We also undertake no obligation to publicly update or revise any forward-looking statement to reflect current or future events or circumstances.

The interim financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2008 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K, as well as in conjunction with our subsequent reports on Forms 10-Q and 8-K.

Overview

We are a leading fabless semiconductor company that designs and sells integrated circuits (ICs) for high-speed communications over existing electrical wiring. Our ICs enable home connectivity, which is the sharing and moving of content among home gateways, personal computers and other consumer electronics products in the home. Consumer demand for broadband services and the proliferation of digital video, audio and data content are driving the market for home connectivity. We believe our solutions are targeted to address the challenges of sharing entertainment content throughout the home. Products using our ICs are easy to install and use, and deliver connectivity through electrical outlets across the home. Our newest ICs also meet the performance demands required for the delivery of high-definition video content.

We have made a substantial investment in research and development and in sales and marketing since our inception in 1989, and, as a result, we sell two families of powerline ICs, HomePlug-based ICs, which account for the majority of our sales, and command and control ICs. We outsource our semiconductor fabrication, assembly and test functions, reducing the level of our capital investment and enabling us to focus on the design, development, sale and marketing of our products. As of ~~June~~September 30, 2009, we had shipped approximately 3841.68 million powerline communications ICs, including ~~over~~approximately 3033.69 million HomePlug-based ICs that have been integrated into adapters, set-top boxes and other commercial applications. We shipped over 23.42 million powerline communications ICs in the three months ended ~~June~~September 30, 2009, a 103% decline from shipments of over 23.73 million powerline communications ICs in the three months ended ~~June~~September 30, 2008. We shipped approximately 4.8.0 million powerline communications ICs in the ~~six~~nine months ended ~~June~~September 30, 2009, a 97% decline from shipments of over 58.26 million powerline communications IC in the ~~six~~nine months ended ~~June~~September 30, 2008. Our HomePlug-based ICs represented approximately 99% of our revenue for each of the three and ~~six~~nine months ended ~~June~~September 30, 2009. We expect sales of our HomePlug-based products to continue to represent the predominant share of our revenue in the foreseeable future.

WeIn sell our products directly to original equipment manufacturers (OEMs) and service providers, which include our ICs in their products. We also sell our products directly to original design manufacturers (ODMs), which include our ICs in products they supply to OEMs and service providers. ODMs purchase our products only when an OEM incorporates our IC into the ~~design~~third quarter of ~~the OEM’s product. In addition~~2009, we ~~sell~~incurred our products to distributors, which are independent entities that assist us in identifying and servicing OEMs and ODMs and generally purchase our products directly from us for resale to their OEM and ODM customers. These OEMs and ODMs, in turn, sell our products to service providers and, through retail channels, to end-user customers. Service providers use our HomePlug-based ICs to provide in-home connectivity for a ~~variety~~net loss of ~~services, including Internet Protocol Television (IPTV) and broadband distribution as well as movies-on-demand~~$0.4 ~~In some cases~~million, aprimarily ~~service~~due ~~provider makes products containing our ICs available~~ to ~~its~~merger ~~customers~~related asexpenses ~~part~~ of the customers’ service subscription, sometimes as an installer option. Other service providers offer such products to customers for purchase at the customer’s discretion. As a result, the percent of a service provider’s installations using product containing our ICs may vary significantly. For the three months ended June 30, 2009, service providers accounted for approximately ~~55% of our revenue, or~~ $91.68 million~~. Revenue from the service provider channel in the second quarter of 2009 declined approximately 15% compared to the first quarter of 2009~~, ~~but increased approximately 15%~~ compared to ~~the~~net ~~second~~income ~~quarter~~ of 2008. The fluctuations in demand for our HomePlug-based ICs in the service provider channel are due, in part, to order timing by our customers, as well as to changes in demand from a single indirect customer deploying set-top boxes incorporating our HomePlug 1.0 ICs. Historically, demand from this indirect customer has fluctuated significantly. Sales to this customer declined approximately 39%, or $0.93 million, in the ~~three~~ ~~months~~second ~~ended~~quarter of ~~June 30,~~ 2009 and ~~approximately~~net ~~72%,~~income orof $60.45 million, in the six months ended June 30, 2009, compared to the corresponding periods in 2008, primarily as a result of an inventory over-stock position at this customer. Although we expect sales to this customer to nearly double in the third quarter of ~~2009~~2008. ~~compared~~Our toaccumulated ~~the~~deficit ~~second~~as ~~quarter~~ of ~~2009~~September 30, ~~we expect that sales to this customer on an annual basis will be lower in~~ 2009 ~~compared~~was to$135.8 ~~2008~~million.

In the third quarter of 2009, our total revenue was $19.9 million compared to $17.5 million in the second quarter of 2009 and $20.1 million in the third quarter of 2008. The 14% sequential increase in revenue during the third quarter of 2009 compared to the second quarter of 2009 was primarily due to a 30% increase in sales in the service provider channel and a 25% increase in sales in the commercial channel for Ethernet-over-Coax applications in China, which was partially offset by a 12% sequential decline in sales in the retail channel, primarily due to continued global economic weakness. The 1.0% quarter-over-quarter decrease in revenue during the third quarter of 2009 compared to the third quarter of 2008 was primarily due to a 23% decline in sales in the retail channel, which was partially offset by an 8% increase in sales in the service provider channel and a 286% increase in sales in the commercial channel for Ethernet-over-Coax applications.

~~Our~~In ~~sales have historically been made on~~ the ~~basis~~fourth quarter of ~~purchase~~2009, ~~orders~~we ~~rather~~expect ~~than long-term agreements. The demand for~~ our ~~products~~revenue isand ~~ultimately~~aggregate ~~dependent~~unit ~~upon~~ sales of our ~~customers’~~ICs ~~products through their channels~~ to increase ~~retail~~compared ~~purchasers, service providers and other customers. As a result, it is difficult for us~~ to ~~accurately forecast our product demand. If~~ the ~~resulting~~third ~~sales~~quarter of ~~our~~2009 ~~customers’~~and ~~products~~the ~~are~~fourth ~~less~~quarter ~~than~~of ~~forecasted by our customers, our customers will reduce or terminate their demand for our products~~2008. ~~Our lack of visibility into our own customers’ end-customer demand causes us to experience sudden and unexpected fluctuations in our revenue~~However, ~~product mix, inventory levels and gross margins, and~~ we ~~expect these fluctuations to~~ continue and potentially increase in frequency and severity. The limited visibility experienced by us and our customers is exacerbated during product transitions, such as our current transition from our INT6300 IC to ~~our~~be ~~INT6400~~concerned ~~IC,~~about ~~where we must assess demand both for~~ the ~~new product being introduced and the existing product being replaced. During the first half of 2009, the~~ global economic downturn ~~significantly~~ and ~~adversely~~any ~~affected~~deterioration ~~end-customer~~that ~~demand~~may ~~for~~occur ~~our~~as ~~products,~~well ~~particularly~~as in the ~~retail~~associated ~~channel,~~risks ~~and~~of ~~further~~delays ~~reduced~~and ~~our visibility into our customers’ demand~~cancellations ~~and~~in ~~our customers’ end~~ customer ~~demand.~~orders ~~During~~and the ~~first~~related ~~half~~difficulty ~~of 2009, revenue~~ in ~~the~~forecasting ~~retail~~our ~~channel~~product ~~declined approximately 19% and 36% compared to the second half of 2008 and the first half of 2008~~demand, ~~respectively,~~which ~~largely~~could ~~due~~adversely toimpact ~~the~~our ~~global economic downturn. During the second quarter of 2009~~revenue, ~~sales~~inventory ~~into the retail channel increased approximately 96% compared to the first quarter of 2009 due~~levels, ingross ~~part,~~profit toand ~~channel~~results ~~inventory replacement by our customers. Sales in our retail channel during the second quarter~~ of ~~2009~~operations ~~were still 23% below the second quarter of 2008,~~ and we ~~expect~~could ~~sales~~continue ~~in this channel~~ to ~~decline~~incur ~~sequentially~~increased inlosses ~~the~~as ~~third~~a ~~quarter of 2009 due to the channel inventory replacement by our customers in the second quarter~~result.

~~Our~~We ~~customers’~~sell our products ~~are~~directly ~~complex~~to ~~and~~original ~~require~~equipment ~~significant~~manufacturers ~~time~~(OEMs) toand ~~define,~~service ~~specify~~providers, ~~design~~which ~~and~~include ~~manufacture~~our toICs ~~meet production~~in ~~requirements~~their ~~and~~products. ~~volume~~We ~~demands.~~also ~~Accordingly~~sell our products directly to original design manufacturers (ODMs), which include our ~~sales~~ICs ~~cycle~~in isproducts ~~long~~they supply to OEMs and service providers. ~~The~~ODMs ~~typical~~purchase ~~time~~our ~~from~~products ~~early~~only ~~engagement~~when byan OEM incorporates our ~~sales~~IC ~~force~~into tothe ~~actual~~design of the OEM’s product. ~~introduction~~In ~~typically~~addition, ~~runs~~we 6sell our products to 12distributors, ~~months~~which ~~for~~are ~~adapter~~independent entities that assist us in identifying and servicing OEMs and ODMs and generally purchase our products todirectly asfrom ~~much~~us asfor 12resale to 30their ~~months~~OEM ~~for~~and ~~embedded~~ODM ~~consumer~~customers. ~~electronics~~These ~~products~~OEMs and ~~products~~ODMs, ~~used~~in byturn, sell our products to service providers and, ~~electric~~through ~~utilities.~~retail ~~This~~channels, ~~cycle~~to ~~begins~~end-user ~~with~~customers. Service providers use our ~~technical~~HomePlug-based ~~marketing~~ICs to provide in-home connectivity for a variety of services, including ~~sales~~Internet Protocol Television (IPTV) and ~~field~~broadband ~~application~~distribution ~~engineers~~as ~~engaging~~well ~~with~~as movies-on-demand. In some cases, a service provider makes products containing our ICs available to its customers as part of the ~~decision~~customers’ ~~maker~~service subscription, sometimes ~~either~~as an ~~OEM~~installer oroption. Other service ~~provider~~ providers offer such products to customers for purchase at the customer’s discretion. As a result, ~~who~~the ~~selects~~percent ~~our~~of a service provider’s installations using product. ~~These~~containing ~~lengthy~~our ~~sales~~ICs ~~cycles~~may ~~require~~vary significantly. ~~significant~~For ~~investments~~the ofthree ~~time~~months ended September 30, ~~resources~~2009, ~~and~~service ~~engineering~~providers ~~support~~accounted ~~before~~for weapproximately ~~realize~~63% of our revenue, or $12.5 million. Revenue from ~~product~~the ~~sales~~service provider channel in the third quarter of 2009 increased approximately 30% compared to the second quarter of 2009, ifand atincreased ~~all~~approximately 8% compared to the third quarter of 2008. ~~However,~~The iffluctuations wein demand for our HomePlug-based ICs in the service provider channel are ~~successful~~due, ain ~~customer~~part, ~~will~~to ~~decide~~order timing by our customers, as well as to ~~incorporate~~changes in demand from a single customer deploying set-top boxes incorporating our ICHomePlug in1.0 ~~its~~ICs. ~~product~~Historically, ~~which~~demand wefrom ~~refer~~this customer has fluctuated significantly. Sales to asthis acustomer ~~“design~~declined ~~win”~~approximately 16%, or $0.7 million, Wefor ~~believe~~the ~~design~~three ~~wins~~months ~~provide~~ended aSeptember 30, ~~competitive~~2009 ~~advantage~~and approximately 30%, ~~particularly~~or $2.7 million, for ~~embedded~~the ~~products~~nine months ended September 30, ~~because~~2009, ~~once~~compared ~~one~~to ofthe ~~our~~corresponding ~~products~~periods isin ~~incorporated~~2008, ~~into~~primarily as a ~~customer’s~~result of an inventory over-stock ~~design,~~position aat ~~redesign~~this tocustomer ~~incorporate~~that aaffected ~~competitor’s~~sales ~~product~~significantly in ~~place~~the first half of ~~ours~~2009. ~~would~~However, ~~generally~~sales beto ~~time-consuming~~this ~~and~~customer ~~expensive.~~increased ~~However~~sequentially approximately 174%, aor ~~design~~$2.5 ~~win~~million, ~~does~~in ~~not~~the ~~assure~~third ~~continued~~quarter ~~business~~of ~~with~~2009 compared to the ~~customer~~second orquarter of 2009. In addition, we expect sales to this customer to increase significantly in the ~~case~~fourth quarter of a2009 ~~service~~compared ~~provider, indicate~~to the ~~percent~~third quarter of ~~the~~2009. ~~service~~However, ~~provider’s~~we ~~subscriber~~expect ~~installations~~sales ~~where~~to ~~our~~this ~~product~~customer on an annual basis will be ~~deployed.~~lower in 2009 compared to 2008.

WeOur ~~sell~~sales have historically been made on the basis of purchase orders rather than long-term agreements. The demand for our products is ultimately dependent upon sales of our customers’ products ~~worldwide~~ through ~~multiple~~their channels ~~that~~to ~~include~~retail ~~distributors~~purchasers, ~~independent~~service ~~sales~~providers ~~representatives~~ and ~~direct~~other ~~sales~~customers. ~~Our~~As ~~sales~~a ~~organization~~result, ~~consists~~it ofis difficult for us to accurately forecast our product demand. If the resulting sales ~~professionals~~of our customers’ products are less than forecasted by our customers, ~~technical~~our ~~sales~~customers ~~support~~will ~~and~~reduce ~~field~~or ~~application~~terminate ~~engineering~~their demand for our products. Our ~~independent~~lack of visibility into our own customers’ end-customer demand causes us to ~~distributors~~experience ~~primarily~~sudden ~~receive~~and ~~discounts~~unexpected onfluctuations in our ~~products~~revenue, ~~for~~product ~~resale~~mix, ~~and~~inventory ~~occasionally~~levels ~~they~~and ~~earn~~gross ~~commissions~~margins, onand ~~the~~we ~~products~~expect ~~sold~~these ~~directly~~fluctuations to continue and potentially increase in frequency and severity. The limited visibility experienced by us and our ~~OEMs~~customers oris ~~ODMs~~exacerbated during product transitions, where we must assess demand both for the new product being introduced and the existing product being replaced. ~~For~~During the three and nine months ended ~~June~~September 30, 2009, ~~and~~revenue ~~2008,~~in the 78retail channel declined approximately 23% and 7332% ofcompared ~~our~~to ~~revenue~~the ~~was from~~three ~~direct~~and ~~channels~~nine months ended September 30, 2008, respectively, largely due to the global economic downturn. ~~For~~Although sales into the ~~six~~retail ~~months~~channel ~~ended~~increased ~~June 30,~~approximately 96% during the second quarter of 2009 ~~and~~compared ~~2008~~to the first quarter of 2009 due, ~~81%~~in ~~and~~part, 74to channel inventory replacement by our customers, sales in our retail channel declined during the third quarter of 2009 by 12% compared to the second quarter of 2009. ~~our~~We ~~revenue~~expect ~~was~~sales ~~from~~in ~~direct~~the ~~channels~~retail channel to increase slightly sequentially in the fourth quarter of 2009 due, ~~respectively~~in part, to channel inventory replacement by our customers, new product introductions and anticipated seasonal sales in the fourth quarter.

WeOur ~~have~~customers’ ~~direct~~products ~~sales~~are ~~personnel~~complex ~~based~~and inrequire ~~the~~significant ~~U.S.~~time to define, ~~Europe~~specify, design and ~~Asia.~~manufacture Weto meet ~~also~~production ~~have~~requirements ~~field~~and ~~applications~~volume ~~engineering~~demands. ~~personnel~~Accordingly, ~~based~~our insales ~~each~~cycle ofis ~~these~~long. ~~locations~~The ~~who~~typical ~~support~~time ~~all~~from ofearly engagement by our ~~market~~sales ~~channels.~~force ~~These~~to ~~employees~~actual ~~provide~~product introduction typically runs 6 to 12 months for adapter products to as much as 12 to 30 ~~technical~~months ~~support~~for embedded consumer electronics products and ~~assistance~~products toused ~~existing~~by service providers and ~~potential~~electric ~~customers~~utilities. inThis ~~designing~~cycle begins with our technical marketing, ~~testing~~sales and ~~qualifying~~field ~~products~~application ~~that~~engineers ~~incorporate~~engaging with the decision maker, either an OEM or service provider, who selects our ~~ICs~~product. InThese ~~addition~~lengthy sales cycles require significant investments of time, resources and engineering support before we ~~have~~realize arevenue ~~business~~from ~~development~~product ~~group~~sales, ~~that~~if ~~focuses~~at onall. ~~marketing~~However, if we are successful, a customer will decide to ~~service~~incorporate ~~providers~~our IC in ~~all~~its product, which we refer to as a “design win”. We believe design wins provide a competitive advantage, particularly for embedded products, because once one of our ~~geographic~~products ~~markets.~~is incorporated into a

In the second quarter of 2009, we realized net income of $0.3 million, compared to net income of $5,000 in the first quarter of 2009 and a net loss of $0.2 million in the second quarter of 2008. Our accumulated deficit as of June 30, 2009 was $135.3 million. In the second quarter of 2009, our total revenue was $17.5 million compared to $15.5 million in the first quarter of 2009 and $18.1 million in the second quarter of 2008. The sequential increase in revenue was primarily due to increased sales in the retail channel, as well as increased sales in the commercial channel for Ethernet-over-Coax (EoC) applications in China, which were partially offset by a decline in sales in our service provider channel. In addition, sales of our command and control ICs continued to decline in the second quarter of 2009 due to the macroeconomic environment, as well as a planned inventory over-stock position at certain customers as a result of a change in our supply chain. In the third quarter of 2009, we expect our revenue and aggregate unit sales of our ICs to increase compared to the second quarter of 2009 but to decrease compared to the third quarter of 2008. However, we continue to be concerned about the global economic downturn and any further deterioration that may occur as well as the associated risks of delays and cancellations in customer orders and the related difficulty in forecasting our product demand, which could adversely impact our revenue, inventory levels, gross profit and results of operations and we could incur losses as a result.

In the second quarter of 2009, our operating expenses were $8.5 million, compared to $8.0 million in the first quarter of 2009 and $8.2 million in the second quarter of 2008. In the second half of 2009, we expect to hire additional employees to support our operations. As a result, we expect personnel costs to increase in the future as we increase the number of our full-time employees. The actual increase in costs will depend on the timing and compensation of new hires. In the third quarter of 2009, we expect a sequential increase in operating expenses compared to the second quarter of 2009 due to the anticipated increases in engineering program costs related to our next generation ICs and product feature enhancements, as well as increases in payroll for new hires, payroll taxes and legal fees and expenses.

customer’s design, a redesign to incorporate a competitor’s product in place of ours would generally be time-consuming and expensive. However, a design win does not assure continued business with the customer or, in the case of a service provider, indicate the percent of the service provider’s subscriber installations where our product will be deployed.

We sell our products worldwide through multiple channels that include distributors, independent sales representatives and direct sales. Our sales organization consists of sales professionals, technical sales support and field application engineering. Our independent distributors primarily receive discounts on our products for resale, and occasionally they earn commissions on the products sold directly to our OEMs or ODMs. For the three months ended September 30, 2009 and 2008, 83% and 77% of our revenue was from direct channels, respectively. For the nine months ended September 30, 2009 and 2008, 82% and 75% of our revenue was from direct channels, respectively.

We have direct sales personnel based in the U.S., Europe and Asia. We also have field applications engineering personnel based in each of these locations who support all of our market channels. These employees provide technical support and assistance to existing and potential customers in designing, testing and qualifying products that incorporate our ICs. In addition, we have a business development group that focuses on marketing to service providers in all of our geographic markets.

In the third quarter of 2009, our operating expenses were $10.5 million, compared to $8.5 million in the second quarter of 2009 and $8.0 million in the third quarter of 2008. The increase in operating expenses in the third quarter of 2009 was primarily due to approximately $1.8 million in merger related expenses. In the remainder of 2009, we expect to hire additional employees to support our operations. As a result, we expect personnel costs to increase in the future as we increase the number of our full-time employees. The actual increase in costs will depend on the timing and compensation of new hires. In the fourth quarter of 2009, we expect a sequential increase in operating expenses compared to the third quarter of 2009 due to the anticipated increases in engineering program costs related to our next generation ICs and product feature enhancements, as well as increases in payroll for new hires, payroll taxes, and aggregate investment banking and legal fees and expenses in connection with our planned merger.

Proposed Merger with Atheros

On September 8, 2009, we entered into a definitive merger agreement with Atheros Communications, Inc. (Atheros) pursuant to which Atheros will acquire us in a stock and cash transaction. As a result of the merger, each outstanding share of our common stock will be automatically converted into the right to receive Atheros common stock and equivalents (including the assumption of our outstanding restricted stock units and stock options) representing between 45 and 55 percent of the total consideration in the merger and with the remainder being paid in cash, providing an overall value of $7.30 per share based on the five-day average closing price of Atheros as of September 4, 2009. Completion of the merger is subject to customary closing conditions, including approval of the merger by our stockholders. If the merger is not completed, under some circumstances, we may have to pay a termination fee to Atheros in the amount of $8.5 million.

For a description of our proposed merger with Atheros, please refer to the registration statement on Form S-4, and any amendments thereto, filed by Atheros with the SEC. The Form S-4 contains a proxy statement/prospectus and other documents concerning the proposed merger. The proxy statement/prospectus, as amended (when available), and other documents filed with the Securities and Exchange Commission (SEC) by Atheros and us in connection with the proposed merger are available at the SEC’s website at www.sec.gov. For additional information regarding potential risks and uncertainties associated with the proposed merger, please see Part I, Item 1A, Risk Factors below.

Description of Our Revenue, Cost of Revenue and Expenses

Revenue

Our revenue is generated primarily from shipments of our IC products. The price of our IC products is influenced by market and competitive conditions. Periodically, we reduce the price of our products as market and competitive conditions change or as we are able to reduce our manufacturing costs. In addition, the average selling price of our ICs can vary due to changes in our product mix and customer base. To date, all of our revenue has been denominated in U.S. dollars. Therefore, the main factors that impact our revenue are unit volumes and average selling prices.

We also sell development tools to our customers to enable them to build their products around our ICs. Revenue from the sale of development tools was approximately $2027,000 and $~~49,000~~0.1 million for the three month periods ended ~~June~~September 30, 2009 and 2008, respectively. Revenue from the sale of development tools was approximately $~~68,000~~0.1 million and $~~99,000~~0.2 million for the ~~six~~nine month periods ended ~~June~~September 30, 2009 and 2008, respectively.

We sell our ICs directly to OEMs and service providers or indirectly through ODMs and distributors. Historically, a small number of customers have accounted for a substantial portion of our revenue and this concentration has ~~been increasing. We anticipate that significant customer~~ concentration will continue for the foreseeable future and may increase during 2009. Our top five customers accounted for approximately 72% and 68% of our revenue for the six months ended June 30, 2009 and 2008, respectively. The customers representing 10% or more of our revenue during the periods presented were:

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
devolo AG (OEM)	24	%	17	%	24	%	18	%
Free (Service Provider)	21	%	20	%	22	%	19	%
Chenmtech Co Ltd (Distributor)	14	%	*		12	%	*
Lumax International Corporation (Distributor)	*		12	%	*		14	%
Aztech Systems Ltd (OEM)	*		11	%	*		*

been increasing. We anticipate that significant customer concentration will continue for the foreseeable future and may increase during the remainder of 2009. Our top five customers accounted for approximately 68% and 70% of our revenue for the nine months ended September 30, 2009 and 2008, respectively. The customers representing 10% or more of our revenue during the periods presented were:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2009		2008		2009		2008
Free (Service Provider)	21	%	18	%	22	%	19	%
devolo AG (OEM)	15		20		21		19
Chenmtech Co Ltd (Distributor)	14		10		13		*
EchoStar (Service Provider)	13		*		*		*
Jabil Circuit India Pvt Ltd (ODM)	*		12		*		*
Lumax International Corporation (Distributor)	*		12		*		13

*	Denotes that a customer accounted for less than 10% of our revenue in a given period.

In general, we are not able to track the amount of our product sold by our OEM, ODM and distributor customers to their ultimate end-use customers. However, we believe that several of our ODM customers produce products using our HomePlug 1.0 ICs for a single end-use customer, EchoStar Corporation (EchoStar). For the three months ended ~~June~~September 30, 2009 and 2008, we estimate that EchoStar’s direct purchases and indirect purchases through its various ODMs would have accounted for approximately 820% and 1323% of our aggregate revenue, respectively. For the ~~six~~nine months ended ~~June~~September 30, 2009 and 2008, we estimate that EchoStar’s direct purchases and indirect purchases through its various ODMs would have accounted for approximately 712% and 1317% of our aggregate revenue, respectively.

We have experienced variations in demand from most of our customers, including our largest customers. These variations, which will likely continue, are due to a number of factors, including our customers’ inability to predict accurately their end-customer demand, delays in customer programs using our ICs, the rate of adoption of powerline communications in the markets we serve, changes in our product mix and customer base, our efforts to streamline our sales channel, the market acceptance of our products, particularly our new products, the availability of competitive products and fluctuations in the global economy. We have therefore been subject to significant variations in orders from our customers, with orders, including large orders, followed by periods of limited demand from such customers. In light of the current adverse economic conditions, we believe there will be a higher risk of delays and cancellations in customer orders. In the event of material order delays or cancellations or the loss of business to competing suppliers or technologies, we will experience significantly greater volatility in our revenue and earnings or losses, as applicable, and this volatility could be more pronounced than expected given our customer concentration. In the event of an order delay or cancellation by a large customer, by a group of customers serving the same indirect customer, or by a large number of smaller customers, we could experience a significant quarterly or annual decline in revenue and increase in operating losses.

Most of our sales are to customers outside the U.S. and Canada, which we consider North America. These sales statistics only relate to our direct customers and not the end-customers purchasing the products that incorporate our ICs. The following sets forth our revenue breakdown by geographic region, in thousands and as a percentage of revenue, during the periods presented.


	Three Months Ended September 30,								Nine Months Ended September 30,
	2009				2008				2009				2008
	(in thousands, except percentages)
Asia	$	7,804	39.1	%	$	9,683	48.1	%	$	20,394	38.6	%	$	25,211	46.2	%
Europe		7,645	38.4			9,091	45.2			25,573	48.3			23,730	43.5
North America		4,484	22.5			1,338	6.7			6,940	13.1			5,607	10.3
Other		—	—			—	—			9	0.0			6	0.0


Total	$	19,933	100.0	%	$	20,112	100.0	%	$	52,916	100.0	%	$	54,554	100.0	%

	Three Months Ended June 30,								Six Months Ended June 30,
	2009				2008				2009				2008
	(in thousands, except percentages)
Europe	$	8,587	49.1	%	$	7,474	41.2	%	$	17,928	54.4	%	$	14,639	42.5	%
Asia		7,575	43.3			8,718	48.1			12,499	37.9			15,528	45.1
North America		1,304	7.5			1,945	10.7			2,547	7.7			4,269	12.4
Other		9	0.1			—	—			9	0.0			6	0.0
Total	$	17,475	100.0	%	$	18,137	100.0	%	$	32,983	100.0	%	$	34,442	100.0	%

Cost of Revenue

We outsource the wafer fabrication, assembly and test functions of our IC products. We purchase processed wafers on a per wafer basis from ~~our~~ our fabrication, or foundry, suppliers, which are currently United Microelectronics Corporation and Chartered Semiconductor Manufacturing, Ltd for our HomePlug-based ICs, and Chartered Semiconductor ~~Manufacturing, Ltd for our command and control ICs. We~~ also outsource the assembly, final testing and other processing of our products to third-party contractors. We negotiate wafer fabrication on a purchase order basis and we do not have long-term agreements with any of our third-party contractors. For some of our HomePlug AV-based products, we also purchase analog front-end ICs and line drivers from third parties, which are incorporated into multi-chip modules or chipsets sold by us. Any significant product quality or reliability concerns or disruption in the operations of one or more of our wafer fabrication facilities, assembly or test subcontractors, or third-party analog front-end and line driver IC suppliers would adversely impact the production of our products and our ability to meet customer demand.

Manufacturing, Ltd for our command and control ICs. We also outsource the assembly, final testing and other processing of our products to third-party contractors. We negotiate wafer fabrication on a purchase order basis and we do not have long-term agreements with any of our third-party contractors. For some of our HomePlug AV-based products, we also purchase analog front-end ICs and line drivers from third parties, which are incorporated into multi-chip modules or chipsets sold by us. Any significant product quality or reliability concerns or disruption in the operations of one or more of our wafer fabrication facilities, assembly or test subcontractors, or third-party analog front-end and line driver IC suppliers would adversely impact the production of our products and our ability to meet customer demand.

Cost of revenue includes primarily the cost of silicon wafers purchased from our foundry suppliers as well as the analog front-end ICs and line drivers we purchase from third parties. In addition, cost of revenue includes other outsourced manufacturing costs and costs associated with the assembling and testing of our ICs. Cost of revenue also includes items such as license expense, purchasing and production planning personnel and related expenses and inventory valuation write-downs to state inventory at the lower of cost or market caused by product obsolescence and transitions from older to newer products. Our future cost of goods sold could fluctuate based on the volume of ICs sold and the resulting product mix, which consists of products with different costs per IC.

As we do not have formal, long-term pricing agreements with our outsourcing suppliers, our wafer costs and services are subject to price fluctuations based on the cyclical supply and demand for semiconductors, our suppliers’ production costs and inflation. We also face the risks associated with how much acceptable product will result from the manufacturing process of our ICs, or yield, as identified when the product is tested. These risks exist at several stages of the manufacturing process, including the manufacture of the wafers, cutting the wafers into the die that comprise the individual ICs and assembling the die into a multi-chip or a single-chip package. If our manufacturing yields decrease at any stage of production, our cost per unit increases, which could have a significant adverse impact on our gross margins. Manufacturing yields on newly-introduced ICs may vary significantly until such time as the manufacturing process parameters are fully engineered. Manufacturing yields on mature products may also vary. We believe that the difficulty of achieving satisfactory IC yields will increase as we continue to move our IC production processes to smaller geometries, transition existing products to different wafer foundries and integrate our ICs into more multi-chip modules in an effort to offer competitive cost and performance advantages.

Gross Profit

Our gross profit has varied from period-to-period. Factors that have affected and will continue to affect gross profit in the future include product sales mix, customer mix, manufacturing yields, wafer pricing, excess and obsolete inventory, pricing by competitors, subcontractors and suppliers and new product introductions. In the ~~third~~fourth quarter of 2009, we anticipate that our gross profit margins may be slightly lower compared to the ~~second~~third quarter of 2009 due to changes in product and customer mix. Among other factors, we expect demand for ~~the~~our lower margin HomePlug 1.0 ICs we sell to one of our service provider customers to increase ~~more~~significantly ~~than double~~ sequentially in the ~~third~~fourth quarter of 2009 in absolute dollars and as a percentage of our total product mix, which will negatively affect our gross profit margins. We expect that this negative impact may be partially offset by a further increase in the percentage of our total product mix attributable to our INT6400 HomePlug AV-based IC, which has an improved cost structure compared to our earlier generation HomePlug AV-based IC, the INT6300.

Research and Development

Research and development expense primarily consists of compensation and associated costs related to development employees and contractors, mask costs, prototype wafers, software and engineering development, software licenses, reference design development costs, development testing and evaluation, occupancy costs, travel, depreciation expense and stock-based compensation ~~under Statement of Financial Accounting Standards (SFAS) No~~. ~~123~~ ~~(revised 2004), Share-Based Payment (SFAS 123(R)).~~ All research and development costs are expensed as incurred.

20We have experienced significant fluctuations in research and development expenses, in part, due to the timing of our creation and introduction of new products and product enhancements and the degree to which our new products and product enhancements have represented major changes from our then-existing products. As we create new products and product enhancements, we often use third-party contractors to supplement our own research and development teams. We also incur costs for third-party intellectual property that we incorporate into our designs. If we are producing a major new product platform, as we did with the introduction of our first HomePlug AV-based IC, these costs are generally more significant than if we are producing a cost-down version of an existing IC, as we did with our second and third generation HomePlug AV-based ICs and second sourced HomePlug 1.0 with Turbo IC. In addition, as is common in the semiconductor industry, we incur costs associated with the creation of the masks that our foundry vendors use to produce our ICs. Mask costs are more expensive for ICs that use smaller geometries for the manufacturing process. In the future, we may continue to transition our ICs to lower process geometries, which we expect would increase the cost of the masks for such ICs. In addition, we may be required to pay for multiple masks as part of our IC design creation process, which could have a significant adverse effect on

~~We have experienced significant fluctuations in research and development expenses, in part, due to the~~ timing of our creation and introduction of new products and product enhancements and the degree to which our new products and product enhancements have represented major changes from our then-existing products. As we create new products and product enhancements, we often use third-party contractors to supplement our own research and development teams. We also incur costs for third-party intellectual property that we incorporate into our designs. If we are producing a major new product platform, as we did with the introduction of our first HomePlug AV-based IC, these costs are generally more significant than if we are producing a cost-down version of an existing IC, as we did with our second and third generation HomePlug AV-based ICs and second sourced HomePlug 1.0 with Turbo IC. In addition, as is common in the semiconductor industry, we incur costs associated with the creation of the masks that our foundry vendors use to produce our ICs. Mask costs are more expensive for ICs that use smaller geometries for the manufacturing process. In the future, we may continue to transition our ICs to lower process geometries, which we expect would increase the cost of the masks for such ICs. In addition, we may be required to pay for multiple masks as part of our IC design creation process, which could have a significant adverse effect on research and development expense. Historically, most of our new IC development has occurred on a sequential basis, with only one design project occurring at a time. In the future, we believe that we will need to pursue multiple IC development efforts simultaneously in order to be competitive, which will increase our overall research and development expenses.

We expect our research and development costs to increase in absolute dollars in the future as we invest to develop new products. Additionally, we expect these costs, as a percentage of revenue, to fluctuate from one period to another. Specifically, we expect our research and development expenses will increase for the ~~third~~fourth quarter of 2009 compared to the ~~second~~third quarter of 2009 as we ~~develop~~plan to tape-out our next generation ~~ICs~~IC, focus resources on future designs and hire additional personnel.

Sales and Marketing

Sales and marketing expense relates primarily to compensation and associated costs for marketing, business development and selling personnel, ~~public~~ public relations, promotional and other marketing expenses, travel, trade show expenses, depreciation expenses, occupancy costs and stock-based compensation ~~under SFAS 123(R)~~. We expect that sales and marketing expenses will be ~~approximately~~slightly ~~the~~higher ~~same~~ in the ~~third~~fourth quarter of 2009 compared to the ~~second~~third quarter of 2009.

General and Administrative

General and administrative expense relates primarily to compensation and associated costs for general and administrative personnel, information systems, insurance, professional fees, occupancy costs, travel and stock-based compensation ~~under SFAS 123(R)~~. We expect that general and administrative expenses will be ~~approximately~~significantly ~~the~~higher ~~same~~ in the ~~third~~fourth quarter of 2009 compared to the ~~second~~third quarter of of 2009, primarily due to investment banking and legal fees and expenses in connection with our planned merger.

Total Other Income (Expense)

Total other income (expense) consists primarily of interest income, interest expense and other expenses. Interest income consists of interest earned on cash, cash equivalents and short-term investments. Other expenses consist primarily of fees and expenses related to incorporation and franchise taxes., ~~Because~~which exceeded our ~~net~~interest ~~cash~~income ~~balances~~in ~~have~~the three ~~historically~~months ~~exceeded~~ended ~~our~~September 30, ~~debt~~2009 ~~balances~~due ~~and~~to ~~fees~~higher ~~and~~than ~~expenses,~~anticipated wefranchise ~~have~~taxes ~~earned~~for ~~total other income~~2009. We expect our total other income and expense to ~~decline~~be unchanged in the ~~third~~fourth quarter of 2009, compared to the ~~second~~third quarter of 2009~~, primarily as a result of lower interest rates on our investments~~. ~~We incurred no interest expense in the three and six months ended June 30, 2009.~~

Provision for Income Taxes

During the three and ~~six~~nine months ended ~~June~~September 30, 2009, we recognized approximately $4420,000 and $90110,000 of income tax benefit, respectively, related to our Canadian subsidiary, which was ~~partially~~ fully offset by approximately $1345,000 and partially offset by approximately $3075,000, respectively, in U.S. Federal income tax expense. As of ~~June~~September 30, 2009, we had no accrued interest or any penalty associated with any unrecognized tax benefits, nor was any interest expense recognized during the three and ~~six~~nine months ended ~~June~~September 30, 2009.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as reported revenue and expenses during the reporting periods. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances. The ~~Securities and Exchange Commission (~~SEC) considers an accounting policy to be critical if it is important to a company’s financial condition and results of operations and if it requires the exercise of of significant judgment and the use of estimates on the part of management in its application. We have discussed the selection and development of critical accounting policies with the audit committee of our board of directors, and the audit ~~committee~~ committee has reviewed our related disclosures in this filing. Although we believe that our judgments and estimates are appropriate, actual results may differ from those estimates. Our critical accounting policies are discussed in our Annual Report on Form 10-K for the year ended December 31, 2008 and there have been no material changes.

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believe that our judgments and estimates are appropriate, actual results may differ from those estimates. Our critical accounting policies are discussed in our Annual Report on Form 10-K for the year ended December 31, 2008 and there have been no material changes.

Consolidated Results of Operations

The following sets forth our selected consolidated statement of operations data expressed in thousands and as a percentage of revenue for the periods presented:

	Three Months Ended June 30,										Six Months Ended June 30,
	Three Months Ended September 30,										Nine Months Ended September 30,
	2009			% ofRevenue		2008			% ofRevenue		2009			% ofRevenue		2008			% ofRevenue
	(in thousands, except percentages)
Revenue	$	1719,~~475~~933		100.0	%	$	1820,~~137~~112		100.0	%	$	3252,~~983~~916		100.0	%	$	3454,~~442~~554		100.0	%
Cost of revenue		89,~~667~~860		49.65			1011,~~310~~917		5659.83			1626,~~268~~128		49.34			1931,~~280~~197		5657.02
Gross profit		810,~~808~~073		50.45			78,~~827~~195		4340.27			1626,~~715~~788		50.76			1523,~~162~~357		4442.08
Cost of operations:
Research and development		34,~~981~~423		22.82			34,~~935~~038		2120.71			712,~~588~~011		2322.07			812,~~379~~417		2422.37
Sales and marketing		2,~~239~~042		1210.82			21,~~095~~979		119.68			46,~~569~~611		1312.95			46,~~274~~253		1211.45
General and administrative		24,~~302~~003		1320.21			2,~~202~~010		1210.10			48,~~331~~334		1315.17			46,~~271~~281		1211.45
Operating income (loss)		~~286~~(395	)	1(2.60	)		~~(405~~168	)	(20.28	)		~~227~~(168	)	(0.73	)		(1,~~762~~594	)	(52.19	)
Other income (expense)
Interest income		3037		0.2			~~252~~283		1.4			93130		0.2			~~695~~978		21.08
Other expense		(2046	)	(0.12	)		(3231	)	(0.21	)		(4894	)	(0.12	)		(6394	)	(0.2	)
Total other income		10		0.1			220		1.2			45		0.1			632		1.8
Total other income (expense)		(9	)	0.0			252		1.3			36		0.0			884		1.6
Income (loss) before income tax (benefit) expense		296		1.7			(185	)	(1.0	)		272		0.8			(1,130	)	(3.3	)
Income (loss) before income taxes (benefit)		(404	)	(2.0	)		420		2.1			(132	)	(0.3	)		(710	)	(1.3	)
Income tax (benefit) expense		(31	)	(0.2	)		57		0.3			(60	)	(0.2	)		57		0.1
Income tax expense (benefit)		25		0.1			(61	)	(0.3	)		(35	)	(0.1	)		(4	)	(0.0	)
Net income (loss)	$	~~327~~(429	)	1(2.91	)%	$	~~(242~~481	)	(12.34	)%	$	~~332~~(97	)	1.(0.2	)%	$	(~~1,187~~706	)	(31.43	)%

Comparison of Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2009 and 2008

Revenue

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2009		2008		PercentChange		2009		2008		PercentChange
	(in thousands, except percentages)
Revenue	$	1719,~~475~~933	$	1820,~~137~~112	(30.69	)%	$	3252,~~983~~916	$	3454,~~442~~554	(43.20	)%

Our revenue for the three and ~~six~~nine months ended ~~June~~September 30, 2009 was lower in both aggregate unit volume and absolute dollars compared to the corresponding ~~period~~periods in 2008. The decrease in revenue for the three month period was primarily due to the decrease in sales of our command and control ICs to $0.12 million for the three months ended ~~June~~ September 30, 2009, compared to $0.6 million for the corresponding period in 2008, ana 8366.5% decrease. The decrease in revenue for our command and control ICs for the three months ended ~~June~~September 30, 2009 over the prior year period was primarily due to ana 8668.61% decrease in unit volumes, which was partially offset by a ~~23.~~5.0% increase in average selling prices. ~~In addition~~However, the sales of our HomePlug-based ICs ~~decreased~~increased to $1719.47 million in the three months ended ~~June~~ September 30, 2009 from $1719.5 million in the corresponding period in 2008, a 01.73% ~~decrease~~increase. The ~~decrease~~increase in revenue for our HomePlug-based ICs for the three months ended ~~June~~September 30, 2009 over the prior year period was primarily due to a ~~5.4% decrease in unit volumes, which was~~ ~~partially offset by a 5~~1.35% increase in average selling prices due to product mix and a slight decline in unit volumes.

The decrease in revenue for the ~~six~~nine month period was primarily due to the decrease in sales of our command and control ICs to $0.35 million for the ~~six~~nine months ended ~~June~~September 30, 2009, compared to $1.39 million for the ~~corresponding period in 2008, a 79.0%~~

2223

corresponding period in 2008, a 75.3% decrease. The decrease in revenue for our command and control ICs for the ~~six~~nine months ended ~~June~~September 30, 2009 over the prior year period was primarily due to a 7976.43% decrease in unit volumes, which was partially offset by a 14.50% increase in average selling prices. In addition, the sales of our HomePlug-based ICs decreased to $3252.64 million in the ~~six~~nine months ended ~~June~~September 30, 2009 from $3352.0 5 million in the corresponding period in 2008, a 10.2% decrease. The decrease in revenue for our HomePlug-based ICs for the ~~six~~nine months ended ~~June~~September 30, 2009 over the prior year period was primarily due to a 43.70% decrease in unit volumes, which was partially offset by a 32.78% increase in average selling prices due to product mix.

Sales to our top customers varied for the three and ~~six~~nine months ended ~~June~~September 30, 2009 and 2008. There are a number of factors that influence the percent of sales to our top customers. These factors include, among others, changes in product and customer mix, transitions to newer products, market acceptance of our products, changes in our customers’ end-customer demand and our customers’ inability to predict accurately their end-customer demand, delays in customer programs using our ICs and our efforts to improve our sales channel. Examples of these trends include:

• End Customer Demand. The volume of our sales to ODM customers is dependent, in part, on the demand from their end customers and their ability to accurately predict such demand. For example, our sales of HomePlug 1.0 ICs to several ODM customers fluctuate as their customer, EchoStar, makes unexpected changes to its product requirements or alternates the ODM building its product. We estimate that ~~our~~direct ~~indirect~~ sales to EchoStar and indirect sales through its various ODMs for the three months ended ~~June~~September 30, 2009 increased by approximately 41174% compared to the three months ended ~~March~~June 3130, 2009 and decreased by approximately 3916% compared to the three months ended ~~June~~September 30, 2008. Also, for the three months ended ~~June~~September 30, 2009, sales to devolo AG ~~increased~~decreased as a percentage of revenue to 2415% from 1724% infor the ~~corresponding~~three ~~period~~months inended June 30, 2009 and 20% for the three months ended September 30, 2008, primarily as a result of ~~increased~~decreased demand from its end customers. These changes in end customer demand also affect our product and customer mix.

• Product and Customer Mix. Sales of our HomePlug-based ICs were $1719.47 million infor the three months ended ~~June~~September 30, 2009 compared to $1719.5 million infor the three months ended ~~June~~September 30, 2008 and $1517.34 million infor the three months ended ~~March~~June 3130, 2009. Sales of our command and control ICs ~~decreased~~were to $0.12 million infor the three months ended ~~June~~September 30, 2009 ~~from~~compared to $0.6 million infor the three months ended ~~June~~September 30, 2008 and $0.21 million infor the three months ended ~~March~~June 3130, 2009. The sequential increase in sales of our HomePlug-based ICs in the three months ended ~~June~~September 30, 2009 was primarily the result of the increased sales of our HomePlug 1.0 ICs described above, as well as increased demand in ~~the~~our ~~retail~~service ~~channel~~provider and ~~increased~~Ethernet-over-Coax ~~demand~~business in ~~the commercial channel for EoC applications in~~ China. These increases were offset, in part, by decreased sales ~~of our HomePlug 1.0 with Turbo ICs~~ in the ~~service~~retail ~~provider~~ channel infor the three months ended ~~June~~September 30, 2009 compared to the three months ended ~~March~~June 3130, 2009. The sequential ~~and~~increase ~~quarter-over-quarter declines~~ in sales of our command and control ICs were primarily the result of ~~continued~~increased ~~decreased~~unit demand for these ICs infor the three months ended ~~June~~September 30, 2009 ~~due to the macroeconomic environment, as well as a planned inventory over-stock position at certain customers as a result of a change in our supply chain~~.

• Sales Channel Improvements. From time to time, we make changes in our sales channel relationships. For example, Chenmtech Co Ltd, which individually accounted for 14% of our revenue for the three months ended ~~June~~September 30, 2009, purchases some product previously sold to other distributors.

We continue to expect variations in our top customers as a result of these and other trends, including the global economic downturn.

Cost of Revenue

	Three Months Ended June 30,								Six Months Ended June 30,
	Three Months Ended September 30,								Nine Months Ended September 30,
	2009			2008			PercentChange		2009			2008			PercentChange
	(in thousands, except percentages)
Cost of Revenue	$	89,~~667~~860		$	1011,~~310~~917		(1517.93	)%	$	1626,~~268~~128		$	1931,~~280~~197		(1516.62	)%
Percent of revenue		49.65	%		5659.83	%				49.34	%		5657.02	%

The decrease in cost of revenue during the three and ~~six~~nine months ended ~~June~~ September 30, 2009, compared to the corresponding periods in 2008, was primarily due to a decrease in unit sales of our HomePlug 1.0 ICs as well as a second sourcing of our HomePlug 1.0 with Turbo ICs and supply chain and product design efficiencies. Our expenses for purchasing and production planning personnel and related expenses were approximately $0.1 million for each of the three month periods ended ~~June~~September 30, 2009 and 2008. In addition, our expenses for licensing third-party technologies were approximately $0.~~2 million and $0.~~3 million for each of the three month periods ended ~~June~~September 30, 2009 and 2008~~, respectively~~.

~~Our~~24 expenses for purchasing and production planning personnel and related expenses were approximately $0.3 million and $0.2 million for the six month periods ended June 30, 2009 and 2008, respectively. In addition, our expenses for licensing third-party technologies were approximately $0.5 million and $0.6 million for the six month periods ended June 30, 2009 and 2008, respectively.

Our expenses for purchasing and production planning personnel and related expenses were approximately $0.4 million for each of the nine month periods ended September 30, 2009 and 2008. In addition, our expenses for licensing third-party technologies were approximately $0.9 million for each of the nine month periods ended September 30, 2009 and 2008.

Gross Profit

	Three Months Ended June 30,								Six Months Ended June 30,
	Three Months Ended September 30,								Nine Months Ended September 30,
	2009			2008			PercentChange		2009			2008			PercentChange
	(in thousands, except percentages)
Gross Profit	$	810,~~808~~073		$	78,~~827~~195		1222.59	%	$	1626,~~715~~788		$	1523,~~162~~357		1014.27	%
Percent of revenue		50.45	%		4340.27	%				50.76	%		4442.08	%

Gross profit as a percentage of revenue increased in the three and ~~six~~nine months ended ~~June~~ September 30, 2009, compared to the corresponding periods in 2008, primarily due to a decrease in unit sales of our HomePlug 1.0 ICs, and a shift in product mix towards our lower cost 65 nanometer HomePlug AV ICs and ~~second sourced~~ HomePlug 1.0 with Turbo ICs, as well as decreases in the average unit costs of our HomePlug-based ICs resulting from supply chain and product design efficiencies.

Gross profit margins improved in the three months ended ~~June~~September 30, 2009, compared to the corresponding period in 2008, primarily due to decreases in the average unit costs of our HomePlug-based ICs of 1016.08% and an increase in average selling prices for our HomePlug-based ICs of 51.35%. In addition, the average unit costs for our command and control ICs decreased approximately 16.12%, and our average selling prices for our command and control ICs increased ~~23.~~5.0% for the three months ended ~~June~~September 30, 2009, compared to the corresponding period in 2008. In addition, expenses for our purchasing and production planning personnel were a slightly higher percentage of our revenue in the three months ended ~~June~~September 30, 2009 compared to the corresponding period in 2008.

Gross profit margins improved in the nine ~~six~~ months ended ~~June~~September 30, 2009, compared to the corresponding period in 2008, primarily due to decreases in the average unit costs of our HomePlug-based ICs of 1013.61% and an increase in average selling prices for our HomePlug-based ICs of 3 2.78%. In addition, the average selling prices for our command and control ICs increased 14.50% for the ~~six~~ nine months ended ~~June~~September 30, 2009, compared to the corresponding period in 2008, which was partially offset by an increase in the average unit costs for our command and control ICs of approximately 1.35%. In addition, expenses for our purchasing and production planning personnel were a slightly higher percentage of our revenue in the ~~six~~nine months ended ~~June~~September 30, 2009 compared to the corresponding period in 2008.

Research and Development

	Three Months Ended June 30,								Six Months Ended June 30,
	Three Months Ended September 30,								Nine Months Ended September 30,
	2009			2008			PercentChange		2009			2008			PercentChange
	(in thousands, except percentages)
Research and Development	$	34,~~981~~423		$	34,~~935~~038		19.25	%	$	712,~~588~~011		$	812,~~379~~417		(93.43	)%
Percent of revenue		22.82	%		2120.71	%				2322.07	%		2422.37	%

~~Research~~The ~~and~~increase ~~development~~in ~~expenses~~research ~~were essentially the same for each of the three month periods ended June 30, 2009~~ and ~~2008.~~development ~~The slight increase in~~ expenses for the three months ended ~~June~~ September 30, 2009, compared to the corresponding period in 2008, was primarily due to increased compensation-related and new hire expenses of $0.1 3 million.

The decrease in research and development expenses for the ~~six~~nine months ended ~~June~~September 30, 2009, compared to the corresponding period in 2008, was primarily due to a decrease in engineering related expenses of $0.87 million, primarily for the design and development of our 65 nanometer HomePlug AV-based IC which was introduced in October 2008, which was partially offset by increased compensation-related and new hire expenses of $0.3 million.

2425

Sales and Marketing

	Three Months Ended June 30,								Six Months Ended June 30,
	Three Months Ended September 30,								Nine Months Ended September 30,
	2009			2008			PercentChange		2009			2008			PercentChange
	(in thousands, except percentages)
Sales and Marketing	$	2,~~239~~042		$	21,~~095~~979		63.92	%	$	46,~~569~~611		$	46,~~274~~253		65.97	%
Percent of revenue		1210.82	%		119.68	%				1312.95	%		1211.45	%

The slight increase in sales and marketing expenses for the three months ended ~~June~~ September 30, 2009, compared to the corresponding period in 2008, was primarily due to increased compensation-related and new hire expenses of $0.1 million.

The increase in sales and marketing expenses for the ~~six~~nine months ended ~~June~~September 30, 2009, compared to the corresponding period in 2008, was primarily due to increased tradeshow and other marketing related expenses of $0.34 million.

General and Administrative

	Three Months Ended June 30,								Six Months Ended June 30,
	Three Months Ended September 30,								Nine Months Ended September 30,
	2009			2008			PercentChange		2009			2008			PercentChange
	(in thousands, except percentages)
General and Administrative	$	24,~~302~~003		$	2,~~202~~010		499.52	%	$	48,~~331~~334		$	46,~~271~~281		132.47	%
Percent of revenue		1320.21	%		1210.10	%				1315.17	%		1211.45	%

The increase in general and administrative expenses for the three months ended ~~June~~ September 30, 2009, compared to the corresponding period in 2008, was primarily due to merger related expenses of approximately $1.8 million and increased compensation- related expenses of $0.1 million.

The ~~slight~~ increase in general and administrative expenses for the ~~six~~nine months ended ~~June~~September 30, 2009, compared to the corresponding period in 2008, was primarily due to merger related expenses of approximately $1.8 million, increased compensation- related expenses of $0.23 million and occupancy related expenses of $0.2 million, which were partially offset by decreased professional fees of $0.2 million ~~and other operating related expense of $0~~.1 ~~million.~~

Total Other Income (Expense)

	Three Months Ended June 30,								Six Months Ended June 30,
	Three Months Ended September 30,								Nine Months Ended September 30,
	2009			2008			PercentChange		2009			2008			PercentChange
	(in thousands, except percentages)
Total Other Income	$	10		$	220		(95.5	)%	$	45		$	632		(92.9	)%
Total Other Income (Expense)	$	(9	)	$	252		(103.6	)%	$	36		$	884		(95.9	%)
Percent of revenue		0.10	%		1.23	%				0.10	%		1.86	%

The decrease in other income for the three and ~~six~~nine months ended ~~June~~September 30, 2009, compared to the corresponding periods in 2008, was primarily due to a decrease in interest income resulting from reduced interest rates on our invested cash, cash equivalents and short-term investments.

Income Tax Expense (Benefit) ~~Expense~~

	Three Months Ended June 30,								Six Months Ended June 30,
	Three Months Ended September 30,								Nine Months Ended September 30,
	2009			2008			PercentChange		2009			2008			PercentChange
	(in thousands, except percentages)
Income Tax (Benefit) Expense	$	(31	)	$	57		154.4	%	$	(60	)	$	57		205.3	%
Income Tax Expense (Benefit)	$	25		$	(61	)	141.0	%	$	(35	)	$	(4	)	775.0	%
Percent of revenue		(0.21	)%		(0.3	)%				(0.21	)%		(0.10	)%

The income tax ~~benefit~~expense for the three ~~and six~~ months ended ~~June~~September 30, 2009 comprises U.S. Federal income tax expense of approximately $45,000 which was partially offset by net income tax credits attributable to our Canadian subsidiary of approximately $4420,000. ~~and~~The income tax benefit for the nine months ended September 30, 2009 comprises net income tax credits attributable to our Canadian subsidiary of approximately $90110,000, ~~respectively,~~ which ~~were~~was partially offset by U.S. Federal income tax expense of approximately $1375,000 ~~and $30,000, respectively~~.

~~Income~~26 ~~tax expense for the three and six months ended June 30, 2008 represents taxes attributable to our Canadian subsidiary.~~

The income tax benefit for the three and nine months ended September 30, 2008 comprises net income tax credits attributable to our Canadian subsidiary of approximately $61,000 and $4,000, respectively. There was no U.S. Federal income tax credit or expense for either period.

Liquidity and Capital Resources

The following table summarizes our cash flows:

	Six Months EndedJune 30,
	Nine Months EndedSeptember 30,
	2009			2008
	(in thousands)
Consolidated Cash Flow Data:
Net cash provided by operating activities	$	7,~~353~~885		$	~~2,549~~200
Net cash (used in) investing activities		(518,~~628~~077	)		(139,~~214~~037	)
Net cash provided by financing activities		4102			5,~~550~~554
Net increase in cash and equivalents	$	1,729		$	6,885
Net decrease in cash and equivalents	$	(10,090	)	$	(33,283	)

Our principal uses of cash historically have consisted of payments to our suppliers for the costs related to the outsourcing of wafer fabrication, assembly and test functions for our IC products. We have also applied cash for payroll, incentives and other operating expenses including mask expenses and development tools for new product development. In addition, we have made payments related to the purchase of equipment as well as working capital.

As of ~~June~~September 30, 2009, our principal sources of liquidity consisted of cash, cash equivalents and short-term investments of $62.13 million, an increase of $6.57 million compared to $55.6 million as of December 31, 2008. Our cash, cash equivalents and short-term investment balances are primarily the result of net proceeds of $44.5 million, after deducting underwriting discounts, commissions and other offering costs, from our initial public offering in December 2007 and from the exercise of the underwriter’s over-allotment option to purchase additional shares of our common stock in January 2008.

In the event our proposed merger with Atheros is not completed, the merger agreement requires us to pay Atheros a termination fee in the amount of $8.5 million if the merger agreement is terminated under specified circumstances, including if an alternative transaction is entered into or completed under certain circumstances.

Operating Activities

Our cash flows provided by operating activities are significantly influenced by our investments in personnel and infrastructure intended to position our business for the future, sales made to customers, increases in the number of customers using our products and the amount and timing of payments made by these customers and payments made by us to our vendors.

During the ~~six~~nine months ended ~~June~~September 30, 2009, our operating activities provided approximately $7.49 million of net cash. Cash provided by operating activities for the ~~six~~nine months ended ~~June~~September 30, 2009 resulted primarily from a decrease of $21.37 million in inventory, a decrease of $20.13 million in accounts receivable related to the timing of customer payments, an increase of $13.23 million in accounts payable and accrued expenses related to the timing of payments to vendors, non-cash expenses for stock-based compensation of $1.17 million, non-cash depreciation, accretion and amortization ~~expenses~~ of $0.6 9 million, ~~net~~the ~~income~~receipt of $0.3 million in income tax refunds and ~~the receipt~~an increase of $0.2 million in ~~income~~deferred ~~tax refunds~~income. These increases in cash were partially offset by an increase of $0.4 million in prepaid expenses and other assets and a net loss of $0.1 million.

During the ~~six~~nine months ended ~~June~~September 30, 2008, our operating activities provided approximately $20.52 million of net cash. Cash provided by operating activities for the ~~six~~nine months ended ~~June~~September 30, 2008 resulted primarily from an increase of $13.48 million in accounts payable and accrued expenses related to the timing of payments to vendors, non-cash expenses for stock-based compensation of $01.83 million, non-cash depreciation, accretion and amortization ~~expenses~~ of $0.~~6 million,~~7 ~~a decrease of $0.5~~ million ~~in accounts receivable related to the timing of customer payments, a decrease of $0.3 million in inventory~~ and the receipt of income tax refunds and ~~the~~a decrease in prepaid expenses and other assets of $0.1 million. ~~The~~These ~~increase~~increases in cash ~~was~~were partially ~~used~~offset toby ~~fund~~an ~~our~~increase of $13.23 million ~~net~~in ~~operating~~accounts ~~loss~~receivable ~~during~~related to the ~~six~~timing ~~months~~of ~~ended~~customer ~~June 30~~payments, ~~2008~~an increase of $1.7 million in inventory and a net loss of $0.7 million.

Investing Activities

Our primary investing activities have consisted of purchases of marketable securities, the purchase or development of intangible assets, improvements made to our leased facilities and purchases of laboratory and computer equipment and software tools used in the design of our ICs. As we continue to invest in our business, we expect purchases of computer and laboratory equipment and development tools to grow in absolute dollars.

~~During~~27 the six months ended June 30, 2009, we used approximately $5.6 million of net cash in investing activities, primarily for the purchase of short-term investments of $25.0 million, which was partially offset by the proceeds from the maturity of short-term investments of $20.3 million. The remaining $0.9 million was used to purchase property and equipment, as well as for the development of intangible assets. During the six months ended June 30, 2008, we used approximately $1.2 million of net cash in investing activities, primarily to purchase property and equipment as well as for the purchase or development of intangible assets.

During the nine months ended September 30, 2009, we used approximately $18.1 million of net cash in investing activities, primarily for the purchase of short-term investments of $49.4 million, which was partially offset by the proceeds from the maturity of short-term investments of $32.8 million. The remaining $1.5 million was used to purchase property and equipment, as well as for the development of intangible assets. During the nine months ended September 30, 2008, we used approximately $39.0 million of net cash in investing activities, primarily for the purchase of short-term investments of $37.5 million. The remaining $1.5 million was used to purchase property and equipment as well as for the purchase or development of intangible assets.

Financing Activities

During the ~~six~~nine months ended ~~June~~September 30, 2009, employees’ exercises of stock options provided approximately $~~4,000~~0.1 million of net cash.

During the ~~six~~nine months ended ~~June~~September 30, 2008, we raised $5.6 million in net proceeds, after deducting underwriting discounts and commissions of $0.4 million and other offering costs of $0.1 million, from the exercise of the underwriter’s over-allotment option subsequent to our initial public offering in December 2007.

Off Balance Sheet Arrangements

We do not have any special purpose entities, and, other than operating leases as described below, we had no off-balance sheet financing arrangements as of ~~June~~September 30, 2009 or 2008.

Contractual Obligations and Known Future Cash Requirements

Set forth below is information concerning our known contractual obligations as of ~~June~~September 30, 2009 that ~~are~~is fixed and determinable.

	Total		Less than1 year		1-3 years		3-5 years		More than5 years
	(in thousands)
Operating lease obligations	$	34,~~267~~536	$	1,~~571~~490	$	1,~~223~~746	$	~~473~~791	$	—509
Purchase obligations		87,~~294~~664		87,~~294~~664		—		—		—
Total	$	1112,~~561~~200	$	9,~~865~~154	$	1,~~223~~746	$	~~473~~791	$	—509

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

Future Capital Requirements

We believe that our existing cash, cash equivalents, short-term investments and any operating cash flow will be sufficient to meet our projected operating and capital expenditure requirements for at least the next twelve months. In addition, we expect that our existing cash, cash equivalents, short-term investments and any operating cash flow will provide us with the financial flexibility to execute our strategic objectives, including the ability to make acquisitions and strategic investments. Our ability to generate cash, however, is subject to our performance, general economic conditions, industry trends and other factors. To the extent that our existing cash, cash equivalents, short-term investments and operating cash flow are insufficient to fund our future activities and requirements, we may need to raise additional funds through public or private equity or debt financing. If we issue equity securities in order to raise additional funds, substantial dilution to existing stockholders may occur. Additional funds may not be available on terms favorable to us or at all, particularly given the current economic downturn and tightening of credit markets.

Recent Accounting Pronouncements

With the exception of those stated below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2009, as compared to the recent accounting pronouncements described in the Annual Report, that are of material significance, or have potential material significance, to us.

Effective January 1, 2009, we adopted the Financial Accounting Standards Board (FASB) SFAS No. 141R, Business Combinations (SFAS 141R). SFAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. SFAS 141R also provides guidance for recognizing changes in an acquirer’s existing income tax valuation allowances and tax uncertainty accruals that result from a business combination transaction as adjustments to income tax expense. The adoption of SFAS 141R did not have a material impact on our financial position, results of operations, cash flows or disclosures.

In April 2009, the FASB issued Staff Position (FSP) No. 141R-1, Accounting for Assets and Liabilities Assumed in a Business Combination That Arise From Contingencies (FSP FAS 141R-1). FSP FAS 141R-1 amends and clarifies SFAS 141R to address application issues regarding initial recognition and measurement, subsequent measurement and accounting and disclosure of assets and liabilities arising from contingencies in a business combination. FSP FAS 141R-1 is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of FSP FAS 141R-1 did not have a material impact on our financial position, results of operations, cash flows or disclosures.

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

Effective April 1, 2009, we adopted FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2). FSP FAS 115-2 amends the other-than-temporary impairment (OTTI) guidance in U.S. GAAP to make the guidance more operational and to improve the presentation of other-than-temporary impairments in the financial statements. Prior to FSP FAS 115-2, if OTTI had been determined to exist, we would have recognized an OTTI charge into earnings in an amount equal to the difference between the investment’s amortized cost basis and its fair value as of the balance sheet date of the reporting period. Under FSP FAS 115-2, if OTTI has been incurred, and it is more-likely-than-not that we will not sell the investment security before the recovery of its amortized cost basis, then the OTTI is separated into (a) the amount representing the credit loss and (b) the amount related to all other factors. The amount of the total OTTI related to the credit loss is recognized in earnings. The amount of the total OTTI related to other factors would be recognized in accumulated other comprehensive income (AOCI). The total OTTI, which would include both credit and non-credit losses, would be presented gross in our statements of operations and would be reduced by the non-credit loss amount of the total OTTI recognized in AOCI. There was no initial effect of our adoption of FSP FAS 115-2 on April 1, 2009 as we have no securities that have previously been or are currently deemed as other-than-temporarily impaired.

Effective April 1, 2009, we adopted FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4). FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for an asset or liability have significantly decreased. FSP FAS 157-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly. The adoption of FSP FAS 157-4 did not have a material impact on our financial position, results of operations, cash flows or disclosures.

Effective April 1, 2009, we adopted FSP FAS 107-1 and Accounting Principles Board (APB) 28-1, Interim Disclosures About Fair Value of Financial Instruments (FSP FAS 107-1). FSP FAS 107-1 amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements and also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in all interim financial statements. The adoption of FSP FAS 107-1 did not have a material impact on our financial position, results of operations, cash flows or disclosures.

Effective January 1, 2009, we adopted FSP FAS No. 142-3, Determination of the Useful Life of Intangible Assets (FSP FAS 142-3), which amends the guidance about estimating the useful lives of recognized intangible assets and requires additional disclosures related to renewing or extending the terms of recognized intangible assets under SFAS No. 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008. The adoption of FSP FAS 142-3 did not have a material impact on our financial position, results of operations, cash flows or disclosures.

Recent Accounting Pronouncements

With the exception of those stated below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2009, compared to the recent accounting pronouncements described in the Annual Report, that are of material significance, or have potential material significance, to us.

Effective July 1, 2009, we adopted the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 105-10, Generally Accepted Accounting Principles – Overall (ASC 105-10). ASC 105-10 establishes the FASB Accounting Standards Codification (the Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority. The Codification superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative. The FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (ASUs). The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification. References made to FASB guidance throughout this document have been updated for the Codification.

Effective January 1, 2008, we adopted FASB ASC 820-10, Fair Value Measurements and Disclosures—Overall (ASC 820-10), with respect to our financial assets and liabilities. In February 2008, the FASB issued updated guidance related to fair value measurements, which is included in the Codification in ASC 820-10-55, Fair Value Measurements and Disclosures – Overall – Implementation Guidance and Illustrations (ASC 820-10-55). The updated guidance provided a one year deferral of the effective date of ASC 820-10 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, we adopted the provisions of ASC 820-10 for non-financial assets and non-financial liabilities effective January 1, 2009, and such adoption did not have a material impact on our financial position, consolidated results of operations, cash flows or disclosures.

Effective April 1, 2009, we adopted FASB ASC 320-10-65, Investments – Debt and Equity Securities – Overall – Transition and Open Effective Date Information (ASC 320-10-65). ASC 320-10-65 amends the other-than-temporary impairment (OTTI) guidance in U.S. GAAP to make the guidance more operational and to improve the presentation of other-than-temporary impairments in the financial statements. Prior to ASC 320-10-65, if OTTI had been determined to exist, we would have recognized an OTTI charge into earnings in an amount equal to the difference between the investment’s amortized cost basis and its fair value as of the balance sheet date of the reporting period. Under ASC 320-10-65, if OTTI has been incurred, and it is more-likely-than-not that we will not sell the investment security before the recovery of its amortized cost basis, then the OTTI is separated into (a) the amount representing the credit loss and (b) the amount related to all other

factors. The amount of the total OTTI related to the credit loss is recognized in earnings. The amount of the total OTTI related to other factors would be recognized in accumulated other comprehensive income (AOCI). The total OTTI, which would include both credit and non-credit losses, would be presented gross in our statements of operations and would be reduced by the non-credit loss amount of the total OTTI recognized in AOCI. There was no initial effect of our adoption of ASC 320-10-65 on April 1, 2009 as we have no securities that have previously been or are currently deemed as other-than-temporarily impaired.

Effective April 1, 2009, we adopted ASC 820-10-65, Fair Value Measurements and Disclosures-Overall-Transition and Open Effective Date of Information (ASC 820-10-65). ASC 820-10-65 provides additional guidance for estimating fair value in accordance with ASC 820-10 when the volume and level of activity for an asset or liability have significantly decreased. ASC 820-10-65 also includes guidance on identifying circumstances that indicate a transaction is not orderly. The adoption of ASC 820-10-65 did not have a material impact on our financial position, consolidated results of operations, cash flows or disclosures.

Effective April 1, 2009, we adopted FASB ASC 825-10-65, Financial Instruments – Overall – Transition and Open Effective Date Information (ASC 825-10-65). ASC 825-10-65 amends ASC 825-10 to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements and also amends ASC 270-10, Interim Reporting – Overall (ASC 270-10), to require those disclosures in all interim financial statements. The adoption of ASC 825-10-65 did not have a material impact on our financial position, results of operations, cash flows or disclosures. See Note 2 for additional disclosures included in accordance with ASC 825-10-65.

Effective January 1, 2009, we adopted FASB ASC 350-30, Intangibles – Goodwill and Other - General Intangibles other than Goodwill (ASC 350-30) which amends the guidance in ASC 350, Intangibles – Goodwill and Other (ASC 350) about estimating the useful lives of recognized intangible assets and requires additional disclosures related to renewing or extending the terms of recognized intangible assets under ASC 350. ASC 350-30 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008. The adoption of ASC 350-30 did not have a material impact on our financial position, consolidated results of operations, cash flows or disclosures.

Effective April 1, 2009, we adopted FASB ASC 855-10, Subsequent Events - Overall (ASC 855-10). ASC 855-10 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. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date - that is, whether that date represents the date the financial statements were issued or were available to be issued. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. Adoption of ASC 855-10 did not have a material impact on our financial position, consolidated results of operations, cash flows or disclosures.

Effective July 1, 2009, we adopted FASB ASU 2009-05, Fair Value Measurements and Disclosures (Topic 820) (ASU 2009-05). ASU 2009-05 provided amendments to ASC 820-10 pertaining to the fair value measurement of liabilities. ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using certain techniques. ASU 2009-05 also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of a liability. ASU 2009-05 also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are level one fair value measurements. Adoption of ASU 2009-05 did not have a material impact on our financial position, results of operations, cash flows or disclosures.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. The primary objectives of our investment activities, in order of importance, are to preserve principal, provide liquidity, seek diversification and maximize income without significantly increasing risk. We do not hold or issue financial instruments for trading purposes or have any derivative financial instruments. As of ~~June~~September 30, 2009, our cash reserves were maintained primarily in U.S Treasury and U.S. Federal Home Loan Bank System obligations, money market investment accounts and bank deposit accounts totaling $62.13 million. Our investment policy requires that all securities mature in one year or less, with a weighted average maturity of no longer than nine months.

We consider our direct exposure to foreign exchange rate fluctuations to be minimal. Currently, sales to customers and payments made under our contracts and purchase orders with third-party manufacturers are denominated in U.S. dollars and are not subject to exchange rate fluctuations. As of June 30, ~~2009, we have not experienced material gains or losses as a result of transactions denominated in foreign currencies.~~

We consider our direct exposure to foreign exchange rate fluctuations to be minimal. Currently, sales to customers and payments made under our contracts and purchase orders with third-party manufacturers are denominated in U.S. dollars and are not subject to exchange rate fluctuations. As of September 30, 2009, we have not experienced material gains or losses as a result of transactions denominated in foreign currencies.

We have operating expenses in foreign currencies, predominantly Canadian dollars, but also Pounds Sterling and Euros that are converted to U.S. dollars for financial reporting. If these foreign currencies strengthen against the U.S. dollar, this increases our reported operating expenses. These currencies weakened against the U.S. dollar for the first nine months of 2009 compared to the year ago period. As a result, our operating expenses were approximately $0.8 million lower during the nine months ended September 30, 2009 relative to the nine months ended September 30, 2008. In addition, these currencies began strengthening against the U.S. dollar in June 2009. As a result, our operating expenses would have been approximately $0.1 million lower during the three month period ended September 30, 2009 had currencies remained at the June 2009 exchange rates.

We expect to experience further fluctuations in currency exchange rates in the future that may adversely affect our revenue and operating margins. If foreign currencies strengthen against the U.S. dollar, inventory and expenses denominated in foreign currencies will become more expensive. Alternatively, if the value of the U.S. dollar increases relative to other currencies, the effective cost of our ICs for customers that use such currencies for their operations could increase, thereby reducing demand for our products or increasing customer pressure for price reductions that could adversely affect our gross margins. Furthermore, our foreign competitors could benefit from such a currency fluctuation, making it more difficult for us to compete with them. We do not use derivative financial instruments to hedge against foreign currency exchange fluctuations or other risks in our investment portfolio.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) that are designed to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is (i) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and (ii) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. In designing and evaluating these disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and no evaluation of controls and procedures can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Prior to filing this Quarterly Report on Form 10-Q, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that as of ~~June~~September 30, 2009, our disclosure controls and procedures were effective to provide reasonable assurance of the achievement of these objectives.

Changes in Internal Control Over Financial Reporting

There were no significant changes in our internal control over financial reporting identified in connection with the evaluation described in this Item 4 that occurred during our ~~second~~third quarter of 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

We are not currently a party to any litigation. However, the semiconductor industry is marked by a significant number of patents, copyrights, trade secrets and trademarks and by frequent litigation based on allegations of infringement or other violation of intellectual property rights. In the future we could become involved in various legal proceedings relating to these or other claims arising out of our ordinary course of business. For additional discussion of certain risks associated with legal proceedings, see the section entitled “Risk Factors” in Part II, Item 1A of this Quarterly Report.

intellectual property rights. In the future we could become involved in various legal proceedings relating to these or other claims arising out of our ordinary course of business. For additional discussion of certain risks associated with legal proceedings, see the section entitled “Risk Factors” in Part II, Item 1A of this Quarterly Report.

ITEM 1A.

RISK FACTORS

The risk factors that could potentially adversely affect our business are set forth below. These risk factors include any material changes to and supersede the description of our risk factors associated with our business previously set forth in ~~Part II, Item 1A of~~ ~~our Quarterly Report on Form 10-Q for the quarter ended March 31, 2009.~~

Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2009. For information regarding potential risks and uncertainties associated with our proposed merger with Atheros in addition to those described below, including risks and uncertainties to which the combined company may be subject following the merger, please see the registration statement on Form S-4 filed by Atheros with the SEC, and any amendments thereto.

Risk Factors Relating to the Merger with Atheros

Failure to complete our planned merger with Atheros could materially and adversely affect our stock price, business and results of operations.

We entered into a definitive merger agreement with Atheros on September 8, 2009. Completion of the merger is subject to customary closing conditions, including approval by our stockholders. We cannot assure you that these conditions will be met or waived, that the necessary approvals will be obtained, or that we will be able to successfully consummate the merger as currently contemplated under the merger agreement or at all. If the merger is not completed for any reason, we will be subject to risks, including the following:

•

we may not realize any or all of the potential benefits of the merger, including any potential synergies that could result from combining the financial, technical and manufacturing resources of Atheros and us;

•

we may be required to pay Atheros a termination fee of $8.5 million if the merger agreement is terminated under certain circumstances;

•

at the time the definitive agreement was announced, the total consideration per share offered by Atheros in the merger represented a premium to the trading price of our common stock; accordingly, the current market price of our common stock may reflect this takeover premium as well as a market assumption that the merger will occur, and a failure to complete the merger could result in a sudden and significant decline in the market price of our common stock and a negative perception by the market of our company generally;

•

we have incurred substantial transaction costs relating to the merger (including significant legal, accounting and financial advisory fees) and expect to incur additional such costs, and these substantial costs (other than certain additional investment banking fees payable only upon consummation of the merger) are payable by us whether or not the merger is completed;

•

our failure to complete the merger could be viewed negatively by our customers and could provide marketing advantages to our competitors, any of which could have an adverse effect on our revenues and results of operations;

•

the substantial commitment of time made by our management and employees related to the merger (including integration planning) would provide no benefits and could otherwise have been devoted to other opportunities that might have been beneficial;

•

the diversion of management time related to the termination of the merger could also adversely affect our results of operation and lead to the loss of important customers;

•

our employees and contractors who will not be offered continuing work with Atheros after the merger, including those who may be offered positions only on a transitional basis, may decide to terminate their employment or contractor roles before the expected merger closing date, causing us to lose our relationship with those employees or contractors even though the merger does not occur;

•

Atheros could potentially use information learned during due diligence and integration planning related to the merger to compete with us;

•

our proposed merger may be viewed negatively by our suppliers and could result in us receiving lower priorities for the supply of product in general and for the supply of wafers for our ICs specifically due to the recent tightening of wafer fabrication capacity, which could result in supply shortages for our customers;

•

we would continue to face the risks that we currently face as an independent company, as further described below; and

•

any operational investments that we may delay due to the pending transaction would need to be made, potentially on an accelerated timeframe, which could then prove costly and more difficult to implement.

If the merger is not completed, these risks may materialize and materially adversely affect our business, financial results, financial condition and stock price. In addition, we would not realize any of the expected benefits of having completed the merger.

The announcement of our proposed acquisition, and uncertainties associated with the merger, may cause a material disruption to our business, including diversion of management’s time and attention and delays in customer orders or loss of customers and suppliers, which could adversely affect our results of operations and our stock price.

The announcement of our proposed transaction with Atheros could cause a material disruption to our business. For example, the announcement of the pending merger may lead to uncertainty for our employees, customers and suppliers which could divert the attention of our management and employees from day-to-day operations and cause our current and potential customers, suppliers or distributors to cancel orders, delay or defer decisions concerning their purchase or use of our products, or seek to modify or terminate existing agreements with us. In particular, prospective customers could be reluctant to purchase our products due to uncertainty about the direction of the combined company’s product offerings following the merger and the combined company’s willingness to support and service existing products. Current and prospective customers may also be reluctant to incorporate our technology into future product designs, which would adversely affect our design wins and future revenues. Our businesses and operations may also be harmed to the extent that customers and others believe that the combined company cannot effectively compete in the marketplace without the transaction, or there is employee uncertainty surrounding the future direction of our product and service offerings and our strategy on a standalone basis. To the extent that the proposed merger creates uncertainty among our current and potential customers such that one large customer, or a significant group of smaller customers, delays, defers or changes purchases in connection with the planned merger, our results of operations would be adversely affected. As we receive a substantial portion of our revenue from a limited number of customers, we may be subject to a greater risk of customer uncertainty and loss of revenue as a result of the announcement of the merger. Further, we may be required to offer our customers assurances to address their uncertainty about the direction of the combined company’s product and related support offerings, which may require us to incur additional obligations. The occurrence of any of these events individually or in combination could materially and adversely affect our results of operations and our stock price, and if the proposed merger with Atheros is not consummated, we may be at a disadvantage to our competitors.

The merger agreement limits our ability to pursue alternatives to the merger and could negatively impact our stock price if the merger agreement is terminated in certain circumstances.

The merger agreement contains provisions that make it more difficult for us to sell our business to a party other than Atheros. Pursuant to these provisions, we are prohibited from soliciting any acquisition proposal or offer for a competing transaction and we are required to pay a termination fee of $8.5 million if the merger agreement is terminated in specified circumstances after we receive an alternative proposal or offer, including if an alternative transaction is entered into or completed under certain circumstances. Covenants in the merger agreement also impede our ability to complete other transactions that are not in the ordinary course of business but that could be favorable to our stockholders. Atheros required that we agree to these provisions as a condition to Atheros’ willingness to enter into the merger agreement. These restrictions could discourage a potential third party from considering or proposing an acquisition of all or a significant part of us, even if that party were prepared to pay consideration with a higher per share market price than the current proposed merger consideration. Furthermore, the termination fee may result in a potential competing acquirer proposing to pay a lower per share price to acquire us than it might otherwise have proposed to pay. In the event the merger is terminated by Atheros or us, the trading price of our stock may decline.

The merger agreement with Atheros imposes certain restrictions on our activities until the closing.

The merger agreement with Atheros limits certain of our activities that are considered other than in the ordinary course of business inconsistent with past practice, including but not limited to granting options to employees, incurring indebtedness above certain limits, renewing or entering into certain new contracts, and paying or discharging certain obligations.

The portion of the merger consideration to be paid in Atheros common stock will not be adjusted in the event the value of Atheros common stock declines before the merger is completed. As a result, the value of the shares of Atheros common stock at the time that our stockholders receive them could be less than the value of those shares at the time we entered into the definitive agreement or today.

The number of shares of Atheros common stock that our stockholders may receive in the merger is fixed even though the stock price of Atheros may increase or decrease. The merger consideration will not be adjusted as a result of any change in the market price of Atheros common stock between the date we entered the merger agreement and the date that our stockholders receive shares of Atheros common stock in the merger. The market price of Atheros common stock will likely be different, and may be lower, on the date our stockholders receive their shares of Atheros common stock than the market price of shares of Atheros common stock when we entered into the merger agreement. Differences in Atheros’ stock price

may be the result of changes in the business, operations or prospects of Atheros, market reactions to the proposed merger, general market and economic conditions or other factors. Neither we nor Atheros are permitted to terminate the merger agreement because of changes in the market prices of our respective common stock.

Risks Related to Our Business and Industry

We have incurred substantial losses in the past, and we may incur additional future losses.

Prior to the quarter ended September 30, 2008, we sustained losses and did not achieve profitability under U.S. GAAP for any fiscal quarter or year. ~~Although~~ weFor ~~realized net income of $0.3 million for~~ the ~~six~~nine months ended ~~June~~September 30, 2009 and 2008, we incurred net losses of $0.91 million ~~for~~and ~~the~~$0.7 ~~year ended December 31~~million, ~~2008,~~respectively. ~~our~~Our accumulated deficit as of ~~June~~September 30, 2009 was $135.3 8 million. We may continue to incur operating losses in the future due to a number of factors, including lower revenues and gross margins, increased expenses related to product development and hiring personnel for sales, marketing and research and development, and public company expenses. We have incurred, and if we fail to complete our planned merger with Atheros, we will continue to incur, substantial additional costs related to being a public company that we did not incur as a private company. If our revenue and gross margins decline or fail to grow, or if we fail to manage our expenses, we may not sustain profitability in the future. As a result, our business could be harmed, and our stock price could decline.

Economic conditions may adversely affect our revenue, inventory levels, gross margins and results of operations.

The adverse conditions in the global economy may result in reduced spending, constrained credit, reluctance to adopt new technology, and loss of consumer and business confidence. Any of these factors could lead to decreased or delayed purchases of products containing our ICs by our customers, including our retail, service provider, commercial and utility customers. For example, for the quarter ended ~~June~~September 30, 2009, sales in our retail channel, which represented approximately 3829% of our total revenue, were 23% below the prior year quarter. In addition, while sales in the retail channel ~~increased~~decreased sequentially during the third ~~second~~ quarter of 2009, we expect sales in the retail channel to ~~decline~~increase slightly in the ~~third~~fourth quarter of 2009 over the ~~second~~third quarter of 2009.

Powerline communications is an emerging market, and, in the retail channel, the purchase of products including our ICs may involve changes to established consumer purchasing patterns. As consumers reduce discretionary spending or transition spending to discount retailers and lower cost products, demand for our products in the retail channel could decline. In the service provider channel, if subscriber growth or demand for new services such as IPTV or Internet-based movies-on-demand slows, end-customer turnover increases, service providers experience payment collection issues, new program rollouts are delayed or cancelled or our customers attempt to minimize their inventory levels, demand for our products from service providers could decline. Any reduction in demand for our products could adversely affect our revenue, increase our inventory levels, and result in lower selling prices and gross margins. If the economic downturn is further prolonged, we may have difficulty maintaining and establishing a market for our existing and new products, and our financial performance may suffer. Further, the adverse economic conditions will make it more difficult for us to forecast customer purchases, and our revenue and financial results could become more volatile, particularly due to our customer concentration, which has been increasing. The lack of visibility is particularly acute for indirect customers to whom we do not sell directly but who nevertheless account for a material portion of our revenue. These adverse economic conditions may also make it more difficult for our customers to operate and finance their businesses, which could result in credit losses on our accounts receivable or lead to consolidation among our customers. In addition, changes in foreign currency exchange rates that increase the effective cost of our ICs to customers whose businesses operate in other currencies could make our ICs less attractive to those customers and require us to reduce selling prices, which could have an adverse effect on our revenue, gross margins and profitability.

We may also experience adverse conditions in our operating expenses and product costs due to price increases by our suppliers, inflationary trends in the economy, changes in foreign currency exchange rates that reduce the purchasing power of the U.S. dollar, increases in energy costs, and increases in salaries and benefits and general and administrative expenses, as well as other factors. These conditions may harm our gross margins and profitability if we are unable to offset these costs by, among other things, controlling our expenses or increasing our pricing.

Furthermore, interest rates earned on our cash, cash equivalents and short-term investments have declined significantly. This has reduced the interest income we are earning on our cash, cash equivalents and short-term investments, which has had, and will continue to have, an adverse effect on our results of operations.

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Our operating results may fluctuate significantly due to a number of factors that could adversely affect our business and our stock price.

Historically, our operating results have fluctuated and are likely to fluctuate from quarter-to-quarter in the future. These fluctuations are due to a number of factors, including:

•

the level of and fluctuations in demand for our ICs by our customers and our associated revenue, as well as fluctuations in the available supply of ICs from our competitors;

•

the product mix and related gross margins of our sales;

• the introduction of new products and product features by us and by our competitors and the success or failure of such product offerings to achieve customer acceptance;

•

the timing and amount of our research and development expenditures;

•

delays or other problems in the introduction of our new products, the emergence of new markets, or the acceptance of our products in those markets;

•

the complexity, length and unpredictability of our sales cycle;

•

the availability and pricing of third-party products and services, including commodities used to manufacture, test and assemble our ICs;

• the highly cyclical nature of the semiconductor industry; ~~and~~

• general economic conditions, including adverse conditions in the financial and credit markets.; and

As• athe ~~result,~~amount itof isthe ~~difficult~~costs, ~~for~~fees ~~us to accurately forecast our revenue~~ and ~~results~~expenses ~~of operations on a quarterly basis,~~ and ~~you~~charges ~~should~~related ~~not rely upon quarter-~~to~~-quarter~~ ~~or year-over-year comparisons to predict~~ our ~~future~~proposed ~~financial~~transaction ~~performance.~~with ~~These~~Atheros, ~~factors~~including ~~could~~the bepossibility ~~exacerbated~~that by the ~~current~~merger ~~economic~~agreement ~~downturn~~may ~~and~~be byterminated ~~increased~~under ~~competition.~~circumstances Ifthat werequire ~~fail~~us to ~~meet~~pay ~~investors’~~Atheros ora ~~analysts’ expectations~~termination orfee ifof ~~our~~up ~~operating results are below guidance that we may provide~~ to ~~the market, our stock price could decline, rapidly and without notice~~$8.5 million.

As a result, it is difficult for us to accurately forecast our revenue and results of operations on a quarterly basis, and you should not rely upon quarter-to-quarter or year-over-year comparisons to predict our future financial performance. These factors could be exacerbated by the current economic downturn and by increased competition, rapidly changing technology and evolving and competing industry standards. If we fail to meet investors’ or analysts’ expectations or if our operating results are below guidance that we may provide to the market, our stock price could decline, rapidly and without notice.

We are subject to order and shipment uncertainties, and differences in our estimates of customer demand and product mix from actual results could negatively impact our inventory levels, sales and operating results.

Our revenue is generated on the basis of purchase orders with our customers rather than long-term purchase commitments. We historically have not experienced significant backlog of customer orders for our ICs. In addition, our customers can cancel purchase orders or defer the shipments of our products under certain circumstances. Our products are manufactured according to our estimates of customer demand, which requires us to make separate demand forecast assumptions for every customer, each of which may introduce significant variability into our aggregate estimate. We have limited visibility into the future customer demand and product mix that our customers will require, including the extent to which our customers’ requirements may be affected by the current adverse conditions in the global economy, or by new products introduced by us or our competitors, or as a result of our proposed merger with Atheros. In the past, we have been subject to significant variations in orders from our customers, with orders, including large orders, followed by periods of limited demand from such customers. Our visibility into customer demand is particularly limited for new markets with respect to which we have limited or no experience and for customers to whom we do not sell to directly. Some of these indirect customers account for a material portion of our revenue. Such limited visibility could adversely affect our revenue forecasts and gross margins, particularly in the event a large customer, a group of customers serving the same indirect customer, or a large number of smaller customers were to delay or cancel orders or shift their future business to one of our competitors. We may also be subject to greater revenue and gross margin volatility due to our customer concentration, which has been increasing. Moreover, many of our customers have difficulty accurately forecasting their own product requirements and customer demand, as well as difficulty accurately estimating the timing of their new product and service rollouts and those of their customers (which ultimately affects their demand for our ICs). The limited visibility experienced by us and our customers is exacerbated during product transitions, ~~such as our current transition from our INT6300 IC to our INT6400 IC,~~ where we must assess demand both for the new product being introduced and the existing product being replaced. Historically, because of the limited visibility experienced by us and our customers, our actual results have been different from our forecasts of customer demand, and some of these differences have been sudden and material, leading to excess inventory or product shortages and revenue and gross margin results below those forecast by us. Given our relatively fixed operating costs, adjustments to our expenditures to account for lower revenue can be difficult to implement and take time, resulting in additional operating losses. Such differences in actual results from forecasts may occur in the future, and the adverse impact of these differences could grow if we are successful in selling a much larger number of ICs to some customers. In addition, the rapid progress of innovation and competition in our industry, with a corresponding adverse effect on revenues and operating results, could cause us to lose business and render significant ~~portions of our inventory obsolete. Excess or obsolete inventory~~ levels could result in lower selling prices, unexpected expenses or increases in our reserves that would adversely affect our business, operating results and financial condition. Conversely, if we were to underestimate customer demand or if sufficient manufacturing capacity were unavailable, we would forego revenue opportunities, potentially lose market share and damage our customer relationships and our reputation in the industry.

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portions of our inventory obsolete. Excess or obsolete inventory levels could result in lower selling prices, unexpected expenses or increases in our reserves that would adversely affect our business, operating results and financial condition. Conversely, if we were to underestimate customer demand or if sufficient manufacturing capacity were unavailable, we would forego revenue opportunities, potentially lose market share and damage our customer relationships and our reputation in the industry.

In addition, in light of the current adverse economic conditions, we believe there will be a higher risk of delays and cancellations in customer orders, which may be followed by unexpected increases in demand as customers subsequently replenish inventory levels. In the event of material order delays and cancellations, we would experience significantly greater volatility in our revenue and earnings or losses, as applicable, and this volatility could be more pronounced than expected given our customer concentration. Any significant future cancellations or deferrals of product orders or the return of previously sold products due to manufacturing defects could materially and adversely impact our business, revenue, inventory levels, gross margins, and operating results on a quarterly or annual basis, as well as increase our product obsolescence and restrict our ability to fund our operations. If these cancellations or deferrals are followed by unexpected increases in demand for our products, we may be unable to meet this demand, which could cause us to lose business to our competitors, or we may be required to expend considerable resources in an effort to meet this demand, which could have a material adverse effect on our business regardless of whether we are successful in doing so.

In the past, we have experienced periods of rapid growth, and if we fail to sustain our growth or fail to effectively manage future growth, if any, our business will suffer.

Our revenue grew to $1719.59 million for the ~~second~~third quarter of 2009 from $1517.5 million for the ~~first~~second quarter of 2009. In addition, our operating expenses increased to $810.5 million for the ~~second~~third quarter of 2009 from $8.05 million for the ~~first~~second quarter of 2009, primarily due to expenses of approximately $1.8 million related to our proposed merger with Atheros. Historically, we have experienced periods of significant growth and expansion. Such historic growth has placed, and any future growth will continue to place, a significant strain on our management, personnel, systems and financial resources. We anticipate that we will continue to expand our workforce and increase our operating expenses through internal growth as well as through potential acquisitions. If we expand our business too rapidly in anticipation of increased demand for our products and this demand does not materialize at the rate we expect, our inventory levels could be negatively impacted, the rate of our increased operating expenses could exceed our revenue growth, and we could incur operating losses. If we are unable to manage future growth, if any, effectively, we may not be able to take advantage of market opportunities, develop new or enhanced products, satisfy customer requirements, execute our business plan, or respond to competitive pressures, and our business could be harmed.

We face significant and increasing competition and may be unsuccessful against current and future competitors.

The markets for ICs generally, and ICs for powerline communications in particular, are intensely competitive. We expect competition to increase and intensify as more and larger IC manufacturers enter our markets. Increased competition could result in price pressure, reduced profitability and loss of market share, any of which could materially adversely affect our business, revenue and operating results.

As several technologies enable communications for high-bandwidth home networking applications, we compete with suppliers of ICs based on powerline, other wireline and wireless technologies. Our primary powerline competitors for HomePlug 1.0 ICs include Arkados Group Inc., Conexant Systems, Inc., and Maxim Integrated Products Inc. In addition, Gigle Semiconductor released its first HomePlug AV-based IC during the second quarter of 2009, using a design with a proprietary second frequency band that is designed to deliver a higher PHY rate than HomePlug AV. We also compete with Design of Systems on Silicon (DS2) and Panasonic, which build IC’s based on incompatible non-HomePlug powerline communications technologies. Because they use different technologies but share the same electrical wire, powerline communications solutions based on different standards do not interoperate and will cause interference that will prevent the systems from coexisting effectively. We also expect to have additional HomePlug powerline competition this year from several new competitors, including CopperGate Communications, Ltd., which werecently ~~believe will~~announced ~~introduce~~ a HomePlug AV-based IC as well as a pending agreement to be acquired by Sigma Designs, and STMicroelectronics, which in October 2008 announced an agreement with Arkados Group, Inc. to develop and manufacture a HomePlug AV-based system-on-a-chip, which is expected to interoperate with HomePlug 1.0 devices. In addition, we expect to have increased powerline competition this year from Spidcom Technologies S.A., which ~~recently~~has announced a HomePlug AV-based system-on-a-chip, and Xeline Co., Ltd. We compete or expect to compete with most of these companies in our digital home, commercial and utility markets and in the use of powerline communications technology over coaxial cable and telephone wiring as well as powerlines. We expect the products from our HomePlug AV competitors will include features not offered by us. We also face competition from a large number of companies that offer other wireline and wireless communications ICs based on various technologies, including Atheros Communication, Inc., Broadcom Corporation, CopperGate ~~Communications,~~ ~~Ltd., Entropic~~ Communications, ~~Inc., Intel Corporation, Marvell Technology Group~~ Ltd., ~~Realtek Semiconductor Corp. and Texas Instruments Incorporated. Any of these companies as well as others could also decide to offer powerline~~Entropic communications ICs in the future. We also face competition from companies that provide enabling technology for applications related to the management of electrical distribution systems that can be monitored or managed remotely, known as smart grid, and the use of powerline technology to provide Internet access to homes over neighborhood powerlines, known as broadband over powerline. Our primary competitor for sales of broadband ICs for utility applications is DS2. We also face competition from systems providers and manufacturers of narrow band ICs who have developed proprietary utility communications technology including fixed wireless over private and public networks, in-home wireless, powerline, other wireline and hybrid networks that utilize wireless, powerline and/or other wireline technologies. These competitors include Cellnet Technology, Inc., Echelon Corporation, Ember Corporation, Esco Corporation, Freescale Semiconductor, Maxim Integrated Products, Inc. Sigma Designs, Texas Instruments and Yitran. We expect to face competition from new and emerging companies that may enter our existing or future markets. We may also face increased competition in the event of industry consolidation from companies that acquire, or enter into licensing arrangements or strategic alliances with, our competitors. These companies may have financial, sales, marketing, manufacturing, distribution, technical and other resources that exceed our own. Because substantial time, expense and technology are required to design, manufacture and bring to market a new or modified IC, our ability to compete with the products or product features offered by our competitors may be delayed or limited, and we may be unable to do so.

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Communications, Inc., Intel Corporation, Marvell Technology Group Ltd., Realtek Semiconductor Corp. and Texas Instruments Incorporated. Any of these companies as well as others could also decide to offer powerline communications ICs in the future. We also face competition from companies that provide enabling technology for applications related to the management of electrical distribution systems that can be monitored or managed remotely, known as smart grid, and the use of powerline technology to provide Internet access to homes over neighborhood powerlines, known as broadband over powerline. Our primary competitor for sales of broadband ICs for utility applications is DS2. We also face competition from systems providers and manufacturers of narrow band ICs who have developed proprietary utility communications technology including fixed wireless over private and public networks, in-home wireless, powerline, other wireline and hybrid networks that utilize wireless, powerline and/or other wireline technologies. These competitors include Cellnet Technology, Inc., Echelon Corporation, Ember Corporation, Esco Corporation, Freescale Semiconductor, Maxim Integrated Products, Inc., Sigma Designs, Texas Instruments and Yitran. We expect to face competition from new and emerging companies that may enter our existing or future markets. We may also face increased competition in the event of industry consolidation from companies that acquire, or enter into licensing arrangements or strategic alliances with, our competitors. These companies may have financial, sales, marketing, manufacturing, distribution, technical and other resources that exceed our own. Because substantial time, expense and technology are required to design, manufacture and bring to market a new or modified IC, our ability to compete with the products or product features offered by our competitors may be delayed or limited, and we may be unable to do so.

Many of our competitors and potential competitors have longer operating histories, greater resources, greater name recognition, more extensive product offerings, a larger customer base, longer relationships with customers and distributors and lower wafer and supply chain costs than we do. As a result, they may be able to respond more quickly to customer requirements, devote greater resources to the development, promotion and sales of their products and influence industry standards and market acceptance of their products better than we can. Our competitors may also own or have better access to complementary technologies that can be integrated into system-on-a-chip devices that offer lower cost implementation of powerline communications. These competitors may also be able to adapt more quickly to new or emerging technologies or standards and may be able to deliver products with performance comparable or superior to that of our products at a lower cost. In addition, regardless of whether our competitors’ products offer any performance or cost benefits, we may face increased competitive pressures to the extent our customers decide to second source the ICs used in their products.

If our customers do not design our products into their product offerings, or if our customers’ product offerings are delayed or are not commercially successful, our revenue and operating results will be adversely affected.

Our powerline communications products are not sold directly to end-users but are used as components in the products developed and sold by others. We sell our products directly or indirectly through resellers to OEMs and service providers, which include our ICs in their products, and to ODMs, which include our ICs in the products they supply to OEMs and service providers. Our products are generally incorporated into our customers’ products in the early stages of their development after an evaluation of our and our competitors’ products. As a result, we rely on OEMs and service providers to specify our products into the products they sell, which we refer to as a “design win”. Without these design wins, we would not be able to sell our products and our business would be materially and adversely affected. We often incur significant expenditures on the development of a new product without any assurance that an OEM or service provider will specify our product into its products. If we do not complete our design-in activities before a customers’ design window closes, we will lose the opportunity, which could eliminate or substantially delay revenues from certain target customers and markets and adversely affect our future sales and revenues, as well as harm our customer relationships. Once an OEM or service provider specifies a competitor’s product into its product offering, it becomes significantly more difficult for us to sell our products to that customer because changing suppliers involves significant cost, time, effort and risk for the customer. This is especially true for applications where the IC is embedded into a personal computer or consumer electronics product. Furthermore, even if an OEM designs one of our products into its product offering, we cannot be assured that its product will be commercially successful, that we will receive any revenue from that OEM, that the OEM will not second source the ICs using a competitor’s product, or that a successor design will include one of our products. The timing and amount of our revenue depends on the ability of the OEMs who use our ICs to develop, market, produce and ship products incorporating our technology, a process over which we have no control. If we are unable to accurately forecast the demand from these OEMs, our product mix, margins and inventory levels could be adversely affected. In addition, any decline in the sales of OEM products that use our ICs would decrease our revenue. If our customers experience delays in completing one of their products, if they are unsuccessful in commercializing a product or if they experience reductions or delays in orders from their customers, they would likely postpone or terminate their purchase of our ICs for that product, which would cause our sales to decrease. Moreover, because our IC solution is only one component included in the products sold by our customers, our customers must obtain the other components needed to complete their products from third parties. Some of these other components may have long lead times or be changed or discontinued, which could delay shipment or require redesign of the affected customer product, any of which would delay or reduce our revenue.

If37 ~~we fail to develop and introduce new and enhanced products that achieve market acceptance in a timely and cost-effective manner, our operating results and competitive position will be harmed.~~

Our markets are characterized by rapidly changing technology, evolving and competing industry standards, changing customer needs and intense competition. Our future success will depend on our ability to anticipate and adapt to changes in technology, standards, customer demand and competing products in a timely and cost-effective manner, particularly by developing and introducing new products and product enhancements that offer increased performance and a lower total solution cost to the customer. Our product development efforts, including those for our HomePlug AV-based ICs, are time-consuming and require substantial research and development expense. Our research and development expenses were approximately $4.0 and $7.6 million in the three and six months ended June 30, 2009. If we have not made, or in the future do not make, adequate investments in research and development, sales and marketing and customer support, or if we do not have sufficient resources to do so, we may be unable to develop and introduce new or enhanced products, or identify and make technological advances, as necessary to be competitive and grow our business. In the future, it may be necessary for us to acquire complementary technologies, licenses and designs to create new and enhanced products and to be able to integrate our IC designs or technology into system-on-a-chip devices. There can be no assurance that we will be successful in developing or acquiring new products or product enhancements, that our new and/or enhanced products will be introduced before our competitors’ new releases, that our products will meet market requirements, or that we will achieve an acceptable return on our research and development investment.

If we fail to develop and introduce new and enhanced products that achieve market acceptance in a timely and cost-effective manner, our operating results and competitive position will be harmed.

Our markets are characterized by rapidly changing technology, evolving and competing industry standards, changing customer needs and intense competition. Our future success will depend on our ability to anticipate and adapt to changes in technology, standards, customer demand and competing products in a timely and cost-effective manner, particularly by developing and introducing new products and product enhancements that offer increased performance and a lower total solution cost to the customer. Our product development efforts, including those for our HomePlug AV-based ICs, are time-consuming and require substantial research and development expense. Our research and development expenses were approximately $4.4 and $12.0 million in the three and nine months ended September 30, 2009. If we have not made, or in the future do not make, adequate investments in research and development, sales and marketing and customer support, or if we do not have sufficient resources to do so, we may be unable to develop and introduce new or enhanced products, or identify and make technological advances, as necessary to be competitive and grow our business. In the future, it may be necessary for us to acquire complementary technologies, licenses and designs to create new and enhanced products and to be able to integrate our IC designs or technology into system-on-a-chip devices. There can be no assurance that we will be successful in developing or acquiring new products or product enhancements, that our new and/or enhanced products will be introduced before our competitors’ new releases, that our products will meet market requirements, or that we will achieve an acceptable return on our research and development investment.

The development of our products is highly complex. Due to the relatively small size of our hardware and software design teams, our research and development efforts may lag behind those of our competitors, some of whom may have substantially greater financial and technical resources. In addition, we have in the past and may in the future experience unexpected delays in developing and introducing new products and product enhancements. Such delays divert substantial engineering resources, which may increase our costs, impair our ability to develop new products and enhancements, and adversely impact the commercial acceptance of such new products and product enhancements, which may negatively affect the revenue generated from sales of such products. These delays may also shift the associated product development expenses from one reporting period into another and, as a result, create unexpected differences in anticipated operating expenses. The risk of these delays and expense shifts may be exacerbated by the use of independent contractors and vendors who fail to deliver on time. If we fail to meet investors’ or analysts’ expectations regarding operating expenses, or our operating expenses exceed any guidance we may provide to the market, our stock price could be negatively impacted. In addition, we may expend significant amounts on research and development programs for new HomePlug AV-based ICs or other future products that may not achieve market acceptance. We began shipping the first, second and third generations of our newest products, our HomePlug AV-based ICs, in the second quarter of 2006, the second quarter of 2007 and the third quarter of 2008, respectively. If our HomePlug AV-based ICs or our other new and enhanced products do not achieve market acceptance or are not adopted at the rate we anticipate, we may not earn an acceptable return on our research and development or technology acquisition expenditures, and we may be unable to maintain or increase our revenue or achieve our margin forecasts, any of which could materially adversely affect our business and result in a decline in our stock price.

The average selling price of our products will decrease over their product life cycle. If the selling price reductions are greater than we expect, or if we are unable to effectively offset average selling price erosion, our results of operations may be adversely affected.

Historically, and consistent with trends in the IC industry generally, the average selling price of our products has decreased over their product life cycle. We believe that we will be required to continue to reduce the average unit prices of our powerline communications products due to a number of factors, including competitive pricing pressures and product bundling, new product introductions and the future introduction of system-on-a-chip devices that include powerline communications and other technologies. We expect to face increased pricing pressure on our HomePlug AV ICs as new HomePlug AV competitors enter the market this year. Moreover, if the cost of our ICs increases the retail cost of our customer’s product to an unacceptable level, the customer will not add a powerline communications solution to the product, regardless of whether our ICs are priced competitively. In products where powerline communications is the second or third communications technology (for example, after Ethernet and wireless capabilities), we face particularly strong pricing pressure with respect to our products. A reduction in the average selling price to one of our customers could force us to lower our average selling price to other customers, both as a result of competitive factors and as a result of most favored nation pricing commitments to certain customers. If we are unable to offset any reductions in our average selling prices with increased sales volumes or reduced production costs or if we are unable to manage our inventory to reduce the impact of such price declines, our results of operations would be harmed.

Changes to the mix of products we sell may have a significant impact on our financial results.

As we sell several ICs with differing functionality, prices and costs, the mix and types of our ICs sold to customers affect the average selling price and average cost of our products and can substantially impact our revenue and gross margins. Our gross margins may vary from quarter-to-quarter for a number of reasons, including market conditions, customer demand, changes in our customer base, product mix and our sales volume, average selling price, and cost for each product sold. To the extent that our sales mix results in a decline in our gross margins, our ability to recover our fixed costs and investments associated with a particular product and our business, results of operations and financial condition could be materially adversely affected.

Changes to current or future laws and regulations, or the imposition of new laws and regulations, by federal, state, local and foreign governments and government agencies in the markets where the products using our ICs are sold could restrict or eliminate our ability to sell our products or otherwise harm our business.

Devices such as our customers’ products containing our ICs for powerline communications are subject to various U.S. and foreign governmental regulations, including, for example, regulations regarding transmission power, permissible frequencies of operation, electromagnetic interference and electrical wiring. These regulations and the interpretation and enforcement of the regulations may vary from country-to-country and are subject to change. For example, in the U.S., rules governing power limits and measuring techniques for broadband over powerline devices have been adopted by the Federal Communications Commission (FCC). “Access” broadband over powerline rules govern systems installed and operated by an electric utility on the supply side of the customer’s premises. “In-house” broadband over powerline rules govern that portion of a broadband over powerline system that operates on customer premise lines not owned by the utility. In April 2008, after the access broadband over powerline rules were appealed to the U.S. Court of Appeals for the District of Columbia, the Court remanded the rules to the FCC. The Court ordered the FCC, in part, to provide justification for its choice of extrapolation factor for access broadband over powerline, or in the alternative, to adopt another factor. If, in response to this ruling or otherwise, the FCC were to amend the rules applicable to products using our ICs for smart grid and access broadband over powerline applications, for example by effectively reducing the allowable transmit power, our ICs might be unable to meet customer requirements or to be competitive against alternative solutions and our business could be harmed as a result. If the application of the ruling and any resulting rule changes were to be extended to products using our ICs for in-home powerline communications, the impact would be more severe and we could experience a material adverse effect on our business, results of operations and financial condition.

our ICs might be unable to meet customer requirements or to be competitive against alternative solutions and our business could be harmed as a result. If the application of the ruling and any resulting rule changes were to be extended to products using our ICs for in-home powerline communications, the impact would be more severe and we could experience a material adverse effect on our business, results of operations and financial condition.

In most countries outside of the U.S., regulations governing powerline communications devices are generally based upon standards adopted by the International Electrotechnical Commission, International Special Committee on Radio Interference (IEC/CISPR). Based on information provided in part by our customers, we believe that the majority of the ICs we sell are ultimately used in devices that are sold in countries that base their regulations on standards adopted by IEC/CISPR. The IEC/CISPR rules and test procedures on powerline communications are currently in a state of flux. A CISPR project to address the subject of powerline communications standards for both access and in-house broadband over powerline is expected to take several years to complete, and there is no guarantee that favorable IEC/CISPR standards will eventually be adopted. Powerline communications regulations are based upon specific country requirements in the absence of adoption of IEC/CISPR or other international standards. In some countries, including Japan, the regulations limit use of powerline communications to in-home devices, thereby prohibiting use of broadband over the power grid, and require in-home transmission power levels that are below those permitted in the U.S. Other countries may require that certain frequency bands, such as those used for search and rescue, be filtered out of the spectrum being used for powerline communications, which reduces throughput.

A change, including a rapid change, in the existing regulations, the adoption of new regulations or a change in the interpretation or testing methods used to demonstrate compliance with the regulations could prevent products using our ICs from being used in the applicable country, could reduce the performance of such products below customer requirements, or could require us to redesign our ICs or require our customers to redesign their products to comply with the new regulatory requirements. Such actions could also require the use of products already sold into the marketplace to be terminated. Although some of our HomePlug-based ICs have limited capabilities to filter additional frequencies to meet specific country requirements, our other ICs do not have this flexibility and even those that do may not be able to meet future regulatory requirements or may perform below customer requirements if substantial portions of the available spectrum are required to be filtered. Any regulatory reduction in the available frequencies or the available transmit power of our ICs will reduce the performance of our ICs and, depending on the amount of the reduction and the intended use of the IC, could cause the IC to fail to meet customer requirements or cause it to be less competitive with other communications solutions. If we were required to redesign an IC to meet new regulatory filtering, transmit power or other requirements, we would be required to incur substantial time and expense and there is no assurance that we would be able to make changes to our IC, or introduce a new IC, that would result in a product that would meet regulatory or customer requirements by the time necessary for compliance, if at all.

~~The~~39 products containing our ICs may also be subject to regulations specifying the maximum amount of electric current that the product may use when in operation, in standby mode or not in use. These provisions, which are intended to promote power conservation, are sometimes referred to as “code of conduct” regulations. Governmental interest in promulgating these regulations appears to be increasing, particularly in Europe, which is our largest geographic market. If our ICs do not allow a product manufacturer to meet applicable code of conduct regulations for a product, the manufacturer will not use our ICs in the product. If our competitors offer ICs with lower power consumption, this may give them a competitive advantage. If we were required to redesign an IC to meet new code of conduct or other power consumption requirements, we would be required to incur substantial time and expense and there is no assurance that we would be able to make changes to our IC, or introduce a new IC, that would result in a product that would meet regulatory or customer requirements by the time necessary for compliance, if at all. Even if our ICs are competitive in terms of power consumption, the time required for a manufacturer to comply with new code of conduct requirements applicable to the manufacturer’s product could delay deployment of the product and, accordingly, the manufacturer’s purchase of our ICs.

We depend upon a small number of customers for a significant portion of our revenue, and the loss of, or significant delay, reduction, or cancellation in sales to, any one of these customers could adversely affect our operations and financial condition.

~~revenue~~The ~~accounted~~products ~~for~~containing byour ~~one~~ICs ormay ~~more~~also be subject to regulations specifying the maximum amount of ~~our~~electric ~~customers~~current ~~could~~that ~~increase~~the ifproduct ~~our~~may ~~total~~use ~~revenue~~when ~~were~~in tooperation, ~~decline~~in standby mode or not in use. ~~The~~These ~~loss~~provisions, ofwhich ~~any~~are ~~large~~intended ~~customer~~to promote power conservation, aare ~~significant~~sometimes referred to as “code of conduct” regulations. ~~reduction~~Governmental interest in ~~sales~~promulgating wethese ~~make~~regulations appears to ~~them~~be increasing, ~~any~~particularly ~~delay~~in orEurope, ~~cancellation~~which ofis ~~orders~~our ~~they~~largest ~~have~~geographic ~~made~~market. ~~with~~If ~~us,~~our ~~any~~ICs ~~failure~~do not allow a product manufacturer to ~~pay~~meet applicable code of conduct regulations for a product, the ~~products~~manufacturer wewill ~~have~~not ~~shipped~~use toour ~~them,~~ICs ~~any~~in ~~return~~the ofproduct. ~~products~~If ~~previously~~our ~~sold~~competitors tooffer ICs with lower power consumption, this may give them ~~due~~a tocompetitive ~~manufacturing~~advantage. ~~defects~~If orwe ~~any~~were ~~shift~~required ~~of their~~to ~~future~~redesign ~~business~~an IC to ~~one~~meet new code of ~~our~~conduct ~~competitors~~or ~~could~~other ~~materially~~power consumption ~~and~~requirements, ~~adversely~~we ~~affect~~would ~~our~~be ~~results~~required ofto ~~operations~~incur substantial time and ~~financial~~expense ~~condition.~~and ~~Increased~~there ~~customer~~is ~~concentration~~no ~~may~~assurance ~~also~~that ~~adversely~~we ~~impact~~would be able to make changes to our ~~gross~~IC, ~~margins~~or introduce a new IC, that would result in ~~the~~a ~~event~~product ofthat ~~large~~would ~~purchases~~meet ofregulatory or ~~our~~customer ~~lower~~requirements ~~margin~~by ~~products~~the time necessary for compliance, if at all. WeEven ~~may~~if ~~not~~our beICs ~~able~~are tocompetitive ~~maintain~~in terms of power consumption, ~~increase~~the ortime ~~accurately~~required ~~forecast~~for ~~sales~~a manufacturer to comply with new code of ~~our~~conduct ~~products~~requirements applicable to ~~these~~the manufacturer’s ~~customers~~product ~~for~~could adelay ~~number~~deployment of ~~reasons~~the product and, ~~including~~accordingly, ~~but~~the ~~not~~manufacturer’s ~~limited~~purchase ~~to,~~of ~~the~~our ~~following:~~ICs.

We depend upon a small number of customers for a significant portion of our revenue, and the loss of, or significant delay, reduction, or cancellation in sales to, any one of these customers, including as a result of our proposed merger with Atheros, could adversely affect our operations and financial condition.

We have derived a significant portion of our revenue from a small number of OEM, ODM and distributor customers, and our customer concentration has increased since 2008. We expect such customer concentration to continue for the foreseeable future. In the three months ended September 30, 2009, Free, a service provider; devolo AG, an OEM; Chenmtech Co Ltd, a distributor; and EchoStar, a service provider, accounted for approximately 21%, 15%, 14% and 13% of total revenue, respectively. In general, we are not able to track the amount of our product sold by our OEM, ODM and distributor customers to their ultimate end-use customers. We are also less able to accurately forecast our revenues for such indirect customers, and their revenues are subject to greater uncertainty and therefore greater volatility. In addition, we are also exposed to certain customer concentration risk for our indirect customers. For example, we believe that several of our ODM customers produce products using our ICs for EchoStar. For the three months ended September 30, 2009 and 2008, we estimate that EchoStar’s direct purchases and its indirect purchases through its various ODMs of our HomePlug 1.0 ICs would have accounted for approximately 20% and 23% of our aggregate revenue, respectively. Our aggregate customer concentration may increase in future periods if we are successful in adding new customers who buy our ICs in substantially higher volumes than our existing customers. In addition, the percentage of revenue accounted for by one or more of our customers could increase if our total revenue were to decline. The loss of any large customer, a significant reduction in sales we make to them, any delay or cancellation of orders they have made with us, any failure to pay for the products we have shipped to them, any return of products previously sold to them due to manufacturing defects or any shift of their future business to one of our competitors could materially and adversely affect our results of operations and financial condition. Increased customer concentration may also adversely impact our gross margins in the event of large purchases of our lower margin products. We may not be able to maintain, increase or accurately forecast sales of our products to these customers for a number of reasons, including, but not limited to, the following:

•

our customers typically purchase from us based on a purchase order rather than an agreement that requires them to purchase minimum quantities of our products;

•

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

•

our customers and our customers’ customers may be unable to forecast the demand for their products;

•

our customers and our customers’ customers may experience delays in rolling out new products and services that use our ICs;

•

our customers may use our competitors’ products instead of ours;

•

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

• we may be unsuccessful in providing the ICs or customer enablement support that our customers require to meet their volume targets; or

• we may be unable to develop new products or product enhancements that are desirable to our customers at competitive prices and on the schedule they require.; or

•

our customers and our customers’ customers may delay or defer decisions concerning their purchase of our products in response to the proposed merger with Atheros or due to the diversion of management’s attention as a result of the merger.

HomePlug powerline communications solutions for our digital home, utility and commercial markets may not gain widespread acceptance, which could materially adversely affect our business.

During the three months ended ~~June~~September 30, 2009, approximately 99% of our revenue was derived from the sale of HomePlug-based ICs. Our HomePlug-based ICs are primarily used in retail and service provider-specified applications for home connectivity, which is the sharing and moving of content among home gateways, personal ~~computers~~ and other consumer electronics products in the home. The home connectivity market is currently dominated by wired Ethernet and wireless (Wi-Fi) local area network (LAN) technologies. The powerline communications and networking market iscomputers relatively new and lacks broad consumer market awareness and acceptance. Powerline communications generally, and the HomePlug standards in particular, face competition from other wireline communications technologies as well as Ethernet and wireless technologies. Among the competing technologies, including coaxial cable, Ethernet, phone line, wireless and non-HomePlug powerline, many are actively supported by larger companies and by various global and regional industry and standards development organization (SDO) alliances, and some offer performance and features that HomePlug powerline communications products cannot provide. Some of these competing communications technologies have a longer history of availability and stronger industry alliance support and have become integrated within products offered by service providers, electric utilities and technology leaders in the personal computer and consumer electronics markets, and therefore have gained greater market acceptance and have the benefit of higher economies of scale associated with larger product volumes. Leading semiconductor companies continue to invest heavily in promoting and improving wireless technologies, particularly Wi-Fi LAN. To help advance the establishment of the HomePlug standards and accelerate the growth and adoption of our HomePlug-based products, we endeavor to develop formal and informal relationships with technology leaders in the personal computer, consumer electronics, service provider and utility markets. If we are unable to establish and maintain these relationships and these technology leaders fail to promote the advantages of the HomePlug standards and our HomePlug-based ICs, or if competing technologies or standards such as wireless, coaxial cable, Ethernet, or non-HomePlug powerline provide better performance at a more competitive price than we can offer, our solutions could fail to achieve widespread market adoption. If HomePlug powerline communications technology generally, and our HomePlug-based ICs specifically, do not achieve widespread market acceptance in the digital home, utility or commercial markets, there may be less demand or no demand for some of our products, causing our business to suffer and our stock price to decline.

and other consumer electronics products in the home. The home connectivity market is currently dominated by wired Ethernet and wireless (Wi-Fi) local area network (LAN) technologies. The powerline communications and networking market is relatively new and lacks broad consumer market awareness and acceptance. Powerline communications generally, and the HomePlug standards in particular, face competition from other wireline communications technologies as well as Ethernet and wireless technologies. Among the competing technologies, including coaxial cable, Ethernet, phone line, wireless and non-HomePlug powerline, many are actively supported by larger companies and by various global and regional industry and standards development organization (SDO) alliances, and some offer performance and features that HomePlug powerline communications products cannot provide. Some of these competing communications technologies have a longer history of availability and stronger industry alliance support and have become integrated within products offered by service providers, electric utilities and technology leaders in the personal computer and consumer electronics markets, and therefore have gained greater market acceptance and have the benefit of higher economies of scale associated with larger product volumes. Leading semiconductor companies continue to invest heavily in promoting and improving wireless technologies, particularly Wi-Fi LAN. To help advance the establishment of the HomePlug standards and accelerate the growth and adoption of our HomePlug-based products, we endeavor to develop formal and informal relationships with technology leaders in the personal computer, consumer electronics, service provider and utility markets. If we are unable to establish and maintain these relationships and these technology leaders fail to promote the advantages of the HomePlug standards and our HomePlug-based ICs, or if competing technologies or standards such as wireless, coaxial cable, Ethernet, or non-HomePlug powerline provide better performance at a more competitive price than we can offer, our solutions could fail to achieve widespread market adoption. If HomePlug powerline communications technology generally, and our HomePlug-based ICs specifically, do not achieve widespread market acceptance in the digital home, utility or commercial markets, there may be less demand or no demand for some of our products, causing our business to suffer and our stock price to decline.

Powerline technology is subject to significant technical challenges that may make it difficult for us to meet future market requirements.

The use of existing electrical wiring as a method for reliable communications is technically challenging. Powerlines are subject to interference, or noise, and the amount and type of noise varies significantly. For example, simple household products, such as cell phone chargers, power supplies, halogen lights, compact florescent lights and hair dryers, can all create noise that can have a serious adverse effect on the quality of powerline communications. The operation of other large electrical devices such as refrigerators and air conditioning units can also have an adverse effect. Powerline communications are also subject to signal reduction, or attenuation, based on the length of the wiring paths and the presence of other devices including arc fault circuit interrupters, or AFCIs, residual current devices, or RCDs, earth leakage circuit breakers, or ELCBs, and surge protectors. The U.S. National Electrical Code requires AFCIs for newly installed bedroom outlets and, in the future, may require AFCIs for all newly installed outlets. AFCIs are also being considered or required by other jurisdictions. RCDs and ELCBs are also required by many countries. AFCIs, RCDs and ELCBs from certain manufacturers may cause attenuation and/or impedance modulation sufficient to block or substantially impair powerline communications. In addition, attenuation may be caused by surge protectors which block the communications signal from a powerline adapter or other product that is plugged into the surge protector. The instructions to HomePlug-enabled products generally instruct customers to plug the devices into surge protectors designed to pass the HomePlug signal or directly into electrical outlets (as most HomePlug-based adapters and other product designs include surge protection circuitry). However, end users may experience unacceptable results if they fail to follow these instructions. Future products not yet identified by us or released into the marketplace may also have adverse effects on powerline communications due to noise, attenuation or other causes. The degree to which household products and devices such as AFCIs, RCDs, ELCBs and surge protectors adversely affect the performance of our products, and the relative competitive impact of any reduction in performance, depends on a large number of factors, including the number and combination of devices creating noise or attenuation in a home, the timing, spectrum and extent of the noise and the throughput required for the specific powerline connectivity application. Some of these factors and the resulting impact on our ability to meet customer requirements may vary be geography.

36Although the HomePlug technologies provide solutions to many of these challenges, powerline remains a more difficult medium than competing wireline technologies such as Ethernet and coaxial cable LANs. As a result, powerline communications may be unable to provide the reliable data or video transmission capacity, or throughput, required by some customers and may be an ineffective or less competitive connectivity solution in some environments. These technical challenges may also make it more difficult to achieve further performance improvements in powerline communications compared to other wireline communications technologies, which may put powerline communications technologies at a disadvantage as customer bandwidth requirements and interest in anywire communications technologies continue to grow. Furthermore, unlike other communications such as Wi-Fi and some coaxial cable LANs, which offer multiple channels, powerline technology to date has generally been limited to a single channel, making it difficult to increase throughput by adding additional channels. The lack of multiple channels presents challenges in multiple dwelling unit (MDU) environments, as the powerline signal from one apartment may bleed into an adjacent apartment. Although security routines

~~residual~~may ~~current~~prevent ~~devices,~~any ormisuse ~~RCDs,~~of ~~earth~~content ~~leakage~~between ~~circuit~~the ~~breakers~~units, orthe ~~ELCBs,~~total ~~and~~transmission ~~surge protectors. The U.S. National Electrical Code requires AFCIs for newly installed bedroom outlets and~~capacity, inor ~~the future~~bandwidth, ~~may~~must ~~require~~be ~~AFCIs~~shared ~~for~~on ~~all~~some ~~newly installed outlets~~basis. ~~AFCIs~~As ~~are~~the ~~also~~use ~~being~~of considered or required by other jurisdictions. RCDs and ELCBs are also required by many countries. AFCIs, RCDs and ELCBs from certain manufacturers may cause attenuation and/or impedance modulation sufficient to block or substantially impair powerline communications. ~~In addition~~increases, ~~attenuation may be caused by surge protectors which block~~ the ~~communications signal from a~~potential ~~powerline~~need ~~adapter~~for orsharing ~~other~~will ~~product~~become ~~that is plugged into the surge protector~~greater. The ~~instructions~~technical tosolutions ~~HomePlug-enabled~~for ~~products~~this ~~generally~~sharing ~~instruct~~have ~~customers~~not tobeen ~~plug~~fully ~~the~~resolved. ~~devices~~Even ~~into~~if ~~surge protectors designed to pass~~ the ~~HomePlug~~technical ~~signal~~requirements orfor ~~directly~~sharing ~~into electrical~~are ~~outlets (as most HomePlug-based adapters and other product designs include surge protection circuitry). However~~developed, ~~end~~the ~~users~~shared ~~may~~bandwidth ~~experience~~available ~~unacceptable results if they fail~~ to ~~follow~~each ~~these~~unit ~~instructions.~~could ~~Future~~reduce ~~products~~performance ~~not yet identified~~to byunacceptable uslevels. orThe ~~released~~lack ~~into~~of ~~the~~multiple ~~marketplace~~channels ~~may~~ also ~~have~~creates ~~adverse~~challenges ~~effects~~when onincompatible powerline ~~communications~~technologies ~~due~~are toused ~~noise,~~in ~~attenuation or other causes. The degree to which household products and devices such as AFCIs, RCDs, ELCBs and surge protectors adversely affect~~ the ~~performance~~same ofhome ~~our~~or ~~products, and the relative competitive impact of any reduction~~ in ~~performance,~~MDUs ~~depends~~or onother aenvironments ~~large~~where ~~number of factors, including~~ the ~~number~~respective ~~and~~incompatible ~~combination~~products ofcan ~~devices~~interfere ~~creating~~with ~~noise~~each orother. When ~~attenuation~~this ~~in a home~~occurs, ~~the~~all ~~timing, spectrum and extent~~ of the ~~noise~~incompatible ~~and the throughput required for the specific~~ powerline ~~connectivity~~communications ~~application.~~products ~~Some~~may ofbe ~~these~~unable ~~factors and the resulting impact on our ability~~ to ~~meet~~provide ~~customer~~a ~~requirements~~satisfactory ~~may~~consumer ~~vary be geography~~experience.

Although the HomePlug technologies provide solutions to many of these challenges, powerline remains a more difficult medium than competing wireline technologies such as Ethernet and coaxial cable LANs. As a result, powerline communications may be unable to provide the reliable data or video transmission capacity, or throughput, required by some customers and may be an ineffective or less competitive connectivity solution in some environments. These technical challenges may also make it more difficult to achieve further performance improvements in powerline communications compared to other wireline communications technologies, which may put powerline communications technologies at a disadvantage as customer bandwidth requirements and interest in anywire communications technologies continue to grow. Furthermore, unlike other communications such as Wi-Fi and some coaxial cable LANs, which offer multiple channels, powerline technology to date has generally been limited to a single channel, making it difficult to increase throughput by adding additional channels. The lack of multiple channels presents challenges in multiple dwelling unit (MDU) environments, as the powerline signal from one apartment may bleed into an adjacent apartment. Although security routines may prevent any misuse of content between the units, the total transmission capacity, or bandwidth, must be shared on some basis. As the use of powerline communications increases, the potential need for sharing will become greater. The technical solutions for this sharing have not been fully resolved. Even if the technical requirements for sharing are developed, the shared bandwidth available to each unit could reduce performance to unacceptable levels. The lack of multiple channels also creates challenges when incompatible powerline technologies are used in the same home or in MDUs or other environments where the respective incompatible products can interfere with each other. When this occurs, all of the incompatible powerline communications products may be unable to provide a satisfactory consumer experience.

We may be required to apply significant human and financial resources to evaluate and address these technical challenges. These efforts and expenditures could be substantial with no certainty that we would be able to develop a solution. If we are unsuccessful, our ability to maintain or attract new customers may be adversely affected and our ability to maintain or grow our business may be harmed. Also, concerns about the uncertain and adverse effects of incompatible powerline communications products may persuade service providers, electric utilities and personal computer and consumer electronics manufacturers not to adopt powerline communications or embed powerline communications ICs into their products. HomePlug-based ICs do not coexist effectively with powerline communications ICs based on other standards, such as those made by DS2 and Panasonic. If a major service provider, electric utility or other major customer were to adopt an existing or future powerline or anywire communications technology that cannot coexist with our HomePlug-based ICs, we could face difficulties selling our ICs in the applicable markets.

Our business is highly dependent on the expansion of new and rapidly evolving segments of the consumer electronics and service provider markets and our ability to have our ICs embedded into products in these markets. Our business could be harmed if this expansion does not continue or if our products fail to gain market acceptance in embedded applications.

We derive a substantial portion of our revenue from the sale of our ICs for use in adapters that enable communication across existing powerlines in the home. We are working to increase the portion of our revenue that is derived from selling ICs that are embedded into consumer electronics and service provider products, such as broadband gateways, internet protocol and other video set-top boxes, digital media adapters (DMAs), and televisions, among others. Our ability to sustain and increase revenue is in large part dependent on the continued growth of these new and rapidly evolving markets and on our ability to have our ICs embedded into products in these markets. Many factors could slow or prevent the expansion of these markets, including general economic conditions, other competing technologies and products, pricing pressures, uncertainty about industry standards, technology challenges associated with powerline technology, and insufficient interest in new technology innovations. In addition, even if these markets expand, manufacturers of products in these markets may not choose to embed our ICs in their own products, but rather may adopt communications solutions from our competitors, develop their own, or delay embedding pending the release of new communications products or standards. Moreover, market acceptance of the products of manufacturers that do embed our ICs may not occur at all or as quickly as expected. Furthermore, to the extent that there are any problems or defects with embedded ICs, we may be required to incur substantial costs to re-work, repair or replace the entire product into which the ICs are embedded. In any such case, our business could be materially and adversely affected.

As we rely on a limited number of third parties to manufacture, assemble and test our IC products and to supply required parts and materials, we are exposed to significant supplier risks.

As a fabless semiconductor company, we do not maintain our own manufacturing, assembly or testing facilities. Instead, we rely on a limited number of third-party vendors to manufacture, assemble and test the products we design. In recent years, we have historically used a single wafer foundry to manufacture our HomePlug-based wafers. However, during the second half of 2008, we began using a second wafer foundry to manufacture the wafers for two of our HomePlug-based ICs. We also use this second wafer foundry to manufacture wafers for our command and control ICs. However, we still use only one foundry for each of our ICs except our HomePlug 1.0 with Turbo IC. We also use only a limited number of principal subcontractors for the assembly and testing of our ICs. In addition, our third-party vendors that test our products often utilize third-party test equipment. As we rely on these vendors and their use of third-party test equipment, we have less control over quality assurance, delivery schedules and costs, which could result in product shortages and increased costs. The production of our ICs for powerline communications requires a wide range of parts and materials, which our foundry suppliers currently procure from domestic and foreign sources. Some components have a long-lead time, requiring us to place orders months in advance of our anticipated demand, which increases our risk that forecasts will vary substantially from actual demand and which could lead to excess inventory or loss of sales, particularly during product transitions. In addition, in some cases, we rely on a sole source for certain components, including the third-party analog front-end devices used in some of our HomePlug AV-based products. If any of our third-party vendors ceases to do business, fails to provide us in a timely manner with the products and services we request, fails to meet the pricing or performance standards we require or terminates its relationship with us, including as a result of our proposed merger with Atheros, we may be unable to obtain replacement products or services to fill customer orders in a timely and cost-effective manner, if at all, and our relationships with our customers and our sales could suffer.

As we do not have long-term supply contracts with our third-party vendors, they are not obligated to provide the products and services we request for any specified period, in any specific quantities or at any specific price, except as provided in each purchase order we submit. As a result, our third-party vendors have the right to increase the prices we pay for our products and services or to allocate their resources to other customers’ projects and reduce efforts for our products on short notice, exposing us to risks of late deliveries, poor quality and inadequate supply. If our third-party vendors enter into long-term agreements with other customers, these vendors may decrease their services to us on a more permanent scale. Our supplier risk is also significant due to the general cyclicality of the semiconductor industry, the adverse effect of the current economic downturn on the financial stability of our suppliers, decisions during recent years by some large technology companies to outsource more of their IC production to third party foundries and the substantial time and capital investment required to construct new foundry facilities to meet increased demand. If demand for ICs increases or available capacity declines, our suppliers could allocate resources to larger customers and we could face shortages, longer delivery cycles and higher prices from our suppliers. This risk could increase if, and when, general economic conditions improve since many semiconductor companies have reduced their inventory levels and may need to increase orders in the event of unanticipated demand from their customers. In order to secure specified pricing or sufficient supply to meet our customers’ demands, we may enter into various arrangements with vendors that could be costly and harm our operating results, including, for example, entering into agreements that commit us to purchase minimum quantities of components over extended periods.

Regardless of the reason, if we are unable to secure sufficient supply, it may be difficult for us to develop relationships with other third-party vendors who are able to satisfy our production and supply requirements, and it can take several months to qualify a new service provider. Changes in providers may also require the affected ICs to go through re-qualification testing and customer approvals, adding further delay and cost and the potential for our customers to cancel orders or fail to place new orders. In addition, because many of the design libraries used in the design of an IC may be specific to a particular wafer foundry or foundry process, the change from one foundry or foundry vendor to another may require us to redesign all or part of the affected IC, which could take approximately 6 to 15 months, and to incur the costs of new IC masks, which can be substantial, particularly for lower process geometries. Furthermore, if we are unable to obtain the parts and materials necessary for our operations in a timely manner and on favorable terms, or, if we are unable to pass on to our customers any increased costs charged by our suppliers, our business and financial results may be adversely affected.

Furthermore, not all of our vendors provide us with indemnification regarding our product purchases. Other vendors impose limits on their indemnification obligations. If such products infringe the intellectual property rights of a third party either alone or in combination, or if we are found to owe license fees or royalties relating to these products, our margins and operating results would be severely negatively impacted.

The development of new industry standards by various global and regional industry alliances and SDOs may cause our products to become uncompetitive or obsolete and force us to incur substantial development costs and time to bring new products to market.

38Although most of the transceiver ICs we sell are based upon the HomePlug 1.0 and HomePlug AV specifications adopted by the HomePlug Powerline Alliance, the HomePlug Powerline Alliance could adopt changes to these specifications or adopt new or additional specifications that would require us to make changes to our ICs or to create new ICs in order to comply with the new specifications. More than 70 companies are members of the HomePlug Powerline Alliance, including some of our competitors that have developed or may in the future develop technology competitive to ours that could be included in future HomePlug specifications. In addition, other industry associations formed to promote powerline communications, such as the Universal Powerline Association (UPA), the HD-PLC Alliance and the Consumer Electronics Powerline Communication Alliance (CEPCA), have already established their own specifications for powerline communications or the coexistence among powerline communications products, and these specifications conflict with the specifications adopted by the HomePlug Powerline Alliance. Other groups that have more international recognition as independent SDOs, such as the Institute of Electrical and Electronics Engineers Communications Society (IEEE) and the International Telecommunication Union (ITU), as well as regional SDOs with strong local support, are working on the adoption of powerline and anywire wireline communications standards that may be different from and incompatible with the specifications adopted by the HomePlug Powerline Alliance and used by our products. For example, in July 2009, the IEEE 1901 standards work group on powerline communications approved the in-home and access 1901 draft powerline standards, which include technology contributions from HomePlug and Panasonic, among others. The draft standards provide for the flexibility to support either the HomePlug AV or the Panasonic physical layer. Under this approach, future ICs based on the draft standards would use either one or the other physical layers and would interoperate with other future products using the same physical layer as well as with existing products based on the same physical layer. Future products using different physical layers would coexist but not interoperate. Although we believe that our HomePlug AV ICs would interoperate with

~~Although most of the transceiver ICs we sell are based upon the HomePlug 1.0 and HomePlug AV~~ ~~specifications adopted by~~ the HomePlug Powerline Alliance, the HomePlug Powerline Alliance could adopt changes to these specifications or adopt new or additional specifications that would require us to make changes to our ICs or to create new ICs in order to comply with the new specifications. More than 75 companies are members of the HomePlug Powerline Alliance, including some of our competitors that have developed or may in the future develop technology competitive to ours that could be included in future HomePlug specifications. In addition, other industry associations formed to promote powerline communications, such as the Universal Powerline Association (UPA), the HD-PLC Alliance and the Consumer Electronics Powerline Communication Alliance (CEPCA), have already established their own specifications for powerline communications or the coexistence among powerline communications products, and these specifications conflict with the specifications adopted by the HomePlug Powerline Alliance. Other groups that have more international recognition as independent SDOs, such as the Institute of Electrical and Electronics Engineers Communications Society (IEEE) and the International Telecommunication Union (ITU), as well as regional SDOs with strong local support, are working on the adoption of powerline and anywire wireline communications standards that may be different from and incompatible with the specifications adopted by the HomePlug Powerline Alliance and used by our products. For example, in July 2009, the IEEE 1901 standards work group on powerline communications approved the in-home and access 1901 draft powerline standards, which include technology contributions from HomePlug and Panasonic, among others. The draft standards provide for the flexibility to support either the HomePlug AV or the Panasonic physical layer. Under this approach, future ICs based on the draft standards would use either one or the other physical layers and would interoperate with other future products using the same physical layer as well as with existing products based on the same physical layer. Future products using different physical layers would coexist but not interoperate. Although we believe that our HomePlug AV ICs would interoperate with the HomePlug physical layer version of the 1901 draft standard, we are unable to predict whether or when the final specification will be confirmed by the IEEE or, if it is, the degree to which the final specification, or subsequent changes to the specification, will require us to make changes to our existing ICs or to IC designs we have in progress. With respect to the anywire communications standard being developed by the ITU, ~~in December 2008,~~although ~~the ITU G.hn~~ work ~~group~~continues ~~moved~~on ~~most~~the ofmedia ~~the~~access ~~physical~~control layer ~~components~~ for the proposed standard, toin ~~what~~October is2009, ~~called~~ the ~~“consent”~~ITU ~~stage,~~G.hn ~~which~~work ~~will~~group beapproved ~~followed~~the byphysical ~~efforts~~layer atcomponents ~~comment~~for ~~resolution as well as work on~~ the ~~media~~proposed ~~access control layer~~standard. We do not believe that our HomePlug AV ICs would interoperate or coexist with the G.hn physical layer that ~~moved~~was ~~to consent~~approved. We are unable to predict whether or when a final G.hn ~~standard~~specification will be ratified by the ITU or, if it is, the degree to which the final specification, or subsequent changes to the specification, may require us to make changes to our existing ICs or to IC designs we have in progress in order to have those ICs or IC designs qualify as G.hn compliant.

Standards organizations sometimes take years to reach agreement on new final specifications and may be unable to do so, even when a baseline technology for a proposed specification is selected early in the adoption process. The adoption or expected adoption of new or different powerline or anywire communications standards, including by the HomePlug Powerline Alliance, more established global SDOs such as the IEEE or the ITU, or regional SDOs with strong local support, could make our products incompatible with the new standard or otherwise uncompetitive or obsolete and cause us to incur substantial development costs to adapt to new or alternative industry standards, particularly if the new or alternative standards were to receive, or be perceived as likely to receive, greater penetration in the marketplace than the HomePlug-based specifications used by us for our ICs. Moreover, the adoption or expected adoption of such standards, or the support of such standards by industry alliances such as the HomeGrid Forum, could have a chilling effect on the sale of existing products even before products based on the new standard become available. The time and expense required for us to develop new products or change our existing products to comply with new industry standards would be substantial, and there is no assurance that we would be successful in doing so. If we were not successful in complying with the industry standards required by our customers, we could lose market share, causing our business to suffer.

The adoption of new powerline or anywire standards by global or regional SDOs such as the IEEE or the ITU may increase competition in the market for powerline and other wireline communications ICs by reducing or eliminating the uncertain market acceptance of various competing standards established by industry alliance groups such as HomePlug, the UPA and the HD-PLC Alliance, potentially attracting larger semiconductor companies to join the market.

Our use of standards-based technology reduces the value of our intellectual property and exposes us to additional competition.

As we believe that some of our customers and potential customers prefer to use powerline communications ICs that are based on industry standards rather than proprietary technologies, we have in the past elected, and may in the future elect, to base our powerline transceiver ICs on specifications approved by standards bodies or industry alliances and to have our intellectual property included in these specifications. The applicable standards bodies and alliances, including the HomePlug Powerline Alliance, typically require that participating companies license their necessary patent claims on non-exclusive, reasonable and non-discriminatory terms to other members, including competitors, who elect to produce products compliant with the applicable standard. For example, as a sponsor member of the HomePlug Powerline Alliance, we are obligated to license our necessary patent claims on non-exclusive, reasonable and non-discriminatory terms to other HomePlug Powerline Alliance members, including competitors, who elect to produce products compliant with the HomePlug 1.0 and HomePlug AV specifications, as well as any future HomePlug specifications, to the extent that the necessary claims are needed to allow compatibility of a product based on the future specification to HomePlug 1.0 or HomePlug AV. We have similar obligations with respect to the necessary claims relating to our command and control ICs. If we are successful in having our intellectual property included in additional industry standards, the scope of these licensing obligations could increase. These obligations to license our necessary patent claims may allow our competitors to use our patents to develop and sell products that compete with our products without spending the time and expense that we incurred to develop the technology covered by the patents, thereby potentially reducing any time to market advantage we might have as a result of these patents. These obligations also substantially restrict and may eliminate our ability to use our patents as a barrier to entry or as a significant source of revenue. Moreover, because the specifications for these industry standards are generally available to members of the applicable standards bodies and alliances for little or no cost, competitors can more easily create ICs that compete with our products.

we are successful in having our intellectual property included in additional industry standards, the scope of these licensing obligations could increase. These obligations to license our necessary patent claims may allow our competitors to use our patents to develop and sell products that compete with our products without spending the time and expense that we incurred to develop the technology covered by the patents, thereby potentially reducing any time to market advantage we might have as a result of these patents. These obligations also substantially restrict and may eliminate our ability to use our patents as a barrier to entry or as a significant source of revenue. Moreover, because the specifications for these industry standards are generally available to members of the applicable standards bodies and alliances for little or no cost, competitors can more easily create ICs that compete with our products.

We have limited experience in applying our powerline communications technology to other media, such as coaxial cable and telephone wiring, and if we are unsuccessful in our efforts to do so, our business could be harmed.

Although some service providers ~~are~~ are using our powerline ICs for communications over coaxial cable and telephone wiring, we intend to continue to evaluate whether we can successfully extend the use of our powerline communications technology and ICs to these other media. We do not currently derive a significant portion of our revenue from these applications. In addition, because of interest from customers and standards organizations in single solutions that ~~can enable communications over multiple wired media, including~~ powerline, coaxial cable and telephone wiring, sometimes referred to as anywire technology, we expect that our future product roadmap will need to include ICs with enhanced anywire capabilities. We have far less experience with these other media than we have with powerline communications. As a result, we may be unable to gain, or may need to incur significant costs in order to obtain, the necessary experience and expertise required to apply our powerline communications technology to these other media or to develop and obtain other wireline communications technology and intellectual property. In pursuing this business, we will be competing with companies that have substantially greater experience with, and technologies specifically designed to optimize communications over, these other media. In addition, some applications of our products on these other media may interfere with other technologies that use the same wires, such as Data Over Cable Service Interface Specification (DOCSIS) or Very High Speed Digital Subscriber Line (VDSL) protocols, potentially making commercialization of these applications impractical.

can enable communications over multiple wired media, including powerline, coaxial cable and telephone wiring, sometimes referred to as anywire technology, we expect that our future product roadmap will need to include ICs with enhanced anywire capabilities. We have far less experience with these other media than we have with powerline communications. As a result, we may be unable to gain, or may need to incur significant costs in order to obtain, the necessary experience and expertise required to apply our powerline communications technology to these other media or to develop and obtain other wireline communications technology and intellectual property. In pursuing this business, we will be competing with companies that have substantially greater experience with, and technologies specifically designed to optimize communications over, these other media. In addition, some applications of our products on these other media may interfere with other technologies that use the same wires, such as Data Over Cable Service Interface Specification (DOCSIS) or Very High Speed Digital Subscriber Line (VDSL) protocols, potentially making commercialization of these applications impractical.

The sales cycle for our products is long and requires expenditures and the development of new products in advance of sales that may or may not be realized when anticipated, if at all.

Our customers generally take a considerable amount of time to evaluate our HomePlug-based ICs before purchasing. The typical time from early engagement by our sales force to actual product introduction typically runs 6 to 12 months for adapter products to as much as 12 to 30 months for embedded consumer electronics products and products used by service providers and electric utilities. The delays inherent in these lengthy sales cycles increase the risk that a customer will decide to cancel, curtail, reduce or delay its product plans, causing us to lose or delay anticipated sales. Additionally, while our sales cycles can be long, our average product life cycles tend to be short because we operate in an environment of rapidly changing technology and evolving customer requirements. As a result, the resources devoted to product sales and marketing may not generate material revenue for us when expected, if at all, and from time-to-time, we may need to write-off excess and obsolete inventory. In addition, we typically are required to incur substantial development costs in advance of a prospective sale with no certainty that we will recover such costs. There can be no assurance that our products will be able to meet the specifications required by our customers or that our products will be delivered to the market in a timely manner as compared with our competitors’ products. A substantial amount of time may pass between the selection of our technology for use in a customer’s product and the generation of revenue related to the expenses previously incurred, which can potentially cause our operating results to fluctuate significantly from period to period. In addition, if we do not generate revenue after we have incurred substantial expenses to develop any of our products, our business will suffer.

We derive a small portion of our revenue from sales of our ICs to customers in the commercial and utility markets, and our business could be materially adversely affected if we are unable to maintain or grow our sales in these markets.

While we only derived a small portion of our revenue from sales of our ICs to customers in the commercial and utility markets in the three months ended ~~June~~September 30, 2009, we expect to continue to strive to achieve sales of our ICs to customers in these markets. Customers in the commercial market use our ICs to enable distribution of broadband services and back channel communications over existing electrical wiring and coaxial cable to individual units within apartment buildings and other MDUs. Customers in the utility market use our ICs in smart grid and broadband over powerline applications. Although service providers in the commercial market and electric utilities in the utility market are conducting field trials and limited deployments of these applications, the number of volume commercial deployments is low.

Our ability to maintain and increase revenue in the commercial and utility markets depends upon the growth of these markets, the standards and technologies adopted for use in these markets and our competitive position within such markets. We have fewer strategic and customer relationships in these markets and, in some cases, different competitors than we have in the digital home market. The growth of the commercial market will depend, in part, on the expansion of Internet, video-on-demand and other broadband services to MDUs. In the utility market, the growth of smart grid management and broadband over powerline applications will depend upon a number of factors, including a favorable utility regulatory environment that allows the cost of smart grid systems to be funded by the utility’s rate base and the development of new third-party products and services, as well as business models, necessary to commercialize these applications. In recent periods, customer interest in broadband over powerline applications has declined due to concerns about the financial and operational success of such systems, while customer interest in smart grid applications has increased. The standards and technologies that will be used in utility and smart grid applications are still being determined and both narrowband and broadband powerline and wireless technologies are being considered, as well as hybrid systems, with narrowband communications systems being more prevalent to date. We do not offer narrowband powerline ICs or wireless ICs for smart grid applications. In addition, the sales cycle for commercial and utility customers is typically long. If demand for utility applications using our broadband powerline ICs does not grow or we are otherwise unable to increase our revenue within these markets, our business could be materially and adversely affected. We may also need to make changes to our existing products or develop new products for our commercial and utility business to be successful. For example, the HomePlug Powerline Alliance is working on a proposed powerline specification for narrowband smart grid applications as well as a

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necessary to commercialize these applications. In recent periods, customer interest in broadband over powerline applications has declined due to concerns about the financial and operational success of such systems, while customer interest in smart grid applications has increased. The standards and technologies that will be used in utility and smart grid applications are still being determined and both narrowband and broadband powerline and wireless technologies are being considered, as well as hybrid systems, with narrowband communications systems being more prevalent to date. We do not offer narrowband powerline ICs or wireless ICs for smart grid applications. In addition, the sales cycle for commercial and utility customers is typically long. If demand for utility applications using our broadband powerline ICs does not grow or we are otherwise unable to increase our revenue within these markets, our business could be materially and adversely affected. We may also need to make changes to our existing products or develop new products for our commercial and utility business to be successful. For example, the HomePlug Powerline Alliance is working on a proposed ~~powerline~~ specification for ~~narrowband smart grid applications as well as a proposed specification for~~ broadband over powerline applications. The IEEE is also working on an access powerline standard as part of its 1901 initiative as well as other standards efforts. ~~We have not determined whether we will create any products based on these specifications, and there is no assurance that, if we were to attempt to do so, any such products would be successful.~~ To the extent we do develop new products or product enhancements for these markets, we will be required to expend significant resources and to adapt our business processes to address the unique challenges and requirements of these markets. However, there is no assurance that any products we develop based on these specifications would be successful. If we are unsuccessful in tailoring our existing products or creating new products to meet the needs of our customers in the commercial and utility markets on a timely and cost-effective basis, we will remain at a competitive disadvantage to other companies that currently service these markets, we will be unable to grow or maintain our sales in these markets, and the growth of our overall business may be adversely affected.

Our ability to compete may be affected by our ability to protect our intellectual property and proprietary information.

We believe that the protection of our intellectual property rights, both domestic and foreign, is and will continue to be important to the success of our business. To protect our proprietary technologies and processes, we rely primarily on patent, copyright, trademark and trade secret laws, as well as nondisclosure and confidentiality agreements and other methods. We currently have 3435 issued U.S. patents and 4445 pending U.S. patents, with foreign counterparts in some jurisdictions. The process of seeking patent protection can be long and expensive. We cannot be certain that any currently pending or future applications will actually result in issued patents, and our existing and future patents may be challenged. The rights granted under any issued patents may not be of sufficient scope or strength to provide meaningful protection or provide us with a competitive advantage, and our competitors may be able to develop similar or superior technology to our own now or in the future. Any future infringement upon our intellectual property or proprietary information may require us to engage in litigation in the future. Such litigation could result in significant costs to us and the distraction of our management. Despite our efforts to protect our intellectual property and proprietary information, some of our innovations may not be protectable. Some countries may limit or deny protection of our patents, copyrights, trademarks and trade secrets. In addition, the steps that we have taken to protect our intellectual property rights may not be adequate to preclude misappropriation or infringement of our intellectual property rights. If our patents do not adequately protect our technology, our competitors may be able to offer similar products and may also be able to develop similar technology, designed around our patents. In addition, it is possible that third parties may copy or obtain and use our proprietary information without our authorization, and no adequate remedies may be available. The ability of our competitors to access and use our proprietary information may inhibit our ability to compete.

Claims that we have infringed upon third-party intellectual property rights could subject us to significant liability and could invalidate our intellectual property rights.

Participants in the IC industry vigorously protect and pursue their intellectual property rights. We have in the past received, and expect that in the future we may receive, communications from various industry participants alleging our infringement of their patents or other intellectual property. With respect to past claims we completed investigating, we concluded and, in each case, replied to such third parties that we believed their claims were without merit, and we received no further claims or notices of infringement from such third parties. From time to time, we also identify third party intellectual property that could result in claims of infringement even though we have not received any notice of infringement or we believe that we are not infringing or that the intellectual property involves claims that are invalid. In those situations, we may seek to obtain licenses from the owners of such intellectual property to reduce the risks, costs and management diversion from litigation with a third party that may otherwise seek to assert a claim against us. For example, we are currently seeking a non-exclusive cross license from a third party for certain intellectual property rights used in our HomePlug family of products. We believe this third party is contractually obligated to license such intellectual property rights to us pursuant to a membership agreement with the HomePlug Powerline Alliance. This cross license would also provide such third party a limited non-exclusive license to certain of our patents which are used in a product currently marketed by such third party. We may not be able to obtain licenses to such intellectual property on reasonable terms, if at all. Any litigation relating to the intellectual property rights of third parties, including claims arising through our contractual indemnification of our customers, would be costly and could divert the efforts and attention of our management and technical personnel, regardless of the merit of such claims. Given the complex technical issues and uncertainties inherent in intellectual property litigation, we cannot assure you that we would prevail in any such suit. In the event of an adverse ruling in any such litigation, we could be required to:

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pay substantial damages;

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cease the manufacture, use or sale of infringing products, processes or technologies;

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expend significant resources to develop non-infringing technology; or

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license technology from the third party claiming infringement, which may not be available on commercially reasonable terms or at all.

Our business also could be harmed if our customers become involved in litigation regarding infringement of third-party intellectual property rights, which adversely affects their ability to sell their products incorporating our ICs and their demand for our ICs. In addition, under the standard terms and conditions of our customer purchase orders, we are required to defend, at our expense, certain third-party intellectual property infringement suits against our customers who purchase our ICs subject to such terms and conditions. We are also required to pay any damages that are awarded. The defense and settlement of such suits would increase our costs, could require us to pay substantial damages and could hurt our relationships with our customers, which would have a material adverse effect on our business, results of operations and financial condition.

We must integrate third-party technology into some of our products, which exposes us to risks of incompatibility, additional product defects and the risk that this third-party technology would no longer be supported or made available to us.

We rely extensively on third-party technology that is integrated into some of our products, including third-party intellectual property that we license to meet the HomePlug specifications. Due to the complexity of our products, the incorporation of third-party technology could result in unforeseen or undetected defects or bugs, which could delay the introduction or adversely affect the market acceptance of new products and damage our reputation with customers. We have in the past experienced, and may in the future experience, reliability, quality or compatibility problems because of the use of third-party technology. As a result, we may have to expend significant financial and other resources to correct these problems, including the costs of repair, rework, recall, replacement and resolving claims by our customers or third parties. Due to our reliance on third-party technology, if we were unable to continue to use or license these third-party technologies on reasonable and cost-effective terms or if the third-party technology were to fail to operate as required, we could be unable to secure alternatives in a timely manner, if at all, and our business would be harmed. In addition, if we were unable to license technology from third parties to develop future products, we would be unable to develop such products in a timely manner, or at all.

In order to broaden the market acceptance of our products, we have entered into, and in the future we may enter into, licensing and joint venture arrangements, which may require us to incur substantial development costs, result in reduced product revenue, lower gross margins on our products and tie the success of our products to the success of our collaborators in marketing their products.

Pricing pressures and business strategies may lead us to seek to enter into licensing or joint venture arrangements designed to increase the penetration of our HomePlug-based powerline communications solutions into high-volume applications, particularly price-sensitive products, such as personal computers, home gateways or routers, that we believe would expand the market for our ICs in other products. For example, in June 2005, we entered into a technology collaboration and license agreement with Intel Corporation that provides, among other things, for most favored pricing and supply terms for our HomePlug AV-based products and for an option to license from us a HomePlug AV-based IC design and, if we either then have or own (or then have commenced or later commence work on), a related analog front-end IC design, for use in Intel microprocessors, chipsets and platforms at Intel’s sole discretion on a worldwide basis, either royalty-free or royalty-bearing, depending on product application. The license option is only exercisable under certain circumstances and does not permit Intel to use the designs licensed in an IC product having communications over powerlines and/or coaxial cable as its primary purpose or communications over wireless and over powerlines and/or coaxial cable as its primary purpose. Further, Intel may not distribute Intel products incorporating the licensed HomePlug AV design until Intel or Intel customers using certain Intel personal computer reference designs first purchase from us a certain volume of our HomePlug AV-based ICs. There is no assurance that Intel will exercise its option. Even if Intel exercises its option, it may not be able to successfully market and sell products incorporating our designs, and accordingly, our license of our designs to Intel may not expand the market for our ICs in other products. The agreement expires in June 2010, but can be renewed upon the mutual consent of the parties. Either party may terminate the agreement upon default and failure to cure by the other party, and in the event of such termination, the non-defaulting party may revoke the grant of license rights to the defaulting party.

Our licensing and joint venture arrangements could include licensing our HomePlug-based designs for use in third-party system-on-a-chip solutions that include other communications, interface or home gateway technologies. The royalty income, if any, we would derive from these arrangements would be substantially less than our expected dollar value of gross profits from the sale of an equivalent volume of ICs, and there is no assurance that we would derive enough revenue from the sale of our ICs for use in other products to make the licensing arrangement successful from the standpoint of our overall business. These third-party arrangements may require us to grant certain important rights to third parties, including exclusive rights to one or more of our IC designs and issuance of warrants or other securities. In addition, we have entered into, and from time to time in the future may be required to enter into, licenses and covenants that could limit our ability to initiate patent infringement actions against third parties, including third-party collaborators, their customers, distributors, agents and contractors. Packaging our designs for use in these arrangements would require us to incur substantial

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~~require us to incur substantial~~ development costs with no certainty we would recover these costs. Implementing the arrangements would also involve substantial risks that we have not faced before, including converting our design for use in the system-on-a-chip device and being reliant on our third-party partner for the integration, production, marketing and sale of the resulting product. There is no assurance that we would be successful in entering into or implementing any such arrangement.

The complexity of our products and the process used to produce our products could result in unforeseen delays or expenses arising from undetected problems or defects, which could impair market acceptance for our products, result in lost revenues, increase our costs and negatively impact our reputation and relationships with our customers.

Powerline communications is a complex and relatively new technology. Highly complex ICs such as our powerline communications ICs may contain design defects, errors and software flaws, or bugs, in the IC hardware or software, particularly when first introduced or as new versions are released. We have experienced in the past and may experience in the future delays and problems in completing the development and introduction of new products and product enhancements due to problems such as design defects, errors and bugs. In addition, products incorporating our ICs that are supplied to customers by our OEMs or ODMs have in the past and may in the future contain defects that are unrelated to our ICs. Furthermore, because we outsource the manufacturing of our ICs, and in some cases purchase the analog front-end components and line drivers used in our chipsets from others, we have been, and in the future we may be subject to problems resulting from the actions or omissions of these third parties. The process of producing ICs, referred to as the wafer fabrication process, is extremely complicated, where even small changes in design, materials or specifications can result in material decreases in the percentage of acceptable product resulting from the manufacturing process, referred to as the manufacturing yield, and even the suspension of production. On occasion, we and our third-party vendors have experienced in the past, and may experience in the future, manufacturing defects and resultant reductions in manufacturing yields due to errors in the manufacturing, assembly or testing processes or the implementation of our designs, particularly in connection with new products and new technologies. Detection of manufacturing defects is difficult, and identifying problems may not be possible early in the fabrication process. Failure to detect manufacturing defects may negatively impact the quality or reliability of our products, and low manufacturing yields may inhibit our ability to fulfill customer orders on a timely basis and may increase our cost of goods sold and negatively impact our operating results.

Any of these problems may delay the introduction, volume shipment and market acceptance of the applicable products, harm our ability to retain existing customers and attract new customers, adversely affect sales and cause existing customers to cancel orders or return previously sold product. If any of these problems are not found until after we have commenced commercial production of a product, we may be required to incur the cost of product recalls, repairs or replacements and of resolving claims by our customers or third parties. ~~Furthermore~~ In addition, if any problem is found after our ICs have been incorporated into a customer’s product, we may be required to re-work, repair or replace our customer’s product, which would require us to incur costs substantially higher than the costs of repairing or replacing our ICs alone. Furthermore, these problems may require us to incur additional development and customer support costs in an effort to correct the problems, which could divert human and financial resources from other new product developments, resulting in the delay of those projects as well. The time and expense required to correct IC defects, errors and bugs and to improve manufacturing yields, reliability and quality can be very high, particularly if the masks for smaller geometry ICs must be redesigned, and there is no assurance that we will be able to successfully correct the problems at all or within the time required for the product to be successful in the marketplace. Any of the foregoing events could have a material adverse effect on our business, results of operations and financial condition.

We may experience difficulties in transitioning to smaller geometry process technologies or in achieving higher levels of design integration, which may result in reduced manufacturing yields, delays in product deliveries, increased expenses and loss of design wins and sales.

We periodically evaluate the anticipated benefits, risks and expenses of migrating one or more of our IC designs and manufacturing to ~~smaller~~ smaller geometry process technologies in an effort to reduce our product costs. Any such transition would require us to redesign the applicable product and require us and our foundry suppliers to use new or modified manufacturing processes for the product. We also evaluate whether we can use smaller geometry processes in our new ICs. Prior to 2008, the smallest geometry process we used for any of our ICs was 90 nanometer. In 2008, we began shipping a HomePlug AV-based IC which uses a 65 ~~nanometer~~ nanometer process. We are dependent on our relationships with our foundry subcontractors to transition to smaller geometry processes successfully. The foundries that we use may not have the tools, design libraries or manufacturing facilities required to use the smaller geometries we want to use, may be unable to produce the smaller geometry ICs with the yields we need to be successful or may be unwilling to make the smaller geometries available to us on a timely or cost-effective basis. The yield risks associated with smaller geometry ICs are generally much higher than those with higher geometry processes. As we try to move to smaller geometry processes, we may be unable to maintain our existing foundry relationships, which could adversely affect the availability and cost of the existing products we buy from them, or develop new ones. If any of our foundry suppliers cannot meet our requirements or we experience ~~significant delays in this transition or fail to efficiently~~ implement this transition, we could experience reduced manufacturing yields, delays in product deliveries and increased expenses, all of which could harm our relationships with our customers and result in the loss of design wins and sales, which would materially adversely affect our results of operations.

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significant delays in this transition or fail to efficiently implement this transition, we could experience reduced manufacturing yields, delays in product deliveries and increased expenses, all of which could harm our relationships with our customers and result in the loss of design wins and sales, which would materially adversely affect our results of operations.

Our operating results could be adversely affected if we have to satisfy product warranty or liability claims.

If our ICs or chipsets, or products that integrate our ICs or chipsets, malfunction or are found to be defective, we could be subject to product warranty or product liability claims that could have significant warranty-related charges or litigation costs. In addition, we may spend significant resources investigating potential product design, quality and reliability claims, which could result in additional expenses.

We may be unable to raise additional needed capital, which could substantially harm our business and our ability to compete.

We believe that our existing balance of cash, cash equivalents, short-term investments and cash expected to be generated from operations will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, unexpected circumstances could require us to raise additional funds, which we may be unable to obtain on favorable terms, if at all. Recent market conditions have effectively shut down the availability of the equity markets for many companies, including us. We may not have the ability to raise equity in the financial markets for the foreseeable future until conditions in the equity markets improve. Raising additional funds through equity financings may result in a significant dilution of our stockholders’ ownership interest, causing the per share value of our common stock to decline. On the other hand, additional debt financings may only be available on strict terms, if at all, restricting our business through high interest rates or by requiring us to maintain certain liquidity or other ratios. The global credit markets are currently experiencing significant distress and instability, resulting in a dramatic reduction of the willingness by lenders to make new loans and tightened credit requirements, particularly for emerging companies including us. If we were required to seek debt financing, we may not be able to secure such debt financing on commercially reasonable terms, if at all. Holders of new equity or debt securities may also have rights, preferences and privileges senior to those of our holders of common stock. In either case, an inability to raise additional funds may frustrate our ability to compete and to meet our business objectives, causing our stock price to decline and our stockholders to lose some or all of their investment.

An inability to raise necessary additional capital on acceptable terms may reduce our ability to, among other things, enhance our existing products and services and develop new products, expand operations and hire, train and retain employees. Additionally, failure to raise additional capital could harm our ability to acquire complementary businesses, technologies or products. Our failure to take any of these actions could have a material adverse effect on our business, operating results and financial condition.

The consolidation of industry participants may result in stronger competitors, fewer customers and reduced demand, any of which could harm our business.

Historically, consolidation within the semiconductor industry is not uncommon, and we expect it to continue as companies attempt to strengthen their positions in the various markets we have targeted. Consolidation may also increase as a result of the adverse conditions in the global economy. Consolidation or strategic alliances among competitors, or the acquisition of a competitor by a larger semiconductor company not yet engaged in the powerline communications business, could result in stronger competitors with larger customer bases, more diversified product offerings and greater technological and marketing expertise, allowing them to compete more effectively against us. Consolidation among customers could also result in fewer customers, reduced demand and increased pressure on the prices we charge for our products. Consolidation among our third-party suppliers could increase the costs of, or reduce our ability to obtain, needed materials and services, thereby reducing our ability to compete. Any of the above occurrences could have a materially adverse effect on our business, operating results and financial condition.

If we are unable to attract and retain qualified management, technical and other personnel, including as a result of our proposed merger with Atheros, our business could suffer.

Our success depends on our ability to hire and retain experienced executive management and other key employees. Due to the complexity of our products, we are also particularly dependent on qualified research and development personnel who possess unique skills and experience that are not replicated within the company and may be difficult to replace. We have entered into employment agreements with some of our management and other employees. However, these agreements do not require them to provide services to us for any specific length of time, and they can terminate their employment with us at any time, with or without notice, without penalty. IfDuring wethe ~~were~~pendency toof ~~lose~~our ~~the~~proposed ~~services~~merger, ofour ~~these~~employees ~~executives~~may orexperience ofuncertainty ~~one~~about their future role until or ~~more~~after ~~other~~strategies ~~key~~with ~~employees,~~regard ~~our~~to the combined company are announced or ~~business~~executed, ~~could~~or there may be ~~seriously~~employee ~~harmed.~~uncertainty surrounding the future direction of our product and service

~~Competition~~49 for qualified personnel in the semiconductor industry is intense, and our historic growth has placed a significant burden on our human resources. If we are unable to attract and retain additional qualified personnel as needed, our business results will be negatively impacted. We maintain our headquarters in Orlando, Florida and a portion of our research and development team and other significant operations in Ocala, Florida. As Central Florida often has few, if any, candidates for the positions we are seeking to fill, and many of the potential candidates we recruit may choose not to relocate to Central Florida, we must expend additional time and expense to recruit new employees for our Central Florida locations from outside of our immediate geography. We have also experienced difficulties in recruiting experienced personnel in other areas. Adverse conditions in the housing markets and home mortgage business may make it more difficult for employees being recruited to relocate, reducing our pool of available personnel or increasing our recruiting and relocation costs. Due to these challenges, we may be unable to attract candidates

~~with~~offerings ~~the qualifications~~ and ~~experience~~strategy weon ~~desire~~a orstandalone ~~we may be required to base certain employees in other locations~~basis. ~~Moreover,~~We wealso ~~may~~must ~~need~~continue to ~~incur additional~~motivate ~~costs~~our ~~to hire subcontractors to perform certain functions that would ideally be performed by~~ employees. Weand ~~expect~~keep ~~competition~~them infocused ~~these~~on ~~areas~~our tostrategies ~~continue~~ and ~~we may experience similar difficulties in the future. In addition~~goals, wewhich may ~~outsource~~ orbe ~~expand~~particularly ~~our~~difficult ~~operations~~due ~~into~~to ~~overseas locations where we could face significant competition for qualified employees or subcontractors and face additional challenges and incur significant costs in managing those operations from~~ the ~~U.S. We~~ ~~may~~potential ~~also~~distractions ~~face challenges in retaining some~~ of ~~our existing employees to~~ the ~~extent~~proposed ~~the~~merger. ~~then~~These ~~current~~circumstances ~~market~~may ~~value~~adversely ofaffect our ~~common~~ability ~~stock~~to isretain ~~substantially~~our ~~below~~executives ~~the~~and ~~exercise~~key ~~prices of the stock options held by such~~ employees. If we ~~cannot~~were ~~attract additional~~to ~~key~~lose ~~employees~~the orservices ifof weone door ~~not~~more ~~maintain~~of ~~competitive~~our ~~compensation~~executives ~~policies~~or tokey ~~retain current~~ employees, ~~we may not be able to scale~~ our business ~~and operations effectively, and the efficiency and effectiveness of our operations~~ could be ~~impaired~~seriously harmed.

Competition for qualified personnel in the semiconductor industry is intense, and our historic growth has placed a significant burden on our human resources. Our ability to attract new employees may also be harmed by uncertainties associated with our proposed merger with Atheros. If we are unable to attract and retain additional qualified personnel as needed, our business results will be negatively impacted. We maintain our headquarters in Orlando, Florida and a portion of our research and development team and other significant operations in Ocala, Florida. As Central Florida often has few, if any, candidates for the positions we are seeking to fill, and many of the potential candidates we recruit may choose not to relocate to Central Florida, we must expend additional time and expense to recruit new employees for our Central Florida locations from outside of our immediate geography. We have also experienced difficulties in recruiting experienced personnel in other areas. Adverse conditions in the housing markets and home mortgage business may make it more difficult for employees being recruited to relocate, reducing our pool of available personnel or increasing our recruiting and relocation costs. Due to these challenges, we may be unable to attract candidates with the qualifications and experience we desire or we may be required to base certain employees in other locations. Moreover, we may need to incur additional costs to hire contractors to perform certain functions that would ideally be performed by employees. We expect competition in these areas to continue and we may experience similar difficulties in the future. In addition, we may outsource or expand our operations into overseas locations where we could face significant competition for qualified employees or contractors and face additional challenges and incur significant costs in managing those operations from the U.S. We may also face challenges in retaining some of our existing employees to the extent the then current market value of our common stock is substantially below the exercise prices of the stock options held by such employees. If we cannot attract additional key employees or if we do not maintain competitive compensation policies to retain current employees, we may not be able to scale our business and operations effectively, and the efficiency and effectiveness of our operations could be impaired.

We may pursue acquisitions of, or investments in, businesses that may not be successful and that could adversely affect our operating results.

As the complexity and speed of technological changes make it impractical for us to pursue development of all technological solutions on our own, we continually evaluate acquisitions of or investments in businesses that may complement our existing product offerings, augment our market coverage or enhance our technological capabilities, and in the event that our proposed merger with Atheros is not consummated, we expect to continue to evaluate such acquisitions or investments. However, we cannot assure you that we will be able to identify and consummate suitable acquisition or investment transactions in the future.

These acquisitions and investments involve numerous risks, including but not limited to:

•

problems associated with integrating acquired companies, products or technologies;

•

the incurrence of substantial debt and assumption of unknown liabilities;

•

the risk of entering market segments where we have little or no prior experience and where competitors are in a stronger market position than we are;

•

the potential loss of key employees from the acquired company;

•

the potential dilution of existing stockholders and subordination to rights, preferences and privileges senior to those of our common stock;

•

uncertain capital markets reaction to the acquisition or investment;

•

amortization expenses related to intangible assets;

•

the potential disruption of our ongoing business;

•

the diversion of management’s attention from other core business concerns; and

•

potential goodwill impairment.

We cannot assure you that any acquisitions or investments will be successfully integrated with our business, and the failure to avoid any of these or other risks associated with such acquisitions or investments could cause a material adverse effect on our business, results of operations and financial condition.

We50 ~~have incurred, and will continue to incur, increased costs as we comply with the laws and regulations affecting public companies.~~

As a public company, we incur significant legal, accounting and other costs associated with the reporting requirements of public companies. We are required to, among other things, create and periodically review the effectiveness of internal controls over financial reporting and may be required to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. In addition, the requirements of the Sarbanes-Oxley Act of 2002 and the rules of the SEC and The NASDAQ Global Market oblige our management to devote a substantial amount of time to new compliance initiatives, which could increase our legal and financial compliance costs. These costs of compliance, both in the form of monetary expenditures and additional management responsibilities, have been increasing, making them difficult to estimate with any degree of certainty. We also expect further changes in the laws and regulations affecting public companies, which will increase our expenses as we comply with the new requirements.

If our internal controls over financial reporting are inadequate or we have material weaknesses or significant deficiencies, investors could lose confidence in our financial reports, and our business and stock price may be adversely affected.

~~identify~~We ~~significant~~have ~~deficiencies or material weaknesses in our internal control over financial reporting. In addition~~incurred, ~~over~~and ~~the~~if ~~course of our ongoing evaluation of our internal controls,~~ we ~~may~~fail ~~identify areas requiring improvement and may have~~ to ~~design~~complete ~~enhanced processes and controls to address issues identified through this review. If~~ our ~~internal~~planned ~~control~~merger ~~over~~with ~~financial~~Atheros ~~reporting~~we iswill ~~found~~continue ~~by management or by our independent registered public accounting firm~~ to ~~be inadequate or if we disclose significant existing or potential deficiencies or material weaknesses in those controls~~incur, increased ~~investors~~costs ~~could~~as ~~lose confidence in our financial reports,~~ we ~~could~~comply bewith ~~subject to sanctions or investigations by The NASDAQ Global Market,~~ the ~~SEC~~laws ~~or other regulatory authorities~~ and ~~our~~regulations ~~stock~~affecting ~~price~~public ~~could be adversely affected~~companies. In addition, such deficiencies could impair our ability to obtain financing or could increase the cost of any financing we obtain and require additional expenditures to comply with applicable requirements.

As a public company, we incur significant legal, accounting and other costs associated with the reporting requirements of public companies. We are required to, among other things, create and periodically review the effectiveness of internal controls over financial reporting and may be required to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. In addition, the requirements of the Sarbanes-Oxley Act of 2002 and the rules of the SEC and The NASDAQ Global Market oblige our management to devote a substantial amount of time to new compliance initiatives, which could increase our legal and financial compliance costs. These costs of compliance, both in the form of monetary expenditures and additional management responsibilities, have been increasing, making them difficult to estimate with any degree of certainty. We also expect further changes in the laws and regulations affecting public companies. If we fail to complete our planned merger with Atheros, such changes could increase our expenses as we comply with the new requirements.

Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404) requires our management to report on, and our independent auditors to attest to, the effectiveness of our internal control structure and procedures for financial reporting. We have incurred, and expect that we will continue to incur significant costs, and expend significant time and management resources, to comply with Section 404. Although we have an ongoing program to perform the system and process evaluation and testing necessary to comply with these requirements, we cannot be certain that our management or our independent registered public accounting firm will not identify significant deficiencies or material weaknesses in our internal control over financial reporting. In addition, over the course of our ongoing evaluation of our internal controls, we may identify areas requiring improvement and may have to design enhanced processes and controls to address issues identified through this review. If our internal control over financial reporting is found by management or by our independent registered public accounting firm to be inadequate or if we disclose significant existing or potential deficiencies or material weaknesses in those controls, investors could lose confidence in our financial reports, we could be subject to sanctions or investigations by The NASDAQ Global Market, the SEC or other regulatory authorities and our stock price could be adversely affected. In addition, such deficiencies could impair our ability to obtain financing or could increase the cost of any financing we obtain and require additional expenditures to comply with applicable requirements.

We face business, political, operational, financial and economic risks in our markets outside of the U.S.

We conduct a substantial amount of our business with customers and third-party vendors located outside the U.S, and our future growth is dependent, in part, on continued geographic expansion. We have four wholly-owned foreign subsidiaries, Intellon Canada Inc., Intellon Hong Kong Limited, Intellon Korea Ltd. and Intellon Taiwan Ltd., and may form additional subsidiaries. We also have employees and distributor relationships in Asia and Europe. Our sales to customers in ~~Europe~~Asia and ~~Asia~~Europe accounted for approximately 4939.1% and 43 38.34% of revenue, respectively, in the three months ended ~~June~~September 30, 2009~~, respectively~~. Our sales to customers in Europe and Asia accounted for approximately 5448.43% and 3738.96% of revenue, respectively, in the ~~six~~nine months ended ~~June~~September 30, 2009~~, respectively~~. Nearly all of our sales in Europe are currently to customers in France and Germany. Most of our sales in Asia are in Taiwan but also include sales to customers in China, the Republic of Korea and Singapore, among others. In addition, our customers often integrate our ICs into their products that are then sold to end-customers in various locations, including foreign locations. As a result of our international business relationships, we face numerous risks and challenges, including but not limited to:

•

longer and more difficult collection of receivables;

•

increased difficulty in enforcement of contractual obligations;

•

limited protection of our intellectual property and other assets;

•

compliance with local laws and regulations and unanticipated changes in those laws and regulations, including tax laws and regulations;

•

trade and foreign exchange restrictions and tariffs;

•

travel restrictions;

•

timing and availability of import and export licenses and other governmental approvals, permits and licenses, including export classification requirements;

•

transportation delays and limited local infrastructure and disruptions, such as large scale outages or interruptions of service from utilities and telecommunications providers;

•

difficulties in staffing and managing international operations;

•

local business and cultural factors that differ from our normal standards and practices;

•

differing employment practices and labor issues;

•

regional health issues, including epidemics such as H1N1 influenza (swine flu), avian bird flu and SARS;

•

work stoppages;

•

fluctuations in currency exchange rates and the resulting gains or losses on the conversion to or from U.S. dollars; and

•

acts of terrorism, war or natural disasters including, particularly in Asia, earthquakes, typhoons, floods and fires.

Because most of our OEMs, ODMs and third-party vendors are located overseas, we also face the risk that any impact upon these customers and vendors from the above factors could affect us as well and have a material adverse effect on our business, results of operations and financial condition.

Our headquarters are located in Florida, and many of our customers and third-party vendors are concentrated in Asia, areas subject to significant natural disaster risks.

Our HomePlug-based ICs are manufactured in Taiwan and Singapore and assembled and tested primarily in Taiwan and the Republic of Korea. Our command and control ICs are manufactured, assembled and tested primarily in Singapore, the Philippines, Taiwan and/or the U.S. Many of our customers and other third-party vendors are also located in Asia. The Pacific Rim region is subject to extreme weather and frequent earthquakes due to the presence of major fault lines. As a result of natural disasters, our customers and third-party vendors in the past have experienced, and in the future may again experience, power outages and other damage and disruptions to their operations. Any disruption in the operations of our customers or our customers’ suppliers could make it difficult or impossible for our customers to produce their products that use our ICs. Any disruption of the operations of our third-party vendors could reduce or eliminate the manufacture, assembly or testing of our ICs by those vendors or make it difficult or impossible for us or our vendors to obtain components or materials necessary for the production of our ICs. In such an event, we may be required to seek alternative sources of supply on reasonable terms and timeframes, and we could be required to incur substantial costs and time delays in doing so, if we can at all. Any significant damage to or destruction of any of the foundries that manufacture the wafers for our ICs would have a particularly adverse effect on us, as the rebuilding of a foundry or locating an alternative manufacturer would be difficult and time consuming. In addition, because the design libraries and manufacturing process used in producing the wafers for our ICs may be specific to the particular foundry, we may be unable to transfer production to an alternative foundry, even if one were available, without incurring substantial time and expense to redesign all or part of the affected IC and to incur the costs of a new IC mask, which can be substantial, particularly for lower process geometries. We do not have any arrangements for any backup sources of supply for the wafers used in our ICs.

costs and time delays in doing so, if we can at all. Any significant damage to or destruction of any of the foundries that manufacture the wafers for our ICs would have a particularly adverse effect on us, as the rebuilding of a foundry or locating an alternative manufacturer would be difficult and time consuming. In addition, because the design libraries and manufacturing process used in producing the wafers for our ICs may be specific to the particular foundry, we may be unable to transfer production to an alternative foundry, even if one were available, without incurring substantial time and expense to redesign all or part of the affected IC and to incur the costs of a new IC mask, which can be substantial, particularly for lower process geometries. We do not have any arrangements for any backup sources of supply for the wafers used in our ICs.

Our headquarters are located in Florida, an area that often experiences forest fires as well as hurricanes, tropical storms and other extreme weather. We have in the past experienced, and may again in the future experience, power outages and other damage and disruptions in our operations due to these natural disasters. Any of the foregoing disruptions could have a material adverse effect on our business, operating results and financial condition.

Our ability to utilize our net operating loss and tax credit carry forwards may be limited, which could result in our payment of income taxes earlier than if we were able to fully utilize our net operating loss and tax credit carry forwards.

As of ~~June~~September 30, 2009, we had estimated available U.S. federal income tax net operating loss (NOL) carryforwards of approximately $9994.15 million, state income tax net operating loss carryforwards of approximately $6661.15 million and estimated U.S. tax credit carryforwards of approximately $54.17 million. To the extent then available, these can be used to offset federal taxable income and federal tax liabilities in future years. Our NOL carryforwards will begin to expire in 2009 and are scheduled to continue to expire through ~~2027~~2029. Section 382 of the Internal Revenue Code of 1986, as amended (Section 382), imposes an annual limitation on the amount of net operating loss carryforwards and tax credit carryforwards that may be used to offset federal taxable income and federal tax liabilities when a corporation has undergone significant changes in its ownership. Our ability to utilize NOL carryforwards and federal tax credit carryforwards may be limited by the issuance of common stock in future offerings or as a result of future events. In addition, utilization of these net operating loss and tax credit carryforwards is dependent upon our achieving profitable results. In connection with our initial public offering in December 2007, we experienced an ownership change as defined by Section 382. As a result of this ownership change, our ability to use our federal NOL carryforwards and tax credit carry forwards in subsequent periods is limited to approximately $5.3 million per year, plus recognized built-in gain during the five years beginning on the date of the ownership change. To the extent our use of net operating loss and tax credit carryforwards is further limited by Section 382 as a result of the issuance of common stock in future transactions or by our implementation of an international tax structure or other future events, our income would be subject to cash payments of income tax earlier than it would if we were able to fully use our net operating loss and tax credit carryforwards in the U.S. In addition, we operate in foreign jurisdictions and are subject to paying foreign taxes even though we have net operating losses. We are also subject to alternative minimum tax.

Risks Related to Ownership of Our Common Stock

Market volatility could reduce your ability to resell shares of our outstanding common stock.

The trading price of our common stock is volatile and is influenced by various factors, some of which are beyond our control. Our stock price recently increased significantly as a result of the announcement of our proposed merger with Atheros. We cannot predict the prices at which, or the volumes in which, our common stock will trade. In addition, public stock markets have recently experienced extreme price and trading volume volatility, as well as sharp price declines, particularly with respect to technology sectors of the market. Stock prices of many technology companies have fluctuated in a manner apparently unrelated or disproportionate to the operating performance of those companies. Historically, periods of volatility in a company’s stock prices as well as merger announcements are sometimes followed by securities class action litigation. Such litigation, if brought against us, could result in substantial legal costs and diversion of management’s attention from the conduct of our business.

Future sales of our common stock by existing stockholders could cause the per share price of our common stock to decline.

Any sale, or announcement of any sale, of substantial amounts of our common stock (including sales by our management), or the perception that such sales could occur, could adversely affect the market price for our common stock. Such sales or announcements could also make it more difficult for us to sell equity or equity-related securities upon favorable terms in the future, if at all.

An active trading market for our common stock may not be sustained.

Since our initial public offering in December 2007, there has been, and we expect that there will continue to be, only a limited volume of trading in our common stock. Although the trading volume in our common stock increased during the second ~~quarter~~and third quarters of 2009 compared to earlier periods, the increase may not be sustained. We cannot predict whether an active trading market in our common stock will develop or be sustained, or how liquid any such market might become. In the absence of an active public market, it may be difficult for an investor to sell shares of our common stock in the volume, or at a price and time, which is attractive to such investor, if at all. In addition, relatively small trades have had, and may continue to have, a significant impact on the market price of our common stock, which could increase the volatility and depress the price of our common stock. Moreover, the closing prices of our common stock over the past 12 months on the NASDAQ Global Market have ranged from $1.43 to $7.49. At certain of those price levels, with our limited trading volume, the policies and practices of certain institutional investors and brokerage houses may limit investment in our common stock. Furthermore, because much of our common stock is held by our affiliates, unless we achieve a wider dissemination of those shares, a more active trading market in our common stock may not develop. All of these factors may discourage purchases of our common stock, which may further affect the liquidity of our common stock and potentially lead to further declines in our stock price.

price of our common stock, which could increase the volatility and depress the price of our common stock. Moreover, our common stock is trading below $5.00 per share on the NASDAQ Global Market. At that price level, with our limited trading volume, the policies and practices of institutional investors and brokerage houses may limit investment in our common stock. Furthermore, because much of our common stock is held by our affiliates, unless we achieve a wider dissemination of those shares, a more active trading market in our common stock may not develop. All of these factors may discourage purchases of our common stock, which may further affect the liquidity of our common stock and potentially lead to further declines in our stock price.

Any guidance that we provide about our business or expected future results may differ from actual results.

From time to time we have shared our views in press releases, filings with the SEC and on public conference calls about current business conditions and our expectations as to potential future results. Correctly identifying the key factors affecting business conditions and predicting future events is inherently an uncertain process especially in the current adverse economic environment. Given the complexity and volatility of our business, our analyses and forecasts may prove to be incorrect. We offer no assurances that such predictions or analyses will ultimately be accurate, and investors should treat any such predictions or analyses with appropriate caution. Any analysis or forecast that we make which ultimately proves to be inaccurate may adversely affect our stock price.

If securities or industry analysts do not publish research or publish misleading or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. The number of securities analysts who cover our company is limited. If no or few securities or industry analysts cover our company, the trading price for our stock could be negatively impacted. If one or more of the analysts who covers us downgrades our stock or publishes misleading or unfavorable research about our ~~business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us~~ ~~regularly, demand for our stock could decrease, which could cause our stock price or trading volume to decline.~~

business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price or trading volume to decline.

Our certificate of incorporation, bylaws and provisions under Delaware law might discourage, delay or prevent a change in control of our company or changes in our management and, therefore, depress the trading price of our common stock.

Our certificate of incorporation and bylaws contain provisions that act to discourage, delay or prevent a change in control of our company or changes in our management, even where the stockholders of our company may deem such changes advantageous. These provisions:

•

establish a classified board of directors so that not all members of our board of directors are elected at one time;

•

authorize the board to issue “blank check” preferred stock to increase the number of outstanding shares to discourage a takeover attempt;

•

prohibit stockholder action by written consent, which means that all stockholder actions must be taken at a meeting of our stockholders;

•

prohibit stockholders from calling a special meeting of our stockholders;

•

grant the board of directors the authority to make, alter or repeal our bylaws;

•

establish advance notice requirements for actions to be taken at stockholder meetings or for the nomination of directors to be elected to the board; and

•

require a supermajority (66²/3%) vote by stockholders to adopt, amend or repeal certain provisions of our certificate of incorporation or bylaws.

Additionally, Section 203 of the Delaware General Corporation Law prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any holder of 15% or more of its capital stock for a period of three years following the date on which the holder acquired such percentage of the corporation’s stock, unless, among other things, the board of directors approves the transaction. This provision may discourage, delay or prevent a change in control of our company. Any provision that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Equity Securities

None.

Use of Proceeds

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

~~Our 2009 Annual Meeting of Stockholders was held on June 10, 2009 at the Hyatt Regency Orlando Airport Hotel, 9300 Airport Blvd~~None., Orlando, Florida. At the meeting, our stockholders voted upon the following matters: (1) the election of two Class II directors, Richard I. Goldstein and R. Douglas Norby, each for a term of three years and until his successor has been duly elected and qualified or until his earlier resignation, death or removal; (2) the approval of an amendment and restatement of our amended and restated certificate of incorporation to decrease the number of authorized shares of our common stock from 200,000,000 shares to 125,000,000 shares; and (3) ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the calendar year ending December 31, 2009.

The results of each proposal are as follows:

In Proposal No. 1, our stockholders elected two Class II directors to serve for a three-year term expiring at the Annual Meeting of Stockholders in 2012. The nominees received the following votes:

	For	Withheld
Richard I. Goldstein	12,993,269	7,388,138
R. Douglas Norby	13,031,420	7,349,987

In Proposal No. 2, our stockholders approved an amendment and restatement of our amended and restated certificate of incorporation to decrease the number of authorized shares of our common stock from 200,000,000 shares to 125,000,000 shares. This proposal received the following votes:

		Votes
For		20,362,751
Against		451
Abstain		18,205

In Proposal No. 3, our stockholders ratified the appointment of Ernst & Young LLP as our independent registered public accounting firm for the calendar year ending December 31, 2009. This proposal received the following votes:

		Votes
For		20,317,983
Against		61,600
Abstain		1,824

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

3.1*		Amended and Restated Certificate of Incorporation
3.2**		Bylaws, as amended
4.1**		Second Amended and Restated Investors’ Rights Agreement, dated December 15, 2006
10.1***		HomePlug Powerline Alliance Sponsor’s Agreement, between the registrant and the HomePlug Powerline Alliance, Inc., dated June 5, 2009


2.1*		Agreement and Plan of Merger dated as of September 8, 2009 among Atheros Communications, Inc., Iceman Acquisition One Corporation, Iceman Acquisition Two LLC, Inc. and Intellon Corporation

4954

3.1**		Amended and Restated Certificate of Incorporation
3.2***		Bylaws, as amended
4.1***		Second Amended and Restated Investors’ Rights Agreement, dated December 15, 2006
10.1****		Office Lease Agreement between Intellon Corporation and Southeast STB Portfolio, LLC, dated September 4, 2009
31.1		Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Incorporated by reference to the identical document filed as an exhibit to the registrant’s Current Report on Form 8-K dated ~~June~~September 119, 2009.

** Incorporated by reference to the identical document filed as an exhibit to the registrant’s ~~Registration~~Current ~~Statement~~Report on Form S8-1,K asdated ~~amended~~June ~~(Registration~~11, ~~Statement No~~2009. ~~333-144520).~~

*** Incorporated by reference to the identical document filed as an exhibit to the registrant’s ~~Current~~Registration ~~Report~~Statement on Form 8S-K1, ~~dated~~as ~~June~~amended 5,(Registration ~~2009~~Statement No. 333-144520).

50**** Incorporated by reference to the identical document filed as an exhibit to the registrant’s Current Report on Form 8-K dated September 10, 2009.

SIGNATURE

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

Date: ~~August~~October 728, 2009

Intellon Corporation (Registrant) By: /Ss/ BRIAN T. MCGEE Brian T. McGee Senior Vice President and Chief Financial Officer

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