The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, or Quarterly Report, and our consolidated financial statements and related notes as of and for the year ended December 31, 2007 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2007, or Annual Report, filed with the Securities and Exchange Commission, or SEC, on March 3, 2008.

Forward-Looking Statements

The following discussion contains forward-looking statements, which involve risks and uncertainties. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, competitors, future financial position, future revenues, projected costs, prospects and plans and objectives of management. These forward-looking statements are based on our current expectations, estimates, approximations and projections about our industry and business, management's beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by words such as "anticipates," "expects," "intends," "plans," "predicts," "believes," "seeks," "estimates," "may," "will," "should," "would," "could," "potential," "continue," "ongoing" and similar expressions, and variations or negatives of these words. Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are listed under "Risk Factors" in Part II, Item 1A and elsewhere in this Quarterly Report, and in our other filings with the SEC. We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements in this Quarterly Report. Forward-looking statements herein speak only as of the date of this Quarterly Report. Unless required by law, we undertake no obligation to update or revise any forward-looking statements to reflect new information or future events or developments. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements.

Overview

Entropic Communications is a leading fabless semiconductor company that designs, develops and markets systems solutions to enable connected home entertainment. Our technologies significantly change the way high-definition television-quality video, or HD video, and other multimedia content such as movies, music, games and photos are brought into and delivered throughout the home. Our products include home networking chipsets based on the Multimedia over Coax Alliance, or MoCA, standard, high-speed broadband access chipsets, integrated circuits that simplify and enhance digital broadcast satellite services and silicon television tuner integrated circuits. We use our considerable experience with service provider-based deployments to create solutions that address the complex requirements associated with delivering multiple streams of HD video into and throughout the home, while seamlessly coexisting with video, voice and data services that are using the same coaxial cable infrastructure.

In December 2004, we introduced and commenced commercial shipments of our home networking products. In the first quarter of 2006, we began commercially shipping our broadband access solutions. In May 2007, we acquired Arabella Software Ltd., or Arabella, a developer of embedded software. In June 2007, we acquired RF Magic Inc., or RF Magic, a provider of digital broadcast satellite outdoor unit and silicon television tuner solutions. In April 2008, we acquired certain specified assets of Vativ Technologies, Inc., or Vativ, including Vativ's intellectual property rights, existing product lines, inventory and equipment. Since inception, we have invested heavily in product development and have not yet achieved profitability on a quarterly or annual basis. Our revenues have grown from $3.7 million in 2005 to $41.5 million in 2006 to $122.5 million in 2007, driven primarily by demand for our home networking products. Our revenues have increased from $82.4 million during the nine months ended September 30, 2007 to $116.5 million during the nine months ended September 30, 2008, driven primarily by demand for our home networking products and, to a lesser extent, from sales resulting from the RF Magic acquisition. As of September 30, 2008, we had an accumulated deficit of $109.7 million.

We generate revenues principally by sales of our semiconductor products. We also generate service revenues from development contracts. We principally sell our products directly to either original design manufacturers, or ODMs, or original equipment manufacturers, or OEMs. We price our products based on market and competitive conditions and reduce the price of our products over time, as market and competitive conditions change, and as manufacturing costs are reduced. Our markets are generally characterized by declining average selling prices over the life of a product and, accordingly, we must reduce costs and successfully introduce new products and enhancements to maintain our gross margins.

We rely on a limited number of customers for a significant portion of our revenues. Sales to these customers are in turn driven by service providers that purchase our customers' products which incorporate our products. Substantially all of our revenues are dependent upon three major service providers, Verizon Communications, Inc. through its FiOS deployment, EchoStar Satellite, LLC and DIRECTV. In addition, we are dependent on sales outside of the United States for almost all of our revenues and expect that to continue in the future.

In the nine months ended September 30, 2008, Motorola, Inc., or Motorola, and Actiontec Electronics, Inc., or Actiontec, accounted for 39% and 21%, respectively, of our net revenues. We expect to continue to have major concentrations of sales to a relatively small number of ODM and OEM customers.

In the nine months ended September 30, 2008, 95% of our revenues were derived from Asia, 3% were derived from Europe, and 2% was derived from the United States and other North American countries. In the nine months ended September 30, 2007, 97% of our revenues were derived from Asia, 2% was derived from Europe, and 1% was derived from the United States and other North American countries. Many of our ODM and OEM customers in Asia incorporate our chipsets into products that they sell to U.S.-based service providers.

We use third party foundries and assembly and test contractors to manufacture, assemble and test our products. This outsourced manufacturing approach allows us to focus our resources on the design, sales and marketing of our products and avoid the cost associated with owning and operating our own manufacturing facility. A significant portion of our cost of net revenues consists of payments for the purchase of wafers and for manufacturing, assembly and test services.

We expect research and development expenses to continue to increase in total dollars as we develop additional products and expand our business, and to fluctuate over the course of the year based on the timing of our fabrication mask costs. We also anticipate that our sales and marketing expenses will increase as we expand our domestic and international sales and marketing organization and activities and build brand awareness. Due to the lengthy sales cycles that we face, we may experience significant delays from the time we incur research and development and sales and marketing expenses until the time, if ever, that we generate sales from the related products.

In February 2008, we relocated our two separate facilities in San Diego, California, into a 90,000 square foot facility which serves as our corporate headquarters.

Since our inception, we have funded our operations using a combination of preferred stock issuances, cash collections from customers, bank credit facilities, cash received from the exercise of stock options and proceeds from our initial public offering, or IPO. We intend to continue spending substantial amounts in connection with the growth of our business and we may need to obtain additional financing to pursue our business strategy, develop new products, respond to competition and market opportunities and acquire complementary businesses or technologies.

Results of Operations

The following table sets forth selected items from our unaudited condensed
consolidated statements of operations as a percentage of total net revenues for
the periods indicated.



                                                  Three Months Ended             Nine Months Ended
                                                    September 30,                  September 30,
                                                2008             2007           2008            2007
Consolidated Statements of Operations
Data:
Net revenues                                       100 %            100 %          100 %         100 %
Cost of net revenues                                55               61             55            66

Gross profit                                        45               39             45            34
Operating expenses:
Research and development                            43               33             37            28
Sales and marketing                                 13                9             11             8
General and administrative                           9                7              8             6
Write off of in-process research and
development                                         -                -               1            26
Amortization of purchased intangible
assets                                               2                4              2             2
Restructuring charge                                 1               -               1            -

Total operating expenses                            68               53             60            70

Loss from operations                               (23 )            (14 )          (15 )         (36 )
Other income (expense), net                          1               (4 )           -             (2 )
Provision for income taxes                          -                -              -             -

Net loss attributable to common
stockholders                                       (22 )%           (18 )%         (15 )%        (38 )%

Comparison of Three and Nine Months Ended September 30, 2008 and 2007

(Tables presented in thousands, except percentage amounts)

Net Revenues

The decrease in net revenues for the three months ended September 30, 2008 compared to the three months ended September 30, 2007 was driven primarily by softness in demand for our home networking products.

The increase in net revenues for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 was driven primarily by demand for our home networking products and from sales of digital broadcast satellite, or DBS, outdoor unit chips resulting from the RF Magic acquisition.

Gross Profit/Gross Margin



                        Three Months Ended                       Nine Months Ended
                           September 30,                           September 30,
                         2008          2007       % Change       2008          2007       % Change
  Gross profit        $   14,370     $ 14,145            2 %   $  52,488     $ 27,886           88 %
  % of net revenues           45 %         39 %                       45 %         34 %

Although gross profit increased by $0.2 million for the three months ended September 30, 2008 compared to the three months ended September 30, 2007, the increase was primarily due to a $2.1 million inventory step-up charge related to the acquisition of RF Magic that lowered our gross profit for the three months ended September 30, 2007. Absent the effect of the inventory step-up charge, the gross profit for the three months ended September 30, 2008, as compared to the three months ended September 30, 2007, decreased by $1.9 million primarily as a result of lower revenue from softness of demand for our home networking products.

Gross profit increased by $24.6 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. This increase was primarily due to higher revenues from our home networking chipsets and the addition of revenues as a result of our acquisition of RF Magic.

The increase in gross profit as a percentage of revenue for the three months ended September 30, 2008 compared to the three months ended September 30, 2007 was primarily due to the $2.1 million of inventory step-up charge included in the cost of net revenues for three months ended September 30, 2007.

The increase in gross profit as a percentage of revenue for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 was primarily due to a decrease in the unit costs of our home networking chipsets principally as a result of more favorable manufacturing costs and from the contribution to gross margin from the sales of our DBS outdoor unit products as a result of our acquisition of RF Magic.

Additionally, as a result of our acquisitions, which we accounted for by using the purchase method of accounting as required by Statement of Financial Accounting Standards, or SFAS, No. 141, Business Combinations, cost of net revenues included amortization of developed technology in the amounts of $1.6 million and $4.4 million for the three and nine months ended September 30, 2008, respectively, and $1.2 million for each of the three and nine month periods ended September 30, 2007.

Research and Development Expenses



                                      Three Months Ended                       Nine Months Ended
                                         September 30,                           September 30,
                                       2008          2007       % Change       2008          2007       % Change
Research and development            $   13,902     $ 11,923           17 %   $  42,892     $ 22,812           88 %
% of net revenues                           43 %         33 %                       37 %         28 %

The increase in research and development expenses during the three months ended September 30, 2008, compared to the three months ended September 30, 2007, was primarily due to increased personnel costs of $1.9 million (of which $0.4 million was due to stock-based compensation) which included approximately $2.3 million related to a 24% increase in the number of employees engaged in research and development activities at the end of the periods and was offset by a reduction of $0.4 million in accrued management bonuses, which was primarily due to the improbable achievement of annual performance targets under the management bonus plan during the three months ended September 30, 2008. The increase in research and development personnel primarily resulted from normal hiring to support the growth of our business and the addition of employees in connection with the Vativ acquisition in April 2008. The remainder of the increase was primarily due to increases in overhead allocations of $0.2 million, mainly due to higher facility related costs, and depreciation of $0.2 million, offset by a decrease in development tools and licensing of $0.5 million, which was primarily due to the timing of these expenditures.

The increase in research and development expenses during the nine months ended September 30, 2008, compared to the nine months ended September 30, 2007, was primarily due to increased personnel costs of $15.2 million (of which $3.6 million was due to stock-based compensation) which included approximately $14.5 million primarily due to a 24% increase in the number of employees engaged in research and development activities at the end of the periods, and 0.6 million due to the Vativ bonuses. The increase in research and development personnel primarily resulted from the addition of employees in connection with the RF Magic acquisition in June 2007, and to a lesser extent, from normal hiring to support the growth of our business and the addition of employees in connection with the Vativ acquisition in April 2008. The remainder of the increase was primarily due to increases in overhead allocations of $2.8 million, mainly due to higher facility related costs, development tools and licensing expenditures of $0.8 million, and depreciation of $0.8 million, primarily due to increased activities related to customer-driven projects.

Sales and Marketing Expenses



                         Three Months Ended                       Nine Months Ended
                            September 30,                           September 30,
                          2008          2007       % Change        2008         2007       % Change
 Sales and marketing   $    3,991      $ 3,283           22 %   $   12,590     $ 6,642           90 %
 % of net revenues             13 %          9 %                        11 %         8 %

The increase in sales and marketing expenses for the three months ended September 30, 2008, compared to the three months ended September 30, 2007, included increased personnel costs of $0.2 million (of which $0.2 million was due to stock-based compensation) which included approximately $0.5 million primarily related to a 17% increase in the number of employees engaged in sales and marketing activities at the end of the periods and was offset by a reduction of $0.3 million in accrued management bonuses, which was primarily due to the improbable achievement of annual performance targets under the management bonus plan during the three months ended September 30, 2008. The increase in sales and marketing personnel resulted from normal hiring to support the growth of our business. The remainder of the increase, including increases in overhead allocations of $0.2 million and travel costs of $0.2 million, was primarily due to a general increase in business activities.

The increase in sales and marketing expenses for the nine months ended September 30, 2008, compared to the nine months ended September 30, 2007, included increased personnel costs of $4.0 million (of which $1.3 million was due to stock-based compensation), which included approximately $4.2 million primarily related to a 17% increase in the number of employees engaged in sales and marketing activities at the end of the periods, and $0.1 million due to the Vativ bonuses, and was offset by a reduction of $0.3 million in accrued management bonuses, which was primarily due to the improbable achievement of annual performance targets under the management bonus plan during the three months ended September 30, 2008. The increase in sales and marketing personnel primarily resulted from the addition of employees in connection with the RF Magic acquisition in June 2007, and to a lesser extent, from normal hiring to support the growth of our business and the addition of employees in connection with the Vativ acquisition in April 2008. The remainder of the increase, including increases in overhead allocations of $0.9 million and travel costs of $0.5 million, was primarily due to a general increase in business activities.

General and Administrative Expenses



                                         Three Months Ended                        Nine Months Ended
                                           September 30,                             September 30,
                                        2008            2007        % Change        2008         2007       % Change
General and administrative           $    2,798      $    2,706            3 %   $   9,8624     $ 5,104           93 %
% of net revenues                             9 %             7 %                         8 %         6 %

The $0.1 million increase in general and administrative expenses for the three months ended September 30, 2008, compared to the three months ended September 30, 2007, included decreased personnel costs of $0.1 million, which was primarily related to the improbable achievement of annual performance targets under the management bonus plan during the three months ended September 30, 2008, and increases of $0.2 million in other costs primarily due to being a public reporting company.

The increase in general and administrative expenses for the nine months ended September 30, 2008, compared to the nine months ended September 30, 2007, was partly due to increased personnel costs of $2.6 million (of which $1.9 million was due to stock-based compensation), which included approximately $3.1 million primarily related to a 15% increase in the number of employees engaged in general and administrative activities at the end of the periods and was offset by a reduction of $0.4 million in management bonuses, which was primarily due to the improbable achievement of annual performance targets under the management bonus plan during the three months ended September 30, 2008. The increase in general and administrative personnel primarily resulted from the addition of employees in connection with the RF Magic acquisition in June 2007, and to a lesser extent, from normal hiring to support the growth of our business and the addition of employees in connection with the Vativ acquisition in April 2008. The remainder of the increases, including increases in outside services of $0.6 million, legal fees of $0.6 million and overhead allocations of $0.4 million, was primarily due to being a public reporting company and a general increase in business activities.

Write Off of In-Process Research and Development



                                          Three Months Ended                         Nine Months Ended
                                            September 30,                              September 30,
                                       2008               2007        % Change       2008          2007       % Change
Write off of in-process research
and development                      $      -          $       -            -  %   $   1,300     $ 21,400          (94 )%
% of net revenues                           -  %               -  %                        1 %         26 %

During the nine months ended September 30, 2008, as a result of the Vativ acquisition in April 2008, we incurred a write off of in-process research and development, or IPR&D, related to Vativ's High Definition Multimedia Interface, or HDMI, switch product. During the nine months ended September 30, 2007, as a result of the RF Magic acquisition in June 2007, we incurred a write off of IPR&D related to RF Magic's channel stacking switch products.

The IPR&D was written-off on the acquisition dates because the acquired technology had not yet reached technological feasibility and had no alternative future uses. A discounted cash flow approach was utilized in valuing the IPR&D. The value of the technology was the sum of the present value of projected debt-free net income, in excess of returns on requisite assets, over the economic life of the IPR&D.

Amortization of Purchased Intangible Assets



                                        Three Months Ended                        Nine Months Ended
                                           September 30,                            September 30,
                                        2008           2007       % Change         2008         2007       % Change
Amortization of purchased
intangible assets                     $    713       $  1,296          (45 )%   $    2,022     $ 1,338           51 %
% of net revenues                            2 %            4 %                          2 %         2 %

During the three months ended September 30, 2008, compared to the three months ended September 30, 2007, amortization of purchased intangible assets decreased $0.6 million due to amortization of backlog purchased intangibles of $0 and $0.7 million for the three months ended September 30, 2008 and 2007, respectively, related to the acquisition of RF Magic in June 2007. This decrease of $0.7 million during the three months ended September 30, 2008 was offset by $0.1 million of amortization of purchased intangibles related to the acquisition of Vativ in April 2008.

During the nine months ended September 30, 2008, as compared to the same period in 2007, we incurred an increase in amortization of purchased intangibles as a result of the RF Magic acquisition in June 2007, and the acquisition of Vativ in April 2008.

Restructuring Charges



                                        Three Months Ended                        Nine Months Ended
                                           September 30,                            September 30,
                                        2008           2007       % Change        2008           2007      % Change
Restructuring charges                 $     209       $    -          100  %   $     1,278       $  -          100  %
% of net revenues                             1 %          -  %                          1 %        -  %

During the three months ended September 30, 2008, we recorded a $0.2 million restructuring charge related to the reduction-in-force of approximately 20 employees in August 2008.

In addition to the $0.2 million reduction-in-force restructuring charge during the nine months ended September 30, 2008, we also recorded a $1.1 million restructuring charge related to the relocation of our headquarters into a 90,000 square foot facility in San Diego, California. This restructuring charge consisted of approximately $0.8 million of lease termination costs and . . .