This Quarterly Report contains forward-looking statements that involve risks and uncertainties. We use words such as "anticipates", "believes", "plans", "expects", "future", "intends", "may", "should", "estimates", "predicts", "potential", "continue", "becoming", "transitioning" and similar expressions to identify such forward-looking statements. Our forward-looking statements include statements as to our business outlook, revenues, margins, expenses, tax provision, capital resources sufficiency, capital expenditures, interest income, restructuring activities, cash commitments, expenses and as to our expectation regarding distribution from certain investments.

Investors are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date of this Quarterly Report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks described under "Item 1A. Risk Factors" and elsewhere in this Quarterly Report and our other filings with the SEC.

OVERVIEW

We generate revenues from the sale of semiconductor devices that we have designed and developed or acquired. Almost all of our revenues in any given year come from the sale of semiconductors that are developed prior to that year. For example, 99% of our revenues in the first nine months of 2008 came from parts developed or acquired in 2007 and earlier. After an individual product is released for production and announced it may take several years before that product generates any significant revenues.

Our current revenues are generated by a portfolio of more than 350 products. Our diverse product portfolio services a number of key end markets: the access area of the wide area network, where data traffic flows between homes and business to central offices of service providers; the metropolitan area of the network where high-speed communication and data transfer occurs between cities or regional areas; enterprise storage, where institutions and businesses store and access their data or enterprise networking equipment and data management such as routers, switches, and laser printers.

We expend a substantial amount every year for the research and development of new semiconductor devices. We determine the amount to invest in the development of new semiconductors based on our assessment of the future market opportunities for those components, and the estimated return on investment. To compete globally we must invest in businesses and technologies that are both growing in demand and are cost competitive in the geographic markets that we serve. Going forward, we plan to continue to focus on finding innovative solutions to our customers' problems while finding further operational efficiencies.

Update to the Interim Condensed Consolidated Financial Statements Included in Earnings Press Release for the Third Quarter Ended September 28, 2008 Dated October 16, 2008

Based on additional information from the Reserve Funds subsequent to our earnings press release dated October 16, 2008, we recorded an impairment charge of $11.8 million, presented as loss on investment securities in the condensed consolidated statement of operations, related to shares of the Reserve Funds held at September 28, 2008. The impact of the impairment charge, net of its related tax effect, was a reduction of net income from $16.2 million to $5.7 million and a corresponding decrease in diluted earnings per share from $0.07 to $0.03 for the fiscal quarter ended September 28, 2008, compared to the amounts presented in our earnings press release. Similarly, net income for the nine month period ended September 28, 2008 was reduced from $130.7 million to $120.2 million and diluted earnings per share decreased from $0.58 to $0.54 compared to the amounts presented in our earnings press release. Further, operating cash flows for the nine month period ended September 28, 2008 changed from $76.0 million to $64.2 million compared to the amounts presented in our earnings press release.

Results of Operations

Third Quarter of 2008 and 2007

Net revenues for the third quarter of 2008 were $139.4 million compared to $117.5 million for the same period in 2007, an increase of $21.9 million, or 19%. Revenues generated by our communications markets, which are served by our wide area network ("WAN") infrastructure products and fibre-to-the-home products increased by 17% from the third quarter of 2007. This increase is primarily attributable to the growth of our fibre-to-the-home products in Asia. Revenues generated from our enterprise markets, which are served by our storage and microprocessor-based System-On-Chips ("SOC") products, increased by 20% compared to the third quarter of 2007.

The growth in our fibre-to-the-home sales year-over-year was driven by an increase in shipments to our Chinese customers using passive optical ("EPON") devices for field trials to the China market. In addition, shipments to Japan and Korea increased as carriers built out their networks. Revenues from our WAN infrastructure products also increased in the third quarter of 2008, compared to the same quarter in 2007, which was driven by recent growth in Asia and the emerging markets, in particular China. The growth in our enterprise storage sales was attributable to an increase in storage capacity upgrades and information management solutions expenditures in the third quarter of 2008. This increase was primarily due to our storage devices in 4G Fibre Channel and 3G Serial Attached SCSI ("SAS") interconnect going into production in 2008. The sales of microprocessor-based SOC products increased this past quarter primarily due to increased activity in the laser printer market.

Gross Profit (in millions)



                                              Third Quarter
                                             2008        2007      Change
               Gross profit                 $  92.0     $ 77.6         19 %

               Percentage of net revenues        66 %       66 %

Total gross profit increased $14.4 million in the third quarter of 2008 compared to the same period in 2007 and gross profit was 66% as a percentage of net revenues in both periods.

While product mix can influence our gross profit as a percentage of revenue from quarter to quarter, our underlying gross profit percentage in the third quarter of 2008 remained consistent with that in the third quarter of 2007 as average selling prices decreased in approximately the same proportion as decreases in manufacturing costs.

Other Costs and Expenses (in millions)



                                                      Third Quarter
                                                     2008        2007      Change
      Research and development                      $  39.7     $ 35.6         12 %
      Percentage of net revenues                         28 %       30 %
      Selling, general and administrative           $  23.6     $ 24.1         (2 %)
      Percentage of net revenues                         17 %       21 %
      Amortization of purchased intangible assets   $   9.8     $  9.8         -
      Percentage of net revenues                          7 %        8 %
      Restructuring costs and other charges         $  (0.3 )   $  1.6       (119 %)
      Percentage of net revenues                         -           1 %

Research and Development and Selling, General and Administrative Expenses

Our research and development, or R&D, expenses increased $4.1 million or 12% in the third quarter of 2008 compared to the third quarter of 2007. Total material costs, including outside consultant services, wafer and photomask costs increased by $1.6 million due to completing more tapeouts on smaller geometries in the third quarter of 2008 than in the same period of 2007. These tapeouts carry larger costs. In addition, the IBM RAID R&D programs which began in the first quarter of 2008, added additional costs in the third quarter of 2008. Payroll costs increased by $0.3 million mainly due to increased recruitment activity, which was partially offset by cost reduction activities undertaken in the first and fourth quarter of 2007. Our infrastructure related expenses also increased by $1.0 million due to increased equipment maintenance costs and design related software tools. In addition, we received a $1.2 million research and development related government grant in a foreign jurisdiction in the third quarter of 2007 and there was no such grant in 2008.

Our selling, general and administrative, or SG&A, expenses decreased by $0.5 million, or 2%, in the third quarter of 2008 compared to the third quarter of 2007. This decrease is primarily attributable to the restructuring activity undertaken in the first and fourth quarter of 2007. As a result of those activities, payroll-related costs and facilities-related costs were $0.5 million and $0.6 million lower, respectively. Partially offsetting these decreases were increases in other costs totaling $0.6 million relating to professional fees, infrastructure related expenses for equipment maintenance costs and software tools and marketing materials.

Amortization of purchased intangible assets and in-process research and development

In the first and second quarters of 2006, we completed the acquisitions of the Storage Semiconductor Business from Avago, and of Passave, Inc., respectively. Amortization of intangible assets acquired from the Storage Semiconductor Business and Passave in the third quarter of 2008 was $4.7 million and $5.1 million, respectively (amortization from the Storage Semiconductor Business and Passave in the third quarter of 2007 was $4.7 million and $5.1 million, respectively).

Restructuring costs and other charges

Please refer to the full description of our various restructuring activities and plans in this Management's Discussion and Analysis under "First Nine Months of 2008 and 2007". The activity related to excess facility, contract termination, and severance accruals, under the our restructuring plans during the three months ended September 28, 2008, by year of plan, were as follows:

     (in thousands)                   2007        2006       2005        2001        Total
     Balance at June 29, 2008        $ 1,544     $  424     $ 2,891     $ 3,197     $  8,056
     Adjustments                        (357 )       (3 )        -         (513 )       (873 )
     New charges                          -          -          575          -           575
     Cash payments                      (238 )     (101 )      (335 )      (328 )     (1,002 )

     Balance at September 28, 2008   $   949     $  320     $ 3,131     $ 2,356     $  6,756


     Severance costs

     (in thousands)                   2007
     Balance at June 29, 2008        $   394
     Adjustments                          10
     New charges                          16
     Cash payments                      (236 )

     Balance at September 28, 2008   $   184

           Other income (expense)               Third Quarter
           (in millions)                       2008        2007       Change
           Interest income, net               $  1.5      $  2.7         (44 %)
           Percentage of net revenues              1 %         2 %
           Foreign exchange gain (loss)       $  0.9      $ (7.1 )       113 %
           Percentage of net revenues              1 %        (6 %)
           Loss on investment securities      $ 11.8      $   -          100 %
           Percentage of net revenues              8 %        -
           Amortization of debt issue costs   $ (0.1 )    $ (0.2 )       (50 %)
           Percentage of net revenues             -           -
           Recovery on investment loss        $  0.4      $   -          100 %
           Percentage of net revenues             -           -
           Provision for income taxes         $ (4.3 )    $ (7.9 )        46 %
           Percentage of net revenues             (3 %)       (7 %)

Interest income, net

Net interest income decreased by $1.2 million or 44% in the third quarter of 2008 compared to the third quarter of 2007 due to declining investment yields.

Foreign exchange gain (loss)

We have significant design presence outside the United States, especially in Canada. The majority of our operating expense exposures to changes in the value of the Canadian Dollar relative to the United States Dollar have been hedged through the second quarter of 2009.

Our net foreign exchange gain was $0.9 million in the third quarter of 2008, which was primarily due to a $0.8 million foreign exchange gain on the revaluation of our net tax liability in a foreign jurisdiction. We do not hedge our income tax accruals against fluctuations in foreign currency exchange rates (see Item 3. Quantitative Disclosures About Market Risk). The revaluation of this foreign tax liability was required because of appreciation of other currencies against the United States Dollar. The foreign exchange rate between the US dollar and the currencies of countries where we have significant tax liabilities appreciated 2% in the third quarter of 2008 compared to depreciating 7% in the third quarter of 2007.

Loss on investment securities

Included in the results of the third quarter of 2008 is an $11.8 million impairment in the fair values of our investments in money market funds held by the Reserve International Liquidity Fund Ltd. (the "International Fund") and the Reserve Primary Fund (the "Primary Fund", together the "Reserve Funds'). For additional information, see Critical Accounting Estimates - Investment in Cash Equivalents, Short Term Investments and Investment Securities and Liquidity and Capital Resources included in this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Amortization of debt issue costs

In connection with our repurchase of $98.0 million principal amount of our senior convertible notes in the first quarter of 2008, we expensed a portion of the unamortized debt issue costs related to the issuance of these notes. As a result, our ongoing quarterly amortization expense relating to the remainder of the deferred debt issue costs has decreased from $0.2 million per quarter to $0.1 million per quarter.

Provision for income taxes

We recorded a provision for income taxes of $4.3 million in the third quarter of 2008, compared to a provision for income taxes of $7.9 million in the third quarter of 2007.

First Nine Months of 2008 and 2007

Net Revenues (in millions)

Net revenues for the first nine months of 2008 were $404.2 million compared to $325.8 million for the same period in 2007, an increase of $78.4 million, or 24%. Revenue generated from enterprise markets, which are served by our storage and microprocessor-based SOC products increased 27% compared to the same nine month period in 2007. Revenue generated from communications markets, which are served by our WAN infrastructure products and fibre-to-the-home products increased by 21% compared to the same nine month period in 2007. This increase is primarily attributable to the growth in sales in the Asian region.

The growth in our enterprise storage sales was attributable to an increase in storage capacity upgrades and information management solutions expenditures in the first nine months of 2008 compared to the first nine months of 2007. The sales of our microprocessor-based SOC products increased in the first nine months of 2008 compared to the first nine months of 2007 primarily due to increased activity in the laser printer market. The growth in our fibre-to-the-home sales in the first nine months of 2008 compared to the first nine months of 2007 was driven by an increase in shipments to our Chinese customers using EPON devices for field trials to the China market. In addition, shipments of our fibre-to-the-home products to Japan and Korea increased as carriers built out their networks. Revenues from our WAN infrastructure products increased in the first nine months of 2008 compared to the first nine months of 2007, which was driven by Asia and the emerging markets, in particular China. A portion of this increase is also attributable to changes in how we conduct business with one of the international entities of a certain distributor to a sell-through basis, which is consistent with our revenue recognition practice for business conducted in North America with that distributor.

Gross Profit (in millions)



                                            First Nine Months
                                             2008         2007       Change
             Gross profit                 $    264.5     $ 210.7         26 %

             Percentage of net revenues           65 %        65 %

Total gross profit increased $53.8 million, or 26%, in the first nine months of 2008 compared to the same period in 2007. Gross profit as a percentage of revenues was 65% in the first nine months of 2008 and in the first nine months of 2007.

While product mix can influence our gross profit as a percentage of revenue from period to period, our underlying gross profit percentage in the nine months of 2008 remained consistent with that in the third quarter of 2007 as changes in average selling price decreased in approximately the same proportion as decreases in manufacturing costs.

Operating Expenses and Charges (in millions)



                                                    First Nine Months
                                                     2008         2007       Change
    Research and development                      $    117.0     $ 121.7         (4 %)
    Percentage of net revenues                            29 %        37 %
    Selling, general and administrative           $     72.0     $  76.0         (5 %)
    Percentage of net revenues                            18 %        23 %
    Amortization of purchased intangible assets   $     29.5     $  29.5         -
    Percentage of net revenues                             7 %         9 %
    Restructuring costs and other charges         $      0.8     $  12.2        (93 %)
    Percentage of net revenues                            -            4 %

Research and Development and Selling, General and Administrative Expenses

Our research and development, or R&D, expenses were $117.0 million, or $4.7 million or 4% lower in the first nine months of 2008 compared to the first nine months of 2007. Due to restructuring activities undertaken in the first quarter of 2007, our payroll-related costs decreased $5.2 million. Further in the first nine months of 2008, we incurred $1.0 million less in materials costs due to completing fewer tapeouts than in the first nine months of 2007. Partially offsetting these decreases was a $1.6 million increase in infrastructure related equipment maintenance costs and software tools.

Our selling, general and administrative, or SG&A, expenses were $72.0 million, or $4.0 million or 5% lower in the first nine months of 2008 compared to the first nine months of 2007. The primary reason for the net decrease in SG&A expenses is the restructuring activities undertaken in the third quarter of 2007. As a result, payroll-related costs and facilities-related costs were lowered $3.2 million and $2.0 million, respectively. Professional fees were $1.7 million lower in the first nine months of 2008 compared to the first nine months of 2007, mainly due to settlement of a litigation matter in August 2007. Other SG&A costs were $2.2 million higher in the first nine months of 2008 compared to the first nine months of 2007. The primary reason for the increase is that we received a credit of $2.8 million arising from the favorable settlements of both a payroll tax matter with the United Kingdom tax authorities and a capital tax refund during the first nine months of 2007.

Amortization of purchased intangible assets and in-process research and development

In the first and second quarters of 2006, we completed the acquisitions of the Storage Semiconductor Business from Avago, and of Passave, Inc., respectively. Amortization of intangible assets acquired from the Storage Semiconductor Business and Passave in the first nine months of 2008 was $14.2 million and $15.3 million, respectively (amortization from the Storage Semi-conductor Business and Passave in the first nine months of 2007 was $14.1 million and $15.3 million, respectively).

Restructuring costs and other charges

The restructuring activity related to excess facility, contract termination, and severance accruals under these plans during the nine months ended September 28, 2008 was as follows:

    (in thousands)                    2007        2006        2005         2001        Total
    Balance at December 30, 2007    $  1,931     $  589     $  3,329     $  3,944     $  9,793
    Adjustments                         (365 )      (20 )         -          (555 )       (940 )
    New charges                          200        130          825           -         1,155
    Cash payments                       (817 )     (379 )     (1,023 )     (1,033 )     (3,252 )

    Balance at September 28, 2008   $    949     $  320     $  3,131     $  2,356     $  6,756


    Severance costs

    (in thousands)                    2007
    Balance at December 30, 2007    $  1,118
    Adjustments                         (161 )
    New charges                          610
    Cash payments                     (1,383 )

    Balance at September 28, 2008   $    184

2007

In the first quarter of 2007, we initiated a cost-reduction plan that involved staff reductions of 175 employees at various sites and the closure of design centers in Saskatoon, Saskatchewan and Winnipeg, Manitoba. We also vacated excess office space at our Santa Clara, California facility. We continued to rationalize costs in the fourth quarter of 2007 by reducing headcount by 18 employees primarily at the Burnaby, British Columbia facility.

In 2008, we recorded a net reduction of our accrual for excess facilities by $0.2 million, as we fulfilled a portion of these obligations, and made payments of $0.8 million related to the 2007 plan. To date, we have incurred $10.5 million in termination and relocation costs, $3.0 million for excess facilities and $2.5 million in asset impairment charges.

We have made payments of $11.9 million in connection with this plan. As of September 28, 2008, $0.2 million in severance costs remained to be paid, which we expect to disburse by June 2009, and payments related to the excess facilities may extend until 2011.

2006

In the third quarter of 2006, we closed our Ottawa, Ontario development site in order to reduce operating expenses and the space was vacated by the end of the fourth quarter of 2006. Approximately 35 positions were eliminated, primarily from research and development, resulting in recording restructuring charges for termination benefits, relocation costs and accrual for excess facilities. We also eliminated 10 positions from research and development in our Portland, Oregon development site, resulting in restructuring charges for severance, excess facilities, contract termination costs and asset impairment.

In connection with these two actions, we recorded $2.5 million related to excess facilities and contract termination costs, $3.0 million in severance costs and $0.2 million in asset impairment charges, to date. In 2007, we reduced our estimated severance accrual by $0.3 million and our accrual for excess facilities by $0.4 million, as we fulfilled a portion of these obligations. In 2008, we incurred additional charges of $0.1 million related to the 2006 plan as the original assumptions regarding possible sublease of the exited facilities were not realized, and made $0.4 million cash payments relating to the 2007 plan. We have made payments of $4.2 million related to the 2006 plan. As of September 28, 2008, all severance costs have been paid and payments related to the excess facilities will extend to 2010.

2005

During 2005, we completed various restructuring activities aimed at streamlining production and reducing operating expenses. In the first quarter of 2005, we terminated 24 employees across all business functions. In the second quarter of 2005, we expanded the workforce reduction activities initiated during the first quarter and terminated 63 employees from research and development located in the Santa Clara facility. In addition, we consolidated two manufacturing facilities (Santa Clara and Burnaby) into one facility (Burnaby), which involved the termination of 26 employees from production control, quality assurance, and product engineering. In the third quarter, we consolidated our facilities and vacated excess space in the Santa Clara location.

In the first quarter of 2006, we continued the workforce reduction plans initiated in 2005, primarily from our research and development group, in the Santa Clara facility.

In 2008, we recorded an additional $0.8 million for excess facilities and contract termination costs as the original assumptions regarding possible sublease of the exited facilities were not realized, and made payments of $0.8 million related to the 2005 plan.

To date, we have recorded $6.9 million for excess facilities and contract termination costs, $9.2 million for termination benefits and $0.9 million . . .