The following Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as information contained in "Risk Factors" in Part II, Item 1A and elsewhere in this Quarterly Report on Form 10-Q, contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend that these forward-looking statements be subject to the safe harbors created by those provisions. Forward-looking statements are generally written in the future tense and/or are preceded by words such as "will," "may," "should," "forecast," "could," "expect," "suggest," "believe," "anticipate," "intend," "plan," or other similar words. Forward-looking statements include statements regarding (1) the conversion of our design opportunities into revenue, (2) our revenue levels, including the commercial success of our Customer Specific Standard Products, or CSSPs, and new products, and the effect of our end-of-life products, (3) our liquidity, (4) our gross profit and breakeven revenue level and factors that affect gross profit and the breakeven revenue level, (5) our level of operating expenses, (6) our research and development efforts, (7) our partners and suppliers and (8) industry trends. The following discussion should be read in conjunction with the attached condensed unaudited consolidated financial statements and notes thereto, and with our audited consolidated financial statements and notes thereto for the fiscal year ended December 30, 2007, found in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 11, 2008 and with our condensed unaudited consolidated financial statements and notes thereto for the quarters ended March 30, 2008 and June 29, 2008 found in our Quarterly Reports on Form 10-Q filed with the SEC on May 8, 2008 and August 7, 2008, respectively.

The forward-looking statements contained in this Quarterly Report involve a number of risks and uncertainties, many of which are outside of our control. Factors that could cause actual results to differ materially from projected results include, but are not limited to, risks associated with (1) the conversion of CSSP design opportunities into revenue, (2) the adverse affects of the current financial crisis (3) the commercial and technical success of our CSSPs and new products such as ArcticLink™ and PolarPro®, (4) our ability to accurately estimate quarterly revenue, (5) the liquidity required to support our future operating and capital requirements, (6) our dependence upon single suppliers to fabricate and assemble our products, (7) our dependence on our relationship with Tower, and (8) our successful introduction of products and CSSPs incorporating emerging technologies or standards. Although we believe that the assumptions underlying the forward-looking statements contained in this Quarterly Report are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements will be accurate. The risks, uncertainties and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements include, but are not limited to, those discussed under the heading "Risk Factors" in Part II, Item 1A hereto and the risks, uncertainties and assumptions discussed from time to time in our other public filings and public announcements. All forward-looking statements included in this document are based on information available to us as of the date hereof. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. Furthermore, past performance in operations and share price is not necessarily indicative of future performance. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We are a fabless semiconductor company that operates in a single industry segment where we design, market and support CSSPs, Field Programmable Gate Arrays, or FPGAs, application solutions, associated design software and programming hardware. Our new product family includes ArcticLink, PolarPro, Eclipse™ II and QuickPCI® II; our mature product family includes pASIC® 3, QuickRAM®, Eclipse, QuickDSP and QuickFC, as well as royalty revenue, programming hardware and design software; our end-of-life product family includes pASIC 1, pASIC 2, V3, QuickMIPS and QuickPCI. We develop CSSPs using our ArcticLink and PolarPro solution platforms.

Customer Specific Standard Products, or CSSPs, are customer specific complete solutions that include our silicon solution platform, proven system blocks, custom logic and software drivers. Our ArcticLink and PolarPro solution platforms are standard silicon products and must be programmed to be effective in a system. Our proven system blocks range from intellectual property, or IP, which improves video images to IP which implements commonly used mobile system interfaces, such as secure digital input output, or SDIO, or universal serial bus 2.0 on-the-go, or USB 2.0 OTG. We provide complete solutions by selecting the appropriate solution platform and

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued)

proven system blocks, providing custom logic, integrating logic, programming the device and providing software drivers required for the customers' application.

CSSPs, which we pioneered and introduced in the first quarter of 2007, are developed for specific low power application markets that have similar differentiated IP, intelligent data processing or connectivity requirements. Target customers value CSSPs for the ability to provide a range of products from a single platform and the flexibility to address specific product requirements. Market leading original equipment manufacturers, or OEMs, and original design manufacturers, or ODMs, seek to develop product platforms from which several products can be introduced. For example, multimedia phone companies may plan to introduce products offering mobile TV, WiMAX, Bluetooth 2.1 and USB 2.0 OTG. These customers value our ability to provide a range of products from a single platform design by incorporating different features in the programmable fabric of our solution platforms. Other customers value the flexibility of programmable fabric to address specific product requirements. By providing customized solutions for these customers we increase their ability to meet the time-to-market and time-in-market pressures associated with their markets. In addition to CSSPs, we sell products to industrial, military and other customers who do their own selection and integration of IP cores and add software drivers to their application. We market FPGAs, IP cores and software drivers to these customers, who value the low power consumption, reduced development risk through the use of proven IP cores, fast time-to-market, high IP security, instant-on and reliability of our devices.

This range of offerings allows customers to acquire a solution tailored for their needs. Mobile product OEMs and ODMs tend to prefer a complete solution, and purchase CSSPs. Other customers with proprietary IP requirements choose to purchase our FPGAs or ArcticLink solution platforms and utilize our IP cores as appropriate. Whether a customer uses our CSSPs as a complete solution, or proven IP cores with our FPGAs, we believe our solutions and products enable system manufacturers to improve their time-to-market, lower total system power consumption, reduce their development risk and total cost of ownership, and add features or performance to their embedded applications.

Our CSSPs and the rest of our product offerings are based on our patented ViaLink® metal-to-metal programmable technology. ViaLink is the foundation of our competitive advantage in providing energy efficient devices and solutions that deliver the high performance, high reliability, IP security and instant-on features that our customers value. Our ViaLink technology allows us to create devices smaller than competitors' products on comparable technology, thereby minimizing silicon area and cost. In addition, our ViaLink technology has lower electrical resistance and capacitance than other programmable technologies and therefore supports higher signal speed and low power consumption. Our architecture uses our ViaLink technology to maximize interconnects at every routing wire intersection, which allows more paths between logic cells. As a result, system designers are able to use our devices with smaller gate counts to implement their designs than if they had used competing FPGAs. The abundance of interconnect resources also provides an efficient connection between the Application Specific Standard Product, or ASSP, and the FPGA portions of CSSPs.

We believe that the underlying attributes of our ViaLink technology, including low power consumption, high reliability, design security and design efficiency, enable us to deliver differentiated silicon solutions to our customers.

Our CSSPs provide:

† Complete Flexible Solutions - we partner with customers to bring their differentiated products to market quickly and to adapt these products to meet changing market conditions;

† Platform Design Capability - we partner with customers to develop a range of solutions from a single hardware platform, enabling these manufacturers to bring several products to market quickly and cost effectively through the use of our programmable fabric;

† Reduced Design Expense and Risk - we provide proven system blocks addressing a range of video, network, storage and custom logic requirements, along with software drivers, thereby reducing the time and cost of product development;

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued)

† Small Form Factor - we manufacture single chip solutions in packages as small as 5x5 millimeters, wafer level, chip scale packaging , or WLCSP, and known good die;

† Energy Efficiency - our ViaLink technology is the lowest power consumption full featured programmable logic technology on the market today, allowing the time-to-market and time-in-market advantages of programmable logic for differentiated mobile products;

† Low Total Cost of Ownership - CSSPs reduce time-to-market and lower the risk and expense associated with new product development. In platform designs these savings are leveraged over several products. The flexible nature of CSSPs enables new features in existing designs, which can be used to extend time-in-market and delay the cost of new product development. In addition, CSSPs often reduce bill of materials, or BOM, costs by combining the function of several ASSPs into one cost effective device; a simplified BOM also leads to lower printed circuit board, or PCB, costs;

† Instant-on - our products are live at power up because ViaLink based products require no configuration bit stream;

† High Reliability - ViaLink based products do not rely on a SRAM cell that is susceptible to alpha particles, or brownouts, to define and maintain their functionality; and

† Unmatched IP Security - our ViaLink technology makes it virtually impossible to clone or reverse engineer designs implemented in our programmable fabric.

We offer a range of CSSPs built on our PolarPro and ArcticLink solutions platforms. Our PolarPro architecture provides low power consumption and a cost effective device for pure digital applications. CSSPs developed using our PolarPro solution implement proven system blocks and custom logic in programmable fabric. Based on our engineering analysis of portable media player applications, we believe designers using PolarPro can extend battery life by as much as four times as compared to a standard product implementation, setting a new standard for low power consumption through the use of programmable logic.

We started shipping CSSPs based on our ArcticLink architecture in 2007. ArcticLink solution platforms combine mixed signal physical layers, hard-wired logic and programmable fabric on one device. Mixed signal capability supports the trend toward serial connectivity in mobile applications, where designers benefit from lower pin counts, simplified PCB layout, lower cost PCB interconnect and reduced signal noise. Adding hard-wired IP enables us to deliver more logic per die area, while the programmable fabric allows us to provide CSSPs that can be rapidly customized to differentiate products, add features and reduce system development costs. Market leading companies seek to develop product platforms from which several products can be introduced. This combination of mixed signal physical layer, hard-wired logic and programmable fabric enables us to deliver low cost, small form factor solutions that can be customized for a particular customer or market requirements.

We are marketing CSSPs to OEMs and ODMs offering differentiated mobile products. Our target mobile markets include:

† Cellular - including multimedia and smartphones;

† Consumer Electronics - including personal media players, or PMPs, personal navigation devices, or PNDs, and wireless hard disk drives or wireless storage devices; and

† Computing - including ultra mobile PCs, or UMPCs, mobile internet devices, or MIDS, industrial personal digital assistants, or PDAs, handheld point-of-sales, or POS, terminals and broadband data cards.

Examples of how existing and potential customers benefit from CSSPs are:

† Multimedia Phones - we have been marketing our recently announced Visual Enhancement Engine, or VEE™, a proven system block built upon an IP core we licensed, to enable improved video image, color, contrast and resolution with longer battery life;

† Smartphones - our solutions enable the simultaneous display of video on the handset and an external display;

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued)

† Personal Navigation Devices -our solutions allow the incorporation of the latest storage technology, managed NAND, and access to the latest high capacity SD cards and SDIO based peripherals;

† Portable Media Players -our solutions allow a processor to access and efficiently control a micro hard disk drive;

† Wireless Hard Disk Drives -our solutions allow for the intelligent transfer of data, which improves the data transfer rate, virtually eliminates the CPU cycles associated with data transfer and improves battery life;

† Handheld POS Terminals -our solutions enable high speed connectivity to Wi-Fi and BlueTooth chipsets as well as storage connectivity; and

† Cellular Data Cards -our solutions provide the lowest power interface between a cellular radio and a laptop card slot.

Our CSSPs and new products are also being designed into applications in our traditional markets, such as data communications, instrumentation and test, and military-aerospace, where customers value the low power consumption, instant-on, IP security, reliability and fast time-to-market of our products.

In addition to working directly with our customers, we partner with other technology companies to develop additional intellectual property, reference platforms and system software to provide application solutions. We partner with companies that are experts in certain technologies. For instance, we licensed elements of our VEE technology from Apical Limited, a U.K. company that markets enhanced video image capability to companies such as Nikon, Olympus and Sony Ericsson. We also work with processor manufacturers, such as Marvell Technology Group Ltd., and companies that supply storage, networking or graphics components for embedded systems. The depth of these relationships varies depending on the partner and the dynamics of the end market being targeted, but is typically a co-marketing program that includes joint account calls, promotional activities and/or engineering collaboration, such as reference designs.

We sell programmed and unprogrammed products through distributors and directly to OEMs. We recognize revenue at the time of shipment of products directly to system manufacturers. However, we have historically sold a significant portion of our products through distributors who earn a negotiated margin on the sale of our products and who have stock rotation and price protection privileges. We defer recognition of income from sales of unprogrammed products to these distributors, other than end-of-life products, until after they have sold our products to systems manufacturers. During the third quarter of 2008, we changed our standard distribution agreement from a sell-through to a sell-in model and began to enter into new agreements with our distributors. Under these agreements all products are sold to the distributor at fixed prices without return or price adjustment privileges. We expect to complete the process of moving all of our distributors to the new agreement by the first quarter of 2009. We recognize revenue on programmed products and certain unprogrammed products, for which the price is fixed or determinable and there are no return privileges, at the time of shipment to our distributors. During the first nine months of 2008 and 2007, approximately 70% and 60%, respectively, of the units shipped to our distributors were programmed by us and, accordingly, are not returnable. The percentage of sales derived through distributors was 50% and 60% during the first nine months of 2008 and 2007, respectively.

Two distributors, Avnet, Inc. and Future Electronics, accounted for 14% and 13% of revenue in the first nine months of 2008. These distributors accounted for 22% and 17% of revenue in the first nine months of 2007. We anticipate that a limited number of distributors will continue to account for a significant portion of our revenue and that individual distributors could account for a larger portion of our revenue.

Our international sales were 63% and 53% of our revenue in the first nine months of 2008 and 2007, respectively. We expect that revenue from sales to international customers will continue to represent a significant portion of our revenue. All of our sales originate in the United States and are denominated in U.S. dollars.

We outsource the wafer manufacturing, assembly and testing of all of our products. We currently rely upon Taiwan Semiconductor Manufacturing Company Ltd., or TSMC, Tower, Kawasaki Microelectronics, Inc. and Samsung Semiconductor, Inc. to manufacture our products, and we rely upon Amkor Technology, Inc. and Unisem

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued)

(M) Berhad to assemble, test and program our products. Our wafer suppliers' lead times are often as long as three months and sometimes longer. In addition, Tower requires us to provide them with a monthly wafer start forecast. Under the terms of our agreement with Tower, our ability to increase or decrease our wafer forecast is limited and we are committed to take delivery of and pay for a minimum portion of the forecasted wafer volume. Our long manufacturing cycle times are at odds with our customers' desire for short delivery lead times and, as a result, we typically purchase wafers based on our internal forecasts of customer demand.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued)

Results of Operations



The following table sets forth the percentage of revenue for certain items in
our statements of operations for the periods indicated:



                                              Three Months Ended                     Nine Months Ended
                                       September 28,       September 30,      September 28,      September 30,
                                           2008                2007               2008               2007
Revenue                                         100.0 %             100.0 %            100.0 %            100.0 %
Cost of revenue (1)                              44.6                47.8               46.2               57.8
Long-lived asset impairment                         -                   -                6.0                  -
Gross profit                                     55.4                52.2               47.8               42.2
Operating expenses:
Research and development                         21.7                26.0               26.1               29.4
Selling, general and
administrative                                   42.8                43.7               42.2               54.7
Long-lived asset impairment                         -                   -                1.8                  -
Restructuring costs                                 -                   -                1.7                  -
Loss from operations                             (9.1 )             (17.5 )            (24.0 )            (41.9 )
Write-down of marketable
securities                                          -                   -               (1.6 )                -
Interest expense                                 (1.0 )              (0.8 )             (0.8 )             (1.0 )
Interest income and other, net                   (0.7 )               2.1                0.4                3.2
Loss before income taxes                        (10.8 )             (16.2 )            (26.0 )            (39.7 )
Provision for (benefit from)
income taxes                                     (0.9 )               0.3               (0.1 )              0.3
Net loss                                         (9.9 )%            (16.5 )%           (25.9 )%           (40.0 )%

                                              Three Months Ended                     Nine Months Ended
                                       September 28,       September 30,      September 28,      September 30,
                                           2008                2007               2008               2007
Revenue by product line (2) (in
thousands):
New products                          $         1,422     $         1,620    $         6,584    $         2,837
Mature products                                 4,619               4,536             13,533             12,418
End-of-life products                              189               2,869              5,879              8,417
Total revenue                         $         6,230     $         9,025    $        25,996    $        23,672

(2) For all periods presented: New products include ArcticLink, PolarPro, Eclipse II and QuickPCI II products; mature products include pASIC 3, QuickRAM, Eclipse, QuickDSP and QuickFC products, as well as royalty revenue, programming hardware and design software; end-of-life products include pASIC 1, pASIC 2, V3, QuickMIPS and QuickPCI products.

Three Months Ended September 28, 2008 and September 30, 2007

Revenue. Our revenue for the third quarter of 2008 was $6.2 million, representing a decline of approximately $2.8 million, or 31.0%, from revenue of $9.0 million in the third quarter of 2007. The decline in revenue is primarily due to a decrease in demand for end-of-life products, which declined by $2.7 million compared with the third quarter of 2007. New product revenue declined by $200,000 compared with the third quarter of 2007; lower demand for Eclipse II products was partially offset by higher demand for PolarPro and ArcticLink products. Our mature product revenue increased by $80,000 compared with the third quarter of 2007. A PND manufacturer contributed 13% and 5% of total revenue in the third quarter of 2008 and 2007, respectively. A worldwide customer purchasing primarily pASIC 3 devices contributed 28% and 9% of total revenue in the third quarter of 2008 and 2007, respectively.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued)

Our revenue for the third quarter of 2008 was 28.7% lower sequentially, decreasing by approximately $2.5 million to $6.2 million from $8.7 million in the second quarter of 2008. This sequential revenue decline was primarily due to an anticipated $1.4 million decline in end-of-life product revenue. New product revenue also decreased by $1.1 million sequentially due to an anticipated $1.1 million decrease in demand from a large PND OEM customer. This decrease in demand resulted from the late stage of their product life cycle. End-of-life products contributed $189,000 of revenue in the third quarter. Revenue from these products is expected to fluctuate and contribute less than 10% of total quarterly revenue.

We continue to seek to expand our revenue, including the pursuit of high volume sales opportunities in the consumer market segment, by providing CSSPs incorporating intellectual property such as VEE and boot from managed NAND, or industry standard interfaces such as USB 2.0 OTG, SDIO and integrated drive electronics, or IDE. Our industry is characterized by intense price competition and by lower margins as order volumes increase. While winning large volume sales opportunities will increase our revenue, we believe these opportunities may decrease our gross profit as a percentage of revenue.

Gross Profit. Gross profit was $3.5 million and $4.7 million in the third quarter of 2008 and 2007, respectively, which represented 55.4% and 52.2% of revenue for those periods. The $1.3 million decline in gross profit was primarily due to lower revenue and product mix, which decreased gross profit by $1.4 million, offset by $100,000 of lower charges for the write-down of inventories.

Research and Development Expense. Research and development expense was $1.4 million and $2.3 million in the third quarter of 2008 and 2007, respectively, which represented 21.7% and 26.0% of revenue for those periods. The decrease of approximately $1.0 million was primarily due to savings associated with the operational realignment that we undertook in the second quarter of 2008. This change reduced cash compensation costs by $500,000 and depreciation by $90,000 compared with the third quarter of 2007. In addition, project expenses were $160,000 lower compared with the third quarter of 2007 due primarily to a delay in the start of a new project.

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