products incorporating our semiconductor products for OEMs. Sales to distributors and other resellers accounted for approximately 25% of our net revenues in the fiscal quarter ended January 2, 2009, compared to 25% of our net revenues in the fiscal quarter ended December 28, 2007. One distributor accounted for 13% and 14% of net revenues for the fiscal quarter ended January 2, 2009 and December 28, 2007, respectively. Our top 20 customers accounted for approximately 69% and 74% of net revenues for the fiscal quarter ended January 2, 2009 and December 28, 2007, respectively. Revenues derived from customers located in the Americas, the Asia-Pacific region and Europe (including the Middle East and Africa) were 7%, 88% and 4%, respectively, of our net revenues for the fiscal quarter ended January 2, 2009 and were 7%, 88% and 5%, respectively, of our net revenues for the fiscal quarter ended December 28, 2007. We believe a portion of the products we sell to OEMs and third-party manufacturing service providers in the Asia-Pacific region are ultimately shipped to end-markets in the Americas and Europe. Critical Accounting Policies
The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements, revenues and expenses during the periods reported and related disclosures. Actual results could differ from those estimates. Information with respect to our critical accounting policies that we believe have the most significant effect on our reported results and require subjective or complex judgments of management is contained on pages 38-43 of the Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended October 3, 2008. Management believes that at January 2, 2009, there has been no material change to this information.
Business Enterprise Segments
We operate in one reportable segment, broadband communications. Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information," establishes standards for the way that public business enterprises report information about operating segments in annual condensed consolidated financial statements. Although we had two operating segments at January 2, 2009, under the aggregation criteria set forth in SFAS No. 131, we only operate in one reportable segment, broadband communications. The Company's reporting units, which are also the Company's operating units, Imaging and PC Media ("IPM") and Broadband Access Products ("BBA") were identified based upon the availability of discrete financial information and the chief operating decision maker's regular review of the financial information for these operating segments. The Company evaluated these reporting units for components and noted that there are none below the IPM and BBA reporting units.
Under SFAS No. 131, two or more operating segments may be aggregated into a single operating segment for financial reporting purposes if aggregation is consistent with the objective and basic principles of SFAS No. 131, if the segments have similar economic characteristics, and if the segments are similar in each of the following areas:
• the nature of their products and services;

• the nature of their production processes;

• the type or class of customer for their products and services; and

• the methods used to distribute their products or provide their services.

We meet each of the aggregation criteria for the following reasons:
• the sale of semiconductor products is the only material source of revenue for each of our two operating segments;

• the products sold by each of our operating segments use the same standard manufacturing process;

• the products marketed by each of our operating segments are sold to similar customers; and

• all of our products are sold through our internal sales force and common distributors.

Because we meet each of the criteria set forth above and each of our operating segments has similar economic characteristics, we aggregate our results of operations in one reportable segment.
In early fiscal 2008, we decided to discontinue our investments in stand-alone wireless networking products and technologies. As a result, we have moved gateway-oriented embedded wireless networking products and technologies, which enable and support our DSL gateway solutions, into our BBA product line beginning in fiscal 2008. In August 2008, we completed the sale of our Broadband Media Processing ("BMP") product lines to NXP. As a result, the revenues generated by sales of BMP products have been reported as discontinued operations for all periods presented.
Net revenues from continuing operations by product line are as follows (in thousands):

                                               Fiscal Quarter Ended
                                          January 2,       December 28,
                                             2009              2007
              Imaging and PC Media        $    49,662     $       75,445
              Broadband Access Products        36,836             70,488

                                          $    86,498     $      145,933

Results of Operations
Net Revenues
We recognize revenue when (i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred, (iii) the sales price and terms are fixed and determinable, and (iv) the collection of the receivable is reasonably assured. These terms are typically met upon shipment of product to the customer. The majority of our distributors have limited stock rotation rights, which allow them to rotate up to 10% of product in their inventory two times per year. We recognize revenue to these distributors upon shipment of product to the distributor, as the stock rotation rights are limited and we believe that we have the ability to reasonably estimate and establish allowances for expected product returns in accordance with Statement of Financial Accounting Standards (SFAS) No. 48, "Revenue Recognition When Right of Return Exists." Development revenue is recognized when services are performed and was not significant for any periods presented. Prior to the fourth quarter of fiscal 2008, revenue with respect to sales to certain distributors was deferred until the products were sold by the distributors to third parties. During the fourth fiscal quarter ended October 3, 2008, we evaluated three distributors for which revenue has historically been recognized when the purchased products are sold by the distributor to a third party due to our inability in prior years to enforce the contractual terms related to any right of return. Our evaluation revealed that we are able to enforce the contractual right of return for the three distributors in an effective manner similar to that experienced with the other distributor customers. As a result, in the fourth quarter of fiscal 2008, we commenced the recognition of revenue on these three distributors upon shipment, which is consistent with the revenue recognition point of other distributor customers. At January 2, 2009 and October 3,2008, there is no significant deferred revenue related to sales to our distributors. Revenue with respect to sales to customers to whom we have significant obligations after delivery is deferred until all significant obligations have been completed. At January 2, 2009, there was no deferred revenue. At October 3, 2008, deferred revenue related to shipments of products for which the Company had on-going performance obligations was $0.2 million. Our net revenues decreased 41% to $86.5 million in the fiscal quarter ended January 2, 2009 from $145.9 million in the fiscal quarter ended December 28, 2007. The fiscal quarter ended December 28, 2007 included approximately $14.7 million of non-recurring revenue from the buyout of a future royalty stream. The decline in net revenues, excluding the impact of the non-recurring revenue, was driven by a 34% decrease in net revenues generated by our Imaging and PC Media (IPM) business, which comprises 57% of our total net revenues. The decrease in our IPM business was attributable to a 37% decrease in unit volume shipments which was offset slightly by a 4% increase in average selling price (ASPs). In addition, net revenues generated by our Broadband Access (BBA) business decreased 48%. BBA revenue, which comprises 43% of our total net revenues, decreased a result of a 46% decline in unit volume shipments coupled with a 21% decrease in ASPs.

The global economic recession severely dampened semiconductor industry sales in the first quarter of fiscal 2009, historically a strong quarter for the industry. Weakening demand for the major drivers of semiconductor sales which includes automotive products, personal computers, cell phones, and corporate information technology products, resulted in a sharp drop in semiconductor industry sales. More than 50% of semiconductor demand and the fortunes of the semiconductor industry are increasingly linked to macroeconomic conditions such as gross domestic product, consumer confidence, and disposable income. Demand for all of our products has experienced significant decline in line with the industry decline. We expect revenues to further decline in the fiscal quarter ended April 3, 2009 as compared to the fiscal quarter ended January 2, 2009 as a result of the effects of the overall economic environment. Facing these challenges, the Company has been working to reduce operating costs and actively managing working capital, while continuing to focus on delivering innovative products to gain market share when a market recovery commences. Gross Margin
Gross margin represents net revenues less cost of goods sold. As a fabless semiconductor company, we use third parties for wafer production and assembly and test services. Our cost of goods sold consists predominantly of purchased finished wafers, assembly and test services, royalties, other intellectual property costs, labor and overhead associated with product procurement and non-cash stock-based compensation charges for procurement personnel. Our gross margin percentage for the fiscal quarter ended January 2, 2009 was 53.4% compared with 56.3% for the fiscal quarter ended December 28, 2007. Excluding the $14.7 million royalty buy-out in the fiscal quarter ended December 28, 2007, our gross margin percentage would have been 51.4% compared to 53.4% for the fiscal quarter ended January 2, 2009. The two point gross margin percentage increase in the fiscal quarter ended January 2, 2009 is primarily attributable to a shift in product mix.
We assess the recoverability of our inventories on a quarterly basis through a review of inventory levels in relation to foreseeable demand, generally over the following twelve months. Foreseeable demand is based upon available information, including sales backlog and forecasts, product marketing plans and product life cycle information. When the inventory on hand exceeds the foreseeable demand, we write down the value of those inventories which, at the time of our review, we expect to be unable to sell. The amount of the inventory write-down is the excess of historical cost over estimated realizable value. Once established, these write-downs are considered permanent adjustments to the cost basis of the excess inventory. Demand for our products may fluctuate significantly over time, and actual demand and market conditions may be more or less favorable than those projected by management. In the event that actual demand is lower than originally projected, additional inventory write-downs may be required. Similarly, in the event that actual demand exceeds original projections, gross margins may be favorably impacted in future periods. During the fiscal quarter ended January 2, 2009 and December 28, 2007, we recorded $0.3 million and $2.7 million, respectively, of net charges for excess and obsolete (E&O) inventory. Activity in our E&O inventory reserves for the applicable periods in fiscal 2008 and 2007 was as follows (in thousands):

                                                   Fiscal Quarter Ended
                                              January 2,        December 28,
        (in thousands)                           2009               2007
        E&O reserves at beginning of period   $    17,579      $       17,139
        Additions                                   1,096               3,535
        Release upon sales of product                (809 )              (870 )
        Scrap                                      (3,006 )            (1,353 )
        Standards adjustments and other              (256 )                94

        E&O reserves at end of period         $    14,604      $       18,545

We review our E&O inventory balances at the product line level on a quarterly basis and regularly evaluate the disposition of all E&O inventory products. It is possible that some of these reserved products will be sold, which will benefit our gross margin in the period sold. During the fiscal quarter ended January 2, 2009 and December 28, 2007, we sold $0.8 million and $0.9 million, respectively, of reserved products.

Our products are used by communications electronics OEMs that have designed our products into communications equipment. For many of our products, we gain these design wins through a lengthy sales cycle, which often includes providing technical support to the OEM customer. Moreover, once a customer has designed a particular supplier's components into a product, substituting another supplier's components often requires substantial design changes, which involve significant cost, time, effort and risk. In the event of the loss of business from existing OEM customers, we may be unable to secure new customers for our existing products without first achieving new design wins. When the quantities of inventory on hand exceed foreseeable demand from existing OEM customers into whose products our products have been designed, we generally will be unable to sell our excess inventories to others, and the estimated realizable value of such inventories to us is generally zero.
On a quarterly basis, we also assess the net realizable value of our inventories. When the estimated ASP, less costs to sell our inventory, falls below our inventory cost, we adjust our inventory to its current estimated market value. During the fiscal quarter ended January 2, 2009 and December 28, 2007, credits to adjust certain products to their estimated market values were immaterial. Increases to the lower of cost or market (LCM) inventory reserves may be required based upon actual ASPs and changes to our current estimates, which would impact our gross margin percentage in future periods. Research and Development
Our research and development (R&D) expenses consist principally of direct personnel costs to develop new semiconductor products, allocated indirect costs of the R&D function, photo mask and other costs for pre-production evaluation and testing of new devices, and design and test tool costs. Our R&D expenses also include the costs for design automation advanced package development and non-cash stock-based compensation charges for R&D personnel. R&D expense decreased $11.5 million, or 30%, in the fiscal quarter ended January 2, 2009 compared to the fiscal quarter ended December 28, 2007. The decrease is due to a 35% reduction in R&D headcount from December 2007 to December 2008, restructuring activities and cost cutting measures, lower non-cash stock compensation of $1.1 million and a correcting adjustment of $5.3 million in the fiscal quarter ended December 28, 2007, representing the unamortized portion of the capitalized photo mask costs as of September 29, 2007. Based upon an evaluation of all relevant quantitative and qualitative factors, and after considering the provisions of APB 28, paragraph 29, and SAB Nos. 99 and 108, we believe that this correcting adjustment is not material to our full year results for fiscal 2008. In addition, we do not believe the correcting adjustment is material to the amounts reported in previous periods. Selling, General and Administrative
Our selling, general and administrative (SG&A) expenses include personnel costs, sales representative commissions, advertising and other marketing costs. Our SG&A expenses also include costs of corporate functions including legal, accounting, treasury, human resources, customer service, sales, marketing, field application engineering, allocated indirect costs of the SG&A function, and non-cash stock-based compensation charges for SG&A personnel. SG&A expense decreased $0.5 million, or 3%, in the fiscal quarter ended January 2, 2009 compared to the fiscal quarter ended December 28, 2007. The decrease is primarily due to the 22% decline in SG&A headcount from December 2007 to December 2008, as well as restructuring measures and other cost cutting efforts, partially offset by an increase in non-cash stock compensation expense of $0.9 million.
Amortization of Intangible Assets
Amortization of intangible assets consists of amortization expense for intangible assets acquired in various business combinations. Our intangible assets are being amortized over a weighted-average period of approximately two years.
Amortization expense decreased $1.2 million, or 26%, in the fiscal quarter ended January 2, 2009 compared to the fiscal quarter ended December 28, 2007. The decrease in amortization expense is primarily attributable to the

intangible assets we sold to a third party in October 2008 and other intangible assets that became fully amortized in fiscal 2008. Gain on Sale of Intellectual Property
In October 2008, the Company sold a portfolio of patents including patents related to its prior wireless networking technology to a third party for cash of $14.5 million, net of costs, and recognized a gain of $12.9 million on the transaction. In accordance with the terms of the agreement with the third party, the Company retains a cross-license to this portfolio of patents. Special Charges
Special charges in the fiscal quarter ended January 2, 2009 included $6.6 million of restructuring charges related to our fiscal 2008, 2007, 2006 and 2005 restructuring actions primarily due to a decrease in estimated future rental income from sub-tenants based on tenant defaults in the fiscal quarter and a review of subleasing assumptions and a charge of $3.7 million related to a legal settlement.
Special charges in the fiscal quarter ended December 28, 2007 were comprised of $3.4 million of restructuring charges that were attributable to employee severance and termination benefit costs related to our fiscal 2008, 2007 and 2006 restructuring actions and $1.8 million of facilities related charges resulting from the accretion of rent expense related to our prior restructuring actions. These special charges were offset by the reversal of a $0.9 million reserve related to the settlement of a proposed tax assessment for an acquired foreign subsidiary.
Interest Expense
Interest expense decreased $3.4 million, or 36%, in the fiscal quarter ended January 2, 2009 compared to the fiscal quarter ended December 28, 2007. The decrease is primarily attributable to the repurchase of $53.6 million and $80.0 million of our senior secured notes in March and September 2008, respectively, debt refinancing activities implemented in fiscal 2007, and declines in interest rates on our variable rate debt.

Other expense (income), net

                                                                         Fiscal Quarter Ended
                                                                  January 2,           December 28,
(in thousands)                                                       2009                  2007
Investment and interest income                                    $      (857 )       $       (2,771 )
Other-than-temporary impairment of marketable securities                2,635                      -
Decrease in the fair value of derivative instruments                      482                  8,364
Other                                                                      35                   (248 )

Other expense (income), net                                       $     2,295         $        5,345

Other expense, net during the fiscal quarter ended January 2, 2009 was primarily comprised of an other-than-temporary impairment of marketable securities of $2.6 million and a $0.5 million decrease in the fair value of the Company's warrant to purchase six million shares of Mindspeed common stock, offset by $0.9 million of investment and interest income on invested cash balances. Other expense, net during the fiscal quarter ended December 28, 2007 was primarily comprised of an $8.3 million decrease in the fair value of the Company's warrant to purchase six million shares of Mindspeed common stock mainly due to a decrease in Mindspeed's stock price during the period, offset by $2.8 million of investment and interest income on invested cash balances. Provision for Income Taxes
We recorded a tax provision of $0.9 million for the quarter ended January 2, 2009 and the quarter ended December 28, 2007, primarily reflecting income taxes imposed on our foreign subsidiaries. All of our U.S. Federal income taxes and the majority of our state income taxes are offset by fully reserved deferred tax assets

Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents, sales of non-core assets and operating cash flow.
We believe that our existing sources of liquidity, together with cash expected to be generated from product sales, will be sufficient to fund our operations, research and development, anticipated capital expenditures and working capital for at least the next twelve months. However, additional operating losses or lower than expected product sales will adversely affect our cash flow and financial condition and could impair our ability to satisfy our indebtedness obligations as such obligations come due.
Recent unfavorable economic conditions have led to a tightening in the credit markets, a low level of liquidity in many financial markets and extreme volatility in the credit and equity markets. If the economy or markets in which we operate continue to be subject to adverse economic conditions, our business, financial condition, cash flow and results of operations will be adversely affected. If the credit markets remain difficult to access or worsen or our performance is unfavorable due to economic conditions or for any other reasons, we may not be able to obtain sufficient capital to repay amounts due under
(i) our credit facility expiring November 2009 (ii) our $141.4 million floating rate senior secured notes when they become due in November 2010 or earlier as a result of a mandatory offer to repurchase, and (iii) our $250.0 million convertible subordinated notes when they become due in March 2026 or earlier as a result of the mandatory repurchase requirements. The first mandatory repurchase date for our convertible subordinated notes is March 1, 2011. In the event we are unable to satisfy or refinance our debt obligations as the obligations are required to be paid, we will be required to consider strategic and other alternatives, including, among other things, the negotiation of revised terms of our indebtedness, the exchange of new securities for existing indebtedness obligations and the sale of assets to generate funds. There is no assurance that we would be successful in completing any of these alternatives. Our cash and cash equivalents increased $4.4 million between October 3, 2008 and January 2, 2009. The increase was primarily due to $14.5 million in net cash proceeds from the sale of intellectual property related to our prior wireless networking technology, $6.3 million released from a standby letter of credit, offset by $5.5 million of cash used in operations and $7.9 million of net repayments on the credit facility. At January 2, 2009, we had a total of $250.0 million aggregate principal amount of convertible subordinated notes outstanding. These notes are due in March 2026, but the holders may require us to repurchase, for cash, all or part of their notes on March 1, 2011, March 1, 2016 and March 1, 2021 at a price of 100% of the principal amount, plus any accrued and unpaid interest. At January 2, 2009, we also had a total of $141.4 million aggregate principal amount of floating rate senior secured notes outstanding. These notes are due in November 2010, but we are required to offer to repurchase, for cash, the notes at a price of 100% of the principal amount, plus any accrued and unpaid interest, with the net proceeds of certain asset dispositions if such proceeds are not used within 360 days to invest in assets (other than current assets) related to our business. The sale of the our investment in Jazz Semiconductor, Inc. (Jazz) in February 2007 and the sale of two other equity investments in January 2007 qualified as asset dispositions requiring us to make offers to repurchase a portion of the notes no later than 361 days following the . . .