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 and expenses, restructuring activities, cash commitments, our expectation regarding our amortization of purchased intangible assets, our plans to continue to find further operational efficiencies 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

Our current revenues are generated by a portfolio of more than 350 products, which we have designed and developed or acquired. Our diverse product portfolio services a number of key end markets: the Enterprise Networking market which includes our products and solutions that enable the high-speed interconnection of servers, switches and storage devices that comprise these systems so that large quantities of data can be stored, managed and moved securely; the Wide Area Network Infrastructure market whereby our products and solutions are used in networking equipment such as multi-service switches and edge routers that gather and process signals in different protocols, and then transmit them to the next destination as quickly and efficiently as possible; and the Access Networks market which encompasses both wired and wireless equipment that aggregates data traffic from enterprises and homes and transmits it to the central offices in the metropolitan area of the network.

We invest a substantial amount every year in 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' needs while finding further operational efficiencies.

Results of Operations

First Quarter of 2009 and 2008

Net Revenues

First Quarter ($ millions) 2009 2008 Change Net revenues $ 102.6 $ 125.0 (18 )%

Net revenues for the first quarter of 2009 were $102.6 million compared to $125.0 million for the same period in 2008, a decrease of $22.4 million or 18%. Revenues generated from the Wide Area Network Infrastructure ("WAN") market increased by 16%. Revenues generated from the Enterprise Networking market, which is served by our storage and microprocessor-based System-On-Chips ("SOC") products decreased by 32%. Revenues generated from the Access Networks market decreased by 40%.

WAN infrastructure revenues include revenues from the wireline and wireless infrastructure products and we experienced growth in China while we experienced lower activity in North America, rest of Asia and Europe. The growth in China is attributable to our Chinese Original Equipment Manufacturer ("OEM") customers who supply carriers building out third generation ("3G") wireless networks in China, as well as the increasing demand for aggregation and metro optical transport equipment that is required to handle the increasing levels of data traffic in that market. The lower sales activity in rest of Asia, North America and Europe was due to lower spending on equipment by carriers in those end markets.

There was a decline in the sales to the Enterprise Networking market, as sales to our storage customers decreased due to the general seasonality of this end market, the working down of inventories, and the general slowdown in enterprise spending. Sales in our microprocessor business also decreased due to the lower demand and the inventory levels of our customers in laser printers and enterprise networking. The decline in the Access Networks market is due to the decrease in our Ethernet Passive Optical Networks ("EPON") business in Japan and China, as inventories in those markets were being worked down.

Gross Profit



                                              First Quarter
               ($ millions)                  2009        2008      Change
               Gross Profit                 $  65.8     $ 81.7        (20 )%
               Percentage of net revenues        64 %       65 %

Total gross profit decreased $15.9 million in the first quarter of 2009 compared to the same period in 2008 and gross profit was 64% and 65% as a percentage of net revenues in the first quarters of 2009 and 2008, respectively.

Our underlying gross profit percentage in the first quarter of 2009 remained consistent with the same period in 2008 as average selling prices decreased in approximately the same proportion as decreases in manufacturing costs. The decrease of approximately 1% is mainly due to having a customer funded application-specific integrated circuit ("ASIC") mask set at zero margins, which we did not have in the first quarter of 2008. The remainder of the change is attributable to product mix, which can influence our gross profit as a percentage of revenue from quarter to quarter.

Other Costs and Expenses



                                                      First Quarter
      ($ millions)                                   2009        2008      Change
      Research and development                      $  38.6     $ 37.3          3 %
      Percentage of net revenues                         38 %       30 %
      Selling, general and administrative              21.9       24.2        (10 )%
      Percentage of net revenues                         21 %       19 %
      Amortization of purchased intangible assets       9.8        9.8         -  %
      Percentage of net revenues                         10 %        8 %
      Restructuring costs and other charges             0.3        0.9        (67 )%
      Percentage of net revenues                         -  %        1 %

Research and Development and Selling, General and Administrative Expenses

Our research and development, or R&D, expenses increased $1.3 million or 3% in the first quarter 2009 compared to the first quarter of 2008. Payroll costs increased by $0.3 million due to the increase in termination related costs which were partially offset by headcount reduction. Total material costs, including outside consultant services, wafer and photomask costs increased by $0.6 million related to completing more tapeouts on smaller geometries in the first quarter of 2009 than in the same period of 2008. These tapeouts on smaller geometries carry larger costs. In addition, the IBM RAID R&D programs which began in the first quarter of 2008, added additional costs in the first quarter of 2009. Our infrastructure related expenses also increased by $0.4 million due to increased equipment maintenance costs and design related software tools.

Our selling, general and administrative, or SG&A, expenses decreased by $2.3 million, or 10%, in the first quarter of 2009 compared to the first quarter of 2008. Payroll costs decreased by $1.4 million due to headcount reductions which were partially offset by the increase in termination related costs. The remainder of the decrease of $0.9 million is due to other operating expense cost reduction activities relating to marketing, training, travel, and infrastructure related expenses for equipment maintenance costs and software tools.

Amortization of Purchased Intangible Assets

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 quarter of 2009 was $4.7 million and $5.1 million, respectively. Amortization from the Storage Semiconductor Business and Passave in the first quarter of 2008 was $4.7 million and $5.1 million, respectively.

Restructuring costs and other charges

The activity related to excess facility and severance accruals, under our restructuring plans during the first quarter of 2009, by year of plan, were as follows:

Excess facility costs

       (in thousands)                  2007      2006       2005        2001        Total
       Balance at December 28, 2008   $  830     $ 178     $ 3,048     $ 1,875     $ 5,931
       Reversals and adjustments          (3 )       3          -           16          16
       New charges                        25        20         290          -          335
       Cash payments                    (136 )     (91 )      (377 )      (286 )      (890 )

       Balance at March 29, 2009      $  716     $ 110     $ 2,961     $ 1,605     $ 5,392


       Severance costs

       (in thousands)                  2007
       Balance at December 28, 2008   $    7
       Reversals and adjustments           1
       New charges                        -
       Cash payments                      (4 )

       Balance at March 29, 2009      $    4

During the first quarter of 2009, we made payments totaling $0.9 million for severance and excess facility costs incurred in connection with past restructuring plans. In addition, we recorded an additional $0.3 million for excess facilities as original assumptions regarding possible sublease on exited facilities were not realized.

Payments for excess facilities under these restructuring plans may extend to 2011.

Further details regarding each of the restructuring plans noted in the above table are available in our Annual Report on Form 10-K for the year ended December 28, 2008.

Other Income (Expense)



                                                             First Quarter
                                                                        2008
(in millions)                                            2009         Restated        Change
Foreign exchange gain                                   $  4.1       $      3.2          (28 %)
Percentage of net revenues                                 4.0 %            2.6 %
Gain on repurchase of senior convertible notes, net
and amortization of debt issue costs                      (0.1 )            4.8         (102 %)
Percentage of net revenues                                (0.1 %)           3.8 %
Loss on subleased facilities                              (0.5 )             -          (100 %)
Percentage of net revenues                                (0.5 %)            -
Interest income (expense), net                            (0.8 )            0.3         (367 %)
Percentage of net revenues                                (0.8 %)           0.2 %
Provision for income taxes                                (1.7 )          (38.7 )         96 %
Percentage of net revenues                                (1.7 %)         (31.0 %)

Foreign Exchange Gain

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 fourth quarter of 2009.

Our net foreign exchange gain was $4.1 million in the first quarter of 2009, which was primarily due to a $3.6 million foreign exchange gain on the revaluation of our net foreign tax liability. We do not hedge our income tax accruals against fluctuations in foreign currency exchange rates (see Item 3. Quantitative and Qualitative Disclosures About Market Risk). The revaluation of this foreign tax liability was required because of depreciation of other currencies against the United States Dollar. The foreign exchange rate between the United States Dollar and the currencies of countries where we have significant tax liabilities appreciated 2% in the first quarter of 2009 compared to appreciating 4% in the first quarter of 2008.

Gain on Repurchase of Senior Convertible Notes, net and 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 recognized a gain of $4.9 million which is net of the related deferred debt issue costs and transaction costs expensed.

Loss on Subleased Facilities

We recorded a $0.5 million loss on subleased facilities during the first quarter of 2009.

Interest Income (Expense), net

Net interest income decreased by $1.1 million in the first quarter of 2009 compared to the first quarter of 2008 due partly to lower investment yields, partially offset by decreasing interest expense due to the servicing of this debt.

Provision for Income Taxes

We recorded a provision for income taxes of $1.7 million and $38.7 million for the first quarter of 2009 and 2008, respectively. Part of the reason for the decrease is due to the product and income mix across our subsidiaries. Also, during the first quarter of 2008, one of our foreign subsidiaries received a written communication from a tax authority, resulting in an accrual of $26.5 million, including interest, as part of the liability for unrecognized tax benefits. This and certain other tax matters related to the 2000-2006 tax years were settled for less than had been accrued as part of our liability for unrecognized tax benefits during the latter part of fiscal 2008.

The financial statements for the first quarter of 2009 include the tax effects associated with the sale of certain assets between wholly-owned subsidiaries of the Company. GAAP requires the tax expense associated with gains on such inter-company transactions to be recognized over the estimated life of the related assets. Accordingly, the $22.7 million recorded as long-term prepaid expenses as at March 29, 2009 represents the remaining tax expense to be recognized over periods of up to six years, with corresponding amounts recorded as current and deferred income taxes payable and as liability for unrecognized tax benefits. The tax expense in the first quarter of 2009 resulting from these transactions was $1.0 million.

Critical Accounting Estimates

General

Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect our reported assets, liabilities, revenue and expenses, and related disclosure of our contingent assets and liabilities. Our significant accounting policies are outlined in Note 1. Summary of Significant Accounting Policies to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 28, 2008, which also provides commentary on our most critical accounting estimates. The following estimates are of note:

Valuation of Goodwill and Intangible Assets

The purchase method of accounting for acquisitions requires estimates and assumptions to allocate the purchase price to the fair value of net tangible and intangible assets acquired, including in-process research and development ("IPR&D"). The amounts allocated to IPR&D are expensed immediately. The amounts allocated to, and the useful lives estimated for other intangible assets, affect future amortization. There are a number of generally accepted valuation methods used to estimate fair value of intangible assets, and we use primarily a discounted cash flow method, which requires significant management judgment to forecast the future operating results and to estimate the discount factors used in the analysis. If assumptions and estimates used to allocate the purchase price prove to be inaccurate based on actual results, future asset impairment charges could be required.

Goodwill and intangible assets determined to have indefinite lives are not amortized, but are subject to an annual impairment test. To determine any goodwill impairment, we perform a two-step process on an annual basis, or more frequently if necessary, to determine 1) whether the fair value of the relevant reporting unit exceeds carrying value and 2) to measure the amount of an impairment loss, if any. We review our intangible assets for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Measurement of an impairment loss is based on the fair value of the asset compared to carrying value.

There were no indications of impairment to goodwill or intangible assets during the first quarter of 2009. Changes in the estimated fair values of these assets in the future could result in significant impairment charges or changes to our expected amortization.

Stock-Based Compensation

On January 1, 2006, we adopted SFAS 123(R), which requires the recognition of compensation expense for all share-based payment awards. Under SFAS 123(R) we measure the fair value of awards of equity instruments and recognize the cost, net of an estimated forfeiture rate, on a straight-line basis over the period during which services are provided in exchange for the award, generally the vesting period.

Calculating the fair value of stock-based compensation awards requires the input of highly subjective assumptions, including the expected life of the awards and expected volatility of our stock price. Expected volatility is a statistical measure of the amount by which a stock price is expected to fluctuate during a period. Our estimates of expected volatilities are based on a weighted historical and market-based implied volatility. In order to determine the expected life of the awards, we use historical data to estimate option exercises and employee terminations. Separate groups of employees that have similar historical exercise behavior, such as directors or executives, are considered separately for valuation purposes. The expected forfeiture rate applied in calculating stock-based compensation cost is estimated using historical data.

The assumptions used in calculating the fair value of stock-based awards involve estimates that require management judgment. If factors change and we use different assumptions, our stock-based compensation expense could change significantly in the future. In addition, if our actual forfeiture rate is different from our estimate, our stock-based compensation expense could change significantly in the future. See Note 1. Summary of Significant Accounting Policies and Note 4 Stock-Based Compensation to the Condensed Consolidated Financial Statements for further information on stock-based compensation.

Restructuring Charges - Facilities

In calculating the cost to dispose of our excess facilities, we had to estimate the amount to be paid in lease termination payments, the future lease and operating costs to be paid until the lease is terminated, and the amount, if any, of sublease revenues for each location. This required us to estimate the timing and costs of each lease to be terminated, the amount of operating costs for the affected facilities, and the timing and rate at which we might be able to sublease or complete negotiations of a lease termination agreement for each site. To form our estimates for these costs we performed an assessment of the affected facilities and considered the current market conditions for each site.

For example, we have recorded charges of $3.0 million to date relating to the restructuring of excess facilities in connection with our 2007 restructuring plan. This estimate represents 100% of the estimated future operating costs and lease obligation for the exited space.

We believe our estimates of the obligations for the closing of sites remain sufficient to cover anticipated settlement costs. However, our assumptions on either the lease termination payments, operating costs until the termination, or the amounts and timing of offsetting sublease revenues may turn out to be incorrect and our actual cost may be materially different from our estimates. If our actual costs exceed our estimates, we would incur additional expenses in future periods.

Income Taxes

In estimating our annual effective tax rate we review our forecasted net income for the year by geographic area and apply the appropriate tax rates. We also consider the income tax credits and net operating losses, if any, available in each tax jurisdiction.

Our operations are conducted in a number of countries with complex tax legislation and regulations pertaining to our activities. We have recorded income tax liabilities based on our estimates and interpretations of those regulations for the countries in which we operate. However, our estimates are subject to review and assessment by the tax authorities and the courts of those countries. For example, our estimated tax provision rate decreased significantly at the end of 2008 due to one of our foreign subsidiaries settling several ongoing tax matters for tax years 2000-2006. As a result, we recognized tax benefits of $124.1 million that was previously included in the liability for unrecognized tax benefits. The timing of any such review and final assessment of our liabilities by local authorities is substantially out of our control and is dependent on the actions by those authorities in the countries in which we operate. Any re-assessment of our tax liabilities by tax authorities may result in adjustments of the income taxes we pay or refunds that are due to us.

Investment in Cash Equivalents, Short-Term Investments and Investment Securities

Our cash equivalents, short-term investments and investment securities are comprised solely of money market funds, which may include debt securities with minimum ratings of P-1 or A by Moody's, or A-1 or A by Standard and Poor's, or equivalent. At March 29, 2009, these securities had an estimated fair value of $312.7 million.

Beginning in the first quarter of fiscal 2008, the assessment of fair value is based on the provisions of Statement of Financial Accounting Standard No. 157, Fair Value Measurements. We determined the fair value of our money market funds using quoted prices from active markets, quoted prices for similar assets from third-party sources and by performing valuation analyses. In determining if and when a decline in market value below the carrying value of our money market funds is other-than-temporary, we evaluate on an ongoing basis the market conditions, trends of earnings, financial condition and other key measures for our investments. We assess impairment of our money market fund investments in accordance with FASB Staff Position FAS 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.

During 2008, we assessed the fair value of our money market funds by giving consideration to Level 2 and Level 3 inputs (see Note 3. Fair Value Measurements) in accordance with the fair value hierarchy of SFAS 157 for the Reserve Funds and their underlying securities. Based on this assessment, we recorded an impairment of the Reserve Funds of $11.8 million during the third quarter of 2008, incorporating the Reserve Funds' valuation at zero for debt securities of Lehman Brothers held, and a net asset value of $0.97 per share communicated by the Reserve Funds' Primary Fund. We reassessed the fair value of our investments in money market funds for the first quarter 2009, and there were no further impairments.

We reclassified our investment in shares of the Reserve Funds from Level 1 to Level 3 of the fair value hierarchy due to the inherent subjectivity and significant judgment related to the fair value of the shares of the Reserve Funds and their underlying securities. Accordingly, we changed the valuation method from a market approach to an income approach.

In addition, due to the continuing redemption delays associated with the liquidation proceedings of the Reserve Funds, we reclassified all of these shares from cash and cash equivalents to short-term investments (see Liquidity and Capital Resources).

Changes in market conditions and the method and timing of the liquidation process of the Reserve Funds could result in further adjustments to the fair value and classification of these investments, and these changes could be material.

Business Outlook

We expect our revenues for the second quarter of 2009 to be approximately $114 to $124 million.

We anticipate our second quarter 2009 gross margin percentage to be 66% plus or minus 50 basis points including approximately $0.2 million stock-based compensation expense. As in past quarters this could vary depending on the volume of products sold, since many of our costs are fixed. Margins may also vary depending on the mix of products sold. In addition, part of the increase in expected gross margin in the second quarter of 2009 is due to not having a customer funded ASIC mask set at zero margin in the second quarter as we did in the first quarter.

We expect our second quarter 2009 research and development, and selling, general and administrative expenses, to be approximately between $57.8 million to $58.8 million, including stock-based compensation expense of approximately between . . .