our balance sheet is attributable to the IPM reporting unit and, accordingly, the IPM reporting unit is the primary focus of our goodwill impairment testing. Due to global and domestic economic concerns emerging in the first quarter of fiscal 2009, IPM experienced revenue declines and we anticipated these declines would carry into the second quarter of fiscal 2009. These economic influences resulted in an interim goodwill impairment analysis of the IPM reporting unit in the first quarter of fiscal 2009.
We assess the fair value of our reporting units for purposes of goodwill impairment testing based upon a weighted average of a Discounted Cash Flow (DCF) analysis under the income approach, and a market multiple analysis under the market approach. The resulting fair value of the reporting unit is then compared to the carrying amounts of the net assets of the reporting unit, including goodwill. Carrying amounts of the reporting units are based upon a combination of specifically-identified assets and liabilities allocations using guidance outlined in paragraphs 32 and 34 of SFAS No. 142.
Discounted Cash Flow Analysis: Our DCF analysis reflects Company-prepared forecasts of cash flows discounted to present value at a discount rate commensurate with our assessment of relative risk, including information from a number of market-based sources. Management prepares long-range plans (LRPs) for the reporting units. These forecasts give consideration to anticipated revenue fluctuations. In the first quarter of fiscal 2009, IPM experienced revenue declines and we expected that these declines would carry into the second quarter of fiscal 2009. The forecast, therefore, reflected our expectations based on current and anticipated market conditions. We adjusted the revenue forecasts downward to reflect the anticipated impact of the current economic conditions and the Company's assessment of those factors on current revenue levels and anticipated recovery in future years.
We apply a discount rate to the LRPs which represents the combined impact of industry-level weighted average cost of capital (WACC) adjusted for the return that both debt and equity investors would require for an investment in the entire company compared to our peers after considering such factors as the stage of development for our products and market entrance capabilities and the relative risk of our business unit. For the first quarter of fiscal 2009, we used a discount rate of 23% to calculate the present value of the related cash flows compared to a 20% discount rate applied for the annual goodwill analysis completed in the fourth quarter of fiscal 2008. The increase in discount rate reflected our views regarding future economic uncertainty as of the first quarter of fiscal 2009.
A 50% weighting to the DCF results as of the first fiscal quarter of 2009 was applied to give effect to the impact of market conditions existing in the first quarter of fiscal 2009. For the fiscal 2008 annual goodwill impairment analysis, we applied an 80% weighting on the DCF for the annual goodwill impairment analysis performed in the fourth quarter of fiscal 2008. The weighting between the DCF and Market Multiple Analysis reflects management's evaluation of external market valuations as compared to management's expectations for internal performance. When external market comparisons yield valuations that do not support what management believes to be the reasonable expectations for internal performance, management places a relatively higher weighting on the DCF results. During the annual goodwill impairment test in late fiscal 2008, market comparisons significantly exceeded management's expectations for internal performance which resulted in a weighting on the DCF of 80%. In the interim goodwill testing in early fiscal 2009, management believed that external market valuations were more in line with expected internal performance and, therefore, weighted the DCF and Market Multiple Analysis equally.
Market Multiple Analysis: We select several comparable companies for a reporting unit and calculate their revenue multiples (market cap divided by annual revenue) based on available revenue information and related stock prices as of the date of the goodwill impairment analysis. The comparable companies are selected based upon similarity of product lines. We used a revenue multiple of 1.4 in our analysis of comparable companies multiples for the IPM reporting unit as of January 2, 2009 compared to a revenue multiple of 4.3 in our 2008 annual goodwill evaluation. This significant decline reflects the downward impact of the economic environment during the period. Management believes this multiple is indicative of market conditions in effect during the first quarter of fiscal 2009 and as such applied a 50% weighting to these results. For the fiscal 2008 annual goodwill impairment analysis, we applied a 20% weighting to the market multiple factor as we believed this to be indicative of market conditions in the fourth quarter of fiscal 2008.
Interim Goodwill Test: Our IPM business unit accounted for approximately 57% of the Company's total revenues in the first quarter of fiscal 2009 and is associated with $110 million of goodwill as of January 2, 2009. Overall financial performance declines in the first quarter of fiscal 2009 resulted in an interim test for goodwill impairment. Based upon the results of the testing for the quarter ended January 2, 2009, the Company determined that despite recent declines in the IPM business unit of 21%, performance levels remain sufficient to support the current IPM related goodwill. The Company's fair value methods used for purposes of the goodwill impairment tests incorporated the valuation techniques discussed above. Based upon the assumptions discussed above for the annual goodwill impairment testing performed in the fourth quarter of fiscal 2008 and the interim goodwill impairment testing performed in the first fiscal quarter of 2009, the current IPM performance levels are substantially above those which would result in a possible impairment. If all other variables considered in the IPM goodwill evaluation remained constant, IPM performance declines of greater than 50% from current and projected cash flows levels would be necessary to result in a potential impairment of IPM goodwill. During the second quarter of fiscal 2009, we reviewed the IPM forecasts used in the first quarter of fiscal 2009 interim goodwill impairment analysis and determined there was no further declines in performance and therefore no interim goodwill impairment analysis was considered necessary for the second quarter of fiscal 2009.
Business Enterprise Segments - The Company operates in one reportable segment, broadband communications. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"), establishes standards for the way that

public business enterprises report information about operating segments in condensed consolidated financial statements. Although the Company had two operating segments at April 3, 2009, under the aggregation criteria set forth in SFAS No. 131, it only operates 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.

The Company meets each of the aggregation criteria for the following reasons:

• the sale of semiconductor products is the only material source of revenue for each of the Company's two operating segments;

• the products sold by each of the Company's operating segments use the same standard manufacturing process;

• the products marketed by each of the Company's operating segments are sold to similar customers;

• all of the Company's products are sold through its internal sales force and common distributors;

• the operating segments share common research and development resources and core engineering resources; and

• the operating segments share selling, general and administrative resources.

Because the Company meets each of the criteria set forth above and each of its operating segments has similar economic characteristics, the Company aggregates its 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 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           Six Fiscal Months Ended
                                April 3,       March 28,        April 3,         March 28,
                                  2009            2008            2009              2008
   Imaging and PC Media        $    39,082     $   67,423     $     88,744       $  142,868
   Broadband Access Products        35,397         51,095           72,233          121,583

                               $    74,479     $  118,518     $    160,977       $  264,451

Sale of Broadband Access Products Business

On April 21, 2009, we entered into an Asset Purchase Agreement with Ikanos Communications, Inc. ("Ikanos"), pursuant to which Ikanos has agreed to acquire certain assets related to our BBA business. Assets to be sold pursuant to the agreement include, among other things, specified intellectual property, inventory, contracts and tangible assets. Ikanos has agreed to assume certain liabilities, including obligations under transferred contracts and certain employee-related liabilities. Under the terms of the agreement, Ikanos will pay to us an aggregate of $54 million upon the closing of the transaction, of which $6.75 million will be deposited into an escrow account. The escrow account will remain in place for twelve months following the closing to satisfy potential indemnification claims by Ikanos. The closing is subject to various conditions, including, among other things, the closing of an equity investment in Ikanos by Tallwood III, L.P., Tallwood III Partners, L.P., Tallwood III Associates, L.P. and Tallwood III Annex, L.P. pursuant to a separate Securities Purchase Agreement, and the receipt of certain third party consents. Upon the closing, we have also agreed to enter into an Intellectual Property License Agreement pursuant to which we will obtain a license with respect to certain technology assets sold to Ikanos and Ikanos will obtain a license with respect to certain technology assets that we will retain. Following the completion of the transaction, we will no longer generate revenues from sales of BBA products nor incur related costs.
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 April 3, 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 April 3, 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 37% to $74.5 million in the fiscal quarter ended April 3, 2009 from $118.5 million in the fiscal quarter ended March 28, 2008. This decline was driven a 42% decrease in net revenues generated by our Imaging and PC Media (IPM) business, which comprises 52% of our total net revenues. The decrease in our IPM business was attributable to the global economic recession. Deteriorating global economic conditions resulted in reduced demand for our customer's end products in PC and Imaging markets, which caused a severe reduction in orders of our products. In addition, net revenues generated from our Broadband Access (BBA) business, which comprises 48% of our total revenues, decreased by 31% due to a decrease in demand for our DSL products caused by the worldwide economic slowdown and a slower rate of capital investment in broadband access, and, to a smaller extent, the end of life cycle of certain legacy wireless devices. Our net revenues decreased 39% to $161.0 million in the six fiscal months ended April 3, 2009 from $264.5 million in the six fiscal months ended March 28, 2008. The decline was driven by a 38% decrease in net revenues generated by our Imaging and PC Media (IPM) business and by a 40% decrease in net revenues generated by our Broadband Access (BBA) business due to the global economic recession and, to a smaller extent, the end of life cycle of certain legacy wireless devices. The six fiscal months ended March 28, 2008 included approximately $14.7 million of non-recurring revenue from the buyout of a future royalty stream. The global economic recession severely dampened semiconductor industry sales in the first six fiscal months of fiscal 2009. 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 in the fiscal quarter and nine fiscal months ended July 3, 2009 to be lower as compared to the fiscal quarter and nine fiscal months ended June 27, 2008 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 manage working capital, while continuing to focus on delivering innovative products to gain market share when a market recovery commences. Management believes it reached the bottom of its revenue cycle in the fiscal quarter ended April 3, 2009 and sees signs of market stabilization, evidenced by stronger quarter-over-quarter orders, that support this belief.
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 April 3, 2009 was 52.5% compared with 52.3% for the fiscal quarter ended March 28, 2008. The 0.2 point gross margin percentage increase in the fiscal quarter ended April 3, 2009 is primarily attributable to a shift in product mix.
Our gross margin percentage for the six fiscal months ended April 3, 2009 was 53.0% compared with 54.5% for the six fiscal months ended March 28, 2008. Our gross margin percentage for the six fiscal months ended March 28, 2008 included a $14.7 million royalty buy-out, which contributed 2.7% to our gross margin percentage for the six fiscal months ended March 28, 2008. The remaining gross margin percentage increase in the six fiscal months ended April 3, 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 and six fiscal months ended April 3, 2009, we recorded $0.3 million and $0.05 million, respectively, of net credits for excess and obsolete (E&O) inventory. During the fiscal quarter and six fiscal months ended March 28, 2008, we recorded $0.6 million and $3.2 million, respectively, of net charges for E&O inventory. Activity in our E&O inventory reserves for the applicable periods in fiscal 2009 and 2008 was as follows (in thousands):

                                                   Fiscal Quarter Ended                  Six Fiscal Months Ended
                                               April 3,            March 28,           April 3,           March 28,
                                                 2009                2008                2009                2008
E&O reserves at beginning of period           $    14,604         $    18,545        $     17,579         $   17,139
Additions                                             732               1,274               1,828              4,809
Release upon sales of product                      (1,064 )              (713 )            (1,873 )           (1,583 )
Scrap                                              (1,471 )               (37 )            (4,477 )           (1,390 )
Standards adjustments and other                       135                 (81 )              (121 )               13

E&O reserves at end of period                 $    12,936         $    18,988        $     12,936         $   18,988

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 April 3, 2009 and March 28, 2008, we sold $1.1 million and $0.7 million, respectively, of

reserved products. During the six fiscal months ended April 3, 2009 and March 28, 2008, we sold $1.9 million and $1.6 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 . . .