You should read the following discussion in conjunction with our unaudited condensed consolidated financial statements and related notes in this Form 10-Q and our Form 10-K previously filed with the Securities and Exchange Commission. Except for historical information, the following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In some cases, you can identify forward-looking statements by terms such as "may," "expect," "might," "will," "intend," "should," "could," and "estimate," or the negative of these terms, and similar expressions intended to identify forward-looking statements. These forward-looking statements, include, among other things, statements regarding our capital resources and needs, including the adequacy of our current cash reserves, revenue, our expectations that our operating expenses will increase in absolute dollars as our revenue grows and our expectations that our gross margin will vary from period to period. These forward-looking statements involve risks and uncertainties. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those discussed in the forward-looking statements include, but are not limited to, those discussed under Part II, Item 1A "Risk Factors" in this Form 10-Q as well as other information found in the documents we file from time to time with the Securities and Exchange Commission. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this Form 10-Q. Unless required by U.S. federal securities laws, we do not intend to update any of these forward-looking statements to reflect circumstances or events that occur after the statement is made.

Overview

We are a leading fabless provider of highly integrated system-on-chip, or SoC, solutions that are used to deliver multimedia entertainment throughout the home. We currently offer four distinct technologies that we market as separate product lines: media processors, VXP video image processing, Ultra-wideband devices and Z-Wave devices. Each of these technologies also contributes to our fully integrated SoC offerings. We target five primary markets: internet protocol TV, or IPTV, connected media players, prosumer and industrial audio/video, high definition TV, or HDTV, and wireless.

Our media processor product line represents a family of SoC solutions that combine our semiconductors and software and are a critical component of multiple high-growth, consumer applications that process digital video and audio content including IPTV, connected media players, HDTVs, and portable media players. Our media processors provide high definition digital video decoding for multiple compression standards, graphics acceleration, audio decoding, a central processing unit, or CPU, and display control. Our software provides control of media processing and system security management. Together, our media processor semiconductors and software form a complete SoC solution that we believe provides our customers with a foundation to quickly develop feature-rich consumer entertainment products. We target the IPTV, connected media players and HDTV markets with our media processor products.

Our VXP video image processing product line provides a high performance silicon solution that enables studio-quality video output for professional and prosumer applications such as audio video receivers, broadcast studios, digital cinema, digital signage, front-projection home theatre televisions, HDTV, medical imaging and video conferencing systems. We target the prosumer and industrial audio/video markets with our VXP image processing products.

Our Ultra-wideband, or UWB, devices product line provides a high bandwidth radio frequency, or RF, communication solution based on the WiMedia standard to enable home networking and connectivity of high definition video signals using wireless and coax mediums.

Our Z-Wave devices product line provides a low-bitrate, low-power, low-cost RF communication solution that provides for ubiquitous home control of security, monitoring, and automation, or SMA. We target the wireless market with our UWB devices and Z-Wave devices.

We believe we are the leading provider of digital media processor SoCs for set-top boxes in the IPTV market in terms of units shipped. For set-top boxes in the IPTV market, we believe we are currently the only provider qualified to ship digital media processor SoCs based on the Microsoft IPTV platform. Our SoC solutions are used by leading IPTV set-top box providers such as Cisco Systems/Scientific Atlanta, Motorola, Netgem and UTStarcom. IPTV set-top boxes incorporating our SoC solutions are deployed by telecommunications carriers globally including carriers in Asia, Europe and North America such as AT&T, British Telecom, Deutsche Telekom and Freebox. We work closely with these carriers and set-top box providers as well as with systems software providers such as Microsoft to design solutions that address the carriers' specific requirements regarding features and performance. Our media processor products are also used by consumer electronics providers such as D-Link, Linksys, Netgear, Panasonic, Pioneer, Sharp and Sony in applications such as Blu-ray DVD players, HDTVs and connected media players. Our VXP products are one of the leading solutions for studio-quality video image processing and are used by leading industry participants such as Polycom, Sony and Panasonic. Our UWB and Z-Wave devices product lines target emerging markets and, while they are in production now, we have not yet experienced significant orders from our customers.

Our primary target markets are IPTV, connected media player, prosumer and industrial audio/video, HDTV and wireless. The IPTV set-top box market consists of consumer and commercial products that distribute and receive streaming video using internet protocol, or IP. The connected media player market consists primarily of Blu-ray DVD players, digital media adapters and portable media devices that perform playback of digital media stored on optical or hard disk formats. The prosumer and industrial audio/video markets consist of studio quality audio/video receivers and monitors, digital projectors and medical video monitors. The HDTV market consists of digital television sets offering high definition capability including flat-panel and projection devices. The wireless market consists of UWB wireless HDAV and speaker solutions and wireless home entertainment networking solutions over coax and a wide variety of home control products such as thermostats, light switches and door locks that we acquired in connection with our Z-Wave acquisition.. We also sell products into other markets such as the PC-based add-in and connectivity devices markets. We currently derive minor revenues from sales of our products into these other markets.

For each of the three months ended May 2, 2009 and May 3, 2008, we derived 99% of our net revenue from our SoC solutions. Our SoC solutions consist of highly integrated semiconductors and software that process digital video and audio content. Our net revenue from sales of our SoC solutions decreased $5.3 million, or 10%, in the three months ended May 2, 2009 compared to the corresponding period in the prior fiscal year. The decrease was primarily due to an approximate 7.1% decline in the average selling prices of our SoCs. The decline in average selling prices was primarily the result of certain customers achieving cumulative volume sales targets on purchases of our mature SoC products.

We do not enter into long-term commitment contracts with our customers and receive substantially all of our net revenue based on purchase orders. We forecast demand for our products based not only on our assessment of the requirements of our direct customers but also on the anticipated requirements of the telecommunications carriers that our customers serve. We work with both our direct customers and these carriers to address the market demands and the necessary specifications for our technologies. However, our failure to accurately forecast demand can lead to product shortages that can impede production by our customers and harm our relationship with these customers or lead to excess inventory which could negatively impact our gross margins in a particular period.

The semiconductor industry is highly competitive and, as a result, we expect our average selling prices to decline over time. Many of our target markets are characterized by intense price competition. The willingness of customers to design our SoCs into their products depends to a significant extent upon our ability to sell our products at competitive prices. On occasion, we have reduced our prices for individual customer volume orders as part of our strategy to obtain a competitive position in our target markets. If we are unable to reduce our costs sufficiently to offset any declines in product selling prices or are unable to introduce more advanced products with higher gross margins in a timely manner, we could see declines in our market share or gross margins. We expect our gross margins will vary from period to period due to changes in our average selling prices, volume order discounts, mix of product sales and customers, our costs, the extent of development fees and provisions for inventory obsolescence.

Critical Accounting Policies and Estimates

Management's discussion and analysis of financial condition and results of operations are based on our unaudited condensed consolidated financial statements which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts and disclosures of the assets and liabilities at the date of the unaudited condensed consolidated financial statements and also revenue and expenses during the period reported. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. Management bases its estimates and judgments on historical experience, market trends and other factors that are believed to be reasonable under the circumstances. These estimates form the basis for judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from what we anticipate and different assumptions or estimates about the future could change our reported results. Management believes the critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended January 31, 2009 reflect the more significant judgments and estimates used in preparation of our financial statements.

Results of Operations

The following table is derived from our unaudited condensed consolidated
financial statements and sets forth our historical operating results as a
percentage of net revenue for each of the periods indicated (in thousands):

                                                              Three Months Ended
                                                            % of                                % of
                                       May 2, 2009       Net Revenue       May 3, 2008       Net Revenue
Net revenue                           $      51,243              100%     $      56,882              100%
Cost of revenue                              26,856               52%            28,862               51%
Gross profit                                 24,387               48%            28,020               49%
Operating expenses:
Research and development                     11,517               22%            10,856               19%
Sales and marketing                           3,211                6%             2,641                5%
General and administrative                    3,131                6%             6,468               11%
Acquired in-process research and
development                                       -                 -             1,571                3%
Total operating expenses                     17,859               34%            21,536               38%
Income from operations                        6,528               14%             6,484               11%
Interest income and other income,
net                                             778                2%             2,168                4%
Income before income taxes                    7,306               16%             8,652               15%
Provision for income taxes                    4,563                9%             2,070                4%
Net income                            $       2,743                7%     $       6,582               11%

Net revenue

Our net revenue for the three months ended May 2, 2009 decreased approximately $5.6 million, or 10%, as compared to the corresponding period in the prior fiscal year. This decrease was primarily due to an approximate 7.1% decline in average selling prices of our SoCs and an approximate 2.6% decline in units sold. The decline in average selling prices was primarily the result of certain customers achieving cumulative volume sales targets on purchases of our mature SMP8630 series SoC products.

Net revenue by target market

We sell our products into five primary target markets, which are the IPTV market, the connected media player market, the prosumer and industrial audio/video market, the HDTV market and the wireless market. We also sell our products, to a lesser extent, into several other markets, such as the PC-based add-in market, which we refer to collectively as our other market. The following table sets forth our net revenue by target market and the percentage of net revenue represented by our product sales to each target market (in thousands):

                                                              Three Months Ended
                                                            % of                                % of
                                       May 2, 2009       Net Revenue       May 3, 2008       Net Revenue
IPTV                                  $      34,416               67%     $      43,010               76%
Connected media players                      13,253               26%            11,654               20%
Prosumer and industrial audio/video           1,537                3%             1,099                2%
Wireless                                        672                1%                22                 *
HDTV                                            515                1%               436                1%
Other                                           850                2%               661                1%
Net revenue                           $      51,243              100%     $      56,882              100%

* This target market provided less than 1% of our net revenue in these periods

IPTV: For the three months ended May 2, 2009, net revenue from sales of our SoC solutions, primarily our SMP8630 SoC series, into the IPTV market decreased $8.6 million, or 20%, from the corresponding period in the prior fiscal year. The decline was attributable to an overall slowdown in the IPTV market beginning in the second half of fiscal 2009 as a result of the economic downturn and adjustments to inventory levels at our customers and throughout the supply chain. Our revenue from the IPTV market as a percentage of our total revenue for the three months ended May 2, 2009 as compared to the corresponding period in the prior fiscal year decreased by 9%, primarily due to the increase in SoCs shipped to our customers in the connected media player market. We expect our revenue from the IPTV market to fluctuate in future periods as this revenue is based on IPTV service deployments by telecommunication service providers and the changes in inventory levels at the contract manufacturers that supply them.

Connected media players: For the three months ended May 2, 2009, net revenue from sales of our products to the connected media players market increased $1.6 million, or 14%, from the corresponding period in the prior fiscal year. This increase was primarily the result of a successful product launch with a new customer, who began to incorporate our SMP8630 SoC, into its connected media player product starting in the fourth quarter of fiscal 2009. For the same reason, our percentage of net revenue from sales into the connected media players market increased 6% as a percentage of our total revenue.

Prosumer and industrial audio/video: For the three months ended May 2, 2009, net revenue from sales of our products into the prosumer and industrial audio/video market increased $0.4 million, or 40%, from the corresponding period in the prior fiscal year. This increase is primarily attributable to an increase in demand for our products. We entered into this market through our acquisition of the VXP Group in February 2008. Our percentage of net revenue from sales into the prosumer and industrial audio/video market increased 1% as a percentage of our total revenue primarily due to our continued effort to expand into this market following the acquisition of the VXP Group.

Wireless: For the three months ended May 2, 2009, net revenue from sales of our products into the wireless market increased $0.7 million, or 2,955%, from the corresponding period in the prior fiscal year. This increase was the result of the timing of our entry into the wireless home automation market through our acquisition of Zensys Holdings Corporation ("Zensys") in December 2008. We expect our net revenue from this market to increase in future periods as we expand sales of the Z-Wave product line. For the same reason, our percentage of net revenue from sales into the wireless market increased 1% as a percentage of our total revenue.

HDTV: For the three months ended May 2, 2009, net revenue from sales of our products into the HDTV market increased $0.1 million, or 18%, from the corresponding period in the prior fiscal year.

Other: Our other markets consist of PC add-ins, development contracts, services and other ancillary markets. For the three months ended May 2, 2009, net revenue increased $0.2 million, or 29%, from the corresponding period in the prior fiscal year.

Net revenue by product group

Our primary product group consists of our SoC solutions. To a much lesser extent we derive net revenues from other products and services. The following table sets forth net revenue in each of our product groups and the percentage of net revenue represented by each product group (in thousands):

                                            Three Months Ended
                                          % of                                % of
                     May 2, 2009       Net Revenue       May 3, 2008       Net Revenue
      SoCs          $      50,802               99%     $      56,141               99%
      Other                   441                1%               741                1%
      Net revenue   $      51,243              100%     $      56,882              100%

SoCs: Our SoCs are targeted toward manufacturers and large volume designer and manufacturer customers building products for the IPTV, connected media player, prosumer and industrial audio/video, wireless and HDTV consumer electronic markets. The decrease of $5.3 million, or 10%, in net revenue from SoCs for the three months ended May 2, 2009 compared to the corresponding period in the prior fiscal year was due primarily to an approximate 7.1% decline in average selling prices of our SoCs and an approximate 2.6% decline in units sold. The decline in average selling prices was primarily the result of certain customers achieving cumulative volume sales targets on purchases of our mature SoC products.

Other: We derive revenue from other products and services, including engineering support services for both hardware and software, engineering development for customization of SoCs and other accessories. The decrease in our net revenue from other products of $0.3 million, or 41%, for the three months ended May 2, 2009 compared to the corresponding period in the prior fiscal year was due to a reduction in nonrecurring engineering fees and sales of development kits.

Net revenue by geographic region

The following table sets forth our net revenue by geographic region and the percentage of net revenue represented by each geographic region based on the invoicing location of each customer (in thousands):

* These regions provided less than 1% of our net revenue in these periods

Asia: Our net revenue in absolute dollars from Asia increased $6.9 million, or 22%, for the three months ended May 2, 2009 compared to the corresponding period in the prior fiscal year. Our net revenue from Asia increased 19% as a percentage of our net revenue for the three months ended May 2, 2009 compared to the corresponding period in the prior fiscal year. The increase in net revenue from Asia in both absolute dollars and as a percentage of our net revenue was primarily attributable to the increase in revenue from Taiwan and China. The increase in Taiwan was the result of a successful product launch with a new customer who began to incorporate our SMP8630 series, into its products starting in the fourth quarter of fiscal 2009. The increase in China is primarily due to a company who incorporates our products into their finished goods moving their production orders from a contract manufacturer located in Europe to a contract manufacturer in China.

The following table sets forth the percentage of net revenue from countries in the Asia region that accounted for 10% or more of our net revenue:

                                       Three Months Ended
                                 May 2, 2009         May 3, 2008
                    Taiwan                31%                   *
                    Singapore             19%                 15%
                    China                 19%                 10%
                    Japan                   *                 12%

* Net revenue from this country was less than 10% of our net revenue

Europe: Our net revenue in absolute dollars from Europe decreased $10.3 million, or 47%, for the three months ended May 2, 2009 compared to the corresponding period in the prior fiscal year. Our net revenue from Europe decreased 16% as a percentage of our net revenue for the three months ended May 2, 2009 compared to the corresponding period in the prior fiscal year. The decrease in our net revenue from Europe in both absolute dollars and as a percentage of our net revenue was primarily attributable to a company who incorporates our products into their finished goods moving their production orders to a manufacturer located in Asia.

The following table sets forth the percentage of net revenue from countries in Europe that accounted for 10% or more of our net revenue:

                                        Three Months Ended
                                  May 2, 2009         May 3, 2008
                   France                  15%                 17%
                   Netherlands               *                 13%

* Net revenue from this country was less than 10% of our net revenue

North America: Our net revenue in absolute dollars from North America decreased $2.2 million, or 60%, for the three months ended May 2, 2009 compared to the corresponding period in the prior fiscal year. The decrease in our net revenue from North America in both absolute dollars and as a percentage of our net revenue was primarily attributable companies who incorporate our products into their finished goods placing their orders through manufacturers located outside of North America.

For the three months ended May 2, 2009, our net revenue generated outside North America was 97% of our net revenue as compared to 94% in the corresponding period in the prior fiscal year.

Major Customers

The following table sets forth the major customers that accounted for 10% or
more of our net revenue:

                                                Three Months Ended
           Customer                       May 2, 2009         May 3, 2008
           Cisco Systems, Inc. **                    *                 16%
           MTC Singapore                           19%                 15%
           Cowin Worldwide Corporation             18%                   -
           Macnica, Inc.                             *                 11%
           Freebox SA                                *                 11%

* Net revenue from customer was less than 10% of our net revenue. ** For the three months ended May 2, 2009, Cisco Systems, Inc. transitioned its ordering process with us tomultiple third-party contract manufacturers, none of which individually represented 10% or more of our net revenue.

Gross Profit and Gross Margin

The following table sets forth gross profit and gross margin (in thousands):

                                           Three Months Ended
                                                    %
                                May 2, 2009      change       May 3, 2008
                Gross profit   $      24,387        -13%     $      28,020
                Gross margin           47.6%                         49.3%

The $3.6 million decrease in gross profit, or 1.7 percentage point decrease in gross margin, for the three months ended May 2, 2009 compared to the corresponding period in the prior fiscal year was due primarily to an 7.1% decline in our average selling prices per SoC, which was only partially offset by a 4.7% decline in our average costs per SoC unit. The decline in our average cost per SoC unit was primarily due to overall cost reductions from our suppliers as well as improved yields on our highest volume products. Additionally, for the three months ended May 2, 2009 we experienced an increase in amortization of acquired intangibles of $0.2 million due to the Zensys acquisition that was completed in December 2008. For the three months ended May 2, 2008, we recorded a charge of $0.8 million representing a provision for excess inventories.

Research and development expense

Research and development expense consists primarily of salaries and related costs of employees engaged in research, design and development activities, including share-based compensation expense. Development and design costs consist primarily of costs related to engineering design tools, mask and prototyping . . .