The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, or Quarterly Report, and our consolidated financial statements and related notes as of and for the year ended December 31, 2008 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2008, or Annual Report, filed with the Securities and Exchange Commission, or SEC, on February 23, 2009.

Forward-Looking Statements

The following discussion contains forward-looking statements, which involve risks and uncertainties. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, competitors, future financial position, future revenues, projected costs, prospects and plans and objectives of management. These forward-looking statements are based on our current expectations, estimates, approximations and projections about our industry and business, management's beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by words such as "anticipates," "expects," "intends," "plans," "predicts," "believes," "seeks," "estimates," "may," "will," "should," "would," "could," "potential," "continue," "ongoing" and similar expressions, and variations or negatives of these words. Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are listed under Part II, Item 1A, Risk Factors and elsewhere in this Quarterly Report, and in our other filings with the SEC. We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements in this Quarterly Report or in our other filings with the SEC. Forward-looking statements herein speak only as of the date of this Quarterly Report. Except as required by law, we assume no obligation to update or revise any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements.

In this Quarterly Report, "Entropic Communications, Inc.", "Entropic Communications", "Entropic", the "Company", "we", "us" and "our" refer to Entropic Communications, Inc. and its subsidiaries, taken as a whole, unless otherwise noted.

Overview

Entropic Communications is a leading fabless semiconductor company that designs, develops and markets systems solutions to enable connected home entertainment. Our technologies significantly change the way high-definition television-quality video, or HD video, and other multimedia content such as movies, music, games and photos are brought into and delivered throughout the home. Our products include home networking chipsets based on the Multimedia over Coax Alliance, or MoCA, standard, high-speed broadband access chipsets, integrated circuits that simplify and enhance digital broadcast satellite services and silicon tuner integrated circuits. We use our considerable experience with service provider-based deployments to create solutions that address the complex requirements associated with delivering multiple streams of HD video into and throughout the home, while seamlessly coexisting with video, voice and data services that are using the same coaxial cable infrastructure.

In December 2004, we introduced and commenced commercial shipments of our home networking products. In the first quarter of 2006, we began commercially shipping our broadband access solutions. Our largest acquisition to date was completed in June 2007 when we acquired RF Magic Inc., or RF Magic, a provider of digital broadcast satellite, or DBS, outdoor unit and silicon tuner solutions. Since inception, we have invested heavily in product development and have not yet achieved profitability on a quarterly or annual basis. Our revenues have grown from $41.5 million in 2006 to $122.5 million in 2007 to $146.0 million in 2008, driven primarily by demand for our home networking products. Our revenues have decreased from $116.5 million during the nine months ended September 30, 2008 to $81.2 million during the nine months ended September 30, 2009, driven primarily by softness in demand for our home networking products and a significant downturn in the overall economy.

We generate revenues principally by sales of our semiconductor products. We also generate service revenues from development contracts. We principally sell our products directly to either original design manufacturers, or ODMs, or original equipment manufacturers, or OEMs. We price our products based on market and competitive conditions and reduce the price of our products over time, as market and competitive conditions change, and as manufacturing costs are reduced. Our markets are generally characterized by declining average selling prices over the life of a product and, accordingly, we must reduce costs and successfully introduce new products and enhancements to maintain our gross margins.

We currently rely, and expect to continue to rely, on a limited number of customers for a significant portion of our revenues. Sales to these customers are in turn driven by service providers that purchase our customers' products which incorporate our products. Substantially all of our revenues are currently dependent upon three major service providers: Verizon Communications, Inc., or Verizon, through its FiOS deployment, DISH Network Corporation, or DISH, and DIRECTV. In addition, we are dependent on sales outside of the United States for almost all of our revenues and expect that to continue in the future.

For the nine months ended September 30, 2009, 10 customers accounted for 88% of our net revenues, with Motorola, Inc., or Motorola, Actiontec Electronics, Inc., or Actiontec, and Wistron NeWeb Corporation, or Wistron, accounting for 28%, 19% and 10%, respectively. For the nine months ended September 30, 2008, 10 customers accounted for 95% of our net revenues, with Motorola and Actiontec accounting for 39% and 21%, respectively. We expect to continue to have major concentrations of sales to a relatively small number of ODM and OEM customers.

For the nine months ended September 30, 2009, 93% of our net revenues were derived from Asia, 4% were derived from the United States, 2% were derived from Europe and 1% was derived from other North American countries. For the nine months ended September 30, 2008, 95% of our net revenues were derived from Asia, 3% were derived from Europe and 2% were derived from the United States and other North American countries. Many of our ODM and OEM customers in Asia incorporate our chipsets into products that they sell to U.S.-based service providers.

We use third-party foundries and assembly and test contractors to manufacture, assemble and test our products. This outsourced manufacturing approach allows us to focus our resources on the design, sale and marketing of our products and avoid the cost associated with owning and operating our own manufacturing facility. A significant portion of our cost of net revenues consists of payments for the purchase of wafers and for manufacturing, assembly and test services.

We expect research and development expenses to increase in total dollars as we develop additional products and expand our business, and to fluctuate over the course of the year based on the timing of our fabrication mask costs and purchases of intellectual property licenses. We also anticipate that our sales and marketing expenses will increase as we expand our domestic and international sales and marketing organization and activities and build brand awareness. Due to the lengthy sales cycles that we face, we may experience significant delays from the time we incur research and development and sales and marketing expenses until the time, if ever, that we generate sales from the related products.

Since our inception, we have funded our operations using a combination of preferred stock issuances, cash collections from customers, bank credit facilities, cash received from the exercise of stock options and proceeds from our initial public offering, or IPO. We intend to continue spending substantial amounts in connection with the growth of our business and we may need to obtain additional financing to pursue our business strategy, develop new products, respond to competition and market opportunities and acquire complementary businesses or technologies.

Results of Operations

The following table sets forth selected items from our unaudited condensed
consolidated statements of operations data as a percentage of total net revenues
for each of the periods indicated:



                                                Three Months Ended              Nine Months Ended
                                                   September 30,                  September 30,
                                               2009             2008           2009            2008
Consolidated Statements of Operations
Data:
Net revenues                                     100 %            100 %          100 %          100 %
Cost of net revenues                              50               55             50             55

Gross profit                                      50               45             50             45
Operating expenses:
Research and development                          35               43             42             37
Sales and marketing                               11               13             13             11
General and administrative                         8                9             10              8
Write off of in-process research and
development                                       -                -              -               1
Amortization of intangible assets                 -                 2             -               2
Restructuring charge                              -                 1              3              1

Total operating expenses                          54               68             68             60

Loss from operations                              (4 )            (23 )          (18 )          (15 )
Other income, net                                 -                 1             -              -
Income tax expense                                -                -              -              -

Net loss                                          (4 )            (22 )          (18 )          (15 )

Net loss attributable to common
stockholders                                      (4 )%           (22 )%         (18 )%         (15 )%

Comparison of Three and Nine Months Ended September 30, 2009 and 2008

(Tables presented in thousands, except percentage amounts)

Net Revenues

Net revenues decreased during the three months ended September 30, 2009 compared to the same period in 2008 driven primarily by a difficult economic environment where our direct OEM customers and end customers continued to maintain tight inventory levels.

Net revenues decreased during the nine months ended September 30, 2009 compared to the same period in 2008 driven primarily by softness in demand for our home networking products and a difficult economic environment where our direct OEM customers and end customers continued to maintain tight inventory levels.

Gross Profit/Gross Margin



                                     Three Months Ended                         Nine Months Ended
                                        September 30,                             September 30,
                                     2009           2008        % Change        2009          2008        % Change
Gross profit                       $  15,626      $ 14,370             9 %    $ 40,790      $ 52,488           (22 )%
% of net revenues                         50 %          45 %                        50 %          45 %

Gross profit and gross margin were positively impacted by a reduction in intangible asset amortization in 2009. Cost of net revenues included amortization of developed technology in the amounts of $0.4 million and $1.2 million for the three and nine months ended September 30, 2009, respectively, and $1.6 million and $4.4 million for the three and nine months ended September 30, 2008, respectively. The reductions in the amortization of developed technology of $1.2 million during the three months ended September 30, 2009 compared to the same period in 2008, and $3.2 million during the nine months ended September 30, 2009 compared to the same period in 2008 were primarily driven by the impairment of our intangible assets which occurred in December 2008. As a result of the impairment, most intangible assets were written down to a net value of zero and the carrying amount of our remaining intangibles was greatly reduced, which in turn resulted in lower amortization in 2009.

More specifically, gross profit increased during the three months ended September 30, 2009 compared to the same period in 2008 driven primarily by the $1.2 million reduction in intangible asset amortization in 2009.

Gross profit decreased during the nine months ended September 30, 2009 compared to the same period in 2008 driven primarily by lower home networking product revenues for the nine months ended September 30, 2009. This decrease was primarily offset by the $3.2 million reduction in intangible asset amortization in 2009.

Gross margin increased during the three months ended September 30, 2009 compared to the same period in 2008 driven primarily by the $1.2 million reduction in intangible asset amortization in 2009. Additionally, gross margin increased from our home networking products primarily due to manufacturing costs improvements.

Gross margin increased during the nine months ended September 30, 2009 compared to the same period in 2008 driven by the $3.4 million reduction in intangible asset amortization in 2009 and our gross margin from our home networking products increased primarily due to manufacturing costs improvements.

Research and Development Expenses



                                     Three Months Ended                          Nine Months Ended
                                        September 30,                              September 30,
                                     2009           2008        % Change         2009          2008        % Change
Research and development           $  10,824      $ 13,902           (22 )%    $ 34,249      $ 42,892           (20 )%
% of net revenues                         35 %          43 %                         42 %          37 %

The decrease in research and development expenses during the three months ended September 30, 2009, compared to the three months ended September 30, 2008, was primarily due to decreased personnel costs of $2.6 million (of which $0.8 million was due to stock-based compensation) primarily related to a 23% decrease in the number of employees engaged in research and development activities as a result of the implementation of our March 2009 restructuring plan. Other factors contributing to the decrease in research and development expense include a $0.3 million reduction in development tools and supply costs, which include outside services, masks costs and licenses that fluctuate in timing and amount from period to period, and a $0.1 million reduction in overhead allocations and depreciation, all of which resulted from a general decrease in research and development activities as a result of the March 2009 restructuring plan, including the suspension of the development of our advanced network processor architecture and an associated product which was being staffed primarily out of our Kfar Saba, Israel location.

The decrease in research and development expenses during the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008, was primarily due to decreased personnel costs of $7.1 million (of which $1.9 million was due to stock-based compensation) primarily related to a 23% decrease in the number of employees engaged in research and development activities as a result of the implementation of our March 2009 restructuring plan. Other factors contributing to the decrease in research and development expense include a $0.9 million reduction in development tools and supply costs, which include outside services, masks costs and licenses that fluctuate in timing and amount from period to period, all of which resulted from a general decrease in research and development activities as a result of the March 2009 restructuring plan, including the suspension of the development of our advanced network processor architecture and an associated product which was being staffed primarily out of our Kfar Saba, Israel location.

Sales and Marketing Expenses



                                     Three Months Ended                          Nine Months Ended
                                        September 30,                              September 30,
                                     2009           2008        % Change         2009          2008        % Change
Sales and marketing                $   3,345       $ 3,991           (16 )%    $ 10,377      $ 12,590           (18 )%
% of net revenues                         11 %          13 %                         13 %          11 %

The decrease in sales and marketing expenses for the three months ended September 30, 2009, compared to the three months ended September 30, 2008, included decreased personnel costs of $0.2 million. This decrease included approximately $0.5 million (of which $0.3 million was due to stock-based compensation) attributable to a 5% decrease in the number of employees engaged in sales and marketing activities at the end of the periods and was offset by an increase of $0.3 million in management bonuses, which was primarily due to the cancellation of the management bonus program during the three months ended September 30, 2008. The decrease in sales and marketing personnel resulted primarily from a reduction-in-force in March 2009. The remainder of the decrease in sales and marketing expenses, including decreases in travel related costs of $0.2 million, and marketing and trade show costs of $0.2 million, was primarily due to a general decrease in business activities.

The decrease in sales and marketing expenses for the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008, included decreased personnel costs of $1.6 million (of which $0.8 million was due to stock-based compensation), attributable to a 5% decrease in the number of employees engaged in sales and marketing activities at the end of the periods. The decrease in sales and marketing personnel resulted primarily from a reduction-in-force in March 2009. The remainder of the decrease in sales and marketing expenses, including decreases in travel related costs of $0.3 million, marketing and trade show costs of $0.2 million and overhead allocations of $0.2 million, was primarily due to a general decrease in business activities.

General and Administrative Expenses



                                      Three Months Ended                          Nine Months Ended
                                         September 30,                              September 30,
                                      2009           2008        % Change         2009          2008        % Change
General and administrative          $   2,642       $ 2,798            (6 )%    $   8,043      $ 9,862           (18 )%
% of net revenues                           8 %           9 %                          10 %          8 %

The $0.2 million decrease in general and administrative expenses for the three months ended September 30, 2009, compared to the three months ended September 30, 2008 was primarily driven by a general decrease in business activities primarily attributable to a 7% decrease in the number of employees engaged in general and administrative activities at the end of the three months ended September 30, 2009 compared to the same period in 2008. The decrease in general and administrative personnel resulted primarily from a reduction-in-force in March 2009.

The $1.8 million decrease in general and administrative expenses for the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008, was partly due to decreased personnel costs of $0.3 million primarily attributable to a 7% decrease in the number of employees engaged in general and administrative activities at the end of the nine months ended September 30, 2009 compared to the same period in 2008. The decrease in general and administrative personnel resulted primarily from a reduction-in-force in March 2009. The remainder of the decrease in general and administrative expenses was primarily driven by outside services of $0.7 million, legal fees of $0.4 and recruiting fees of $0.3 million, primarily due to a general decrease in business activities.

Write Off of In-Process Research and Development



                                         Three Months Ended                         Nine Months Ended
                                           September 30,                              September 30,
                                       2009              2008       % Change      2009            2008        % Change
Write off of in-process research

During the nine months ended September 30, 2008, as a result of the acquisition of Vativ Technologies, Inc., or Vativ, in April 2008, we incurred a write off of in-process research and development, or IPR&D, related to Vativ's High Definition Multimedia Interface switch product.

The IPR&D was written-off on the acquisition date because the acquired technology had not yet reached technological feasibility and had no alternative future uses. A discounted cash flow approach was utilized in valuing the IPR&D. The value of the technology was the sum of the present value of projected debt-free net income, in excess of returns on requisite assets, over the economic life of the IPR&D.

Amortization of Intangibles



                                       Three Months Ended                          Nine Months Ended
                                          September 30,                              September 30,
                                     2009            2008         % Change        2009           2008        % Change
Amortization of intangibles          $   -         $     713          (100 )%    $   16        $  2,022           (99 )%
% of net revenues                        - %               2 %                        - %             2 %

Amortization of intangible assets decreased during the three and nine months ended September 30, 2009 compared to the same periods in 2008 primarily driven by the impairment of our intangible assets which occurred in the three months ended December 31, 2008. As a result of the impairment, most intangible assets were determined to be impaired and written down to a net value of zero. The reduced carrying amount of our intangible assets resulted in lower amortization in the three and nine months ended September 30, 2009.

Restructuring Charges

In March 2009, we implemented a restructuring plan that resulted in a reduction-in-force which impacted 55 employees worldwide. Most of the U.S. employees were terminated immediately and received severance payments upon the signing of a separation agreement. Employees in our Israel and France offices were required by contract or law to receive notice period payments in addition to severance payments.

We believe that the statutory notice period payments given to the terminated Israel and France employees represent a one-time termination benefit since we are required by law to pay these employees their notice period payment as part of their termination regardless of whether they continued to work for us through their actual termination date. Our restructuring plan also included vacating certain facilities, for which we record restructuring charges related to the termination of operating leases and other contract costs as restructuring costs in the period in which we cease to use rights conveyed by the applicable contract.

As a result of our March 2009 restructuring plan, we recorded restructuring charges of $0.1 million and $2.2 million during the three and nine months ended September 30, 2009, respectively. We do not expect to record additional material charges, if any, in the future with respect to the March 2009 restructuring plan.

The following table presents our restructuring liability in the consolidated balance sheets (in thousands) as of September 30, 2009:

                                                                  Impairment of
                                                                    property,
                                                                    equipment             Impairment of            Employee
                                        Operating lease            and related             other long-            Separation
                                          commitments               expenses               term assets             Expenses            Total
. . .