The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements. Please see the "Cautionary Statement" above and "Risk Factors" below for discussions of the uncertainties, risks and assumptions associated with these statements. Our fiscal year-end financial reporting periods are a 52- or 53- week year ending on the Saturday closest to December 31st. Fiscal 2009 will have 52 weeks and fiscal 2008 had 53 weeks. In a 52-week year, each fiscal quarter consists of 13 weeks. The extra week in fiscal 2008 was added to the first quarter, making such quarter consist of 14 weeks. Our third quarter of fiscal 2009 ended October 3, 2009. Our third quarter of fiscal 2008 ended October 4, 2008.

Overview

We design and develop proprietary, analog-intensive, mixed-signal integrated circuits (ICs) for a broad range of applications. Mixed-signal ICs are electronic components that convert real-world analog signals, such as sound and radio waves, into digital signals that electronic products can process. Therefore, mixed-signal ICs are critical components in a broad range of applications in a variety of markets, including communications, consumer, industrial, automotive, medical and power management. Our major customers include 2Wire, Huawei, LG Electronics, Motorola, Panasonic, Philips, Samsung, Sony Ericsson, Thomson and Varian Medical Systems.

As a "fabless" semiconductor company, we rely on third-party semiconductor fabricators in Asia, and to a lesser extent the United States and Europe, to manufacture the silicon wafers that reflect our IC designs. Each wafer contains numerous die, which are cut from the wafer to create a chip for an IC. We rely on third-parties in Asia to assemble, package, and, in most cases, test these devices and ship these units to our customers. Testing performed by such third parties facilitates faster delivery of products to our customers (particularly those located in Asia), shorter production cycle times, lower inventory requirements, lower costs and increased flexibility of test capacity.

Our expertise in analog-intensive, high-performance, mixed-signal ICs enables us to develop highly differentiated solutions that address multiple markets. We group our products into the following categories:

† RF products, which include our broadcast radio receivers and transmitters, short-range wireless transceivers, video tuners and demodulators, satellite set-top box receivers and satellite radio tuners;

† Access products, which include our ISOmodem® embedded modems and Voice over IP (VoIP) products, such as our ProSLIC® subscriber line interface circuits and voice direct access arrangement (DAA);

† Broad-based products, which include 8-bit microcontroller products, timing products (including clocks, precision clock & data recovery ICs and oscillators) and power products (including our isolators, current sensors, AC-DC converters and Power over Ethernet devices); and

† Mature products, which include our silicon DAA for PC modems, DSL analog front end ICs, optical physical layer transceivers and RF Synthesizers.

Through acquisitions and internal development efforts, we have continued to diversify our product portfolio and introduce next generation ICs with added functionality and further integration. In the first nine months of 2009, we introduced the expansion of our Any-Rate Precision Clock family with a low jitter clock generator for broadcast video applications, a silicon hybrid TV tuner that supports both analog and digital broadcasts in a single device, a family of ProSLIC single channel telephony ICs for broadband networking equipment, the expansion of our small form factor microcontrollers in a tiny 2x2 mm footprint, a family of ISOpro high-performance, digital isolators, a family of high pin-count capacitive touch-sense microcontrollers for cost-sensitive embedded systems and the EZRadioPRO™ embedded wireless radio family. We plan to continue to introduce products that increase the content we provide for existing applications, thereby enabling us to serve markets we do not currently address and expanding our total available market opportunity.

During the nine months ended October 3, 2009, one customer, Samsung, represented more than 10% of our revenues. No other single end customer accounted for more than 10% of our revenues during the nine months ended October 3, 2009. In addition to direct sales to customers, some of our end customers purchase products indirectly from us through distributors and contract manufacturers. An end customer purchasing through a contract manufacturer typically instructs such contract manufacturer to obtain our products and incorporate such products with other components for sale by such contract manufacturer to the end customer. Although we actually sell the products to, and are paid by, the distributors and contract manufacturers, we refer to such end customer as our customer. Two of our distributors, Edom Technology and Avnet, represented 25% and 10% of our revenues during the nine months ended October 3, 2009, respectively. There were no other distributors or contract manufacturers that accounted for more than 10% of our revenues during the nine months ended October 3, 2009.

The percentage of our revenues derived from customers located outside of the United States was 88% during the nine months ended October 3, 2009. All of our revenues to date have been denominated in U.S. dollars. We believe that a majority of our revenues will continue to be derived from customers outside of the United States.

The sales cycle for our ICs can be as long as 12 months or more. An additional three to six months or more are usually required before a customer ships a significant volume of devices that incorporate our ICs. Due to this lengthy sales cycle, we typically experience a significant delay between incurring research and development and selling, general and administrative expenses, and the corresponding sales. Consequently, if sales in any quarter do not occur when expected, expenses and inventory levels could be disproportionately high, and our operating results for that quarter and, potentially, future quarters would be adversely affected. Moreover, the amount of time between initial research and development and commercialization of a product, if ever, can be substantially longer than the sales cycle for the product. Accordingly, if we incur substantial research and development costs without developing a commercially successful product, our operating results, as well as our growth prospects, could be adversely affected.

Because many of our ICs are designed for use in consumer products such as televisions, personal video recorders, set-top boxes, portable navigation devices and mobile handsets, we expect that the demand for our products will be typically subject to some degree of seasonal demand. However, rapid changes in our markets and across our product areas make it difficult for us to accurately estimate the impact of seasonal factors on our business.

Results of Operations

The following describes the line items set forth in our Condensed Consolidated Statements of Income:

Revenues. Revenues are generated almost exclusively by sales of our ICs. We recognize revenue on sales when all of the following criteria are met: 1) there is persuasive evidence that an arrangement exists, 2) delivery of goods has occurred, 3) the sales price is fixed or determinable, and 4) collectibility is reasonably assured. Generally, we recognize revenue from product sales to direct customers and contract manufacturers upon shipment. Certain of our sales are made to distributors under agreements allowing certain rights of return and price protection on products unsold by distributors. Accordingly, we defer the revenue and cost of revenue on such sales until the distributors sell the product to the end customer. Our products typically carry a one-year replacement warranty. Replacements have been insignificant to date. Our revenues are subject to variation from period to period due to the volume of shipments made within a period, the mix of products we sell and the prices we charge for our products. The vast majority of our revenues were negotiated at prices that reflect a discount from the list prices for our products. These discounts are made for a variety of reasons, including: 1) to establish a relationship with a new customer, 2) as an incentive for customers to purchase products in larger volumes, 3) to provide profit margin to our distributors who resell our products or 4) in response to competition. In addition, as a product matures, we expect that the average selling price for such product will decline due to the greater availability of competing products. Our ability to increase revenues in the future is dependent on increased demand for our established products and our ability to ship larger volumes of those products in response to such demand, as well as our ability to develop or acquire new products and subsequently achieve customer acceptance of newly introduced products.

Cost of Revenues. Cost of revenues includes the cost of purchasing finished silicon wafers processed by independent foundries; costs associated with assembly, test and shipping of those products; costs of personnel and equipment associated with manufacturing support, logistics and quality assurance; costs of software royalties and amortization of purchased software, other intellectual property license costs and certain acquired intangible assets; an allocated portion of our occupancy costs; and allocable depreciation of testing equipment and leasehold improvements.

Research and Development. Research and development expense consists primarily of personnel-related expenses, including stock compensation, new product mask, wafer, packaging and test costs, external consulting and services costs, amortization of purchased software, equipment tooling, equipment depreciation, amortization of acquired intangible assets, as well as an allocated portion of our occupancy costs for such operations. Research and development activities include the design of new products and software, refinement of existing products and design of test methodologies to ensure compliance with required specifications.

Selling, General and Administrative. Selling, general and administrative expense consists primarily of personnel-related expenses, including stock compensation, related allocable portion of our occupancy costs, sales commissions to independent sales representatives, applications engineering support, professional fees, patent litigation legal fees, costs related to relocating our headquarters and promotional and marketing expenses.

In-Process Research and Development. In-process research and development (IPR&D) represents acquired technology resulting from business combinations that had not achieved technological feasibility as of the acquisition closing date and had no alternative future use. For acquisitions occurring prior to fiscal 2009, these costs were expensed on the date of acquisition. Beginning in fiscal 2009, IPR&D acquired in business combinations is recorded as an indefinite-lived intangible asset at fair value. The asset is tested for impairment through its completion and then amortized over its useful life.

Interest Income. Interest income reflects interest earned on our cash, cash equivalents and investment balances.

Interest Expense. Interest expense consists of interest on our short and long-term obligations.

Other Income (Expense), Net. Other income (expense), net reflects foreign currency remeasurement adjustments and gains on the disposal of fixed assets.

Provision for Income Taxes. Provision for income taxes includes both domestic and foreign income taxes at the applicable statutory rates adjusted for non-deductible expenses (including a portion of our stock compensation), research and development tax credits, interest income from tax-exempt investments and interest and penalties related to unrecognized tax benefits.

The following table sets forth our Condensed Consolidated Statements of Income data as a percentage of revenues for the periods indicated:

                                    Three Months Ended          Nine Months Ended
                                 October 3,    October 4,    October 3,    October 4,
                                    2009          2008          2009          2008

Revenues                              100.0 %       100.0 %       100.0 %       100.0 %
Cost of revenues                       35.6          38.9          37.4          38.1
Gross margin                           64.4          61.1          62.6          61.9

Operating expenses:
Research and development               20.6          22.7          24.8          23.3
Selling, general and
administrative                         22.7          22.9          24.9          23.7
In-process research and
development                               -           9.0             -           3.2
Operating expenses                     43.3          54.6          49.7          50.2

Operating income                       21.1           6.5          12.9          11.7

Other income (expense):
Interest income                         0.4           1.8           0.6           2.8
Interest expense                       (0.0 )        (0.1 )        (0.0 )        (0.1 )
Other income (expense), net             0.0          (0.0 )         0.1          (0.2 )
Income before income taxes             21.5           8.2          13.6          14.2
Provision for income taxes              3.7           7.2           3.1           5.8
Net income                             17.8 %         1.0 %        10.5 %         8.4 %

Revenues



                                  Three Months Ended                                   Nine Months Ended
                    October 3,     October 4,                   %       October 3,     October 4,                   %
(in millions)          2009           2008        Change     Change        2009           2008        Change     Change
Revenues           $      125.9   $      113.5   $    12.4      11.0 % $      313.8   $      316.3   $    (2.5 )    (0.8 )%

The growth in the sales of our products in the recent three month period was driven primarily by increased revenues from our RF and broad-based product groups. Unit volumes of our products increased compared to the three and nine months ended October 4, 2008 by 16.8% and 15.6%, respectively. Average selling prices decreased during the same periods by 4.4% and 13.9%, respectively. In general, as our products become more mature, we expect to experience decreases in average selling prices. We anticipate that newly announced, higher priced, next generation products and product derivatives will offset these decreases to some degree.

Gross Margin



                                   Three Months Ended                                  Nine Months Ended
                     October 3,    October 4,                   %       October 3,     October 4,                   %
(in millions)           2009          2008        Change     Change        2009           2008        Change     Change
Gross margin         $      81.0   $      69.3   $    11.7      16.9 % $      196.5   $      195.7   $     0.8       0.4 %
Percent of revenue          64.4 %        61.1 %                               62.6 %         61.9 %

The increase in the dollar amount of gross margin in the recent three month period was primarily due to our increased sales. The increase in gross margin as a percent of revenue in the recent three month period was primarily due to a charge of $1.4 million to record inventory acquired from Integration Associates at fair value during the three months ended October 4, 2008, improvements in our inventory management and manufacturing cost reductions. We may continue to experience declines in the average selling prices of certain of our products. This downward pressure on gross margin as a percentage of revenues may be offset to the extent we are able to: 1) introduce higher margin new products and gain market share with our ICs; 2) achieve lower production costs from our wafer suppliers and third-party assembly and test subcontractors; 3) achieve lower production costs per unit as a result of improved yields throughout the manufacturing process; or 4) reduce logistics costs.

Research and Development



                                         Three Months Ended                               Nine Months Ended
                            October 3,    October 4,                 %      October 3,    October 4,                 %
(in millions)                  2009          2008        Change    Change      2009          2008        Change    Change
Research and development    $      25.9   $      25.8   $    0.1      0.5 % $      77.8   $      73.8   $    4.0      5.4 %
Percent of revenue                 20.6 %        22.7 %                            24.8 %        23.3 %

The increase in research and development expense in the recent nine month period was principally due to an increase of $4.1 million for personnel-related expenses, including personnel costs associated with the acquisition of Integration Associates. We expect that research and development expense will remain relatively stable in absolute dollars, but may fluctuate somewhat due to the timing of certain items related to new product development initiatives, such as mask and wafer costs. In addition, research and development expense will fluctuate as a percentage of revenues due to changes in sales.

Significant recent development projects include the expansion of our Any-Rate Precision Clock family with a low jitter clock generator for broadcast video applications, a silicon hybrid TV tuner that supports both analog and digital broadcasts in a single device, a family of ProSLIC single channel telephony ICs for broadband networking equipment, a family of ISOpro high-performance, digital isolators, a family of high pin-count capacitive touch-sense microcontrollers for cost-sensitive embedded systems, the EZRadioPRO embedded wireless radio family, the expansion of our Any-Rate Precision Clock family, a new family of clock generators and buffers, and an integrated automotive AM/FM radio receiver
IC. We also further expanded our microcontroller portfolio.

Selling, General and Administrative



                                         Three Months Ended                               Nine Months Ended
                            October 3,    October 4,                 %      October 3,    October 4,                 %
(in millions)                  2009          2008        Change    Change      2009          2008        Change    Change
Selling, general and
administrative              $      28.6   $      25.9   $    2.7     10.2 % $      78.2   $      75.0   $    3.2      4.2 %
Percent of revenue                 22.7 %        22.9 %                            24.9 %        23.7 %

The increase in selling, general and administrative expense in the recent three and nine month periods was principally due to increases of $2.5 million and $3.3 million for personnel-related expenses, including personnel costs associated with the acquisition of Integration Associates, respectively. We expect that selling, general and administrative expense will remain relatively stable in absolute dollars in future periods and may fluctuate as a percentage of revenues due to changes in sales.

In-Process Research and Development

In-process research and development (IPR&D) recorded in connection with the acquisition of Integration Associates was $10.3 million for the three and nine months ended October 4, 2008. The IPR&D projects included optoelectronic, power, and radio transmitter and transceiver technologies. The optoelectronic projects are used for infrared data communications and proximity sensing. The power projects enable AC-DC conversion in power supply systems. The radio transmitters and transceivers projects enable the delivery of data over proprietary, short range wireless links. The fair value of each project was determined using the income approach. The discount rate applicable to the cash flows was 20%. This rate reflects the weighted-average cost of capital and the risks inherent in the development process.

There was no acquisition of IPR&D for the three and nine months ended October 3, 2009.

Interest Income



                                      Three Months Ended                           Nine Months Ended
                           October 3,       October 4,                  October 3,      October 4,
(in millions)                 2009             2008         Change         2009            2008         Change

The decrease in interest income for the recent three and nine month periods was due to lower interest rates on the underlying instruments and lower average cash and investment balances.

Interest Expense

Interest expense was $0.1 million and $0.2 million for the three and nine months ended October 3, 2009, respectively, as compared to $0.1 million and $0.3 million for the three and nine months ended October 4, 2008, respectively.

Other Income (Expense), Net

Other income (expense), net was $8 thousand and $0.3 million for the three and nine months ended October 3, 2009, as compared $(43) thousand and $(0.5) million for the three and nine months ended October 4, 2008, respectively.

Provision for Income Taxes



                                         Three Months Ended                          Nine Months Ended
                              October 3,       October 4,                  October 3,     October 4,
(in millions)                    2009             2008         Change         2009           2008         Change
Provision for income taxes   $         4.6    $        8.1   $     (3.5 ) $         9.8   $      18.4   $     (8.6 )
Effective tax rate                    17.0 %          87.6 %                       23.0 %        40.8 %

The effective tax rates for both the three and nine months ended October 3, 2009 decreased from the prior periods, primarily due to the intercompany license of certain technology and the non-deductible write-off of in-process research and development costs during the three months ended October 4, 2008, both of which were related to the acquisition of Integration Associates. Additionally, the effective tax rates for both the three and nine months ended October 3, 2009 decreased due to an increase in the foreign tax rate benefit. The impact of these items was partially offset by the decrease in the reduction of the liability for unrecognized tax benefits.

The effective tax rates for each of the periods presented differ from the federal statutory rate of 35% due to the amount of income earned in foreign jurisdictions where the tax rate may be lower than the federal statutory rate, the limited deductibility of stock compensation expense and other permanent items including changes to the liability for unrecognized tax benefits.

Business Outlook

We expect revenues in the fourth quarter of fiscal 2009 to be in the range of $124 to $129 million. Furthermore, we expect our diluted earnings per share to be in the range of $0.40 to $0.43.

Liquidity and Capital Resources

Our principal sources of liquidity as of October 3, 2009 consisted of $378.0 million in cash, cash equivalents and short-term investments. Our short-term investments consist primarily of U.S. government agency bonds and discount notes, corporate bonds, municipal bonds, U.S. treasury bills, U.S. government bonds, commercial paper, international government bonds and auction-rate securities purchased through UBS ("UBS auction-rate securities").

Our long-term investments consist of non-UBS auction-rate securities. Early in fiscal 2008, auctions for many of our auction-rate securities failed because sell orders exceeded buy orders. As of October 3, 2009, we held $51.6 million par value auction-rate securities, all of which experienced failed auctions. The securities had previously been valued using quoted prices in active markets. When the auctions began to fail, quoted prices for the securities were no longer observable. As such, we changed our fair value measurement methodology for all auction-rate securities from quoted prices in active markets to a cash flow model. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, amount of cash flows, expected holding periods of the securities and a discount to reflect our inability to liquidate the securities.

The underlying assets of our auction-rate securities consisted of student loans and municipal bonds, of which $47.6 million were guaranteed by the U.S. government and the remaining $4.0 million were privately insured. As of October 3, 2009, $40.6 million of the auction-rate securities had credit ratings of AAA, $4.0 million had credit ratings of AA and $7.0 million had a credit rating of BBB. These securities had contractual maturity dates ranging from 2025 to 2046 and were yielding 0.51% to 2.85% per year at October 3, 2009. We are receiving the underlying cash flows on all of our auction-rate securities. The principal amounts associated with failed auctions are not expected to be accessible until a successful auction occurs, the issuer redeems the security, a buyer is found outside of the auction process or the underlying securities mature. We are unable to predict if these funds will become available before their maturity dates.

In November 2008, we entered into an agreement with UBS AG, which provides us certain rights to sell to UBS the auction-rate securities which were purchased through them. As of October 3, 2009, we held $24.2 million par value auction-rate securities purchased from UBS. We have the option to sell these securities to UBS at par value from June 30, 2010 through July 2, 2012. UBS, at its discretion, may purchase or sell these securities on our behalf at any time provided we receive par value for the securities sold. The issuers of the auction-rate securities continue to have the right to redeem the securities at their discretion. The agreement allows for the continuation of the accrual and payment of interest due on the securities. The agreement also provides us with . . .