FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 and the Securities Exchange Act of 1934. Forward-looking statements are based on current expectations, estimates, forecasts and projections about us, our future performance and the industries in which we operate as well as on our management's assumptions and beliefs. Statements that contain words like "expects," "anticipates," "may," "will," "targets," "projects," "intends," "plans," "believes," "seeks," "estimates," or variations of such words and similar expressions are forward-looking statements. In addition, any statements that refer to trends in our businesses, future financial results, and our liquidity and business plans are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks and uncertainties, including those discussed in "Part II, Item 1A-Risk Factors" of this Form 10-Q. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We do not guarantee future results, and actual results, developments and business decisions may differ from those contemplated by those forward-looking statements. We undertake no obligation to update these forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-Q.

EXECUTIVE SUMMARY

We design, manufacture and sell IP-based telecommunications infrastructure products including our primary product suite of Internet Protocol TV ("IPTV"), Next Generation Network ("NGN") and broadband solutions along with the ongoing services relating to the installation, operation and maintenance of these products. In addition, we also sell handsets that are designed and manufactured primarily for the China market. Our products are sold primarily to telecommunications service providers or operators. We sell an extensive range of products that are designed to enable voice, data and video services for our operator customers and consumers around the world. Over the past few years, we have expanded our focus to build a global presence and currently sell our products in several established and emerging growth markets in Asia, Latin America and Europe. We intend to continue to invest in products with technological differentiation likely to drive revenue growth and improved margins. We also intend to maintain a strategic presence in the most attractive markets.

We differentiate ourselves with products designed to reduce network complexity, integrate high performance capabilities and allow a simple transition to next generation networks. We design our products to facilitate cost-effective and efficient deployment, maintenance and upgrades.

Because our products are IP-based, our customers can more easily integrate our products with other industry standard hardware and software. Additionally, we believe we can introduce new features and enhancements that can be cost-effectively added to our customers' existing networks. IP-based devices can be changed or upgraded in modules, saving our customers the expense of replacing their entire system installation.

Overview of Our Third Quarter 2009

†

† Net sales decreased by $110.1 million to $70.5 million during the three months ended September 30, 2009 compared to the same period in 2008. The decrease in net sales in the third quarter of 2009 was primarily due to the continued weakening demand for our Personal Access Solution and Personal Handyphone System (collectively "PAS") Infrastructure and Handsets products.

† Gross profit was $24.2 million, or 34% of net sales, in the three months ended September 30, 2009, compared to $57.3 million, or 32% of net sales, in the corresponding period of 2008. The decrease in gross profit in absolute dollars was mainly due to decrease in overall sales. The increase in gross profit as percentage of net sales was primarily due to lower provision for anticipated contract losses and sales of certain handsets during the quarter which were previously reserved.

† Selling, general and administrative and research and development operating expenses decreased 50% in the third quarter of 2009 compared with the third quarter of 2008 primarily as a result management restructuring and other cost reduction initiatives.

† In June 2009, our Board of Directors approved a restructuring plan (the "2009 Restructuring Plan") designed to reduce operating expenses. The 2009 Restructuring Plan includes a worldwide reduction in force of approximately 50% of our headcount. The initiatives also include plans to outsource manufacturing operations and optimize research and development spending with a focus on selected products. We recognized $8.9 million and $41.5 million in restructuring charges during the three and nine months ended September 30, 2009, respectively, related to our 2009 Restructuring Plan and prior plans.

† In the third quarter of 2009 we divested our Korea operations to a company founded by a former employee and recorded a loss on this divestiture of approximately $1.7 million.

Other Initiatives

In June 2009, we announced our intention to consider a potential sale of our manufacturing, research and development, and administrative offices facility in Hangzhou, China. Accordingly, management performed a recoverability assessment of this asset at June 30, 2009 using the income capitalization approach to estimate fair value. During the third quarter of 2009, we contracted with a commercial real estate agent to assist in evaluating a potential sale of the facility. Furthermore, in October 2009, we initiated actions to consolidate our use of the facility to reduce our operating costs that revised our projected occupancy needs. In light of these developments in the third quarter of 2009 we performed a recoverability assessment of the facility as of September 30, 2009. The carrying value of the Hangzhou facility as of September 30, 2009 is $160.5 million. Management initially considered whether using comparable market transaction activity (market comparison approach) to estimate fair value of the facility would be both feasible and sufficiently objective in the circumstances but concluded the secondary market for similar industrial properties from which to derive sales data was not sufficiently robust to place primary reliance on this valuation approach. Therefore, management used the income capitalization approach to estimate fair value. The income capitalization approach involves estimating a current market rental for the facility through an analysis of rents of similar facilities, either in the locality or in comparable districts, and then using an applicable

capitalization rate to estimate fair value. This resulted in determining that the estimated fair value approximates the carrying value of the Hangzhou facility. No impairment charge was recorded in the third quarter of 2009. The income capitalization approach is subjective in nature and involves various assumptions about the capitalization rate and relevant market rents. Any significant change in the assumptions may result in an impairment charge. While the determination of estimated fair value was based on a generally accepted valuation method, China commercial real estate market historically experienced market fluctuations. Also, future additional relevant information may become available from market participants specific to the area the property is located. If there is a material change in the conditions or circumstances influencing the fair value we may be required to recognize an impairment charge which may have a significant impact on our results of operations and financial position. The building is approximately 2.7 million square feet and unique in its design. We cannot predict whether we will be able to sell the building or the amount at which we would ultimately be able to sell the building should we enter into a sales transaction.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Condensed Financial Statements, which we have prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Estimates are based on historical experience, knowledge of economic and market factors and various other assumptions that management believes to be reasonable under the circumstances. Actual results may differ from those estimates.

On a regular basis we evaluate our estimates, assumptions and judgments and make changes accordingly. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. We believe that the estimates, assumptions and judgments involved in revenue recognition, receivables and allowances for doubtful accounts, accruals including third party commissions payable, restructuring liabilities, litigation and other contingencies, stock-based compensation, product warranty, variable interest entities, inventories, deferred costs, research and development and capitalized software development costs, income taxes, impairment of intangible assets and long-lived assets, and valuation and impairment of investments have the greatest potential impact on our Condensed Consolidated Financial Statements, so we consider these to be our critical accounting policies. Management believes that there have been no significant changes during the nine months ended September 30, 2009 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2008.

RECENT ACCOUNTING PRONOUNCEMENTS

For a description of the new accounting standards that affect us, see Note 2 of Notes to our Condensed Consolidated Financial Statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q.

RESULTS OF OPERATIONS

To align the business units with our corporate strategy to focus on core businesses, on July 1, 2008 we sold PCD to PCD LLC (see Note 3 of Notes to our Condensed Consolidated Financial Statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q). Prior to July 1, 2008, PCD sold and supported handsets other than PAS handsets, mainly in the United States. Included in the Other segment are Mobile Solutions Business Unit ("MSBU") and Custom Solutions Business Unit ("CSBU"). On July 31, 2008, we sold MSBU which was responsible for the development, sales and service of our wireless IPCDMA/IPGSM product line. In the first quarter of 2009, we completed the wind-down of CSBU and the consolidation of voice messaging technology into our Multimedia Communications segment. CSBU historically had been responsible for the development, sales and service of other non-core products. The consolidation of voice messaging technology into the Multimedia Communications segment did not have a significant impact on segment net sales or gross profit. As a result of these changes we revised our internal reporting structure, operating segments and reporting segments.

Effective January 1, 2009, the new reporting segments are as follows:

† Multimedia Communications-Focused on development and market opportunities in IPTV solutions and Wireless infrastructure technologies.

† Broadband Infrastructure-Focused on our portfolio of broadband products.

† Handsets-Focused on mobile phone business with continued focus on the PAS and CDMA handset market, as well as data cards markets. Handset sales to PCD LLC, which commenced after the July 1, 2008 sale of PCD, are included in this segment.

† Services-Focused on providing services and support of our Broadband Infrastructure and Multimedia Communications product lines.

NET SALES




                         Three months ended September 30,                 Nine months ended September 30,
                                % of net                % of net                % of net                 % of net
                     2009        sales        2008       sales        2009       sales        2008        sales
                                                          (in thousands)
Net Sales by
Segment
Multimedia
Communications    $    22,214         32 % $   57,787         32 % $   95,215         35 % $   199,251         14 %
Broadband
Infrastructure         16,092         23 %     31,112         17 %     45,094         17 %      92,591          7 %
Handsets               15,614         22 %     71,906         40 %     84,858         31 %     165,390         12 %
Services               16,584         23 %     14,197          8 %     44,840         17 %      41,172          3 %
PCD                         -          -            -          -            -          -       879,588         63 %
Other                       -          -        5,605          3 %          -          -        21,360          1 %
                  $    70,504        100 % $  180,607        100 % $  270,007        100 % $ 1,399,352        100 %

                         Three months ended September 30,                 Nine months ended September 30,
                                % of net                % of net                % of net                 % of net
                     2009        sales        2008       sales        2009       sales        2008        sales
                                                          (in thousands)
Net Sales by
region
United States     $    10,664         15 % $   43,127         24 % $   53,654         20 % $   907,770         65 %
China                  30,959         44 %     97,605         54 %    134,708         50 %     325,479         23 %
India                  14,399         20 %      8,002          4 %     33,519         12 %      20,838          2 %
Other                  14,482         21 %     31,873         18 %     48,126         18 %     145,265         10 %
Total net sales   $    70,504        100 % $  180,607        100 % $  270,007        100 % $ 1,399,352        100 %

Three months ended September 30, 2009 and 2008

Net sales decreased by 61% to $70.5 million during the three months ended September 30, 2009 compared to the same period in 2008. The decrease was primarily due to decrease in sales of all operating segments except the service segment. Multimedia Communications net sales decreased by $35.6 million, or 62%, for the three months ended September 30, 2009 compared to the same period in 2008, mainly due to continued weakening demand for our PAS Infrastructure products as well as decrease in Next Generation Network ("NGN") sales. Broadband Infrastructure segment net sales decreased by $15.0 million or 48% for the three months ended September 30, 2009 compared to the same period in 2008 mainly due to decrease in sales of all major product lines. Handsets segment net sales decreased by $56.3 million, or 78%, in the third quarter of 2009 primarily due to the declines of our PAS handsets sales in China and CDMA handsets sales to PCD LLC, partially offset by the increase of CDMA handsets sales in China during the three months ended September 30, 2009.

Nine months ended September 30, 2009 and 2008

Net sales decreased by 81% to $270.0 million during the nine months ended September 30, 2009 compared to the same period in 2008. The decrease was primarily due to disposal of PCD and MSBU in 2008 and disbandment of the operations formerly included in the Other segment in the first quarter of 2009. The PCD and Other segments accounted for $900.9 million of the decrease. Net sales for the segments other than the PCD and Other decreased by $228.4 million or 46%. Multimedia Communications net sales decreased by $104.0 million, or 52%, for the nine months ended September 30, 2009 compared to the same period in 2008, mainly due to continued weakening demand for our PAS Infrastructure products as well as decrease in NGN sales partially offset by increase of IPTV system and Set Top Box ("STB") product sales. Broadband Infrastructure segment net sales decreased by $47.5 million or 51% for the nine months ended September 30, 2009 compared to the same period in 2008 mainly due to decrease in sales of all major product lines. Handsets segment net sales decreased by $80.5 million, or 49% primarily due to the declines of our PAS handsets sales partially offset by the increase of CDMA handsets sales in China as well as to PCD LLC.

For additional discussion, see the "Segment Reporting" section of this Item 2.

In 2009 and beyond, we expect a continued decline in demand for our PAS handsets and infrastructure equipment. As of September 30, 2009, we have $205.0 million of deferred revenue associated with PAS infrastructure sales recognized ratably over the expected period of support. We review assumptions regarding the estimated post contract support periods on a regular basis. Due to the China telecommunication industry restructuring and launch of 3G services in China, the PAS services will be phased out by January 1, 2012. Consequently, we have initiated certain actions which are expected to be completed in the fourth quarter of 2009 to determine the remaining period which the post contract support is expected to be provided. We do not expect the total amount of revenue recognized over the life of contract to change, however, the remaining expected period of support may be different from our estimates as of September 30, 2009.

The economic uncertainty that we are operating in today could adversely impact our business. However, the majority of our business is based in China and India-two countries that are still projected to have economic growth in 2009. We currently offer and have initial market acceptance of our IPTV products in China, India, Taiwan and other geographic regions. We believe that the IPTV market presents a meaningful growth opportunity in these regions as well as other regions where we have targeted to expand our IPTV offerings.

GROSS (LOSS) PROFIT



                        Three Months Ended September 30,              Nine Months Ended September 30,
                                Gross                 Gross                 Gross                   Gross
                      2009     profit %     2008     profit %     2009     profit %      2008      profit %
                                                        (in thousands)
Gross (Loss)
Profit by Segment
Multimedia
Communications      $ 10,122         46 % $ 30,846         53 % $ 32,752         34 %  $  92,820         47 %
Broadband
Infrastructure         3,482         22 %    3,032         10 %    5,716         13 %      6,922          7 %
Handsets               3,322         21 %   14,965         21 %  (24,597 )      (29 )%    37,961         23 %
Services               7,263         44 %    4,720         33 %   16,132         36 %     11,832         29 %
PCD                        -          -          -          -          -          -       69,005          8 %
Other                      -          -      3,764         67 %        -          -       12,814         60 %
Total               $ 24,189         34 % $ 57,327         32 % $ 30,003         11 %  $ 231,354         17 %

Cost of sales consists primarily of material and labor costs, including stock-based compensation, associated with manufacturing, assembly and testing of products, costs associated with installation and customer training, warranty costs, fees to agents, inventory write-downs and overhead. Cost of sales also includes import taxes and tariffs on components and assemblies. Some components and materials used in our products are purchased from a single supplier or a limited group of suppliers and, in some cases, are subject to obtaining Chinese import permits and approvals. We also rely on third party manufacturers to manufacture and assemble most of our CDMA handsets.

Our gross profit has been affected by average selling prices, material costs, product mix, the impact of warranty charges and contract loss provisions as well as inventory reserves and release of deferred revenues and related cost pertaining to prior years. Our gross profit, as a percentage of net sales, varies among our product families. We expect that our overall gross profit, as a percentage of net sales, will fluctuate in the future as a result of shifts in product mix, stage of product life cycle, anticipated decreases in average selling prices and our ability to reduce cost of sales.

Three months ended September 30, 2009 and 2008

Gross profit was $24.2 million, or 34% of net sales, in the three months ended September 30, 2009, compared to $57.3 million, or 32% of net sales, in the corresponding period of 2008. The decrease in absolute dollars was mainly due to decrease in overall sales. The increase in gross profit as percentage of net sales was primarily due to lower provision for anticipated contract losses and sales of certain handsets during the quarter which were previously reserved.

Nine months ended September 30, 2009 and 2008

Gross profit was $30.0 million, or 11% of net sales, for the nine months ended September 30, 2009, compared to $231.4 million, or 17% of net sales, in the corresponding period of 2008. The overall gross profit decrease in absolute dollars was primarily due to overall decrease in sales and the disposal of PCD and MSBU in 2008 and disbandment of the operations formerly included in the Other segment in the first quarter of 2009. PCD and Other segments in aggregate accounted for $81.8 million decrease in gross profit for the nine months ended September 30, 2009. Gross profit for the segments other than PCD and Other decreased by $119.5 million for the nine months ended September 30, 2009 as compared to the corresponding period of 2008. This decrease was primarily due to decrease in sales, additional inventory reserves and claim settlement related to certain handsets sold to PCD LLC for the Handsets segments, and decrease in sales of higher margin Multimedia Communications products during the nine months ended September 30, 2009, partially offset by an $8.5 million decrease to cost of sales in the Handsets segment resulting from the amortization of the Marvell supply agreement during the first quarter of 2009 (See Note 3 of Notes to our Condensed Consolidated Financial Statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q.)

For additional discussion, see "Segment Reporting" section of this Item 2.

OPERATING EXPENSES



The following table summarizes our operating expenses:



                            Three months ended September 30,            Nine months ended September 30,
                                         % of               % of                  % of                % of
                                          net                net                   net                 net
                            2009         sales     2008     sales      2009       sales     2008      sales
                                                          (in thousands)
Selling, general and
administrative         $        33,139      47 % $ 59,445      33 % $   114,290      42 % $ 211,199      15 %
Research and
development                     14,246      20 %   35,971      20 %      51,983      19 %   116,657       8 %
Amortization of
intangible assets                    -       -        279       0 %           -       -       3,833       0 %
Restructuring                    8,909      13 %        -       -        41,485      16 %         -       -
Loss (gain) on
divestiture                      1,689       2 %   (3,455 )    -2 %         332       0 %    (3,455 )     0 %
Total net operating
expenses               $        57,983      82 % $ 92,240      51 % $   208,090      77 % $ 328,234      23 %

Selling, general and administrative expenses ("SG&A") include compensation and benefits, professional fees, sales commissions, provision for doubtful accounts receivable and travel and entertainment costs. Research and development ("R&D") expenses consist primarily of compensation and benefits of employees engaged in research, design and development activities, costs of parts for prototypes, equipment depreciation and third party development expenses. We believe that continued and prudent investment in research and development is critical to our long-term success, and we will aggressively evaluate appropriate investment levels. A portion of our costs are fixed and are difficult to quickly reduce in periods of lower sales.

SELLING, GENERAL AND ADMINISTRATIVE

Three months ended September 30, 2009 and 2008

SG&A expenses were $33.1 million for the three months ended September 30, 2009, a decrease of $26.3 million as compared to $59.4 million for the same period in 2008. The decrease in SG&A expense was primarily due to a $15.9 million decrease in personnel related expenses due to continuous streamlining of operations and recent cost reduction measures, a $2.7 million decrease in depreciation expense due to assets impairment write off in 2008, a $2.8 million decrease in travel related expenses due to reduced travel activity and cost containment efforts, a $2.7 million savings from reduction in the use of outside services, a $3.5 million savings from legal and accounting fees, a $1.0 million reduction in advertising and marketing, sales promotions, as well as shows and exhibits expenses due to reduced sales activities; and a $1.6 million recovery of doubtful account as a result of continued efforts in collection compared to $2.6 million recovery of doubtful account in the same period of 2008. The decrease in SG&A expenses was also partially offset by a $2.4 million of acquired license amortization expense during the quarter.

Nine months ended September 30, 2009 and 2008

SG&A expenses were $114.3 million for the nine months ended September 30, 2009, a decrease of $96.9 million as compared to $211.2 million for the same period in 2008. The decrease in SG&A expense was primarily due to a $14.6 million decrease in SG&A expenses related to divested operations, primarily PCD and MSBU, a $34.6 million decrease in personnel related expenses due to continuous streamlining of operations and recent cost reduction measures, a $12.9 million reduction in legal and accounting fees as a result of reduced activity in investigations and litigation, a $7.6 million decrease in depreciation expense due to assets . . .