IKANOS COMMUNICATIONS, INC. - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - IKANOS COMMUNICATIONS, INC.	Financial_Report.xls
EX-31.1 - SECTION 302 CEO CERTIFICATION - IKANOS COMMUNICATIONS, INC.	d233872dex311.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - IKANOS COMMUNICATIONS, INC.	d233872dex312.htm
EX-32.1 - SECTION 906 CEO AND CFO CERTIFICATION - IKANOS COMMUNICATIONS, INC.	d233872dex321.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 2, 2011

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to

Commission File Number: 0-51532

IKANOS COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

Delaware

73-1721486

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

47669 Fremont Boulevard

Fremont, CA 94538

(Address of principal executive office and zip code)

(510) 979-0400

(Registrant’s telephone number including area code)

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) had been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares outstanding of the Registrant’s Common Stock, $ 0.001 par value, was 68,861,559 as of October 28, 2011.

IKANOS COMMUNICATIONS, INC.

FORM 10-Q

TABLE OF CONTENTS


		Page No.
PART I:	FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)		3

	Condensed Consolidated Balance Sheets as of October 2, 2011 and January 2, 2011		3

	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended October 2, 2011 and October 3, 2010		4

	Condensed Consolidated Statements of Cash Flows for the Three and Nine Months Ended October 2, 2011 and October 3, 2010		5

	Notes to Unaudited Condensed Consolidated Financial Statements		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		24

Item 4.	Controls and Procedures		24

PART II:	OTHER INFORMATION

Item 1.	Legal Proceedings		24

Item 1A.	Risk Factors		25

Item 6.	Exhibits		36

	Signatures		37

PART I: FINANCIAL INFORMATION

Item 1.

Financial Statements

IKANOS COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands and unaudited)


	October 2, 2011		January 2, 2011
Assets

Current assets:
Cash and cash equivalents	$	36,264	$	28,950
Short-term investments		—		2,000
Accounts receivable, net		15,596		24,147
Inventory		13,303		17,046
Prepaid expenses and other current assets		2,822		2,096

Total current assets		67,985		74,239
Property and equipment, net		7,109		8,214
Intangible assets, net		4,227		6,102
Other assets		1,832		1,142

	$	81,153	$	89,697


Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	9,886	$	10,401
Accrued liabilities		11,485		13,297

Total current liabilities		21,371		23,698
Long-term liabilities		478		478

Total liabilities		21,849		24,176
Commitments and contingencies (Note 9)
Stockholders’ equity		59,304		65,521

	$	81,153	$	89,697

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

IKANOS COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data, and unaudited)


	Three Months Ended						Nine Months Ended
	October 2, 2011			October 3, 2010			October 2, 2011			October 3, 2010
Revenue	$	35,420		$	41,536		$	101,148		$	154,534
Cost of revenue (1)		17,590			28,575			50,388			106,469

Gross profit		17,830			12,961			50,760			48,065

Operating expenses:
Research and development (2)		14,402			14,757			42,727			47,973
Selling, general and administrative (3)		5,528			6,467			17,332			21,945
Operating asset impairments		—			21,378			—			21,378
Restructuring charges (credits) (4)		—			3,757			(109	)		5,240

Total operating expenses		19,930			46,359			59,950			96,536

Loss from operations		(2,100	)		(33,398	)		(9,190	)		(48,471	)
Gain on sale of marketable securities		—			—			1,295			—
Interest income and other, net		(311	)		8			(222	)		63

Loss before provision for income taxes		(2,411	)		(33,390	)		(8,117	)		(48,408	)
Benefit from income taxes		(261	)		(129	)		(75	)		(19	)

Net loss	$	(2,150	)	$	(33,261	)	$	(8,042	)	$	(48,389	)

Basic and diluted net loss per share	$	(0.03	)	$	(0.61	)	$	(0.12	)	$	(0.89	)

Weighted average number of shares (basic and diluted)		68,807			54,904			68,482			54,493


Includes stock-based compensation expense as follows:
(1) Cost of revenue	$	11		$	24		$	67		$	86
(2) Research and development		772			273			1,919			1,399
(3) Selling, general and administrative		194			168			720			1,245
(4) Restructuring charges (credits)		—			111			—			111

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

IKANOS COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands and unaudited)


	Nine Months Ended
	October 2, 2011			October 3, 2010
Cash flows from operating activities:
Net loss	$	(8,042	)	$	(48,389	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		3,554			3,029
Loss on property and equipment included in restructuring charges		—			314
Stock-based compensation expense		2,706			2,730
Operating asset impairments		—			21,378
Amortization of intangible assets and acquired technology		1,875			5,887
Gain on sale of marketable securities		(1,295	)		—
Changes in assets and liabilities:
Accounts receivable, net		8,551			4,955
Inventory		3,743			12,700
Prepaid expenses and other assets		(1,416	)		(1,487	)
Accounts payable and accrued liabilities		(1,680	)		(12,591	)

Net cash provided by (used in) operating activities		7,996			(11,474	)

Cash flows from investing activities:
Purchases of property and equipment		(3,096	)		(2,353	)
Maturities and sales of investments		2,000			14,139

Net cash provided by (used in) investing activities		(1,096	)		11,786

Cash flows from financing activities:
Net proceeds from issuances of common stock and exercise of stock options		414			942

Net increase in cash and cash equivalents		7,314			1,254
Cash and cash equivalents at beginning of period		28,950			13,317

Cash and cash equivalents at end of period	$	36,264		$	14,571

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

IKANOS COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Ikanos and Summary of Significant Accounting Policies

The Company

Ikanos Communications, Inc. (Ikanos or the Company) was incorporated in the State of California in April 1999 and reincorporated in the State of Delaware in September 2005. The Company is a provider of silicon and software for interactive triple play broadband. The Company develops and markets end-to-end products for the last mile and the digital home, which enable carriers to offer enhanced triple play services, including voice, video and data. The Company has developed programmable, scalable chip architectures, which form the foundation for deploying and delivering multi-play services. Flexible communication processor architecture with wire-speed packet processing capabilities enables high-performance residential gateways for distributing advanced services to the home. These products thereby support telecommunications services providers’ triple play deployment plans to the digital home while keeping their capital and operating expenditures low and have been deployed by service providers in Asia, Europe and North America.

The Company incurred net losses of $2.2 million and $8.0 million for the three and nine months ended October 2, 2011 and had an accumulated deficit of $278.7 million as of October 2, 2011. To achieve consistent profitability, the Company will need to generate and sustain higher revenue, while maintaining cost and expense levels appropriate and necessary for its business. Existing cash and cash equivalents and cash flows expected to be generated from future operations, if any, are expected to be sufficient to meet anticipated cash needs for the next twelve months.

The Company’s fiscal year ends on the Sunday closest to December 31. The Company’s fiscal quarters end on the Sunday closest to the end of the applicable calendar quarter, except in a 53-week fiscal year, in which case the additional week falls into the fourth quarter of that fiscal year.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared without audit in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted in accordance with these rules and regulations. The information in this report should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in its Annual Report on Form 10-K filed with the SEC on March 10, 2011 (Annual Report).

In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to a fair statement of the Company’s financial position, results of operations and cash flows for the interim periods presented. The operating results for the three- and nine-month periods ended October 2, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending January 1, 2012 or for any other future period.

Use of Estimates

The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates, judgments and assumptions. The Company believes that the estimates, judgments and assumptions upon which it relies are reasonable based upon information available to it at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenue and expenses during the periods presented. To the extent there are material differences between these estimates and actual results, the Company’s financial statements would be affected. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (FASB) issued updated accounting guidance to amend existing

requirements for fair value measurements and disclosures. The guidance expands the disclosure requirements around fair value measurements categorized in Level 3 of the fair value hierarchy and requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value but whose fair value must be disclosed. It also clarifies and expands upon existing requirements for fair value measurements of financial assets and liabilities as well as instruments classified in shareholders’ equity. The guidance is effective for annual and interim periods beginning after December 15, 2011. The Company does not have any Level 3 financial instruments and, therefore, the implementation of this guidance is not expected to have any impact on the Company’s consolidated financial position, results of operations or cash flows.

In June 2011, the FASB issued guidance concerning the presentation of Comprehensive Income in the financial statements. Entities will have the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate, but consecutive statements. The disclosure requirements are effective for annual and interim periods beginning after December 15, 2011 and should be retrospectively applied. The implementation of this guidance is not expected to have any impact on the Company’s consolidated financial position, results of operations or cash flows.

In September 2011, the FASB amended its guidance on the testing of goodwill impairment to allow an entity the option of assessing qualitative factors to determine whether performing the current two-step process is necessary. Under the option, the calculation of the reporting unit's fair value would not be required unless, as a result of the qualitative assessment, it is more likely than not that the fair value of the reporting unit is less than the unit's carrying amount. The amendments are effective for fiscal years and interim periods beginning after December 15, 2011, with early adoption permitted. The implementation of this guidance is not expected to have any impact on the Company’s consolidated financial position, results of operations or cash flows.

Summary of Significant Accounting Policies

The Company’s significant accounting policies are described in Note 1 to its audited Consolidated Financial Statements for the fiscal year ended January 2, 2011, included in its Annual Report. These accounting policies have not significantly changed.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash, cash equivalents and accounts receivable. Cash and cash equivalents are held with a limited number of financial institutions. Deposits held with these financial institutions may exceed the amount of insurance provided on such deposits. Management believes that the financial institutions that hold the Company’s investments are creditworthy and, accordingly, minimal credit risk exists with respect to those investments. Short-term investments have included a diversified portfolio of commercial paper and government agency bonds. All investments are classified as available-for-sale. The Company does not hold or issue financial instruments for trading purposes.

Credit risk with respect to accounts receivable is concentrated due to the number of large orders placed by a small number of customers in any particular reporting period. Four customers represented 27%, 24%, 15% and 10% of accounts receivable at October 2, 2011. Three customers represented 20%, 16% and 14% of accounts receivable at January 2, 2011.Three customers accounted for 21%, 14% and 10% of revenue for the three months ended October 2, 2011. Three customers accounted for 23%, 11% and 10% of revenue for the nine months ended October 2, 2011. Three customers accounted for 20%, 20% and 10% of revenue for the three months ended October 3, 2010. Three customers accounted for 16%, 15% and 10% of revenue for the nine months ended October 3, 2010.

Concentration of Suppliers

The Company subcontracts the manufacturing, assembly and testing of its products to third-parties located primarily in Asia. As a result of this geographic concentration, a disruption in the manufacturing process resulting from a natural disaster or other unforeseen event could have a material adverse effect on the Company’s financial position and results of operations. Additionally, a small number of sources manufacture, assemble and test the Company’s products. The Company does not have long-term contracts. Also, each product generally has only one foundry and one assembly and test provider. An inability to obtain these products and services in the amounts needed and on a timely basis or at commercially reasonable prices could result in delays in product introductions, interruptions in product shipments or increases in product costs and, therefore, could have a material adverse effect on the Company’s financial position and results of operations.

Concentration of Other Risk

The semiconductor industry is characterized by rapid technological change, competitive pricing pressures and cyclical market patterns. The Company’s results of operations are affected by a wide variety of factors, including general economic conditions; economic conditions specific to the semiconductor industry; demand for the Company’s products; the timely introduction of new products; implementation of new manufacturing technologies; manufacturing capacity; the availability of materials and supplies;

competition; the ability to safeguard patents and intellectual property in a rapidly evolving market; and reliance on assembly and wafer fabrication subcontractors and on independent distributors and sales representatives. As a result, the Company may experience substantial period-to-period fluctuations in future periods due to the factors mentioned above, factors described in the section titled “Item 1A. Risk Factors” or other factors.

Comprehensive Loss

Comprehensive loss is defined as the change in equity of a business during a period from transactions and other events and circumstances from non-owner sources. The components of comprehensive loss are as follows (in thousands):


	Three Months Ended						Nine Months Ended
	October 2, 2011			October 3, 2010			October 2, 2011			October 3, 2010
Net loss	$	(2,150	)	$	(33,261	)	$	(8,042	)	$	(48,389	)
Other comprehensive loss–unrealized loss on marketable securities		—			(2	)		—			(84	)

Comprehensive loss	$	(2,150	)	$	(33,263	)	$	(8,042	)	$	(48,473	)

Net Loss per Share

Basic net loss per share is computed using the weighted-average number of common shares outstanding during the period. Potentially dilutive securities have been excluded from the computation of diluted net loss per share if their inclusion is anti-dilutive. The calculation of basic and diluted net loss per share is as follows (in thousands, except per share amounts):


	Three Months Ended						Nine Months Ended
	October 2, 2011			October 3, 2010			October 2, 2011			October 3, 2010
Net loss	$	(2,150	)	$	(33,261	)	$	(8,042	)	$	(48,389	)

Weighted average number of shares, basic and diluted outstanding		68,807			54,904			68,482			54,493

Basic and diluted net loss per share	$	(0.03	)	$	(0.61	)	$	(0.12	)	$	(0.89	)

The following potential common shares have been excluded from the calculation of diluted net loss per share as their effect would have been anti-dilutive (in thousands):


	Three Months Ended				Nine Months Ended
	October 2, 2011		October 3, 2010		October 2, 2011		October 3, 2010
Anti-dilutive securities:
Warrants to purchase common stock		3,671		—		3,481		1,109
Weighted average restricted stock units		544		964		560		1,133
Weighted-average options to purchase common stock		11,791		7,794		10,871		8,227

		16,006		8,758		14,912		10,469

Note 2 – Investments and Fair Value Measurements

As of October 2, 2011, the Company has no short-term investments or marketable securities. During the first quarter of 2011, the Company sold its auction rate securities for $2.0 million and recognized a gain of $1.3 million. The Company invested the $2.0 million of proceeds in money market funds. Money market funds are considered cash equivalents and are included in cash and cash equivalents on the balance sheet.

The following is a summary of the Company’s investments as of January 2, 2011 (in thousands):


	Cost		Gross Unrealized Gain		Estimated Fair Value
Total short-term investments—auction rate securities	$	705	$	1,295	$	2,000

There were no unrealized losses on investments aggregated by category as of January 2, 2011.

Marketable securities are classified as available-for-sale as of the balance sheet date and are reported at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income (loss) in stockholders’ equity. Realized gains and losses and permanent declines in value, if any, on available-for-sale securities are reported in other income or expense as incurred. Estimated fair values were determined for each individual security in the investment portfolio. As noted above, as of October 2, 2011, the Company had no marketable securities.

Fair Value Measurements

Fair value is an exit price which represents the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, authoritative guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: observable inputs such as quoted prices in active markets (Level 1); inputs other than the quoted prices in active markets that are observable either directly or indirectly (Level 2); and unobservable inputs in which there is little or no market data, which require the Company to develop its own assumptions (Level 3). This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, the Company measures certain financial assets, mainly comprised of marketable securities, at fair value.

The Company’s cash and investment instruments at October 2, 2011 and January 2, 2011 are classified within Levels 1 and 2 of the fair value hierarchy, respectively. The types of Level 1 instruments, valued based on quoted market prices in active markets, include money market securities. Level 2 types of instruments are valued based on quoted prices of identical or similar instruments in markets that are less than active or for which all inputs are observable. These include investment-grade U.S. government agencies, commercial paper, corporate bonds and notes and auction rate securities. Level 3 types of instruments are valued based on unobservable inputs in which there is little or no market data, and which require the Company to develop its own assumptions. The fair value hierarchy of the Company’s marketable securities as of October 2, 2011 and January 2, 2011 was (in thousands):


	October 2, 2011
	Level 1		Level 2		Level 3		Total
Money market funds	$	12,000	$	—	$	—	$	12,000


	January 2, 2011
	Level 1		Level 2		Level 3		Total
Auction rate securities	$	—	$	2,000	$	—	$	2,000

Note 3 – Operating Asset Impairments

For the quarter and nine months ended October 2, 2011, there was no impairment charge.

For the quarter ended October 3, 2010, the Company recorded impairment charges totaling $21.4 million of which $8.6 million related to goodwill and $12.8 million related to other intangible assets.

The Company tests goodwill for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company’s single reporting unit below its carrying value. The Company issued financial guidance for the third quarter 2010 period and announced a company-wide restructuring to better align the Company’s overhead structure with lower expected revenues and subsequently experienced a sustained decline in market capitalization during the quarter ended October 3, 2010. Based on these indicators of potential impairment, the Company completed an impairment analysis of its goodwill as of October 3, 2010.

The Company performed the first step of the two-step impairment test and compared the fair value of the Company as a single reporting unit to its carrying value. Consistent with the Company’s approach in its annual impairment testing, in assessing the fair value of the reporting unit, the Company considered both the market approach and income approach. Under the market approach, the fair value of the reporting unit is based on quoted stock price on the NASDAQ, the number of shares outstanding for the Company’s common stock and an estimated control premium. Under the income approach, the fair value of the reporting unit is based on the present value of estimated future cash flows. The income approach is dependent on a number of significant management assumptions including estimates of revenue and operating expenses, product penetration, growth and discount rates. Due to current market conditions and the number of significant assumptions required, the Company used the market approach. The market approach was lower, but both valuation approaches indicated that the fair value was less than the carrying value of the net assets and, therefore, the Company performed step two of the impairment test.

In step two of the impairment test, the Company determined the implied fair value of the goodwill and compared it to the carrying value of the goodwill. The Company allocated the fair value of the reporting unit to all of its assets and liabilities as if the reporting unit had been acquired in a business combination and the fair value of the mainline reporting unit was the price paid to acquire the reporting unit. The Company determined fair value of the single reporting unit using discounted cash flows. The weighted average cost of capital used in the impairment was 25.4% with perpetual growth rate of 3%. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. The Company’s step two analysis resulted in no implied fair value of goodwill, and therefore, the Company recognized an impairment charge of $8.6 million, representing a write off of the entire amount of the Company’s previously recorded goodwill (in thousands).


Goodwill as of January 3, 2010	$	8,633
Impairment		(8,633	)

Goodwill as of October 3, 2010	$	—

In addition, as part of and in conjunction with the impairment test, the Company determined that the carrying values of certain intangible assets were less than their fair values. Accordingly, the Company recorded a non-cash intangible asset impairment charge of $12.8 million as of October 3, 2010. The fair value calculation that leads to the impairment of the existing technology and customer relationship intangibles of $10.3 million was determined using the discounted cash flows method. The weighted average cost of capital used in the impairment was 25.4% with no perpetual growth rate. The Company also impaired the remaining $2.5 million of IPR&D related to the gateway line of business under the Conexant BBA product line that was acquired in August 2009, since it was determined to have no alternative use and was therefore abandoned.

Information regarding the nonrecurring fair value measurements completed during the quarter ended October 3, 2010 was (in thousands):


			Fair Value Measurement Using*
	Fair Value as of Measurement Date		Level 1		Level 2		Level 3		Impairment Charge
Goodwill	$	—	$	—	$	—	$	—	$	8,633

Existing technology	$	$3,834	$	—	$	—	$	3,834	$	4,927
Customer relationships		1,458		—		—		1,458		5,343
In-process research and development		1,435		—		—		1,435		2,475

	$	6,727	$	—	$	—	$	6,727	$	12,745

*	Note 2 – See Investments and Fair Value Measurements for explanation of Levels 1, 2, and 3.

Note 4 – Inventory

Inventory consisted of the following (in thousands):


	October 2, 2011		January 2, 2011
Finished goods	$	7,181	$	11,629
Work-in-process		4,991		4,758
Purchased parts and raw materials		1,131		659

	$	13,303	$	17,046

Note 5 – Property and Equipment

Property and equipment consisted of the following (in thousands):


	October 2, 2011			January 2, 2011
Machinery and equipment	$	18,162		$	17,968
Software		8,378			6,294
Computer equipment		5,359			4,777
Furniture and fixtures		861			870
Leasehold improvements		997			960
Construction in progress		543			994

		34,300			31,863
Less: Accumulated depreciation and amortization		(27,191	)		(23,649	)

	$	7,109		$	8,214

Depreciation and amortization expense for property and equipment was $1.2 million and $1.1 million for the three months ended October 2, 2011 and October 3, 2010, respectively. Depreciation and amortization expense for property and equipment was $3.6 million and $3.0 million for the nine months ended October 2, 2011 and October 3, 2010, respectively.

Note 6 – Intangible Assets

The carrying value of intangible assets is as follows (in thousands):


	October 2, 2011
	Gross Carrying Amount		Accumulated Amortization			Net Amount		Useful life (Years)
Existing technology	$	13,390	$	(11,556	)	$	1,834		3
Customer relationships		8,216		(7,258	)		958		4
In-process research and development		1,435		—			1,435		*

	$	23,041	$	(18,814	)	$	4,227


	January 2, 2011
	Gross Carrying Amount		Accumulated Amortization			Net Amount		Useful life (Years)
Existing technology	$	13,390	$	(10,056	)	$	3,334		3
Customer relationships		8,216		(6,883	)		1,333		4
In-process research and development		1,435		—			1,435		*

	$	23,041	$	(16,939	)	$	6,102

*	Technical feasibility of IPR&D has not been reached and, therefore, a useful life has not been determined.

For the three months ended October 2, 2011 and October 3, 2010, the amortization of intangible assets was $0.6 million and $1.5 million, respectively. For the nine months ended October 2, 2011 and October 3, 2010, the amortization of intangible assets was $1.9 million and $5.9 million, respectively. The estimated future amortization of purchased intangible assets as of October 2, 2011 is $0.6 million for the remainder of 2011, $1.8 million in 2012 and $0.4 million in 2013.

Note 7 – Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):


	October 2, 2011		January 2, 2011
Accrued compensation and related benefits	$	3,021	$	3,289
Accrued rebates		1,971		2,216
Deferred rent		819		905
Warranty accrual		742		895
Accrued royalties		804		2,236
Restructuring		218		1,041
Other accrued liabilities		3,910		2,715

	$	11,485	$	13,297

The following table summarizes the activity related to the warranty accrual (in thousands):


	Nine Months Ended
	October 2, 2011			October 3, 2010
Balance, beginning of period	$	895		$	660
Provision		(68	)		419
Usage		(85	)		(61	)

Balance, end of period	$	742		$	1,018

Note 8 – Restructuring Charges

For the three months ended October 2, 2011, there was no restructuring charge. During the third quarter of 2010, the Company implemented a restructuring plan in order to better align its operating expenses with its revised revenue forecast and to reallocate sufficient engineering resources to the continued development of its broadband technology and products. The adjustment to the excess facilities of $142 thousand resulted from the Company’s assigning the lease to a third party. The Company expects to make payments under the software tool license through 2012. A summary of the restructuring activity follows (in thousands):


	Severance and Benefits			Excess Facilities			Software Tools			Total
Balance as of January 2, 2011	$	453		$	151		$	437		$	1,041
Restructuring charges		47			—			—			47
Cash payments		(486	)		(9	)		(219	)		(714	)
Adjustments to provision		(14	)		(142	)		—			(156	)

Balance as of October 2, 2011	$	—		$	—		$	218		$	218

Note 9 – Commitments and Contingencies

Lease Obligations

The Company leases office facilities under non-cancelable operating leases with various expiration dates through 2018. Rent expense for the three months ended October 2, 2011 and October 3, 2010 was $0.7 million and $0.8 million, respectively. Rent expense for the nine months ended October 2, 2011 and October 3, 2010 was $1.7 million and $2.3 million, respectively. The terms of the facility leases provide for rental payments on a graduated scale. The Company recognizes rent expense on a straight-line basis over the lease period and has accrued for rent expense incurred but not paid. Future minimum lease payments as of October 2, 2011 under non-cancelable leases with original terms in excess of one year are $0.4 million for the remainder of 2011, $2.7 million in 2012, $2.8 million in 2013, $2.4 million in 2014 and $5.4 million in 2015 and thereafter.

Purchase Commitments

As of October 2, 2011, the Company had $3.5 million of inventory purchase obligations with various suppliers that are expected to be paid by the end of 2011.

Indemnities, Commitments and Guarantees

During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include intellectual property indemnities to the Company’s customers in connection with the sales of its products, indemnities for liabilities associated with the infringement of other parties’ technology based upon the Company’s products, and indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease. The duration of these indemnities, commitments and guarantees varies, and in certain cases, is indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments that the Company could be obligated to make. The Company believes its internal development processes and other policies and practices limit its exposure related to its contractual indemnification provisions. In addition, the Company requires its employees to sign a proprietary information and inventions agreement, which assigns the rights to its employees’ development work to the Company. The Company has not recorded any liability for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets. The Company does, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable and the amount of the loss can be reasonably estimated, in accordance with authoritative guidance.

In addition, the Company indemnifies its officers and directors under the terms of indemnity agreements entered into with them, as well as pursuant to its certificate of incorporation, bylaws and applicable Delaware law. To date, the Company has not incurred any costs under these indemnity agreements or provisions.

Litigation

In November 2006, three putative class action lawsuits were filed in the United States District Court for the Southern District of New York against the Company, its directors and two former executive officers, as well as the lead underwriters for its initial and secondary public offerings. The lawsuits were consolidated and an amended complaint was filed on April 24, 2007. The amended complaint sought unspecified damages for certain alleged misrepresentations and omissions made by the Company in connection with both its initial public offering in September 2005 and its follow-on offering in March 2006. On June 25, 2007, the Company filed motions to dismiss the amended complaint, and on March 10, 2008, the Court dismissed the case with prejudice. On March 25, 2008,

plaintiffs filed a motion for reconsideration, and on June 12, 2008, the District Court denied the motion for reconsideration. On October 15, 2008, plaintiffs appealed the District Court’s dismissal of the amended complaint and denial of its motion for reconsideration to the United States Court of Appeals for the Second Circuit. On September 17, 2009, the Court of Appeals affirmed the District Court’s dismissal of the amended complaint, but vacated its judgment on the motion for reconsideration and remanded the case to the District Court for further proceedings. On May 13, 2010, the District Court granted plaintiffs leave to file a motion to amend the pleadings. Plaintiffs filed a motion for leave to amend the complaint on June 11, 2010. The Company opposed on July 11, 2010, and on November 23, 2010, the District Court denied the motion. On January 6, 2011, plaintiffs filed a notice of appeal with the United States Court of Appeals for the Second Circuit and, on March 18, 2011, filed Appellant’s Opening Brief. The Company filed its opposition brief on June 17, 2011 and on July 5, 2011 plaintiffs filed a reply. Both parties have requested oral argument before the District Court. The Company cannot predict the likely outcome of the appeal, and an adverse result could have a material effect on its financial statements.

Additionally, from time to time, the Company is a party to various legal proceedings and claims arising from the normal course of business activities. The Company currently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on its financial position, results of operations and statement of cash flows. If an unfavorable ruling were to occur in the legal proceeding described above, there exists the possibility of a material adverse effect on its financial position, results of operations and cash flows. The loss with respect to the litigation described above cannot be reasonably estimated and we have therefore not accrued for losses related to such litigation. The Company continues to monitor these matters; its determination could change, however, and it may decide, at some future date, to establish an appropriate reserve. With respect to the litigation above, except where noted otherwise, the Company has determined that a potential loss is not probable at this time and, accordingly, no amount has been accrued as of October 2, 2011. The Company makes a determination as to when a potential loss is reasonably possible based on relevant accounting literature and then includes appropriate disclosure of the contingency. Except as otherwise noted, the Company does not believe that the amount of loss or a range of possible losses is reasonably estimable.

Note 10 – Significant Customer Information and Segment Reporting

The Company’s chief operating decision maker is the Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenue by geographic region for purposes of making operating decisions and assessing financial performance. On this basis, the Company is organized and operates in a single segment: the design, development, marketing and sale of semiconductors.

The following table summarizes revenue and percentage of revenue by country, based on the country in which the customer’s headquarters is located (in thousands):


	Three Months Ended								Nine Months Ended
	October 2, 2011				October 3, 2010				October 2, 2011				October 3, 2010
China	$	6,451	18	%	$	4,153	10	%	$	13,704	14	%	$	23,020	15	%
Tunesia		7,278	21			7,915	20			23,525	23			22,378	15
Hong Kong		4,172	12			5,497	13			9,420	9			23,647	15
Japan		7,257	20			6,223	15			19,982	20			23,417	15
Taiwan		2,624	7			4,472	11			10,704	11			15,104	10
Netherlands		1,600	5			2,837	7			6,060	6			7,365	5
United States		1,377	4			994	2			1,959	2			4,003	3
Other		4,661	13			9,445	22			15,794	15			35,600	22

	$	35,420	100	%	$	41,536	100	%	$	101,148	100	%	$	154,534	100	%

The Company divides its products into three product families: Broadband DSL, Communications Processors and Other. Broadband DSL consists of the Company’s central office products, DSL modem-only customer premise equipment products and the DSL value of the Company’s integrated devices. Communications Processors includes the Company’s stand alone processors and the processor-only value of the Company’s integrated devices. Other includes products that do not fall into the other two product families. Revenue by product family is as follows (in thousands):


	Three Months Ended								Nine Months Ended
	October 2, 2011				October 3, 2010				October 2, 2011				October 3, 2010
Broadband DSL	$	19,240	54	%	$	24,588	59	%	$	56,076	55	%	$	93,528	61	%
Communications Processors		11,952	34			9,230	22			32,067	32			35,425	23
Other		4,228	12			7,718	19			13,005	13			25,581	16

	$	35,420	100	%	$	41,536	100	%	$	101,148	100	%	$	154,534	100	%

The distribution of long-lived assets (excluding goodwill, intangible assets and other assets) is as follows (in thousands):


	October 2, 2011		January 2, 2011
United States	$	4,972	$	6,295
Asia, predominantly India		1,270		1,914
Other		867		5

	$	7,109	$	8,214

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This quarterly report on Form 10-Q, particularly in the sections entitled “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this document, including statements regarding our future financial position, business strategy, plans and objectives of management for future operations, forecasts regarding the broadband market, market trends, our competitive status, our product development, our product marketing and inventory, technological developments, the features, benefits and performance of our current and future products, our compliance with governmental rules, our ability to adapt to industry standards, future price reductions, our future liquidity and cash needs, management of our expenses, anticipated demand for our products, customer relationships, the integration of our senior management, our dependence on our senior management and our ability to attract and retain key personnel and maintain a consistent senior management team, our ability to integrate current and future senior management, our ability to use of third party intellectual property, the effect of one large stockholder group on our common stock, qualification of foundries and our foundries’ capacities, our ability to deliver quality products with acceptable manufacturing yields, current and potential litigation, the expected benefits of our intellectual property and the potential outcomes of intellectual property disputes, our ability to protect our intellectual property, our expected future operating costs and expenses, our internal controls, exchange rates, investment and foreign currency exposure, potential new competitors, sources of revenue, our continued growth, dependency and concentration of customer base, use of proceeds, the expected impact of various accounting policies and rules adopted by the Financial Accounting Standards Board and our accounting policy estimates, our future office space needs, expected benefits and completion of our corporate restructuring, our ability to operate internationally and fluctuations in our stock price are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “potential,” or the negative of these terms or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions described under the caption “Risk Factors” and elsewhere in this document, regarding, among other things:

•

our history of losses;

•

our ability to integrate the technologies and employees from acquisitions into our existing business;

•

cyclical and unpredictable decreases in demand for our semiconductors;

•

our ability to adequately forecast demand for our products;

•

our ability to develop and achieve market acceptance of new products and technologies;

•

our sales cycle;

•

selling prices of products being subject to declines;

•

our dependence on a few customers;

•

our reliance on subcontractors to manufacture, test and assemble our products;

•

our dependence on and qualification of foundries to manufacture our products;

•

production capacity;

•

our customer relationships;

•

the development and future growth of the broadband digital subscriber line (DSL) and communications processing markets;

•

protection of our intellectual property;

•

currency fluctuations;

•

competition and competitive factors of the markets in which we compete; and

•

future costs and expenses and financing requirements.

These risks are not exhaustive. Other sections of this quarterly report on Form 10-Q include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the effect 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.

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto in Part I, Item 1 above and with our financial statements and notes thereto for the fiscal year ended January 2, 2011, contained in our Annual Report on Form 10-K filed on March 10, 2011.

In this quarterly report on Form 10-Q, references to “Ikanos,” “we,” “us,” “our” or the “Company” means Ikanos Communications, Inc. and our subsidiaries except where it is made clear that the term means only the parent company.

Overview

We are a leading provider of advanced broadband semiconductor and software products for the digital home. Our broadband DSL, communications processors and other offerings power access infrastructure and customer premises equipment (CPE) for many of the world’s leading network equipment manufacturers and telecommunications service providers. Our products are at the core of digital subscriber line access multiplexers (DSLAMs), optical network terminals (ONTs), concentrators, modems, voice over Internet Protocol (VoIP) terminal adapters, integrated access devices (IADs) and residential gateways (RGs). Our products have been deployed by service providers in Asia, Europe and North America.

We believe that we can offer advanced products by continuing to push existing limits in silicon, systems and software. We have developed programmable, scalable chip architectures, which form the foundation for deploying and delivering multi-play services. Expertise in the creation and integration of digital signal processor (DSP) algorithms with advanced digital, analog and mixed signal semiconductors enables us to offer high performance, high-density and low-power asymmetric DSL (ADSL) and very-high-bit rate DSL (VDSL) products. In addition, flexible communications processor architectures with wirespeed packet processing capabilities enable high-performance end-user devices for distributing advanced services in the home. These products thus support service providers’ multi-play deployment plans to the digital home while keeping their capital and operating expenditures low.

We outsource all of our semiconductor fabrication, assembly and test functions, which allows us to focus on the design, development, sales and marketing of our products and reduces the level of our capital investment. Our direct customers consist primarily of original design manufacturers (ODMs), contract manufacturers (CMs), network equipment manufacturers (NEMs) and original equipment manufacturers (OEMs), who in turn sell our semiconductors as part of their product solutions to the service provider market.

We incurred net losses of $2.2 million and $8.0 million, respectively, for the fiscal quarter and nine months ended October 2, 2011 and we had an accumulated deficit of $278.7 million as of October 2, 2011. To achieve consistent profitability, we will need to generate and sustain higher revenue, while maintaining cost and expense levels appropriate and necessary for our business. While we believe that we have the cash necessary to fund our operations for the next twelve months, we may also seek additional financing as deemed appropriate to support future company needs and investments. We filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission (SEC) on October 25, 2010 (declared effective on November 1, 2010) under which we can offer and sell up to $30.0 million of our common stock and warrants. On November 11, 2010 and December 7, 2010 we sold a total of 12.8 million shares of common stock under the Form S-3 in an underwritten offering for $13.5 million. After deducting underwriting fees, legal, accounting and other costs, we realized proceeds of $12.5 million.

We were incorporated in April 1999 and, through December 31, 2001, we were engaged principally in research and development. We began commercial shipment of our products in the fourth quarter of 2002. Over the last three fiscal years, our

revenue was $106.5 million in fiscal year 2008, $130.7 million in fiscal year 2009 and $191.7 million in fiscal year 2010.

Quarterly revenue fluctuations are characteristic of our industry and affect our business, especially due to the concentration of our revenue among a few customers. These quarterly fluctuations can result from a mismatch of supply and demand. Specifically, service providers purchase equipment based on planned deployment. However, service providers may deploy equipment more slowly than initially planned, while OEMs continue for a time to manufacture equipment at rates higher than the rate at which equipment is deployed. As a result, periodically and usually without significant notice, service providers will reduce orders with OEMs for new equipment, and OEMs, in turn, will reduce orders for our products, which will adversely impact the quarterly demand for our products, even when deployment rates may be increasing.

Furthermore, our future revenue growth depends upon new service providers’ beginning to deploy new platforms with our products, among other factors. It is inherently difficult to predict if and when platforms will pass qualification, when service providers will begin to deploy the equipment and at what rate, because we do not control the qualification criteria or process, and the systems manufacturers and service providers do not always share all of the information available to them regarding qualification and deployment decisions. Some of our products are mature and certain of our customers have entered into last time buys of those products beginning in the fourth quarter of 2011. We have several new products in development and believe our team of engineers, DSL products, technology, patents and other intellectual property will allow us to create products which may allow us to increase our market share and enable us to implement our digital home initiatives and next generation VDSL2 development.

On June 14, 2011, John H. Quigley resigned as CEO and president and as a member of our Board of Directors, effective immediately. Diosdado P. Banatao, our executive chairman, has assumed the role of interim president and CEO while we search for a new CEO and president.

Critical Accounting Policies and Estimates

In preparing our unaudited condensed consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on amounts reported. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates and make changes accordingly. We also discuss our critical accounting estimates with the Audit Committee of our Board of Directors. We believe that the assumptions, judgments and estimates involved in the accounting for revenue, cost of revenue, marketable securities, accounts receivable, inventories, warranty, income taxes, impairment of goodwill and related intangibles, acquisitions and stock-based compensation expense have the greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.

The critical accounting policies, are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the fiscal year ended January 2, 2011, and have not changed materially as of October 2, 2011.

Results of Operations

Revenue

Our revenue is derived from sales of our semiconductor products. Revenue from product sales is generally recognized upon shipment, net of sales returns, rebates and allowances. Revenue from product sales to a distributor is generally recognized when the distributor has sold through to the end customer. As is typical in our industry, the selling prices of our products generally decline over time. Therefore, our ability to increase revenue is dependent upon our ability to increase unit sales volumes of existing products and to introduce and sell new products in greater quantities. Our ability to increase unit sales volume is dependent primarily upon our ability to increase and fulfill current customer demand, to obtain new customers and to develop and produce new products. The continuing effects of the worldwide recession have adversely affected the businesses of service providers around the world, causing them to reevaluate how they employ capital. Consequently the rate at which broadband infrastructure is upgraded may slow or delay new broadband programs.

Revenue decreased by $6.1 million, or 15%, to $35.4 million in the three months ended October 2, 2011 from $41.5 million in the three months ended October 3, 2010. Revenue decreased by $53.3 million, or 35%, to $101.2 million in the nine months ended October 2, 2011 from $154.5 million in the nine months ended October 3, 2010. The decline in third quarter and nine month revenue reflects Ikanos’ move away from lower margin segments of the ADSL market and our customers’ desire to have multiple sources of supply for VDSL components.

We generally sell our products to OEMs through a combination of our direct sales force and third-party sales representatives. Sales are generally made under short-term, non-cancelable purchase orders. We also have volume purchase agreements and certain

customers who provide us with non-binding forecasts. Although certain OEM customers may provide us with rolling forecasts, our ability to predict future sales in any given period is limited and subject to change based on demand for our OEM customers’ systems and their supply chain decisions. Historically, a small number of OEM customers, the composition of which has varied over time, have accounted for a substantial portion of our revenue. We expect that significant customer concentration will continue for the foreseeable future, but it may diversify across more carrier customers as we expect more service providers world-wide to begin deployments of broadband solutions and Gateway products. The following direct customers each accounted for more than 10% of our revenue for the periods indicated.

Three Months Ended

Nine Months Ended

Our Direct Customer

October 2,
2011

October 3,
2010

October 2,
2011

October 3,
2010

Sagemcom Tunisie

ZTE Corporation

NEC

Paltek Corporation

Alcatel-Lucent

Flextronics

*	Less than 10%

Revenue by Country as a Percentage of Total Revenue


	Three Months Ended						Nine Months Ended
	October 2, 2011			October 3, 2010			October 2, 2011			October 3, 2010
China		18	%		10	%		14	%		15	%
Tunisia		21			20			23			15
Hong Kong		12			13			9			15
Japan		20			15			20			15
Taiwan		7			11			11			10
Netherlands		5			7			6			5
United States		4			2			2			3
Other		13			22			15			22

The table above reflects sales to our direct customers based on where they are headquartered. It does not necessarily reflect carrier deployment of our products as we do not sell directly to them. Although the percentage of revenue by country remained relatively stable, revenue in absolute dollars declined in virtually all countries.

Revenue by Product Family as a Percentage of Total Revenue


	Three Months Ended						Nine Months Ended
	October 2, 2011			October 3, 2010			October 2, 2011			October 3, 2010

Broadband DSL		54	%		59	%		55	%		61	%
Communications Processors		34			22			32			23
Other		12			19			13			16

The change in product mix reflects the decline in our ADSL business and our continuing migration away from the lower margin products.

Cost and Operating Expenses


	Three Months Ended							Nine Months Ended
	October 2, 2011		October 3, 2010		% Change			October 2, 2011			October 3, 2010		% Change
Cost of revenue	$	17,590	$	28,575		(38	)	$	50,388		$	106,4699		(53	)
Research and development		14,402		14,757		(2	)		42,727			47,973		(11	)
Sales, general and administrative		5,528		6,467		(15	)		17,332			21,945		(21	)
Operating asset impairments		—		21,378		nm			—			21,378		nm
Restructuring charges (credits)		—		3,757		nm			(109	)		5,240		nm

nm—Not meaningful

Cost and Operating Expenses as a Percentage of Total Revenue:


	Three Months Ended						Nine Months Ended
	October 2, 2011			October 3, 2010			October 2, 2011			October 3, 2010
Cost of revenue		50	%		69	%		50	%		69	%
Research and development		41			36			42			31
Sales, general and administrative		16			16			17			14
Operating asset impairments		—			51			—			14
Restructuring charges (credits)		nm			9			nm			3

nm—Not meaningful

Cost of Revenue

Our cost of revenue consists primarily of the cost of silicon wafers purchased from third-party foundries and third-party costs associated with assembling, testing and shipping of our semiconductors. Because we do not have formal, long-term pricing agreements with our outsourcing partners, our wafer costs and services are subject to price fluctuations based on the cyclical demand for semiconductors among other factors. In addition, after we purchase wafers from foundries, we also incur yield loss related to manufacturing these wafers into usable die. Manufacturing yield is the percentage of acceptable product resulting from the manufacturing process, as identified when the product is tested. When our manufacturing yields decrease, our cost per unit increases which could have a significant adverse impact on our cost of revenue. Cost of revenue also includes accruals for actual and estimated warranty obligations and write-downs of excess and obsolete inventories, payroll and related personnel costs, licensed third-party intellectual property, depreciation of equipment, stock-based compensation expenses and amortization of acquisition-related intangibles.

Cost of revenue decreased to $17.6 million for the three months ended October 2, 2011 compared to $28.6 million for the three months ended October 3, 2010. Cost of revenue decreased to $50.4 million for the nine months ended October 2, 2011 as compared to $106.5 million for the nine months ended October 3, 2010. The decrease in cost of revenue for both the three and nine month periods ended October 2, 2011 compared to the same periods last year is directly attributable to our decreased sales volume as discussed above. Our gross margins were 50% for the three months ended October 2, 2011 as compared to 31% for the year ago period. Third quarter 2011 margins benefitted from the sale of $0.6 million of previously written off net inventory. During the third quarter of 2010, we wrote off inventory and a prepaid asset amounting to $5.8 million. Our gross margins were 50% for the nine months ended October 2, 2011 compared to 31% for the year ago period. This margin increase included the sale of $3.5 million of inventory previously written down. During the nine months ended October 3, 2010 gross margins were adversely affected by the $16.4 million of inventory write downs and the write down of a prepaid asset previously discussed. This inventory writedown adversely affected 2010 gross margins by 14% and 11%, for the three and nine months ended October 3, 2010, respectively.

Research and development expenses

All research and development (R&D) expenses are expensed as incurred and generally consist of compensation and associated expenses of employees engaged in research and development; contractors; tape-out costs; reference board development; development testing, evaluation kits and tools; stock based compensation expenses and depreciation expense. Before releasing new products, we incur charges for mask sets, amortization of acquisition-related intangibles, prototype wafers, mask set revisions, bring-up boards and other qualification materials, which we refer to as tape-out costs. These tape-out costs cause our R&D expenses to fluctuate because they are not incurred uniformly every quarter.

R&D expenses decreased $0.4 million, or 3%, to $14.4 million for the three months ended October 2, 2011 compared to $14.8 million for the three months ended October 3, 2010. Personnel costs declined by $1.3 million as a result of our restructuring in the

third quarter of 2010 to reflect the decline in our sales forecasts related to declining ADSL sales and our moving away from lower margin products. During the third quarter of 2011 we received a credit of $0.9 million related to qualified research and development expenditures made by a foreign subsidiary. These cost reductions were somewhat offset by higher tape out costs of $0.6 million, higher software and license fees of $0.4 million and higher stock compensation costs of $0.5 million in the third quarter of 2011 versus the comparable quarter in 2010.

R&D expenses decreased $5.3 million, or 11%, to $42.7 million for the nine months ended October 2, 2011 compared to $48.0 million for the nine months ended October 3, 2010. The decreased costs resulted from lower personnel costs of $4.5 million due to the effect of the restructuring activities in the first and third quarters of 2010, the $0.9 million research and development credit discussed above, lower software and licensing costs of $0.5 million and lower back end costs of $1.2 million. These reductions were somewhat offset by higher deferred compensation cost of $0.5 million, and higher tape out costs of $0.7 million.

The majority of our R&D personnel are located in the United States or India. As of October 2, 2011, we had 238 people engaged in R&D of which 86 were located in India, 147 were located in the United States and 5 were located in other Company locations. As of October 3, 2010, we had 278 people engaged in R&D of whom 98 were located in India, 158 were located in the United States and 22 in other Company locations.

Selling, general and administrative expenses

Selling, general and administrative (SG&A) expenses generally consist of compensation and related expenses for personnel; public company costs; legal, recruiting and auditing fees; and depreciation. SG&A expenses decreased by $0.9 million for the three months ended October 2, 2011, or 15%, to $5.5 million compared to $6.5 million for the three months ended October 3, 2010. The decline in SG&A expense includes lower personnel costs of $0.5 million which was the result of fewer personnel in 2011 and the effects of the third quarter 2010 restructuring. The amortization of acquired intangibles was $0.5 million lower in the third quarter of 2011 versus the comparable 2010 quarter due to of our impairment of intangible assets during the third quarter of 2010.

SG&A expenses decreased by $4.6 million for the nine months ended October 2, 2011, or 21%, to $17.3 million compared to $21.9 million for the nine months ended October 3, 2010. The decrease in SG&A expenses is primarily attributable to lower personnel costs of $2.6 million resulting from lower employee levels after our first and third quarter 2010 restructuring efforts; lower amortization of acquired intangibles of $2.0 million resulting from our impairment of intangible assets during the third quarter of 2010; and lower stock compensation costs of $0.5 million. Included in personnel costs are severance costs which were $0.5 million and $1.2 million for the nine months ended October 2, 2011 and October 3, 2010, respectively. These were offset by higher auditing costs of $0.5 million due to the timing of charges and additional audit services related to our Singapore facility.

As of October 2, 2011, SG&A headcount was 74 compared to 81 at October 3, 2010.

Operating Asset Impairment

For the quarter and nine months ended October 2, 2011, there was no impairment charge.

For the quarter ended October 3, 2010, we recorded impairment charges totaling $21.4 million of which $8.6 million related to goodwill, $12.8 million related to intangibles.

We test goodwill for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the our single reporting unit below its carrying value. We issued financial guidance for the third quarter 2010 period and announced a company-wide restructuring to better align our overhead structure with lower expected revenues and subsequently experienced a sustained decline during the quarter ended October 3, 2010 in market capitalization. Based on these indicators of potential impairment, we completed an impairment analysis of our goodwill as of October 3, 2010.

We performed the first step of the two-step impairment test and compared the fair value of the Company as a single reporting unit to its carrying value. Consistent with our approach in our annual impairment testing, in assessing the fair value of the reporting unit, we considered both the market approach and income approach. Under the market approach, the fair value of the reporting unit is based on quoted stock price on the NASDAQ, the number of shares outstanding for our common stock and an estimated control premium. Under the income approach, the fair value of the reporting unit is based on the present value of estimated future cash flows. The income approach is dependent on a number of significant management assumptions including estimates of revenue and operating expenses, product penetration, growth and discount rates. Due to current market conditions and the number of significant assumptions required, we used the market approach. The market approach was lower, but both valuation approaches determined that the fair value was less than the carrying value of the net assets and, therefore, we performed step two of the impairment test.

In step two of the impairment test, we determined the implied fair value of the goodwill and compared it to the carrying value of the goodwill. We allocated the fair value of the reporting unit to all of its assets and liabilities as if the reporting unit had been acquired in a business combination and the fair value of the mainline reporting unit was the price paid to acquire the reporting unit. We determined the fair value of the single reporting unit using discounted cash flows. The weighted average cost of capital used in the impairment was 25.4% with perpetual growth rate of 3%. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. Our step two analysis resulted in no implied fair value of goodwill, and therefore, we recognized an impairment charge of $8.6 million, representing a write off of the entire amount of our previously recorded goodwill (in thousands).


Goodwill as of January 3, 2010	$	8,633
Impairment		(8,633	)

Goodwill as of October 3, 2010	$	—

In addition, as part of and in conjunction with the impairment test, we determined that the carrying values of certain intangible assets were less than their fair values. Accordingly, we recorded a non-cash intangible asset impairment charge of $12.8 million as of October 3, 2010. The fair value calculation that lead to the impairment of the existing technology and customer relationship intangibles of $10.3 million was determined using the discounted cash flows method. The weighted average cost of capital used in the impairment was 25.4% with no perpetual growth rate. We also impaired the remaining $2.5 million of IPR&D related to the gateway line of business under the Conexant BBA product line that was acquired in August 2009, since it was determined to have no alternative use and was therefore abandoned.

Restructuring

For the three months ended October 2, 2011, there were no restructuring charges. For the three months ended October 3, 2010 restructuring charges were $3.8 million. During the third quarter of 2010, we implemented a restructuring plan in order to better align our operating expenses with our revised revenue forecast and to reallocate sufficient engineering resources to the continued development of our broadband technology and products. In addition, we closed three overseas offices. Total restructuring costs in the third quarter of 2010 amounted to $3.8 million of which $2.8 million related to severance costs, $0.3 million to facilities and $0.7 million to software tools.

For the nine months ended October 2, 2011 restructuring charges were not significant. Our remaining restructuring liability consists of $0.2 million for a software tool license. We expect to make payments under the software tool license through 2012. Total restructuring charges for the nine months ended October 3, 2010 amounted to $5.2 million and includes the $3.8 million restructuring charges discussed above and $1.5 million, consisting of severance and benefits, incurred in the first quarter. In the first quarter of 2010 we implemented a plan to restructure our work force and reduce our cost structure subsequent to our acquisition of the Broadband Access product line. The remaining severance and benefit costs related to this restructuring have been paid.

Gain on Sale of Marketable Securities

In the first quarter of 2011 we sold our auction rate securities for $2.0 million and recognized a gain of $1.3 million.

Interest Income and Other, Net

Interest income and other, net consists primarily of interest income earned on our cash, cash equivalents and investments, as well as other non-operating expenses including gains and losses on foreign exchange and the sales of fixed assets. Net interest income and other, net was a net loss of $0.3 million for the quarter ended October 2, 2011 and a gain of less than $0.1 million for the quarter ended October 3, 2010. Foreign exchange losses in Q3 2011 were $0.3 million resulting from the strengthening of the dollar versus the Euro and Indian Rupee.

Net interest income and other, net was a net loss of $0.2 million for the nine months ended October 2, 2011 and a gain of less than $0.1 million for the nine months ended October 3, 2010. The loss during the nine months ended October 2, 2011 stems from the strengthening of the dollar versus both the Euro and Indian Rupee in the third quarter of 2011.

Provision for (Benefit from) Income Taxes

Income taxes are comprised mostly of foreign income taxes and state minimum taxes. We maintain a full valuation allowance for our tax assets as a result of recurring losses. The benefit from taxes was $0.3 million and $0.1 million for the three and nine month periods ended October 2, 2011. The benefit for both periods reflects a net tax benefit of $0.3 million, primarily the result of an increase in deferred tax assets in India. The benefit from income taxes was $0.1 million and less than $0.1 million for the three and nine month periods ended October 3, 2010, respectively.

Net Loss

As a result of the above factors, we had net losses of $2.2 million and $8.0 million for the three and nine month periods ended October 2, 2011, respectively, compared to net losses of $33.3 million and $48.4 million, respectively, for the three and nine month periods ended October 3, 2010. Over the past several years, we have taken actions to reduce our operating expense structure such as consolidating locations, reducing capital expenditures, outsourcing our back-end physical design, reducing the number of development projects and reducing overall headcount. As appropriate, we have restructured parts of our business due to changes in the nature of our business and the business environment in which we operate. In addition, we have reduced our unit manufacturing costs by working to achieve better wafer pricing based on larger volume of purchases, consolidating business with vendors and reducing other input costs.

Liquidity and Capital Resources

Year-to-date, cash and investments increased by $5.3 million to $36.3 million as of October 2, 2011 versus $31.0 million as of January 2, 2011.

As of October 2, 2011, we have funded our operations primarily through cash from private and public offerings of our common stock and cash generated from the sale of our products. Our uses of cash include payroll and payroll-related expenses, manufacturing costs, purchases of equipment, tools and software and operating expenses, such as tape outs, marketing programs, travel, professional services and facilities and related costs. We believe there will be additional working capital requirements to fund and operate our business. We expect to finance our operations primarily through operating cash flows and existing cash and investment balances.

The following table summarizes our statement of cash flows for the nine months ended October 2, 2011 and October 3, 2010 (in millions):


	Nine Months Ended
	October 2, 2011			October 3, 2010
Statements of Cash Flows Data:
Cash and cash equivalents - beginning of period	$	29.0		$	13.3
Net cash provided by (used in) operating activities		8.0			(11.5	)
Net cash provided by (used in) investing activities		(1.1	)		11.8
Net cash provided by financing activities		0.4			1.0

Cash and cash equivalents - end of period	$	36.3		$	14.6

Operating Activities

For the nine months ended October 2, 2011, we generated $8.0 million of net cash from operating activities, while incurring a net loss of $8.0 million. Included in the net loss was approximately $8.1 million in various non-cash expenses consisting of depreciation and amortization, stock based compensation expense and amortization of intangible assets and acquired technology. Operating cash flows also benefited from a decrease in accounts receivable and inventory of $8.6 million and $3.7 million, respectively. These were offset in part by increases in prepaid expenses and other assets of $1.4 million and decreases in accounts payable and accrued liabilities of $1.7 million. In addition, our $1.3 million gain on the sale of our auction rate securities is a reduction to cash from operating activities, but the proceeds of $2.0 million from the sale are included in cash from investing activities.

For the nine months ended October 3, 2010, we used $11.5 million of net cash in operating activities, while incurring a net loss of $48.4 million. Included in the net loss was approximately $12.0 million in various non-cash expenses consisting of depreciation and amortization, stock based compensation expense and amortization of intangible assets and acquired technology. Non-cash impairments of intangible assets, goodwill and in-process research and development costs amounted to $21.4 million. Net inventory and accounts receivable decreased $12.7 million and $5.0 million, respectively. The decrease in inventory includes a write down of $16.4 million. Cash flow from operating activities was adversely affected by increases in prepaid and other assets of $1.5 million and a decrease in accounts payable and accrued liabilities of $12.6 million.

Investing Activities

Investing activities used $1.1 million for the nine months ended October 2, 2011, primarily consisting of capital expenditures of $3.1 million partially offset by $2.0 million in proceeds from the sale of our auction rate securities. Investing activities provided $11.8 million for the nine months ended October 3, 2010, primarily consisting of the maturities and sales of short-term investments of $14.1 million offset by capital expenditures of $2.3 million.

We currently have no investments. Previously, we have classified our investment portfolio as “available for sale.” Our investment objectives are to preserve principal and provide liquidity, while maximizing yields without significantly increasing risk. We may sell an investment at any time if the quality rating of the investment declines; the yield on the investment is no longer

attractive; or we are in need of cash. We have used cash to invest in technologies that enhance and expand our product offerings and, we anticipate that we will continue to do so in the future. The nature of these transactions makes it difficult to predict the amount and timing of such cash requirements. We anticipate that we will continue to purchase necessary property and equipment in the normal course of our business. The amount and timing of these purchases and the related cash outflows in future periods depend on a number of factors, including the hiring of employees, the rate of change of computer hardware and software used in our business and our business outlook.

Financing Activities

Financing activities provided $0.4 million for the nine month period ending October 2, 2011 due generally to the issuance of common stock in connection with our employee stock purchase plan. Our financing activities provided $0.9 million for the nine months ended October 3, 2010 primarily resulting from the purchase of stock under our employee stock purchase plan and from the exercise of employee stock options.

We have used, and intend to continue to use, the net proceeds from any financing activities for working capital and general corporate purposes, which may include the acquisition of businesses, products, product rights or technologies, strategic investments or purchases of common stock.

We believe that our existing cash, cash equivalents and cash flows expected to be generated from future operations, if any, will be sufficient to meet our anticipated cash needs for the next twelve months. Our future capital requirements will depend upon many factors including our rate of revenue growth, our ability to develop future revenue streams, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, the costs to ensure access to adequate manufacturing capacity and the continuing market acceptance of our products. Additionally in the future, we may become party to agreements with respect to potential investments in, or acquisitions of, other complementary businesses, products or technologies, which could also require us to seek additional equity or debt financing. The sale of additional equity securities or convertible debt securities would result in additional dilution to our stockholders. Additional debt would result in increased interest expenses and could result in covenants that would restrict our operations. We currently have a $15.0 million unused line of credit. Due to certain covenants in connection with our line of credit, there is no assurance that such financing or any other financing, if required, will be available in amounts or on terms acceptable to us, if at all.

Contractual Commitments and Off-Balance Sheet Arrangements

We lease certain office facilities, equipment and software under non-cancelable operating leases. The following table summarizes our contractual obligations as of October 2, 2011, and the effect those obligations are expected to have on our liquidity and cash flow in future periods (in millions):


	Total		Remainder of 2011		2012 and 2013		2014 and 2015		2016 and thereafter
Operating lease payments	$	13.7	$	0.4	$	5.5	$	4.4	$	3.4
CAD software tools		2.5		1.1		1.4		—		—
Inventory purchase obligations		3.5		3.5		—		—		—

	$	19.7	$	5.0	$	6.9	$	4.4	$	3.4

For the purpose of this table, purchase obligations for the purchase of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on our current manufacturing needs and are fulfilled by our vendors within short time horizons. In addition, we have purchase orders that represent authorizations to purchase rather than binding agreements. We do not have significant agreements for the purchase of raw materials or other goods specifying minimum quantities or set prices that exceed our expected requirements.

In the normal course of business, we provide indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant, and we are unable to estimate the maximum potential impact of these indemnification provisions on our future consolidated results of operations.

Recent Accounting Pronouncements

Recent accounting pronouncements are detailed above and in Note 1 to our Consolidated Financial Statements included in our Annual Report on Form 10-K filed with the SEC on March 10, 2011.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

All market risk sensitive instruments were entered into for non-trading purposes. We do not use derivative financial instruments for speculative trading purposes. As of October 2, 2011, we did not hold derivative financial instruments.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. The primary objectives of our investment activities are to preserve principal and meet liquidity needs, while maximizing yields and without significantly increasing risk. Our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure to any single issue, issuer, or type of investment. We have invested in the past, and may invest in the future, in U.S. government notes and bonds, commercial paper and other similar financial instruments. All investments are carried at market value.

As of October 2, 2011, we had cash and cash equivalents totaling $36.3 million. Money market funds are considered cash equivalents and accounted for $12.0 million of the amount. We do not enter into investments for trading or speculative purposes. If the return on our money market funds were to change by one hundred basis points, the effect would be immaterial.

Investment Risk

Our marketable securities portfolio as of October 2, 2011 was $12.0 million and consisted entirely of money market funds. Our money market funds are considered cash equivalents and included in the line item cash and cash equivalents on our balance sheet. Investment risk is minimal.

Foreign Currency Risk

Our revenue and cost, including subcontractor manufacturing expenses, are predominately denominated in U.S. dollars. An increase of the U.S. dollar relative to the currencies of the countries in which our customers operate would make our products more expensive to them and increase pricing pressure or reduce demand for our products. We also incur a portion of our expenses in currencies other than the U.S. dollar, including the Euro, the Japanese yen, Korean won, Indian rupee, Singapore dollar, Chinese yuan and the Taiwanese dollar. During the third quarter of 2011, we incurred a $0.3 million foreign exchange loss as the U.S. dollar strengthened against the Euro and Indian rupee. We do not currently enter into forward exchange contracts to hedge exposure denominated in foreign currencies or any other derivative financial instruments for trading or speculative purposes. If exchange rates were to change by ten percent, the effect would be to change 2011 projected operating expenses by approximately $0.7 million.

Item 4.

Controls and Procedures

Evaluation of disclosure controls and procedures

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer (collectively, our “certifying officers”), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as required by Rules 13a-15(b) or 15d-15(b) of the Securities Exchange Act of 1934, as amended. Based on their evaluation, our certifying officers concluded that these disclosure controls and procedures were effective.

We believe that a system of internal controls, no matter how well designed and operated, is based in part upon certain assumptions about the likelihood of future events, and can be affected by limitations inherent in all internal controls systems including the realities that human judgment in decision-making can be faulty, that persons responsible for establishing controls need to consider their relative costs and benefits, that breakdowns can occur because of human failures such as simple error or mistake, and that controls can be circumvented by collusion of two or more people. Accordingly, we believe that our system of internal controls, while effective, can only provide reasonable, not absolute, assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. There was no change in our internal control over financial reporting during the three months ended October 2, 2011 that our certifying officers concluded materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1.

Legal Proceedings

In November 2006, three putative class action lawsuits were filed in the United States District Court for the Southern District of

New York against us, our directors and two former executive officers, as well as the lead underwriters for our initial and secondary public offerings. The lawsuits were consolidated and an amended complaint was filed on April 24, 2007. The amended complaint sought unspecified damages for certain alleged misrepresentations and omissions made by us in connection with both our initial public offering in September 2005 and our follow-on offering in March 2006. On June 25, 2007, we filed motions to dismiss the amended complaint, and on March 10, 2008, the Court dismissed the case with prejudice. On March 25, 2008, plaintiffs filed a motion for reconsideration, and on June 12, 2008, the District Court denied the motion for reconsideration. On October 15, 2008, plaintiffs appealed the District Court’s dismissal of the amended complaint and denial of its motion for reconsideration to the United States Court of Appeals for the Second Circuit. On September 17, 2009, the Court of Appeals affirmed the District Court’s dismissal of the amended complaint, but vacated its judgment on the motion for reconsideration and remanded the case to the District Court for further proceedings. On May 13, 2010, the District Court granted plaintiffs leave to file a motion to amend the pleadings. Plaintiffs filed a motion for leave to amend the complaint on June 11, 2010. We opposed on July 11, 2010, and on November 23, 2010, the District Court denied the motion. On January 6, 2011, plaintiffs filed a notice of appeal with the United States Court of Appeals for the Second Circuit and, on March 18, 2011, filed Appellant’s Opening Brief. We filed our opposition brief on June 17, 2011 and on July 5, 2011 plaintiffs filed a reply. Both parties have requested oral argument before the District Court. We cannot predict the likely outcome of the appeal, and an adverse result could have a material effect on our financial statements.

Additionally, from time to time, we are a party to various legal proceedings and claims arising from the normal course of business activities. We currently believe that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position, results of operations and statement of cash flows. If an unfavorable ruling were to occur in the legal proceeding described above, there exists the possibility of a material adverse effect on our financial position, results of operations and cash flows.

Item 1A.

Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this quarterly report on Form 10-Q, and in our other filings with the SEC, before deciding whether to invest in shares of our common stock. Additional risks and uncertainties not presently known to us may also affect our business. If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on us, our business, financial condition and results of operations could be seriously harmed. In that event, the market price for our common stock will likely decline and you may lose all or part of your investment.

Risks Related to Our Customers and Markets

Our operating results have fluctuated significantly over time and are likely to continue to do so, and as a result, we may fail to meet or exceed our revenue forecasts or the expectations of securities analysts or investors, which could cause the market price of our common stock to decline.

Our industry is highly cyclical and is characterized by constant and rapid technological change, product obsolescence and price erosion, evolving standards, uncertain product life cycles and wide fluctuations in product supply and demand. The industry has, from time to time, experienced significant and sometimes prolonged, downturns, often connected with or in anticipation of, maturing product cycles and declines in general economic conditions. To respond to these downturns, some service providers have decreased their capital expenditures, changed their purchasing practices to use refurbished rather than purchasing new equipment, canceled or delayed new developments, and taken a cautious approach to acquiring new equipment and technologies from OEMs, usually with very little notice. This, in turn, has reduced the demand for new semiconductors by our direct customers which could result in significant fluctuations of revenue as the economy changes.

Any future downturns may reduce our revenue and result in us having excess inventory. By contrast, any upturn in the semiconductor industry could result in increased demand and competition for limited production capacity, which may affect our ability to ship products and prevent us from benefiting from such an upturn. Accordingly, our operating results may vary significantly as a result of the general conditions in the semiconductor or broadband communications industry, which could cause the market price of our common stock to decline.

If we fail to continue to meet all applicable NASDAQ Global Market requirements, our stock could be delisted from the NASDAQ Global Market. If delisting occurs, it would adversely affect the market liquidity of our common stock and harm our business.

Our common stock is currently traded on the NASDAQ Global Market under the symbol “IKAN.” If we fail to meet any of the continued listing standards of the NASDAQ Global Market, our common stock could be delisted from the NASDAQ Global Market. These continued listing standards include specifically enumerated criteria, including a $1.00 minimum closing bid price. If our common stock were to trade below $1.00 per share for a period of 30 consecutive trading days, NASDAQ would send a deficiency notice and advise us that we would have a “compliance period” of 180 calendar days to regain compliance with the applicable requirements.

Our common stock has closed at a price below $1.00 for fewer than 30 consecutive trading days in the recent past. If our stock price were to close below the $1.00 bid price in the future, there is no assurance that we will be able to meet The NASDAQ Stock Market’s minimum bid price requirements and, therefore, may lose our eligibility for quotation on The NASDAQ Stock Market. Any delisting could adversely affect the market price of and liquidity of the trading market for our common stock, our ability to obtain financing for the continuation of its operations and could result in the loss of confidence by investors, suppliers and employees.

Fluctuations in our expenses could affect our operating results.

Our expenses are subject to fluctuations resulting from various factors, including, but not limited to, higher expenses associated with new product releases, costs for manufacturing or components increasing without notice because we do not have formal pricing arrangements with our subcontractors, costs of design tools and large up-front license fees to third parties for intellectual property integrated into our products, as well as other factors identified throughout these risk factors.

Because many of our expenses are relatively fixed in the short term, or are incurred in advance of anticipated sales, we may not be able to reduce our expenses sufficiently to mitigate any reductions in revenue. In addition, the acquisition of other businesses can generate extraordinary expenses, such as our acquisition of the Broadband Access, or BBA, product line from Conexant Systems, Inc. in 2009. As a result, quarter to quarter comparisons of our operating expenses and results should not be relied on as an indicator of future performance. If our operating results do not meet the expectations of securities analysts or investors for any quarter or other reporting period, the market price of our common stock may decline.

General macroeconomic conditions could reduce demand for services based upon our products.

Our business is susceptible to macroeconomic and other market conditions. As an example, we believe that consumer-targeted broadband services, which are deployed using our technology, are part of most households’ discretionary spending. If individual consumers decide not to install—or decide to discontinue purchasing—broadband services in their homes in order to save money in an uncertain economy, the resulting drop in demand could cause telecommunications service providers to reduce or stop placing orders for OEM equipment containing our products. Accordingly, the OEMs’ demand for our products could drop further, potentially having a materially negative effect on our revenue.

We have had a history of losses, and future losses or the inability achieve or sustain profitability in the future may cause the market price of our common stock to decline.

Since our inception, we have only been profitable in the third and fourth quarters of 2005. Prior to the third quarter of 2005, we incurred significant net losses, and we incurred net losses in the past five fiscal years. We have an accumulated deficit of $278.7 million as of October 2, 2011. To achieve profitability again, we will need to generate and sustain higher revenue and to improve our gross margins while maintaining expense levels that are appropriate and necessary for our business. We may not be able to achieve profitability again and, even if it were able to attain profitability, we may not be able to sustain profitability on an on-going quarterly or an annual basis in the future.

We may need additional capital, and the sale of additional shares of common stock or other securities would result in additional dilution to our stockholders.

We believe that our current cash and cash equivalents, anticipated cash flow from operations and the net proceeds received by us from our public offering in fiscal year 2010 will be sufficient to meet our anticipated cash needs for the next twelve months. We may, however, require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities, which could result in additional dilution to our stockholders. Incurring indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

Our success is dependent upon achieving new design wins into commercially successful systems sold by our OEM and ODM customers.

Our products are generally incorporated into our OEM and ODM customers’ systems at the design stage. As a result, we rely on OEMs and ODMs to select our products to be designed into their systems, which we refer to as a “design win.” At any given time, we are competing for one or more of these design wins and we often incur significant expenditures over multiple fiscal quarters without

any assurance that we will achieve a design win. Furthermore, even if we achieve a design win, we cannot be assured that the OEM or ODM’s equipment that we are designed into will be marketed, sold or commercially successful and, accordingly, we may not generate any revenue from the design win. In addition, our OEM and ODM customers can choose at any time to discontinue their systems that include our products or delay deployment, which has occurred in the past from time to time. If we are unable to achieve design wins or if our OEM customers’ systems incorporating our products are not commercially successful or deployed, our operating results would suffer.

Industry consolidation may lead to increased competition and may harm our operating results.

There has been a trend toward industry consolidation in our industry. We expect this trend to continue as companies attempt to strengthen or hold their market positions in an evolving industry and as companies are acquired or are unable to continue operations. We believe that industry consolidation may result in stronger competitors that are better able to compete for customers. This could have a material adverse effect on our business, financial condition and results of operations. Furthermore, rapid consolidation could result in a decrease in the number of customers we serve. Loss of a major customer could have a material adverse effect on our business, financial condition and results of operations.

If we are unable to develop, introduce or achieve market acceptance of our new semiconductor products, our operating results would be adversely affected.

Our industry is characterized by rapid technological innovation and intense competition. Our future success will depend on our ability to continue to predict what new products are needed to meet the demand of the broadband, communication processor or other markets addressable by our products and then introduce, develop and distribute such products in a timely and cost-effective manner. The development of new semiconductor products is complex, and from time to time we have experienced delays in completing the development and introduction of new products. We have in the past invested substantial resources in developing and purchasing emerging technologies that did not achieve the market acceptance that we had expected.

Our ability to develop and deliver new semiconductor products successfully will depend on various factors, including our ability to:

•

successfully integrate certain technologies acquired in acquisitions into our product lines;

•

accurately predict market requirements and evolving industry standards;

•

accurately define new semiconductor products;

•

timely complete and introduce new product designs or features;

•

timely qualify and obtain industry interoperability certification of our products and the equipment into which our products will be incorporated;

•

ensure that our subcontractors have sufficient foundry capacity and packaging materials and achieve acceptable manufacturing yields;

•

shift our products to smaller geometry process technologies to achieve lower cost and higher levels of design integration; and

•

gain market acceptance of our products and our OEM customers’ products.

If we are unable to develop and introduce new semiconductor products successfully and in a cost-effective and timely manner, we will not be able to attract new customers or retain our existing customers, which would harm our business.

If we do not successfully manage our inventory in the transition process to next generation semiconductor products, our operating results may be harmed.

If we are successful in timely developing new semiconductor products ahead of competitors but do not cost-effectively manage our inventory levels of existing products when making the transition to the new semiconductor products, our financial results could be negatively affected by high levels of obsolete inventory and our operating results would be harmed.

The average selling prices and gross margins of our products are subject to declines, which may harm our revenue and profitability.

Our products are subject to rapid declines in average selling prices due to pressure from customers and competitive pressures, including lowering average selling prices in order to maintain or increase market share. We have lowered our prices significantly at times to gain or maintain market share, and we expect to do so again in the future. In addition, we have not been able to reduce our costs of goods sold as rapidly as our prices have declined. Our financial results, in particular (but not limited to) our gross margins, will suffer if we are unable to maintain or increase pricing, or are unable to offset any future reductions in our average selling prices by increasing our sales volumes, reducing our manufacturing costs or developing new or enhanced products that command higher prices or better gross margins on a timely basis.

Our product sales mix is subject to frequent changes, which may impact our revenue and margin.

Our product margins vary widely by product and customer. As a result, a change in the sales mix of our products could have an impact on the forecasted revenue and margins for the quarter. For example, our Broadband DSL product family generally has higher margins as compared to our Communication Processor product family. Furthermore, the product margins within our Broadband DSL product family can vary based on the type and performance of deployment being used as customers typically pay higher selling prices for higher performance. While we forecast a quarter’s product mix, actual results can be materially different than our forecast, which could negatively impact our revenue and margins.

Because we depend on a relatively small number of significant customers for a substantial portion of our revenue, the loss of any of our key customers, our inability to continue to sell existing and new products to our key customers in significant quantities or our failure to attract new significant customers could adversely impact our revenue and harm our business.

We have in the past and expect in the future to derive a substantial portion of our revenue from sales to a relatively small number of customers. The composition of these customers has varied in the past, and we expect that it will continue to vary over time. As a result, the loss of any significant customer or a decline in business with any significant customer would materially and adversely affect our financial condition and results of operations. In addition, we may experience pressure from significant customers to agree to customer-favorable sales terms and price reductions. The following customers accounted for more than 10% of our revenue in the periods indicated below:

Year Ended

Nine Months Ended

Direct Customer

January 3,
2010

January 2,
2011

October 2,
2011

Sagemcom Tunisie

Flextronics International

Paltek Corporation

ZTE Corporation

Alcatel-Lucent and affiliated contract manufacturers

NEC Corporation of America

*	Less than 10%

Recent changes in our senior management positions could negatively affect our operations and relationships with our customers and employees.

We have experienced recent changes in our senior management team, most recently the resignation of our President and Chief Executive Officer in June 2011, the resignation of our Vice President of Operations in March 2011, and the resignation of our Vice President of Marketing in September 2011. Our Executive Chairman is serving as our interim President and Chief Executive Officer while we search for a permanent replacement. Changes in our senior management or technical personnel could affect our customer relationships, employee morale, and our ability to operate in compliance with existing internal controls and regulations and harm our business. If we are unable to maintain a consistent senior management team or successfully integrate our current and future members of senior management, our business could be negatively affected.

Because competition for qualified personnel is intense in our industry, we may not be able to recruit and retain necessary personnel, which could impact our product development and sales.

Our future success depends on our ability to continue to attract, retain and motivate other senior management and qualified technical personnel, particularly software engineers, digital circuit designers, mixed-signal circuit designers and systems and algorithms engineers. Competition for these employees is intense and many of our competitors may have greater name recognition and significantly greater financial resources to better compete for these employees. If we are unable to retain our existing personnel, or attract and train additional qualified personnel, our growth may be limited due to our lack of capacity to develop and market our

products. All of our key employees are employed on an “at will” basis. The loss of any of these key employees could slow our product development processes and sales efforts or harm the perception of our business. We may also incur increased operating expenses and be required to divert the attention of other senior management to recruit replacements for key employees. Also, our depressed common stock price may result in difficulty attracting and retaining personnel as stock options and other forms of incentive equity grants generally comprise a significant portion of our compensation packages for all employees, which could harm our ability to provide technologically competitive products.

In addition, in the third quarter of 2010 we implemented a corporate restructuring plan that included a reduction in work force of approximately 20% and the closure of three of our overseas offices. That restructuring is predominantly complete. The changes in senior management and the multiple restructurings and reductions in force over the past year have had and may continue to have a negative effect on employee morale.

Risks Related to the Tallwood Investment

Tallwood Investors may exercise significant influence over us, including through their ability to elect three members of our Board of Directors.

In April 2009, we sold 24 million shares of our common stock and warrants to purchase up to an additional 7.8 million shares of our common stock (such common stock and warrants collectively referred to as the Securities) to Tallwood III, L.P., a Delaware limited partnership, Tallwood III Partners, L.P., a Delaware limited partnership, Tallwood III Associates, L.P., a Delaware limited partnership, and Tallwood III Annex, L.P., a Delaware limited partnership (collectively referred to as the Tallwood Investors). The funds raised for the sale of the Securities funded a portion of our acquisition of the Broadband Access product line from Conexant Systems, Inc. In addition, one of the Tallwood Investors participated in our public offering of our common stock in fiscal year 2010 and purchased an additional 5.6 million shares of our common stock. The common stock owned by Tallwood Investors represented approximately 43% of the outstanding shares of our common stock (excluding the exercise of warrants) as of October 28, 2011. Assuming the full exercise of the warrants, the common stock owned by the Tallwood Investors would represent 49% of the outstanding shares of our common stock. Until the third anniversary of the closing of the original issuance of the Securities to the Tallwood Investors, the Tallwood Investors have agreed to vote all of their shares in excess of the shares constituting 35% of our outstanding common stock in the same proportion as the votes cast by all our other stockholders. We also entered into a stockholder agreement with the Tallwood Investors, which, among other things, contains certain governance arrangements and various provisions relating to board composition, stock ownership, transfers by the Tallwood Investors and their affiliates, voting and other matters. Subject to certain exceptions, the Tallwood Investors are permitted under the terms of the stockholder agreement to maintain their ownership interest in Ikanos in subsequent equity offerings. As a result, the Tallwood Investors may have the ability to significantly influence the outcome of any matter submitted for the vote of our stockholders. The Tallwood Investors may have interests that diverge from, or even conflict with, our interests and those of our other stockholders. In addition, the Certificate of Designation of the Series A Preferred Stock provides that the Tallwood Investors have the right to designate three directors to our Board of Directors while the Tallwood Investors hold at least 35% of our outstanding common stock, and a number of directors to our Board of Directors proportional to the Tallwood Investors’ ownership position in us at such time as the Tallwood Investors hold less than 35% of our outstanding common stock. As a result, the directors elected to our Board of Directors by the Tallwood Investors may exercise significant influence on matters considered by our Board of Directors.

The market price of our common stock may decline as a result of future sales of our common stock by the Tallwood Investors.

We are unable to predict the potential effects of the Tallwood Investors’ ownership of our outstanding common stock on the trading activity in and market price of our common stock. Pursuant to the stockholder agreement, we have granted the Tallwood Investors and their permitted transferees’ registration rights for the resale of the shares of our common stock and shares of our common stock underlying the warrants. Under the terms of the registration rights, we have filed a registration statement that permits the resale of such securities into the public market, and any such resale would increase the number of shares of our common stock available for public trading. Sales by the Tallwood Investors or their permitted transferees of a substantial number of shares of our common stock in the public market, or the perception that such sales might occur, could have a material adverse effect on the price of our common stock.

Risks Related to Our Operations and Technology

We rely on third-party technologies for the development of our products, and our inability to use such technologies in the future or the failure of such technology would harm our ability to remain competitive.

We rely on third parties for technologies that are integrated into some of our products, including the memory cells, input/output cells, hardware interfaces and core processor logic. If we are unable to continue to use or license these technologies on reasonable terms, or if these technologies fail to operate properly, we may not be able to secure alternatives in a timely manner and our ability to

remain competitive would be harmed. In addition, the third party intellectual property could also expose us to liability and, while we have not experienced material warranty costs in any period as a result of third party intellectual property, there can be no assurance that we will not experience such costs in the future.

We are a fabless semiconductor company and failure to secure and maintain sufficient capacity with our subcontractors could significantly disrupt shipment of our products, impair our relationships with customers and decrease sales, which would negatively impact our market share and operating results.

We are a fabless semiconductor company and currently use nine wafer foundries and five outside factory subcontractors, located in Austria, China, Israel, Korea, Malaysia, Singapore, Taiwan, and the United States to manufacture, assemble and test all of our current semiconductor devices. While we work with multiple suppliers, generally each product is made by one foundry and one assembly and test subcontractor. Accordingly, we are greatly dependent on a limited number of suppliers to deliver quality products on time. In past periods of high demand in the semiconductor market, we have experienced delays in meeting our capacity demand and as a result were unable to deliver products to our customers on a timely basis. In addition, we have experienced similar delays due to technical and quality control problems.

If we were to need to qualify a new facility to meet our capacity, or if a foundry or subcontractor ceased working with us, as has happened in the past, or if production is disrupted, we may be unable to meet our customer demand on a timely basis, or at all. We may be required to incur additional costs and may need to successfully qualify an alternative facility in order to not disrupt our business.

In the event we seek to use new wafer foundries to manufacture a portion of our semiconductor products, we may not be able to bring the new foundries on-line rapidly enough and may not achieve anticipated cost reductions.

As indicated above, we use a limited number of independent wafer foundries to manufacture all of our semiconductor products which could expose us to risks of delay, increased costs and customer dissatisfaction in the event that any of these foundries are unable to meet our semiconductor requirements. We may seek to qualify additional wafer foundries to meet our future requirements but the qualification process typically requires several months or more. By the time a new foundry is qualified, the need for additional capacity may have passed or we may have lost the potential opportunity to a competitor. If we cannot accomplish this qualification in a timely manner, we would experience a significant interruption in supply of the affected products which could in turn cause our costs of revenue to increase and our overall revenue to decrease. This would harm our customer relationships and our market share and operating results would suffer as a result.

When demand for manufacturing capacity is high, we may take various actions to try to secure sufficient capacity, which could be costly and negatively impact our operating results.

Although we have purchase order commitments to supply specified levels of products to our OEM customers, we do not have a guaranteed level of production capacity from any of our subcontractors’ facilities that we depend upon to produce semiconductors. Facility capacity may not be available when we need it or at reasonable prices. We place our orders on the basis of our OEM customers’ purchase orders or our forecast of customer demand, and our subcontractors may not be able to meet our requirements in a timely manner, or at all.

In order to secure sufficient manufacturing facility capacity when demand is high and mitigate the risks described in the foregoing paragraphs, we may enter into various arrangements with subcontractors that could be costly and negatively affect our operating results, including:

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option payments or other prepayments to a subcontractor;

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nonrefundable deposits with or loans to subcontractors in exchange for capacity commitments;

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contracts that commit us to purchase specified quantities of components over extended periods;

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purchase of testing equipment for specific use at subcontractors’ facilities;

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issuance of equity securities to a subcontractor; and

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other contractual relationships with subcontractors.

We may not be able to make any such arrangements in a timely fashion or at all, and any arrangements may be costly, reduce our financial flexibility, not be on terms favorable to us and may contain financial penalties if we do not use all of our allocated facility capacity. These penalties and obligations may be expensive and could harm our business.

Defects and poor performance in our products could result in loss of customers, decreased revenue, unexpected expenses and loss of market share, and we may face warranty and product liability claims arising from defective products.

We have in the past, and may in the future experience, defects (commonly referred to as “bugs”) in our products which may not always be detected by testing processes. Defects can result from a variety of causes, including but not limited to manufacturing problems or third party intellectual property incorporated into our products. If defects are discovered after our products have shipped, we have experienced, and could continue to experience, warranty and consequential damages claims from our customers. If we are unable to deliver quality products, our reputation would be harmed, which could result in the loss of, future orders and business with our customers. Further, we may experience difficulties in achieving acceptable yields on some of our products, which may result in higher per unit cost, shipment delays, and increased expenses associated with resolving yield problems. If any of these adverse risks are realized and we are not able to offset the lost opportunities, our revenue, margins and operating results would decline.

If our forecasts of our OEM customers’ demand are inaccurate, our financial condition and liquidity would suffer.

We place orders with our suppliers based on the forecasts of our OEM customers’ demand. Our forecasts are based on multiple assumptions, each of which may introduce errors into our estimates. If we do not accurately forecast customer demand, we may forego revenue opportunities, lose market share, damage customer relationships or allocate resources to manufacturing products that we may not be able to sell. As a result, as we experienced in the second and third quarters of fiscal 2010, we could have excess or obsolete inventory, resulting in a decline in the value of our inventory, which would increase our cost of revenue, negatively affect gross margins, and create a drain on our liquidity. Our failure to accurately manage inventory against demand would adversely affect our financial results.

To remain competitive, we need to continue to reduce the cost of our semiconductor chips, which includes migrating to smaller geometrical processes, and our failure to do so may harm our business.

We negotiate pricing with our suppliers from time to time. Negotiations with respect to pricing typically depend on order volumes and, if our order volumes decrease over time, we may experience difficulties negotiating favorable pricing, negatively impacting our ability to compete.

We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometrical processes, which are measured in microns or nanometers. We have in the past, and may in the future, experience some difficulties in shifting to smaller geometry process technologies or new manufacturing processes, which resulted in reduced manufacturing yields, delays in product deliveries and increased product costs and expenses. Additionally, upfront expenses associated with smaller geometry process technologies such as for masks and tooling can be significantly higher than those for the processes that we currently use, and our migration to these newer process technologies can result in significantly higher research and development expenses.

Third-party claims of infringement or other claims against us could adversely affect our ability to market our products, require us to redesign our products or seek licenses from third parties, and harm our business. In addition, any litigation required to defend such claims could result in significant expenses and diversion of our resources.

Semiconductor industry companies and intellectual property holding companies often aggressively protect and pursue their intellectual property rights. From time to time, we receive, and we are likely to continue to receive in the future, notices that claim our products infringe upon other parties’ proprietary rights. We may in the future be engaged in litigation with parties who claim that we have infringed their patents or misappropriated or misused their trade secrets or who may seek to invalidate one or more of our patents, and it is possible that we would not prevail in any future lawsuits. An adverse determination in any of these types of claims could prevent us from manufacturing or selling some of our products, could increase our costs of products and could expose us to significant liability. In addition, a court could issue a preliminary or permanent injunction that would require us to withdraw or recall certain products from the market or redesign certain products offered for sale or that are under development. In addition, we may be liable for damages for past infringement and royalties for future use of the technology and we may be liable for treble damages if infringement is found to have been willful. Even if claims against us are not valid or successfully asserted, these claims could result in significant costs and a diversion of management and personnel resources to defend.

Any potential dispute involving our patents or other intellectual property could also include our customers which could trigger our indemnification obligations to one or more of them and result in substantial expense to us.

In any potential dispute or claim involving our patents or other intellectual property, our customers could also become the target of litigation. Because we may indemnify our customers for intellectual property claims made against them for products incorporating

our technology, any litigation could trigger technical support and indemnification obligations in some of our license agreements, which could result in substantial expenses. While we have not incurred any indemnification expenses as a result of infringement notices to our customers, any future indemnity claim could adversely affect our relationships with our OEM customers and result in substantial costs to us.

We face intense competition in the semiconductor industry and the broadband communications markets, which could reduce our market share and negatively affect our revenue.

The semiconductor industry and the broadband communications markets are intensely competitive. In the VDSL or VDSL-like technology, PON and communications processing markets, we currently compete or expect to compete with, among others, Broadcom Corporation, BroadLight, Inc., Cavium Networks, Inc., Freescale Semiconductor, Inc., Lantiq Deutschland GmbH, Marvell Technology Group Ltd., MediaTek Inc., PMC-Sierra, Inc. and Realtek Semiconductor Corp.

Many of our competitors may have stronger manufacturing subcontractor relationships than us and longer operating histories, greater name recognition, larger customer bases, and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources. In addition, many of our competitors have extensive technology libraries that could enable them to incorporate broadband or communications processing technologies into a system on a chip, creating a more attractive product line than ours. These competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. In addition, current and potential competitors have established or may establish financial or strategic relationships among themselves or with existing or potential customers, resellers or other third parties. Accordingly, new competitors or alliances among competitors could emerge and rapidly acquire significant market share. Existing or new competitors may also develop alternative technologies that more effectively address our markets with products that offer enhanced features and functionality, lower power requirements, greater levels of semiconductor integration or lower cost. We cannot assure you that we will be able to compete successfully against current or new competitors, in which case we may lose market share in our existing markets and our revenue may fail to increase or may decline.

Other data transmission technologies and communications processing technologies may compete effectively with the service provider services addressed by our products, which could adversely affect our revenue and business.

Our revenue currently is dependent upon the increase in demand for service provider services that use broadband technology and integrated residential gateways. Besides xDSL and other DMT-based technologies, service providers can decide to deploy PON or fiber and there would be reduced need for our products. For example, a major service provider in Korea announced its intention to use more FTTH deployments in the future, which could be in lieu of xDSL products. If more service providers decide to use FTTH deployments, it could harm our xDSL business if our products are not needed. Furthermore, residential gateways compete against a variety of different data distribution technologies, including Ethernet routers, set-top boxes provided by cable and satellite providers, wireless (WiFi and WiMax) and emerging power line and multimedia over coax alliance technologies. If any of these competing technologies proves to be more reliable, faster or less expensive than, or has any other advantages over the broadband technologies we provide, the demand for our products may decrease and our business would be harmed.

Rapidly changing standards and regulations could make our products obsolete, which would cause our revenue and operating results to suffer.

We design our products to conform to regulations established by governments and to standards set by industry standards bodies worldwide such as the Committee T1E1.4 (now known as NIPP-NAI) of the ATIS (accredited by ANSI), and worldwide by both the IEEE and the ITU-T. Because our products are designed to conform to current specific industry standards, if competing standards emerge that are preferred by our customers, we would have to make significant expenditures to develop new products. If our customers adopt new or competing industry standards with which our products are not compatible, or the industry groups adopt standards or governments issue regulations with which our products are not compatible, our existing products would become less desirable to our customers, and our revenue and operating results would suffer.

If we fail to secure or protect our intellectual property rights, competitors may be able to use our technologies, which could weaken our competitive position, reduce our revenue or increase our cost.

Our success will depend, in part, on our ability to protect our intellectual property. We rely on a combination of patent, copyright, trademark and trade secret laws, confidentiality procedures and licensing arrangements to establish and protect our proprietary rights. Our pending patent applications may not result in issued patents, and our existing and future patents may not be sufficiently broad to protect our proprietary technologies or may be held invalid or unenforceable in court. While we are not currently aware of misappropriation of our existing technology, policing unauthorized use of our technology is difficult and we cannot be certain that the steps we have taken will prevent the misappropriation or unauthorized use of our technologies, particularly in foreign countries where we have not applied for patent protections and, even if such protections were available, the laws may not protect our

proprietary rights as fully as United States law. The patents we have obtained or licensed, or may obtain or license in the future, may not be adequate to protect our proprietary rights. Our competitors may independently develop or may have already developed technology similar to us, duplicate our products or design around any patents issued to us or our other intellectual property. In addition, we have been, and may be, required to license our patents as a result of our participation in various standards organizations. If competitors appropriate our technology and it is not adequately protected, our competitive position would be harmed, our legal costs would increase and our revenue would be harmed.

Changes in current or future laws or regulations or the imposition of new laws or regulations by federal or state agencies or foreign governments could impede the sale of our products or otherwise harm our business.

The effects of regulation on our customers or the industries in which they operate may materially and adversely impact our business. For example, India’s government is currently considering regulation that may limit or prohibit sales of certain telecommunications products manufactured in China. While the rule-making process is not final, if the rules apply to equipment containing our semiconductor products, such regulation could reduce sales of our products and have a negative effect on our operating results.

In addition, the Ministry of Internal Affairs and Communications in Japan, the Ministry of Communications and Information in Korea, various national regulatory agencies in Europe, the European Commission in the European Union, the U.S. Federal Communications Commission have broad jurisdiction over our target markets. Although the laws and regulations of these and other federal or state agencies may not be directly applicable to our products, they do apply to much of the equipment into which our products are incorporated. Governmental regulatory agencies worldwide may affect the ability of telephone companies to offer certain services to their customers or other aspects of their business, which may in turn impede sales of our products.

In addition to the laws and regulations specific to telecommunications equipment, other laws and regulations affect our business. For instance, changes in tax, employment and import/export laws and regulations, and their enforcement commonly occur in the various countries in which we operate. If changes in those laws and regulations, or in the enforcement of those laws and regulations, occur in a manner that we did not anticipate, those changes could cause us to have increased operating costs or to pay higher taxes, and thus have a negative effect on our operating results.

Failure to maintain adequate internal controls as required by Section 404 of the Sarbanes-Oxley Act (SOX) could harm our operating results, our ability to operate our business and our investors’ view of Ikanos.

If we do not maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of SOX. Effective internal controls particularly those related to revenue recognition, valuation of inventory and warranty provisions, are necessary for us to produce reliable financial reports and are important in helping to prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock could drop significantly.

Our international operations subject us to risks not faced by companies without international operations.

We currently obtain substantially all of our manufacturing, assembly and testing services from suppliers and subcontractors located outside the United States, and have a significant portion of our research and development team located in China and India. In addition, 98% of our revenue for the nine months ended October 2, 2011 and 98% of our revenue for the fiscal year ended January 2, 2011 were derived from sales to customers outside the United States. We have expanded our international business activities and may open other design and operational centers abroad. International operations are subject to many other inherent risks, including but not limited to:

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political, social and economic instability, including war and terrorist acts;

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exposure to different legal standards, particularly with respect to intellectual property;

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trade and travel restrictions;

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the imposition of governmental controls and restrictions or unexpected changes in regulatory requirements;

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burdens of complying with a variety of foreign laws;

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import and export license requirements and restrictions of the United States and each other country in which we operate;

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foreign technical standards;

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changes in tariffs;

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difficulties in staffing and managing international operations;

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foreign currency exposure and fluctuations in currency exchange rates;

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difficulties in collecting receivables from foreign entities or delayed revenue recognition; and

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potentially adverse tax consequences.

Because we are currently substantially dependent on our foreign sales, research and development and operations, any of the factors described above could significantly harm our ability to produce quality products in a timely and cost effective manner, and increase or maintain our foreign sales.

Fluctuations in exchange rates between and among the U.S. dollar and other currencies in which we do business, may adversely affect our operating results.

We maintain extensive operations internationally. We have offices in China, India and other offices in France, Germany, Japan, Korea, Singapore and Taiwan. We incur a portion of our expenses in currencies other than the U.S. dollar, including the Chinese Yuan, the Euro, the Indian rupee, the Korean won, the Japanese yen, Singapore dollar and the Taiwanese dollar. As a result, we may experience foreign exchange gains or losses due to the volatility of these currencies compared to the U.S. dollar. Because we report our results in U.S. dollars, the difference in exchange rates in one period compared to another directly impacts period to period comparisons of our operating results. In addition, our sales have been historically denominated in U.S. dollars. Currency exchange rates have been especially volatile in the recent past and these currency fluctuations may make it difficult for us to predict and/or provide guidance on our results. Currently, we have not implemented any strategies to mitigate risks related to the impact of fluctuations in currency exchange rates and we cannot predict future currency exchange rate changes.

Several of the facilities that manufacture our products, most of our OEM customers and the service providers they serve, and our California facility are located in regions that are subject to earthquakes and other natural disasters.

Several of our subcontractors’ facilities that manufacture, assemble and test our products and five of our wafer foundries are located in Malaysia, Singapore and Taiwan. Several large customers are located in Japan and Korea. The Asia-Pacific region has experienced significant earthquakes and other natural disasters in the past, including a recent major earthquake and tsunami in Japan, and could be subject to additional seismic activities. Any earthquake or other natural disaster in these areas could significantly disrupt these manufacturing facilities’ production capabilities and could result in our experiencing a significant delay in delivery, or substantial shortage of wafers, in particular, and possibly in higher wafer prices, and our products in general. Our headquarters in California are also located near major earthquake fault lines. If there is a major earthquake or any other natural disaster in a region where one of our facilities is located, it could significantly disrupt our operations.

Changes in our tax rates could affect our future results.

Our future effective tax rates could be favorably or unfavorably affected by the absolute amount and future geographic distribution of our pre-tax income, our ability to successfully shift our operating activities to foreign operations and the amount and timing of inter-company payments from our foreign operations subject to U.S. income taxes related to the transfer of certain rights and functions.

Risks Related to Our Common Stock

The market price of our common stock has been and may continue to be volatile, and holders of our common stock may not be able to resell shares at or above the price paid, or at all.

The market price of our common stock has fluctuated substantially since our initial public offering and is likely to continue to be highly volatile and subject to wide fluctuations. Fluctuations have occurred and may continue to occur in response to various factors, many of which we cannot control, including:

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quarter-to-quarter variations in our operating results;

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announcements of changes in our senior management;

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the gain or loss of one or more significant customers or suppliers;

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announcements of technological innovations or new products by our competitors, customers or us;

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the gain or loss of market share in any of our markets;

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general economic and political conditions and specific conditions in the semiconductor industry and broadband technology markets, including seasonality in sales of consumer products into which our products are incorporated;

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continuing international conflicts and acts of terrorism;

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changes in earnings estimates or investment recommendations by analysts;

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changes in investor perceptions;

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changes in product mix; or

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changes in expectations relating to our products, plans and strategic position or those of our competitors or customers.

The closing sale price of our common stock on the NASDAQ Global Market for the period of January 1, 2007 to October 2, 2011 ranged from a low of $0.86 to a high of $9.34. In addition, the market prices of securities of semiconductor and other technology companies have been volatile, particularly for companies like us, with low trading volumes. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to the operating performance of the specific companies. Accordingly, holders of our common stock may not be able to resell their shares at or above the price paid.

The pending class action litigation could cause us to incur substantial costs and divert our management’s attention and resources.

In November 2006, three putative class action lawsuits were filed in the United States District Court for the Southern District of New York against us, our directors and two former executive officers, as well as the lead underwriters for our initial and secondary public offerings. The lawsuits were consolidated and an amended complaint was filed on April 24, 2007. The amended complaint sought unspecified damages for certain alleged misrepresentations and omissions made by us in connection with both our initial public offering in September 2005 and our follow-on offering in March 2006. On June 25, 2007, we filed motions to dismiss the amended complaint, and on March 10, 2008, the Court dismissed the case with prejudice. On March 25, 2008, plaintiffs filed a motion for reconsideration, and on June 12, 2008, the District Court denied the motion for reconsideration. On October 15, 2008, plaintiffs appealed the District Court’s dismissal of the amended complaint and denial of its motion for reconsideration to the United States Court of Appeals for the Second Circuit. On September 17, 2009, the Court of Appeals affirmed the District Court’s dismissal of the amended complaint, but vacated its judgment on the motion for reconsideration and remanded the case to the District Court for further proceedings. On May 13, 2010, the District Court granted plaintiffs leave to file a motion to amend the pleadings. Plaintiffs filed a motion for leave to amend the complaint on June 11, 2010. We opposed on July 11, 2010, and on November 23, 2010, the District Court denied the motion. On January 6, 2011, plaintiffs filed a notice of appeal with the United States Court of Appeals for the Second Circuit and, on March 18, 2011, filed Appellant’s Opening Brief. We filed our opposition brief on June 17, 2011 and on July 5, 2011 plaintiffs filed a reply. Both parties have requested oral argument before the District Court. We cannot predict the likely outcome of the appeal, and an adverse result could have a material effect on our financial statements.

If the securities analyst who currently publishes reports on Ikanos does not continue to publish research or reports about our business, or if he issues an adverse opinion regarding our common stock, the market price of our common stock price and trading volume could decline.

The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us or our business. We have lost all the securities research coverage with the exception of one analyst. If this analyst issues an adverse opinion regarding our common stock, the stock price would likely decline. If the analyst ceases coverage of us or fails to regularly publish reports on us, we could lose further visibility to the financial markets, which in turn could cause the market price of our common stock or trading volume to decline.

Takeover attempts that stockholders may consider favorable may be delayed or discouraged due to our corporate charter and bylaws which contain anti-takeover provisions, Delaware law, or the Tallwood Investors.

Provisions in our certificate of incorporation may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:

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the right of our Board of Directors to elect a director to fill a vacancy created by the expansion of our Board of Directors;

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the establishment of a classified Board of Directors requiring that not all members of the board be elected at one time;

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the prohibition of cumulative voting in the election of directors which would otherwise allow less than a majority of stockholders to elect director candidates;

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the requirement for advance notice for nominations for election to the board of directors or for proposing matters that can be acted upon at a stockholders’ meeting;

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the ability of our Board of Directors to alter our bylaws without obtaining stockholder approval;

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the ability of our Board of Directors to issue, without stockholder approval, up to 1,000,000 shares of preferred stock with terms set by the Board of Directors, which rights could be senior to those of common stock;

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the required approval of holders of at least two-thirds of the shares entitled to vote at an election of directors to adopt, amend or repeal our bylaws or amend or repeal the provisions of our certificate of incorporation regarding the election and removal of directors and the ability of stockholders to take action;

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the required approval of holders of a majority of the shares entitled to vote at an election of directors to remove directors for cause; and

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the elimination of the right of stockholders to call a special meeting of stockholders and to take action by written consent.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us. These provisions in our certificate of incorporation, bylaws and under Delaware law could discourage potential takeover attempts and could reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than it would without these provisions.

Due to the significant number of shares of our common stock that the Tallwood Investors hold as discussed above, the Tallwood Investors may have the ability to significantly influence the outcome of any matter submitted for the vote of our stockholders, including a takeover attempt, and may have interests that diverge from, or even conflict with, our interests and those of our other stockholders.

Item 6.

Exhibits

An Exhibit Index has been attached as part of this Quarterly Report on Form 10-Q and is incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	IKANOS COMMUNICATIONS, INC.

Dated: November 3, 2011	By:	/s/ Diosdado Banatao
		Diosdado Banatao
		Interim President and Chief Executive Officer
		(Principal Executive Officer)

Dated: November 3, 2011	By:	/s/ Dennis Bencala
		Dennis Bencala
		Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

IKANOS COMMUNICATIONS, INC.

EXHIBITS TO FORM 10-Q QUARTERLY REPORT

For the Quarter Ended October 2, 2011


Exhibit Number		Description
31.1		Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*		XBRL Instance Document

101.SCH*		XBRL Taxonomy Extension Schema Document

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*		XBRL Taxonomy Extension Label Linkbase Document

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company