As filed with the Securities and Exchange Commission on April 29, 2011

Registration No. 333-172845

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

AMENDMENT NO.1

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

Cortina Systems, Inc.

(Exact name of Registrant as specified in its charter)

Delaware

3674

94-3401917

(State or other jurisdiction of incorporation or
organization)

(Primary Standard Industrial Classification

Code Number)

(I.R.S. Employer

Identification Number)

1376 Bordeaux Drive

Sunnyvale, California 94089

(408) 481-2300

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Amir Nayyerhabibi

President and Chief Executive Officer

Cortina Systems, Inc.

1376 Bordeaux Drive

Sunnyvale, California 94089

(408) 481-2300

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

Larry W. Sonsini

Aaron J. Alter

Michael E. Coke

Wilson Sonsini Goodrich & Rosati, P.C.

650 Page Mill Road

Palo Alto, California 94304

(650) 493-9300

Judy Hamel

Vice President, Legal Affairs

Cortina Systems, Inc.

1376 Bordeaux Drive

Sunnyvale, California 94089

(408) 481-2300

Thomas J. Ivey

Skadden, Arps, Slate, Meagher & Flom LLP

525 University Avenue

Palo Alto, California 94301

(650) 470-4500

Approximate date of commencement of proposed sale to the public:

As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer ¨		Accelerated filer ¨		Non-accelerated filer x		Smaller reporting company ¨

(Do not check if a smaller reporting company)

CALCULATION OF REGISTRATION FEE



Title of Each Class of Securities to be Registered	Proposed Maximum Aggregate Offering Price(1)	Amount of Registration Fee(2)
Common Stock, par value $0.001 per share	$100,000,000	$11,610

(1)	Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. Includes offering price of shares that the underwriters have the option to purchase to cover over-allotments, if any.

(2)	The Registrant previously paid the registration fee in connection with a previous filing of this registration statement.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Prospectus

SUBJECT TO COMPLETION, DATED APRIL 29, 2011

Shares

LOGO

Common Stock

This is the initial public offering of common stock by Cortina Systems, Inc. We are offering shares of common stock and the selling stockholders are offering shares of common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. The estimated initial public offering price is between $ and $ per share.

We intend to apply to have our common stock listed on The NASDAQ Global Market under the symbol “CRTN.”

Investing in our common stock involves risks. See “Risk Factors” beginning on page 10 of this prospectus.


	Per Share	Total
Initial public offering price
Underwriting discounts
Proceeds to us (before expenses)
Proceeds to selling stockholders

We have granted the underwriters a 30-day option to purchase up to an additional shares of common stock from us on the same terms and conditions set forth above to cover over-allotments, if any.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares on or about , 2011.

J.P. Morgan

Barclays Capital



Needham & Company, LLC	Oppenheimer & Co.	Piper Jaffray

	Roth Capital Partners

Prospectus dated , 2011

LOGO

TABLE OF CONTENTS


	Page
PROSPECTUS SUMMARY		1
RISK FACTORS		10
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS		28
USE OF PROCEEDS		29
DIVIDEND POLICY		29
CAPITALIZATION		30
DILUTION		32
SELECTED CONSOLIDATED FINANCIAL DATA		34
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		36
BUSINESS		61
MANAGEMENT		76
EXECUTIVE COMPENSATION		84
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS		108
PRINCIPAL AND SELLING STOCKHOLDERS		109
DESCRIPTION OF CAPITAL STOCK		113
SHARES ELIGIBLE FOR FUTURE SALE		117
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS		119
UNDERWRITING		122
LEGAL MATTERS		130
EXPERTS		130
WHERE YOU CAN FIND MORE INFORMATION		130
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS		F-1

You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. Neither we, the selling stockholders nor the underwriters have authorized anyone to provide you with additional or different information. Neither we, the selling stockholders nor the underwriters are making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

Until , 2011, all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

No action is being taken in any jurisdiction outside the United States to permit a public offering of our common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in a jurisdiction outside the United States are required to inform themselves about, and to observe any restrictions as to, this offering and the distribution of this prospectus applicable to that jurisdiction.

In this prospectus, we refer to information and statistics regarding the industries and the markets in which we compete. We obtained this information and these statistics from various third-party sources. This information involves risks and uncertainties and is subject to change based on various factors, including those discussed in the “Risk Factors” section of this prospectus. The reports that we reference include: Gartner, Inc., Forecast: Enterprise Ethernet Switches, Worldwide, 2008-2015, 1Q11 Update, S. Real, March 3, 2011; Gartner, Inc.,

Forecast: Semiconductor Consumption by Device, Worldwide, 2006-2014, 4Q10 Update, Nolan Reilly et al, January 7, 2011; Infonetics Research, Inc. Optical Network Hardware: Quarterly Worldwide and Regional Market Share, Size and Forecasts: 2Q10, August 19, 2010; Infonetics Research, Inc. PON Equipment Worldwide and Regional Market Size and Forecast, August 30, 2010; and Infonetics Research, Inc. Broadband and CPE and Subscribers: PON, FTTH, Cable, and DSL Quarterly Worldwide and Regional Market Share, Size and Forecasts: 4Q10, March 11, 2011.

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes and the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case included elsewhere in this prospectus.

Overview

We are a leading provider of high-performance communications semiconductor solutions enabling next generation network connectivity and efficient bandwidth delivery from the core network to the home network. Our broad product portfolio includes carrier-class semiconductor devices for next generation optical transport and passive optical network systems, as well as data center connectivity and digital home solutions. We currently have over 800 customers, including leading global network equipment vendors such as Alcatel-Lucent, Ciena Corporation, Cisco Systems, Inc., Ericsson AB, FiberHome Technologies Group, Fujitsu Limited, Huawei Technologies Co., Ltd., Juniper Networks, Inc., Nokia Siemens Networks and ZTE Corporation. Our solutions are installed in many leading global service provider networks, including China Mobile Limited, China Telecom Corp. Ltd., China Unicom (HK) Limited, Deutsche Telecom AG, KT Corporation, Telecom Italia Group, Telefónica S.A., Telstra Corporation Limited and Vodafone Group plc.

The proliferation of video content, social networking and cloud computing, or the delivery of hosted on-demand services over the Internet, has resulted in explosive growth of fixed and mobile network traffic. This growth in network traffic is creating fundamental business challenges as well as significant revenue opportunities for service providers and network equipment vendors. To capitalize on these opportunities, service providers are upgrading their networks to provide increased bandwidth, guaranteed service delivery, anytime-anywhere accessibility and network security. Network equipment vendors are increasingly utilizing communications semiconductors as the fundamental building blocks of these intelligent next generation networks. According to Gartner, the market for communications application specific integrated circuits and application specific standard products was $41 billion in 2010.

We provide platform solutions, and our broad portfolio of carrier-class semiconductor devices, or devices that meet high standards for reliability, addresses our customers’ key requirements for power, scalability and the flexibility to deliver feature-rich content and services. In addition, for the majority of these solutions, we are currently the sole source for our customers. Our differentiated system-on-a-chip solutions enable seamless deployment and network upgrades and incorporate highly integrated, high-performance analog, digital and mixed-signal semiconductor technologies, proprietary software algorithms, serial connectivity, advanced geometries, multi-protocol support and backward compatibility with existing network infrastructure.

We are a fabless global semiconductor company with 432 employees as of March 31, 2011. In the quarter ended March 31, 2011, we generated revenue of $35.6 million, net loss of $3.8 million and non-GAAP net income of $1.7 million. In the year ended December 31, 2010, we generated revenue of $141.1 million, net loss of $10.7 million and non-GAAP net income of $10.9 million. Non-GAAP net income excludes certain non-cash charges as set forth in “—Summary Consolidated Financial Information” below. Though we have incurred GAAP net losses during the past eight quarters, we have been profitable on a non-GAAP basis during these quarters. Further discussion and a reconciliation of our GAAP metrics to our non-GAAP metrics, including our quarterly results, is provided in the sections “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quarterly Results of Operations” and “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Non-GAAP Financial Measures” appearing elsewhere in this prospectus.

Our Industry

Global fixed and mobile network traffic is growing at an accelerating rate, placing a tremendous strain on communications networks. Consumer demand for continuously available and customizable rich-media services, such as cloud-based services, social networking and killer, or popular, applications has changed the nature of network traffic. In addition, the delivery model of services to end users is changing with the proliferation of connected mobile devices such as smartphones, tablets, notebooks and e-readers and the widespread availability of wireless broadband. To meet the increase in bandwidth requirements and support expanded demand for service offerings, service providers are investing significant amounts of capital and building next generation networks that have greater capacity and reach, and are more intelligent and robust. Communications semiconductors have emerged as key enablers of next-generation communications networks across the following market segments:

Transport. Accelerating growth in network traffic is straining core and metro networks, driving demand for next generation, flexible and cost-effective solutions. Service providers are accelerating deployments of next generation networks capable of transmission at 40 Gbps, or 40G, as well as trial deployments of networks capable of transmission at 100 Gbps, or 100G. New generations of carrier-class communications semiconductor devices are the key enablers of faster speeds, longer reach and more reliable networks.

Access. Service providers are required to invest significant amounts of capital to expand capacity in access networks to support the delivery of quad-play services, or services that combine voice, video, data and wireless. Access networks are transitioning to optical fiber as copper lines, primarily used in legacy networks, have reached their bandwidth limitations. Optical fiber, and the communications semiconductor devices that enable bandwidth delivery over optical fiber, have emerged as the key components of high capacity next generation access networks.

Data Center Connectivity. Ubiquitous broadband, the emergence of hosted solutions and an increasingly mobile workforce are driving widespread adoption of cloud computing technology by enterprises. This adoption, coupled with ongoing data center consolidation and an increasing focus on managing operating costs, has resulted in the rapid expansion of large-scale, virtualized data center deployments. Next generation data centers require cost-effective, carrier-class semiconductor technology that provides flexibility, high density, performance, resiliency and reliability.

Digital Home. Quad-play services are transforming home offices into functional work environments and living rooms into sophisticated entertainment centers where families gather to enjoy feature-rich content. The control and delivery of bandwidth and content in the home is migrating from one-way set-top boxes and first generation digital home gateways, to home servers and routing engines that enable user programmability, robust connectivity and quality of service.

Our Solutions

Our global expertise in developing carrier-class, platform solutions across multiple points of the communications network from the core, or central portion, of a telecommunications network to the home, or residential, local area network uniquely positions us to address the complex challenges and requirements of service providers and network equipment vendors. Our solutions combine advanced geometries with our proprietary hardware, software algorithms and architectures to enable the delivery of cost-efficient bandwidth without compromising the quality of service. We have developed our solutions to run on multiple commonly used communications protocols. Our products’ ease of integration and our broad footprint throughout the network enable us to provide end-to-end solutions for both existing and greenfield networks, allowing us to deliver the following key benefits to our customers:

Solving Our Customers’ Most Significant Challenges — Performance, Power and Scalability. Our VLSI, or very large scale integration, technology employs high-speed analog interconnect technologies integrated with very large digital processing systems-on-a-chip to create a robust architecture for our customers. This innovative technology has been designed to minimize power consumption and increase the speed of serial connectivity between network equipment and network components. We have incorporated signal processing and innovative design methodologies as well as creative packaging and noise reduction techniques to overcome some of the most difficult problems facing our customers, including power and total cost of ownership requirements. We have developed large-scale semiconductor devices that enable new network devices to interoperate seamlessly with devices already installed in the network. Our solutions provide support for multiple protocols and enable high speeds while preserving quality of service and the integrity of the network.

Enabling Feature-Rich Service Delivery Platforms. Our solutions enable service providers to migrate to new multi-directional service platforms which allow them to measure bandwidth delivery, provide security across the network and remotely manage and monitor services. This enables service providers to seamlessly tailor interactive content for each individual end user and deliver high levels of bandwidth-on-demand.

Our ability to meet stringent power requirements enables the scalability of network capacity and the proliferation of new service delivery models. We provide significant value for service providers, enterprises and network equipment vendors across the following network segments:

Transport. Our solutions enable network equipment vendors to use denser and lower cost optical systems throughout the core network and the metro network, allowing them to deliver greater and more efficient bandwidth to end users. Additionally, our proprietary forward error correction technology, or technology to add redundant data to its messages to correct for transmission errors, incorporates a unique algorithm that extends the reach of our solution, is backward compatible and has the highest speed transport capabilities.

Access. We leverage our expertise and technology in building large scale transport networks across multiple regions to provide low power and cost-effective access solutions. Our solutions are compatible with a variety of communication protocols and support our customers’ requirements for interoperability, one of the key challenges associated with building access networks. This allows us to provide service providers with cost-effective, high bandwidth solutions.

Data Center Connectivity. We provide low power, low latency 10G optical devices solving data center connectivity and power challenges. Our extensive engineering expertise enables us to incorporate the signal processing characteristics of digital technologies into analog architectures, facilitating lower power and more cost efficient means of transmission within the enterprise data center.

Digital Home. We are developing technologies that enable the convergence of multiple disparate applications for use in the home, including broadband router and gateway functions, content sharing and streaming, network storage, backup and encryption. We believe our next generation of multi-core processors, when integrated with sophisticated networking engines that have been traditionally used in large scale enterprise and core routers, will enable new ways of managing data communication in the home.

Our Key Competitive Strengths

Global Tier 1 Customer Base. We currently have over 800 customers, including leading global network equipment vendors such as Alcatel-Lucent, Ciena Corporation, Cisco Systems, Inc., Ericsson AB, FiberHome Technologies Group, Fujitsu Limited, Huawei Technologies Co., Ltd., Juniper Networks, Inc., Nokia Siemens Networks and ZTE Corporation, and our solutions are installed in many leading global service provider networks, including China Mobile Limited, China Telecom Corp. Ltd., China Unicom (HK) Limited, Deutsche Telecom AG, KT Corporation, Telecom Italia Group, Telefónica S.A., Telstra Corporation Limited and Vodafone Group plc.

Leading Provider of Platform Solutions From the Core Network to the Home Network. Our extensive knowledge and experience across communications networking segments enables us to identify bottlenecks and design solutions to address them, differentiating us from our competitors focused on point solutions for specific applications.

Incumbency Creates Barriers to Entry. Our platform solutions are essential elements of our customers’ complex communications networking systems, making our customers more likely to continue to sole source from us and reluctant to switch suppliers during the life of a system. Additionally, our pipeline of design wins with our Tier 1 customer base creates multiple points of contact and familiarity with the market needs of our customers, making it difficult for competitors to displace us.

Extensive Technology Leadership. We have been able to bring together our knowledge of building large scale networks with our expertise in processing large scale data to create multiple platforms for our customers that are robust, upgradable and that enable seamless migration and interoperability among multiple vendors.

Proven Track Record of Acquiring and Integrating Businesses. Our proven ability to find and integrate innovative founding teams and complementary technologies as well as our ability to realize value from under-appreciated assets has created another growth dimension and helped further our research and development efforts.

Strong Management Team with Proven Ability to Execute. Our executive team has an average of over 25 years of experience in the technology industry and has significant experience and domain knowledge in networking, signal processing, processor development and large-scale computer and network systems.

Our Strategy

Our objective is to be the leading global communications semiconductor provider from the core network to the home network. Key elements of our strategy include:

•

Leveraging our carrier-class platform and current installed base to drive growth;

•

Extending our leadership position in existing and new markets;

•

Extending our technology leadership through continuous innovation;

•

Utilizing our global footprint to further penetrate high growth markets; and

•

Opportunistically pursuing complementary acquisitions.

Risks Affecting Us

Our business is subject to numerous risks. These risks represent challenges to the successful implementation of our strategy and to the growth and future profitability of our business. Some of these risks include:

•

We have experienced losses in our operating history, and we may not be able to achieve or sustain profitability in the future, either on a quarterly or on an annual basis;

•

Our quarterly operating results may fluctuate significantly as a result of factors that may be outside of our control, which may make it more difficult to rely on quarterly comparisons as an indicator of our future performance;

•

We are dependent on capital expenditures by service providers, and any downturn that they experience could negatively impact our business;

•

Our success depends heavily on our ability to respond to rapid technological change and other challenges in the markets in which we operate;

•

Our strategy depends, in part, on our ability to introduce new products into new markets;

•

We face intense competition and expect competition to increase in the future, which could reduce our revenue and customer base; and

•

We rely on a small number of key customers for a substantial portion of our revenue, and the loss of one or more of these key customers or the diminished demand for our products from one or more of our key customers would substantially decrease our revenue and profits.

For further discussion of these and other risks you should consider before making an investment in our common stock, see the section entitled “Risk Factors” immediately following this prospectus summary.

Corporate Information

We were incorporated in the State of Delaware in June 2001. Our executive offices are located at 1376 Bordeaux Drive, Sunnyvale, California 94089, and our telephone number is (408) 481-2300. Our website address is www.cortina-systems.com. Information contained on our website is not incorporated by reference into this prospectus, and should not be considered to be part of this prospectus. Unless the context requires otherwise, references in this prospectus to “Cortina,” “Company,” “we,” “us” and “our” refer to Cortina Systems, Inc. and its subsidiaries.

We use various trademarks and trade names, including, without limitation, “Cortina Systems,” “Cortina” and our logo. This prospectus includes trademarks and tradenames of other persons that are the property of their respective holders.

THE OFFERING

Common stock offered by us

Shares of common stock offered by the selling stockholders

Total

Common stock to be outstanding after this offering

Option to purchase additional shares offered by us

Use of proceeds

We intend to use the net proceeds from this offering primarily for general corporate purposes. We may also use a portion of the proceeds from the offering to acquire other businesses or technologies. However, we are not currently discussing any such potential acquisition or investment with any third party. We will not receive any of the proceeds from the shares of common stock sold by the selling stockholders. See “Use of Proceeds.”

The NASDAQ Global Market symbol

“CRTN”

The number of shares of common stock to be outstanding after this offering is based on 295,978,724 shares outstanding as of March 31, 2011, and excludes:

•

55,579,554 shares of common stock issuable upon exercise of stock options outstanding as of March 31, 2011, at a weighted average exercise price of $0.29 per share;

•

16,027,590 shares of common stock reserved for issuance under our 2001 Equity Incentive Plan and shares of common stock reserved for issuance under our 2011 Equity Incentive Plan and our 2011 Employee Stock Purchase Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under these plans.

Except as otherwise indicated, all information in this prospectus assumes:

•

the automatic conversion of each outstanding share of our Series 1 preferred stock, Series A preferred stock, Series B preferred stock, Series C preferred stock and Series D preferred stock into one share of common stock, upon completion of this offering;

•

no exercise by the underwriters of their option to purchase up to an additional shares of common stock from us and the selling stockholders; and

•

the filing of our amended and restated certificate of incorporation prior to completion of this offering.

SUMMARY CONSOLIDATED FINANCIAL INFORMATION

The following summary consolidated financial data should be read together with our consolidated financial statements and notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. We have derived the following consolidated statement of operations data for our fiscal years ended December 31, 2008, 2009 and 2010 from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the three months ended March 31, 2010 and 2011 and the consolidated balance sheet data as of March 31, 2011 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The historical results presented below are not necessarily indicative of financial results to be achieved in future periods.


	Year Ended December 31,									Three Months Ended March 31,
	2008			2009			2010			2010			2011
										(unaudited)
	(in thousands, except per share data)
Consolidated statements of operations data:
Revenue	$	152,126		$	127,474		$	141,086		$	32,142		$	35,555
Cost of revenue:
Product cost of revenue (1)		65,725			53,522			52,920			12,198			13,601
Amortization of acquired developed technologies		18,604			18,796			18,716			4,679			4,679

Total cost of revenue		84,329			72,318			71,636			16,877			18,280

Gross profit		67,797			55,156			69,450			15,265			17,275
Gross profit percentage		45	%		43	%		49	%		47	%		49	%

Operating expenses:
Research and development (1)	$	41,461		$	45,814		$	50,153		$	12,334		$	13,132
Sales, general and administrative (1)		29,278			28,509			29,648			7,257			7,584
Restructuring charges		—			554			—			—			—
Acquired in-process research and development		971			—			—			—			—

Total operating expenses		71,710			74,877			79,801			19,591			20,716

Operating loss		(3,913	)		(19,721	)		(10,351	)		(4,326	)		(3,441	)
Interest and other income		724			231			116			36			20
Interest and other expense		(682	)		(271	)		(130	)		(37	)		(30	)
Foreign currency translation gain (loss)		171			70			(173	)		(3	)		(4	)

Loss before income taxes		(3,700	)		(19,691	)		(10,538	)		(4,330	)		(3,455	)
Provision for income taxes		762			1,649			178			201			307

Net loss	$	(4,462	)	$	(21,340	)	$	(10,716	)	$	(4,531	)	$	(3,762	)

Net loss per common share—basic and diluted	$	(0.18	)	$	(0.63	)	$	(0.30	)	$	(0.13	)	$	(0.10	)
Weighted average shares used in computing net loss per common share—basic and diluted		25,450			33,918			35,308			34,807			39,168
Pro forma net loss per common share—basic and diluted (unaudited) (2):							$	(0.04	)					(0.01	)
Pro forma shares used in computing net loss per common share—basic and diluted (unaudited) (2):								291,315						295,175

Non-GAAP financial measures (3) (in thousands):
	Year Ended December 31,									Three Months Ended March 31,
	2008			2009			2010			2010			2011
										(unaudited)
Non-GAAP gross profit	$	86,525		$	74,022		$	88,255		$	19,967		$	21,982
Non-GAAP gross profit percentage		57	%		58	%		63	%		62	%		62	%
Non-GAAP operating income	$	18,053		$	2,051		$	11,346		$	1,108		$	1,962
Non-GAAP net income		17,454			352			10,911			899			1,722


	As of March 31, 2011
	Actual			Pro Forma As Adjusted (4)
	(unaudited)
Consolidated summary balance sheet data (in thousands):
Cash, cash equivalents and marketable securities	$	37,368		$
Working capital (5)		64,867
Total assets		150,047
Convertible preferred stock and redeemable convertible preferred stock		225,932			—
Common stock and additional paid in capital		15,067
Total stockholders’ equity (deficit)		(101,352	)

(1)	Includes stock-based compensation expense as follows (in thousands):


		Year Ended December 31,									Three Months Ended March 31,
		2008			2009			2010			2010			2011
											(unaudited)
	Cost of revenue	$	124		$	70		$	89		$	23		$	28
	Research and development		954			666			701			183			176
	Sales, general and administrative		711			671			810			182			234

	Total stock-based compensation	$	1,789		$	1,407		$	1,600		$	388		$	438


(2) Pro forma net loss per common share—basic and diluted for the year ended December 31, 2010 and the three months ended March 31, 2011 has been computed to give effect to the conversion of our convertible preferred stock and redeemable convertible preferred stock (using the if-converted method) into common stock as though the conversion had occurred on the respective original dates of issuance.

(3) We reconcile non-GAAP gross profit, non-GAAP gross profit percentage, non-GAAP operating income and non-GAAP net income as follows (in thousands), (unaudited):

		Year Ended December 31,									Three Months Ended March 31,
		2008			2009			2010			2010			2011
	Gross profit	$	67,797		$	55,156		$	69,450		$	15,265		$	17,275
	Gross profit percentage		45	%		43	%		49	%		47	%		49	%

	Non-GAAP adjustments:
	Amortization of acquired developed technologies	$	18,604		$	18,796		$	18,716		$	4,679		$	4,679
	Stock-based compensation		124			70			89			23			28

	Non-GAAP gross profit	$	86,525		$	74,022		$	88,255		$	19,967		$	21,982

	Non-GAAP gross profit percentage		57	%		58	%		63	%		62	%		62	%

	Operating loss	$	(3,913	)	$	(19,721	)	$	(10,351	)	$	(4,326	)	$	(3,441	)
	Non-GAAP adjustments:
	Amortization of acquired intangible assets		20,177			20,365			20,097			5,046			4,965
	Stock-based compensation		1,789			1,407			1,600			388			438

	Non-GAAP operating income	$	18,053		$	2,051		$	11,346		$	1,108		$	1,962


	Net loss	$	(4,462	)	$	(21,340	)	$	(10,716	)	$	(4,531	)	$	(3,762	)
	Non-GAAP adjustments:
	Amortization of acquired intangible assets		20,177			20,365			20,097			5,046			4,965
	Stock-based compensation		1,789			1,407			1,600			388			438
	Tax effects of non-GAAP adjustments		50			80			70			4			(81	)

	Non-GAAP net income	$	17,454		$	352		$	10,911		$	899		$	1,722

We believe that the use of non-GAAP gross profit, non-GAAP gross profit percentage, non-GAAP operating income and non-GAAP net income is helpful for an investor to determine whether to invest in our common stock. In computing our non-GAAP financial measures, we exclude items included under GAAP that may not be indicative of our core business operating results, specifically, non-cash charges for the amortization of acquired intangible assets, which will be substantially amortized by September 2012, stock-based compensation expense and related tax effects. We believe the exclusion of these non-cash charges is useful to investors because it is more indicative of our core business operating results and the health of our business.

Additionally, referring to these non-GAAP financial measures is helpful to us in assessing our performance and in planning, forecasting and analyzing future periods. These non-GAAP financial measures also facilitate our internal trending of historical performance and liquidity as well as comparisons to our competitors’ operating results. In addition, in years prior to 2010, when we had a profitability component of our performance-based cash bonus targets, we used non-GAAP operating income to determine attainment of targets for key employees and executive officers. Using these non-GAAP measures to evaluate our business also allows us and investors to assess our relative performance against our competitors, and ultimately monitor our capacity to generate returns for our stockholders.

These non-GAAP financial measures may not provide information that is directly comparable to that provided by other companies in our industry, as other companies in our industry may calculate such financial results differently, particularly related to non-recurring, unusual items. Our non-GAAP financial measures are not measurements of financial performance under GAAP, and should not be considered as alternatives to gross profit, gross profit percentage, operating loss and net loss or as indications of operating performance or any other measure of performance derived in accordance with GAAP. We do not consider these non-GAAP financial measures to be a substitute for, or superior to, the information provided by GAAP financial results. Further explanation of our use of these non-GAAP measures is provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures” appearing elsewhere in this prospectus.

(4)

Reflects (i) the conversion of all outstanding shares of our preferred stock into shares of common stock, (ii) our receipt of the net proceeds from our sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, the midpoint of the price range set forth on the front cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses and (iii) the application of the net proceeds of this offering as described under “Use of Proceeds.”

(5)	Working capital is defined as total current assets less total current liabilities.

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including our consolidated financial statements and related notes, before deciding whether to purchase shares of our common stock. If any of the following risks is realized, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that event, the price of our common stock could decline and you could lose part or all of your investment.

Risks Related to Our Business and Industry

We have experienced losses in our operating history, and we may not be able to achieve or sustain profitability in the future, either on a quarterly or on an annual basis.

Since our establishment in 2001, we have not been profitable and we have incurred net operating losses. As of March 31, 2011, we had an accumulated deficit of $116.5 million. The revenue growth trends that we have experienced in prior periods may not be sustainable in future periods. We expect to make significant expenditures related to the development of our products and the expansion of our business, including research and development, sales, general and administrative expenses. As a public company, we will incur significant legal, accounting and other expenses. Additionally, we may encounter unforeseen difficulties, complications, product delays and other unknown factors that require additional expenditures. As a result of these increased expenditures, any future profitability may be dependent on our ability to generate and sustain substantially increased revenue. Accordingly, we may not be able to achieve or maintain profitability and we may incur further losses in the future.

Our quarterly operating results may fluctuate significantly as a result of factors that may be outside of our control, which may make it difficult to rely on our quarterly comparisons as an indicator of future performance.

Our quarterly operating results are likely to fluctuate for a variety of reasons. We rely on a portion of orders placed in any given quarter to be fulfilled in that same quarter, which may make it difficult for us to predict our quarterly operating results. For example, in the fourth quarter of 2008 and the first quarter of 2009, we experienced delayed and cancelled orders from network equipment vendors; we refer to network equipment vendors throughout this prospectus as our customers, whether they purchase directly from us or through a distributor.

We experience variability in the demand for our products. The mix and types of performance capabilities of products sold, as well as the stages of these products in their life cycles, affect the average selling price of our products and have a substantial impact on our operating results. Our product mix is shifting away from our legacy products to our more recently developed, or growth, products, which will affect the average selling price of our products and may affect revenue and gross profit. In addition, we expect revenue from our legacy products to decline over time, both in absolute dollars and as a percentage of total revenue. Our results of operations will be harmed if we are not able to offset the loss of this revenue with increased sales of our growth products.

Other factors that could cause our results to fluctuate include, among other things:

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our ability to accurately predict changing customer requirements and needs;

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the timing of our product introductions, and the variability in lead time between commencement of a design-in process and the eventual production and subsequent purchase of our products;

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the forecasting, scheduling, rescheduling or cancellation of orders by our customers;

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our ability to successfully define, design and release new products in a timely manner that meet our customers’ needs;

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variable demand for our products;

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inventory shortages;

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gain or loss of significant customers;

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exposure to product warranty or product liability claims;

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the timing and availability of adequate wafer fabrication, sort, assembly and test capacity on the part of our third-party vendors;

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the timing of product announcements by our competitors or us;

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productivity and growth of our sales and marketing force;

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fluctuations in foreign currencies in the locations in which we operate;

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future accounting pronouncements and changes in accounting policies;

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volatility in our stock price, which may lead to higher stock compensation expenses;

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general economic and political conditions in the countries where we operate and where our products are sold or used; and

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costs associated with litigation, especially related to intellectual property.

Many of these factors are outside of our control, and the occurrence of one or more of them may cause our operating results to vary widely. Accordingly, we believe that quarterly comparisons of our revenue, operating results and cash flows may not be meaningful and should not be relied upon as an indication of our future performance. In addition, to the extent that our revenue fluctuates more than we predict, we may not be able to adjust expenses on a timely basis to compensate.

We are dependent on capital expenditures by service providers, and any downturn that they experience could negatively impact our business.

Our business is subject to the cyclicality of service providers’ capital expenditures. A substantial portion of our business and revenue depends on continued capital expenditures by service providers fueled by the growth of the technology sector, broadband telecommunications and the Internet. Our communications semiconductor products are sold primarily to network equipment vendors that in turn sell their equipment to service providers. If the demand for our customers’ products declines, as a result of lower capital expenditures by service providers or any other factors, demand for our products will be similarly affected. The recent global economic downturn caused a significant reduction in capital spending on communications network equipment. While we are beginning to see improvement, there are no guarantees that this growth will continue, which could result in market volatility or another downturn. If there is another downturn, our business, operating results and financial condition may be materially harmed.

Our success depends heavily on our ability to respond to rapid technological change and other challenges in the markets in which we operate.

The markets for our products are characterized by rapidly changing technologies and our success depends, in part, upon being the first to introduce new products and enhancements. Our ability to compete in the future will depend in large part on our ability to accurately identify and develop new products or new generations and versions of our existing products that achieve market acceptance on a timely and cost-effective basis.

The successful development and market acceptance of new products or new generations and versions of our existing products depends on a number of factors, including, but not limited to:

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our accurate anticipation of changing customer requirements and needs;

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timely development of new designs;

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timely qualification and certification of our products for use in our customers’ systems;

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commercial acceptance and production of the systems into which our products are incorporated;

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availability, quality, price, performance and size of our products relative to competing products and technologies;

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our customer service and support capabilities and responsiveness;

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whether our products are backwards compatible and interoperable;

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successful maintenance and development of relationships with existing and potential customers; and

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successful development of relationships with key developers of advanced digital semiconductors.

Our pursuit of technological advances may require substantial time and expense and may ultimately prove unsuccessful. If we are not successful in responding to rapid technological change, we may be unable to timely bring to market new products or new generations and versions of our existing products which will adversely affect our revenue.

Further, in the event that new products require features for which we have not developed or otherwise acquired technology, such as wireless capabilities, we will be required to develop or obtain such technology through purchase, license or other arrangements. If the required technology is not available on commercially reasonable terms or at all, it could cause our expenses to increase as we acquire or are required to internally develop the technology. If we are unable to develop or acquire such technology, our competitive position will be harmed.

Our strategy depends, in part, on our ability to introduce new products into new markets. To the extent we are unable to execute this component of our strategy, our operating results and competitive position could be materially harmed.

We intend to derive a significant portion of revenue and income from introducing new products into new markets. For example, our initiative in the digital home market, focused on developing next generation digital home gateways as an alternative to the traditional set top-box, targets one such new market. New markets may be less predictable than existing markets. We may have fewer relationships with key customers than our competitors and our reputation in a new market may not be the same as it is in our existing markets. We may not be successful in our new market initiatives, including in the digital home market. If we are not successful, our revenue and operating results may not grow as expected or may decline.

We face intense competition and expect competition to increase in the future, which could reduce our revenue and customer base.

The markets for our products are highly competitive. We face competition from a number of established companies, including Applied Micro Circuits Corporation, Broadcom Corporation and PMC-Sierra, Inc. We expect competition to intensify in the future, especially as the industry consolidates. There has been a trend toward industry consolidation among communications integrated circuit companies, network equipment companies and telecommunications companies, and we expect this trend to continue. Companies that are strategic alliance partners in some areas of our business may acquire or form alliances with our competitors, thereby reducing their business with us. Consolidation may result in stronger competitors and fewer customers, which in turn could result in a loss in our customers and a decrease in our revenue. Increased competition could make it more difficult for us to sell our products, and could result in increased pricing pressure, reduced gross profit, increased sales and marketing expenses and failure to increase, or the loss of, market share, any of which is likely to seriously harm our business, operating results and financial condition.

Some of our competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than us. This is especially true in the digital home market which we are in the process of entering. Potential customers may prefer to purchase from their existing suppliers rather than a new supplier regardless of product performance or features.

In addition, our customers generally have substantially greater resources than we have. Some customers have used these resources to internally develop their own communications semiconductors. Our future success depends upon the continued acceptance of our products as more attractive alternatives to our customers’ internal development efforts. Network equipment vendors may also decide to acquire components, technologies or products that are similar to, or that may be substituted for, our products. If our network equipment vendor customers fail to accept our products as a preferred alternative, if they develop or acquire the technology to develop such components internally rather than purchase our products, or if we are otherwise unable to develop or maintain strong relationships with them, our business, financial condition and results of operations would be materially and adversely affected.

We rely on a small number of key customers for a substantial portion of our revenue, and the loss of one or more of these key customers or the diminished demand for our products from one or more such key customers could substantially decrease our revenue and profits.

A small number of customers account for a substantial portion of our revenue in any particular period. For the years ended December 31, 2008, 2009 and 2010, four customers represented greater than 10% of our total revenue. Arrow Electronics, Inc., who distributes our products to key end customers such as Cisco Systems, Inc., accounted for approximately 11%, 13% and 19% of our total revenue in the years ended December 31, 2008, 2009, and 2010, respectively. Dragon Technology Distribution (HK) Ltd., who distributes our products to key end customers such as ZTE Corporation, accounted for approximately 12%, 18% and 18% of our total revenue for the years ended December 31, 2008, 2009 and 2010, respectively. Huawei Technologies Co., Ltd. accounted for approximately 24%, 24% and 14% of our total revenue in the years ended December 31, 2008, 2009, and 2010, respectively. Jabil Circuit, Inc. accounted for less than 10% of our total revenue in 2009, but accounted for approximately 10% and 11% of our total revenue in the years ended December 31, 2008 and 2010, respectively. We anticipate that our relationships with these key customers will continue to be important to our business, and we expect that our customer concentration will increase in the future. We have no long-term volume purchase commitments from our key customers. These customers may decide not to purchase our products at all, may purchase fewer products than they did in the past or may otherwise alter their purchasing patterns. Reductions, delays and cancellation of orders from our key customers or the loss of one or more key customers would significantly reduce our revenue and profits.

The average selling prices of products in our markets have historically decreased over time and will likely do so in the future, which could harm our future revenue and gross profits.

Average selling prices of semiconductor products in the markets we serve have historically decreased over time. Our gross profits and financial results will suffer if we are unable to offset any future reductions in our average selling prices by reducing our costs, developing new or enhanced products on a timely basis, or increasing our sales volumes.

The cyclical nature of the semiconductor industry could adversely affect our operating results and our business.

We expect our business to be subject to the cyclicality of the semiconductor industry, especially the market for communications integrated circuits. Historically, there have been significant downturns in this industry segment, characterized by reduced demand for integrated circuits and accelerated erosion of average selling prices. At times, these downturns have lasted for prolonged, multi-year periods. It is likely that the communications integrated circuit business will experience similar downturns in the future and that, during such times, our operating results and our business could be affected adversely. Furthermore, from time to time, the semiconductor industry has experienced periods of increased demand and production constraints, in which event

we may not be able to have our products produced in sufficient quantities, if at all, to satisfy our customers’ needs. It is also likely that the semiconductor industry will experience periods of strong demand. We may have difficulty in obtaining enough products to sell to our customers or may face substantial increases in the wafer prices charged by our foundries, which will increase our costs and may affect our results of operations.

Our customers’ products typically have lengthy design cycles, and our customers may decide to cancel or change their product plans, which could cause us to lose anticipated sales.

After we have developed and delivered a product to a customer, the customer will usually test and evaluate our product prior to designing its own equipment to incorporate our product. Our customers may need more than six months to test, evaluate and adopt our product and an additional nine months or more to begin volume production of equipment that incorporates our product. Due to this lengthy design cycle, we may experience significant delays from the time we invest in development of new products until the time we generate revenue from these products. It is possible that we may never generate any revenue from these products after incurring such expenditures. Even if a customer selects our product to incorporate into its equipment, we cannot guarantee that the customer will ultimately market and sell its equipment or that such efforts by our customer will be successful. The delays inherent in this lengthy design cycle increase the risk that a customer will decide to cancel or change its product plans. Such a cancellation or change in plans by a customer could cause us to lose anticipated sales.

Further, changes in our customers’ plans can have an adverse effect on our ability to accurately forecast demand. Over- or under-estimating our customers’ volume and product mix requirements could lead to insufficient, excess or obsolete inventory, which could harm our operating results, cash flow and financial condition, as well as our ongoing relationships with such customers.

While our customers’ design cycles are typically long, some of our growth products’ life cycles tend to be short as a result of the rapidly changing technology environment in which we operate. As a result, the resources devoted to product sales and marketing may not generate revenue for us, and from time to time, we may need to write off excess and obsolete inventory. If we incur significant sales and marketing expenses and investments in inventory in the future that we are not able to recover, and we are not able to mitigate those expenses, our operating results could be adversely affected.

The time between a design win and a purchase order may be long, and there is no guarantee that design wins will become actual orders and revenue.

A design win occurs when a customer or prospective customer notifies us of its intention to use one of our products and that testing our product with the customer’s product has commenced. Our definition of design win may differ from others in the industry. There can be delays of several months or more between the design win and when a customer initiates actual orders of our product, and we may commit significant resources to the integration of our product into the customer’s product before receiving the initial order. Receipt of an initial order from a customer following a design win, however, is dependent on a number of factors, including the success of the customer’s product, and cannot be guaranteed. The design win may never result in an actual order or sale.

Our ability to compete will depend on our ability to identify and comply with evolving industry standards.

Many of our products are based on widely accepted industry standards, such as those imposed by the Institute of Electrical and Electronics Engineers or the International Telecommunications Union, as well as customer specific requirements that are continually evolving. As a result, we could be required to invest significant time and effort, and incur significant expense, to redesign our products to ensure compliance with relevant standards. If our products are not in compliance with prevailing industry standards or requirements, we could miss opportunities to achieve crucial design wins which in turn could harm our revenue and financial condition.

We may experience difficulties in transitioning our future products to smaller geometry process manufacturing technologies or in achieving higher levels of design integration which may result in reduced manufacturing yields, delays in product deliveries and increased expenses.

As smaller line width geometry manufacturing processes become more prevalent, we intend to move our future products to increasingly smaller geometries in order to reduce costs while integrating greater levels of functionality into our products. This transition will require us and our foundries to migrate to new designs and manufacturing processes for smaller geometry products.

We may not be able to achieve smaller geometries with higher levels of design integration or to deliver new integrated products on a timely basis. We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies to reduce our costs and increase performance. We are dependent on our relationships with our foundries to transition to smaller geometry processes successfully. We cannot assure you that our foundries will be able to effectively manage any such transition. If we or our foundries experience significant delays in this transition or fail to implement this transition, our business, financial condition and results of operations could be materially harmed.

The failure of our distributors to perform as expected could materially reduce our future revenue or negatively impact our reported financial results.

Worldwide revenue through distributors accounted for 51% of our revenue during 2010 and 54% of our revenue for the three months ended March 31, 2011. We rely on a number of distributors, in particular Arrow Electronics, Inc., Dragon Technology Distribution (HK) Limited and Brilliant Technologies Company, to help generate customer demand, provide technical support and other value-added services to our customers, fill customer orders and stock our products. Our distributors do not sell our products exclusively, and to the extent they choose to emphasize a competitor’s products over our products, our results of operations could be harmed. Our contracts with our distributors may be terminated by either party with notice. Our distributors are located all over the world, and are of various sizes and financial conditions. Lower sales, lower earnings, debt downgrades, the inability to access capital markets and higher interest rates could potentially affect our distributors’ operations. Further, our distributors have contractual rights to return unsold inventory to us, and, if this were to happen, we could incur significant cost in finding alternative sales channels for these products or through write-offs. Any adverse condition experienced by our distributors could negatively impact their level of support for our products or the rate at which they make payments to us and, consequently, could harm our results of operations.

We rely on accurate and timely sales reports from our distributors in order for our financial results to represent the actual sales that our distributors make for us in any given period. Any inaccuracies or delays in these reports could negatively affect our ability to produce accurate and timely financial reports and to recognize revenue. We also rely on distributors for sales forecasts, and any inaccuracies in such forecasts could impair the accuracy of our projections and planned operations.

Our ability to add or replace distributors is limited, and any change in distributors could harm our relationships with our customers and otherwise cause lower revenue.

We contract with distributors primarily to perform two functions. One function is to provide logistics support, such as order entry, credit, forecasting, inventory management, shipment of product and payment collection. The second function is to create demand for our products. This requires the training by the distributor of an extended sales force, as well as hiring and training specialized applications engineers skilled in promoting and servicing our products at the engineering level. A change in a distributor could, thus, lead to disruptions in our business. In addition, our distributors’ expertise in the determination and stocking of acceptable inventory levels may not be easily transferable to a new distributor. Also, customers may be hesitant to accept the addition or replacement of a distributor which could also lead to disruptions in our business.

We depend entirely on wafer fabricators to supply us with finished silicon wafers. The failure of these wafer fabricators to satisfy our demand could materially disrupt our business.

Most of our silicon wafers are produced by Taiwan Semiconductor Manufacturing Company, Ltd., or TSMC, in its manufacturing facilities located in Taiwan. Silicon wafer production facilities have a fixed capacity that is allocated solely by our vendors and beyond our direct control, changes in such allocations could increase lead times and cause delays. We have no formalized long-term supply or allocation commitments from our foundry suppliers. From time to time, we have experienced shortages of wafer fabrication capacity at TSMC. Our operations would be disrupted if TSMC or any of our other foundries ended its relationship with us because the time to qualify a new foundry would make fulfilling customer orders very difficult. It would be difficult to establish other wafer supply sources as only a few foundry vendors have the capability to manufacture our most advanced products. Further, engagements with alternative wafer supply sources would bring start-up difficulties, additional costs and significant delays in shipments while these sources are qualified for volume production. In addition, our wafer pricing is affected by the volume of wafers fabricated, and any prolonged drops in our volume would negatively impact our gross profit.

We outsource our wafer fabrication, sorting, assembly, testing, warehousing and shipping operations to third parties. Any problems with our supply chain could adversely impact our business.

We rely on third parties for substantially all of our manufacturing operations, including sorting, assembly, testing, warehousing and shipping. In addition, sometimes we outsource the entire manufacturing process to third parties. For example, we rely on Toshiba America Electronic Components, Inc. for the manufacture of one of our transport products. We depend on these parties to supply us in a timely manner with material of a requested quantity that meets our standards for cost and manufacturing quality. We do not have any long-term supply agreements with our manufacturing suppliers. Our future success also depends on the financial viability of our independent subcontractors. If market demand for subcontractor material and services exceeds available supply or if the subcontractors’ capital structures weaken, we may experience product shortages, quality assurance problems, and/or increased manufacturing costs.

In addition, a significant portion of our revenue comes from customers that practice just-in-time order management from their suppliers, which gives us a limited amount of time in which to process and complete these orders. As a result, delays in the production or shipment of our products by the parties to whom we outsource these functions could reduce our revenue, damage our customer relationships and damage our reputation in the marketplace, any of which could harm our business, results of operations and financial condition.

Our costs may increase substantially if the wafer foundries or the assembly and test vendors that supply and test our products do not achieve satisfactory product yields, reliability or quality.

The wafer fabrication process is extremely complicated. Minor changes in the design, specifications or materials can result in material decreases in manufacturing yields or even the suspension of production. From time to time, we and our wafer foundries have experienced, and are likely to continue to experience, manufacturing defects and reduced manufacturing yields related to errors or problems in our wafer foundries’ manufacturing processes or the inter-relationship of their processes with our designs. In some cases, our wafer foundries may not be able to detect these defects early in the fabrication process or determine the cause of such defects in a timely manner, which may affect the quality or reliability of our products. We may incur substantial research and development expense for prototype or development stage products as we qualify our products for production.

Generally, in pricing our products, we assume that manufacturing and test yields will continue to increase, even as the complexity of our products increases. Once our products are initially qualified with our wafer foundries, minimum acceptable yields are established. We are responsible for the costs of the wafers if the actual yield exceeds the minimum established yield target. If actual yields are below the minimum, we are not required to purchase the wafers. Whether as a result of a design defect or manufacturing, assembly or test error,

unacceptably low product yields or other product manufacturing, assembly or test problems, the overall production time and cost could increase, substantially and adversely impacting our operating results. Product yield losses will increase our costs and reduce our gross profit. In addition to significantly harming our operating results and cash flow, poor yields may delay shipment of our products and harm our relationships with existing and potential customers.

Some of our operations and a majority of our customers and contract manufacturers are located outside of the United States, which subjects us to increased complexity and costs in managing international operations.

We have sales offices and research and development facilities located outside the United States, particularly in Canada, China, Hong Kong, India, Japan, Korea and Taiwan. We conduct, and expect to continue to conduct, a significant amount of our business with companies that are in these locations. International sales accounted for 83% of our revenue for the year ended December 31, 2010 and 90% of our revenue for the three months ended March 31, 2011, and may account for an increasing portion of our future revenue. Our international operations may be subject to certain risks, including:

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difficulty in obtaining, maintaining or enforcing intellectual property rights in some countries;

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local business and cultural factors that differ from our normal standards and practices;

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trade barriers such as tariffs, rising protectionism and other barriers;

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differing employment practices and labor relations issues;

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foreign currency exchange fluctuations;

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changes in regulatory requirements;

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impediments to the flow of foreign exchange capital payments and receipts due to exchange controls instituted by certain foreign governments and the fact that local currencies of some countries are not freely convertible;

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geopolitical and economic instability and military conflicts, including in Asia and the Middle East;

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difficulties in staffing and managing foreign operations;

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difficulties in managing international distributors;

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difficulties in obtaining governmental and export approvals for communications, processors and other products;

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longer payment cycles and difficulties to collect accounts receivable in some countries;

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burdens of complying with a wide variety of complex foreign laws and treaties and unanticipated changes in local laws and regulations, including tax laws;

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difficulty in enforcing agreements, judgments and arbitration awards in foreign jurisdictions;

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potentially adverse tax consequences; and

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adverse economic conditions both globally and in the United States.

We are subject to risks associated with the imposition of legislation and regulations relating to the import or export of high technology products. We cannot predict whether quotas, duties, taxes or other charges or restrictions upon the importation or export of our products will be implemented by the United States or other countries. In addition, because sales of our products are denominated in United States dollars, increases in the value of the United States dollar could increase the price of our products so that they become relatively more expensive to customers in the local currency of a particular country, leading to a reduction in revenue.

Some of our customer purchase orders and agreements are governed by foreign laws, which may differ significantly from laws in the United States. As a result, our ability to enforce our rights under such agreements may be limited compared with our ability to enforce our rights under agreements governed by laws in the United States.

Our operating results could be adversely affected if we have to satisfy product warranty or liability claims.

If our products are defective or malfunction, we could be subject to product warranty or product liability claims on such defective products or product lines that could have significant related warranty charges or warranty reserves in our financial statements. We produce highly complex products that incorporate leading-edge technology, including both hardware and software. Software may contain bugs that can unexpectedly interfere with expected operations. There can be no assurance that our pre-shipment testing programs will be adequate to detect all defects, either ones in individual products or ones that could affect numerous shipments, which may interfere with customer satisfaction, reduce sales opportunities or affect gross profit. Further, we may spend significant resources investigating potential product design, quality and reliability claims, which could result in additional charges in our financial statements until such claims are resolved. An inability to fix a product defect could result in the failure of a product line, temporary or permanent withdrawal from a product or market, damage to our reputation, inventory costs, or product reengineering expenses, any of which could have a material impact on our revenue, margins and net income. Our products are ultimately incorporated into very complex communications networks, and if we are required to recall any defective product we may also be required to indemnify our customers for costs in excess of the purchase price of the products being recalled. We cannot guarantee that warranty reserves will either increase or decrease in future periods.

The complexity of our products may lead to errors, defects and software bugs, which could negatively impact our reputation with customers and result in liability.

Products as complex as ours may contain errors, defects and software bugs when first introduced or as new versions are released. Our products have in the past experienced such errors, defects and software bugs. Delivery of products with production defects or reliability, quality or compatibility problems could significantly delay or hinder market acceptance of the products or result in a costly recall and could damage our reputation and adversely affect our ability to retain existing customers and to attract new customers. Errors, defects or software bugs could cause problems with device functionality, resulting in interruptions, delays or cessation of sales to our customers.

We may be required to make significant expenditures of capital and resources to resolve such problems. We cannot guarantee that problems will not be found in new products after commencement of commercial production, despite testing by us, our suppliers or our customers. Any problem could result in:

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additional development costs;

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loss of, or delays in, market acceptance;

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diversion of technical and other resources from our other development efforts;

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claims by our customers or others against us; and

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loss of credibility with our current and prospective customers.

Any such event could cause an increase in costs which could decrease our product profit margins. In addition, such events could cause a decline in the demand for our products which could negatively impact our revenue and results of operations.

Our business strategy contemplates the acquisition of other companies, products and technologies which typically involves numerous risks which we may not be able to address without substantial expense, delay or other operational or financial problems.

Acquiring products, technologies or businesses from third parties is part of our long-term business strategy. In connection with any future acquisitions, we may need to use a significant portion of our available cash, issue additional equity securities that would dilute current stockholders’ percentage ownership and incur substantial debt or contingent liabilities including those of which we were unaware. Such actions could adversely impact our operating results and the market price of our common stock.

In addition, difficulties may occur in assimilating and integrating the operations, personnel, technologies and products of acquired companies or businesses. For example, key personnel of an acquired company may decide not to work for us. Moreover, to the extent we acquire a company with existing products, those products may have lower gross profit than our own products, which could adversely affect our gross profit and operating results. If an acquired company also has inventory that we assume, we will be required to write up the carrying value of that inventory to fair value. When that inventory is sold, the gross profit for those products is reduced and our gross profit for that period is negatively affected. Furthermore, the purchase price of any acquired businesses may exceed the current fair values of the net tangible assets of such acquired businesses. As a result, we would be required to record material amounts of goodwill and acquired intangible assets, which could result in significant impairment and amortization expense in future periods. These charges, in addition to the results of operations of such acquired businesses and potential restructuring costs associated with an acquisition, could have a material adverse effect on our business, financial condition and results of operations. We cannot forecast the number, timing or size of future acquisitions, or the effect that any such acquisitions may have on our operating or financial results.

Our business is vulnerable to adverse changes in general economic or political conditions and interruption by earthquake, fire, power loss, telecommunications failure, terrorist activity and other events beyond our control.

As we operate in the United States and overseas and derive a majority of our revenue from outside the United States, we have become increasingly subject to the risks arising from adverse changes in both the domestic and global economic and political conditions. The economies of the United States and other developed countries are currently coming out of a recession. We cannot predict either if this economic recovery will continue or retreat back into a recession. Adverse economic and market conditions could harm our business by negatively affecting the parties with whom we do business, including our business partners, our customers and our suppliers. These conditions could impair the ability of our customers to pay for products they have purchased from us, cause our customers to defer purchases of new technologies and slow the pace of new sales. In addition, our suppliers may experience financial difficulties that could negatively affect their operations and their ability to supply us with the parts we need to manufacture our products. If global and domestic economic and market conditions persist or deteriorate, we may experience negative impacts on our business, operating results and financial condition which could result in a decline in the price of our common stock.

Further, we do not have sufficient business interruption insurance to compensate us for actual losses from interruption of our business that may occur, and any losses or damages incurred by us could have a material adverse effect on our business. A significant natural disaster, such as an earthquake, fire or flood, or a significant power outage could have a material adverse impact on our business, operating results and financial condition. We are vulnerable to a major earthquake and other calamities. We have operations in seismically active regions in California. In addition, our foundries are located in Taiwan and in close proximity to major earthquake fault lines. In the event that any of our service providers’ information technology systems or manufacturing or logistics abilities are hindered by any of the events described above, including due to the recent earthquake and tsunami in Japan, shipments could be delayed, resulting in missing financial targets, such as revenue and shipment targets, for a particular quarter. In addition, acts of terrorism could cause disruptions in our business or

the business of our manufacturers, logistics providers, partners or customers, or in the economy as a whole. To the extent that any of the above results in delays or cancellations of customer orders, or the delay in the manufacture, deployment or shipment of our products, the effects could be seriously harmful to our business.

Our future success depends in part on the continued service of our key senior management, and other key personnel, our ability to identify, hire and retain additional, qualified personnel and successful succession planning.

Our future success depends to a significant extent upon the continued service of our senior management personnel and successful succession planning. The loss of key senior executives could have a material adverse effect on our business. There is intense competition for qualified personnel in the semiconductor industry, in particular specialized technical personnel, and we may not be able to continue to attract and retain qualified personnel necessary for the development of our business, or to replace qualified personnel who may leave our employment in the future. There may be significant costs associated with recruiting, hiring and retaining personnel. Periods of contraction in our business may inhibit our ability to attract and retain our personnel. The loss of any member of our key senior management team or key personnel could be significantly detrimental to our ability to implement our business strategy and respond to the rapidly changing market conditions in which we operate.

To manage operations effectively, we will be required to continue to improve our operational, financial and management systems and to successfully hire, train, motivate, and manage our employees. The integration of future acquisitions would require significant additional management, technical and administrative resources. We cannot guarantee that we would be able to manage our expanded operations effectively.

We may not be able to protect and enforce our intellectual property rights, which could impair our ability to compete and reduce the value of our proprietary technology.

Our success and future revenue growth depend, in part, on our ability to protect our intellectual property. We rely primarily on patent, copyright, trademark and trade secret laws, as well as confidentiality procedures, to protect our proprietary technologies and processes. However, these measures may not provide meaningful protection for our intellectual property.

We cannot assure you that any patents will issue from any of our pending applications. Any rights granted under any of our existing or future patents may not provide meaningful protection or any commercial advantage to us. For example, such patents could be challenged or circumvented by our competitors or declared invalid or unenforceable in judicial or administrative proceedings. The failure of any patents to adequately protect our technology would make it easier for our competitors to offer similar products. We do not have foreign patents or pending applications corresponding to some of our U.S. patents and patent applications, including in some foreign countries where our products are sold or may be sold in the future. Even if foreign patents are granted, effective enforcement in foreign countries may not be available.

With respect to our other proprietary rights, it may be possible for third parties to copy or otherwise obtain and use our proprietary technology or marks without authorization or to develop similar technology independently. For example, we recently discovered counterfeit copies of one of our older products being sold in China. Monitoring unauthorized use of our proprietary technology or marks is difficult and costly, and we cannot be certain that the steps we have taken will prevent misappropriation or unauthorized use of our technology or marks. In addition, effective patent, copyright, trademark and trade secret protection may not be available or may be limited in certain foreign countries. Many companies based in the U.S. have encountered substantial infringement problems in foreign countries, including countries in which we sell products. Our failure to effectively protect our intellectual property could reduce the value of our technology and could harm our reputation, business, financial condition and operating results.

Furthermore, we may in the future initiate claims or litigation against third parties to determine the validity and scope of proprietary rights of others. In addition, we may in the future initiate litigation to enforce our intellectual property rights or the rights of our customers or to protect our trade secrets. Litigation by us could result in significant expense and divert the efforts of our technical and management personnel and could materially and adversely affect our business, whether or not such litigation results in a determination favorable to us.

Any claim that our products or our proprietary technology infringe third-party intellectual property rights could increase our cost of operations and could result in expensive judgments or settlement costs.

The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights or positions, which have resulted in often protracted and expensive litigation. We have received notices from time to time that assert we have infringed upon or misappropriated intellectual property rights owned by others. We typically respond when appropriate and as advised by legal counsel. We cannot assure you that parties will not pursue litigation with respect to those allegations. We may, in the future, receive similar notices, any of which could lead to litigation against us. For example, parties may initiate litigation based on allegations that we have infringed their intellectual property rights or misappropriated or misused their trade secrets or may seek to invalidate or otherwise render unenforceable one or more of our patents. Litigation against us can result in significant expense and divert the efforts of our management, technical, marketing and other personnel, whether or not the litigation results in a determination adverse to us. We cannot assure you that we will be able to prevail or settle any such claims or that we will be able to do so at a reasonable cost. In the event of an adverse result in any such litigation, we could be required to pay substantial damages for past infringement and royalties for any future use of the technology.

In addition, we may be required to cease the sale of certain products, recall certain products from the market, redesign certain products offered for sale or under development or cease the use of certain marks or names. We cannot assure you that we will be able to successfully redesign our products or do so at a reasonable cost. Furthermore, we have in the past sought and may in the future seek to obtain a license to a third party’s intellectual rights and have granted and may in the future grant a license to certain of our intellectual property rights to a third party in connection with a cross-license agreement or a settlement of claims or actions asserted against us. However, we cannot assure you that we would be able to obtain a license on commercially reasonable terms, or at all.

Our customers could also become the target of litigation relating to the patent and other intellectual property rights of others. This could trigger technical support and indemnification obligations in some of our distribution or customer agreements. These obligations could result in substantial expenses, including the payment by us of costs and damages related to claims of patent infringement. In addition to the time and expense required for us to provide support or indemnification to our customers, any such litigation could disrupt the businesses of our customers, which in turn could hurt our relations with our customers and cause the sale of our products to decrease. We cannot assure you that claims for indemnification will not be made or that if made, such claims would not have a material adverse effect on our business, operating results or financial condition. We do not have any insurance coverage for intellectual property infringement claims for which we may be obligated to provide indemnification. If we are obligated to pay damages in excess of, or otherwise outside of, our insurance coverage, or if we have to settle these claims, our operating results could be adversely affected.

We rely on the availability of third-party licenses.

Many of our products are designed to include software or other intellectual property licensed from third parties, such as internal architecture technologies built into our communication semiconductor devices. It may be necessary in the future to seek or renew licenses relating to these products. There can be no assurance that the necessary licenses would be available on acceptable terms, if at all. The inability to obtain certain licenses or other rights or to obtain such licenses or rights on favorable terms, or the need to engage in litigation regarding these matters, could have a material adverse effect on our business, operating results, and financial condition.

From time to time, we may become defendants in legal proceedings about which we are unable to assess our exposure and which could become significant liabilities upon judgment.

We may become defendants in legal proceedings from time to time. Companies in our industry have been subject to claims related to patent infringement and product liability, as well as contract and personnel claims. We may not be able to accurately assess the risk related to these suits and we may be unable to accurately assess our level of exposure.

Our future effective tax rates could be affected by changes in the relative mix of our operations and income among different geographic regions and by proposed and enacted U.S. federal income tax legislation, which could affect our future operating results, financial condition and cash flows.

Our future effective income tax rates could be adversely affected if tax authorities challenge our international tax structure or if the relative mix of our United States and international income changes for any reason, or if United States or international tax laws were to change in the future. In particular, recent changes to United States tax laws as well as proposed tax legislation that could become law in the future could substantially impact the tax treatment of our foreign earnings. These proposed and enacted changes, including limitations on our ability to claim and utilize foreign tax credits and deferral of interest expense deductions until non-United States earnings are repatriated to the United States, could negatively impact our overall effective tax rate and adversely affect our operating results. Accordingly, there can be no assurance that our effective tax rate will not increase in the future.

We may incur impairments to goodwill or long-lived assets, which may negatively impact our results of operations.

We review goodwill for impairment annually in the fourth quarter and also review goodwill and our long-lived assets, including intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Significant negative industry or economic trends, including a significant decline in the market price of our common stock, reduced estimates of future cash flows, discontinuations of product lines, or disruptions to our business could lead to an impairment charge of our long-lived assets, including goodwill and other intangible assets.

Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely heavily on projections, including of future operating performance. We operate in highly competitive environments and projections of future operating results and cash flows may vary significantly from actual results. Additionally, if our analysis results in impairment to our long-lived assets, including goodwill and acquired intangible assets, we would be required to record a charge to earnings in our financial statements during a period in which such impairment is determined to exist, which may negatively impact our results of operations.

We are subject to governmental regulations and may be subject to new regulations in the future that could have a negative impact on our business.

Changes in regulatory requirements in the United States or other countries could lower demand for, delay the introduction or, or otherwise negatively affect the sales of our products. In particular, we believe that there may be changes in telecommunications regulations in the markets in which we operated that could slow the expansion of service providers’ network infrastructures and cause a decrease in the demand for our products, resulting in lower revenue.

Because we incorporate encryption technology, which affects certain of our products, we are subject to United States export controls and certain of our products may be exported outside the United States only with the required level of export license or through an export license exception. In addition, various countries regulate the import of certain encryption technology and have enacted laws that could limit our ability to introduce products

or could limit our customers’ ability to implement our products in those countries. Changes in our products or changes in export and import regulations may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products throughout their global systems or, in some cases, prevent the export or import of our products to certain countries altogether. Any change in export or import regulations or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons or technologies targeted by such regulations, could result in decreased use of our products by, or an inability to export or sell our products to, existing or prospective customers with international operations and harm our business.

Risks Relating to Owning Our Common Stock and this Offering

Our share price may be volatile, and you may be unable to sell your shares at or above the offering price.

Our common stock has no prior trading history, and an active public market for these shares may not develop or be sustained after this offering. The initial public offering price for our common stock was determined through negotiations with the representatives of the underwriters. This price does not necessarily reflect the price at which investors in the market will be willing to buy and sell our shares following this offering. In addition, the trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to various factors. In addition to the risks described in this section, factors that may cause the market price of our common stock to fluctuate include:

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fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;

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changes in estimates of our financial results or recommendations by securities analysts;

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loss of one or more significant customers or other developments involving our customers, such as mergers or acquisitions;

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competitive developments;

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recruitment or departure of key personnel;

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investors’ general perception of us;

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failing to achieve our revenue or earnings expectations, or those of investors or analysts;

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seasonality in our business;

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volatility inherent in prices of technology company stocks;

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adverse publicity;

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the volume of trading in our common stock, including sales upon exercise of outstanding options or sales by insiders;

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regulatory developments in our target markets affecting us, our customers or our competitors;

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our failure to receive ongoing analyst coverage;

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terrorist attacks or natural disasters or other such events impacting countries where we or our customers have operations; and

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changes in general economic, industry and market conditions.

In addition, if the stock market in general experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations. Some companies that have had volatile market prices for their securities have had securities class actions filed against them. If a suit were filed against us, regardless of its merits or outcome, it would likely result in substantial costs and divert management’s attention and resources. This could have a material adverse effect on our business, operating results and financial condition.

No public market for our common stock currently exists, and an active trading market may not develop or be sustained following this offering.

Prior to this offering, there has been no public market for shares of our common stock. Although we expect that our common stock will be approved for listing on The NASDAQ Global Market, an active public trading market for our common stock may not develop or, if it develops, may not be maintained after this offering. For example NASDAQ imposes certain securities trading requirements, including minimum trading price, minimum number of stockholders and minimum market capitalization. We and the representatives of the underwriters negotiated to determine the initial public offering price. The initial public offering price may be higher than the trading price of our common stock following this offering. As a result, you could lose all or part of your investment.

Our actual operating results may differ significantly from any guidance that we may issue.

Our management will use various projections in formulating our business plans and analyzing our expected performance. Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. Projections also are based upon specific assumptions with respect to future business decisions, some of which will change. We will generally state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are not intended to represent that actual results may fall outside of the suggested ranges. If our assumptions and projections prove inaccurate, it could impact our overall business plan and results of operations.

From time to time, we may release guidance in our earnings releases, earnings conference calls or otherwise, regarding our future performance that represent our management’s estimates as of the date of release. If given, this guidance, which will include forward-looking statements, will be based on projections prepared by our management as described above. These projections will not be prepared with a view toward compliance with published accounting guidelines, and neither our registered public accountants nor any other independent expert or outside party will compile or examine the projections and, accordingly, no such person will express any opinion or any other form of assurance with respect to such projections. The principal reason that we expect to release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. We do not accept any responsibility for any projections or reports published by any such third persons.

Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions of the guidance furnished by us will not materialize or will vary significantly from actual results. In particular, if our actual performance is not as successful as we anticipate, our guidance may be overstated. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results may vary from our guidance and the variations may be material. In light of the foregoing, investors are urged not to rely upon any of our future guidance in making an investment decision in respect of our common stock.

We will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could adversely affect our operating results.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company, and greater expenditures may be necessary in the future with the advent of new laws and regulations pertaining to public companies. In addition, the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010, as well as rules subsequently implemented by the Securities and Exchange Commission and self-regulated stock exchanges, have imposed or may impose various requirements on public companies, including requiring changes in corporate governance practices. Our management and other personnel continue to devote a substantial amount of time to these compliance initiatives, and additional laws and regulations may divert further management resources. Moreover, if we are not able to comply with the requirements of new compliance initiatives in a timely manner, the market price of our stock could decline, and we could be subject to sanctions or investigations by the Securities and Exchange Commission, NASDAQ or other regulatory authorities, which would require additional financial and management resources.

Concentration of ownership among our existing executive officers, directors and their affiliates may prevent new investors from influencing significant corporate decisions.

Upon the closing of this offering, our executive officers, directors and their affiliates will beneficially own, in the aggregate, approximately % of our outstanding common stock, assuming no exercise of the underwriters’ option to purchase additional shares. As a result, these stockholders will be able to determine substantially all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit your ability to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us. For information regarding the ownership of our outstanding stock by our executive officers and directors and their affiliates, see “Principal and Selling Stockholders.”

As a result of becoming a public company, we will be obligated to develop and maintain proper and effective internal control over financial reporting as well as other controls over other systems. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.

We are required to comply with the management certification requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We are required to report, among other things, control deficiencies that constitute a “material weakness” or changes in internal controls that, or that are reasonably likely to, materially affect internal controls over financial reporting. A “material weakness” is a deficiency or combination of deficiencies that results in a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected. If we fail to continue to comply with the requirements of Section 404, we may be subject to sanctions or investigation by regulatory authorities such as the Securities and Exchange Commission, or the SEC. In addition, failure to comply with Section 404 or the report by us of a material weakness may cause investors to lose confidence in our consolidated financial statements, and our stock price may be adversely affected. As a public company, we will be required to implement and maintain various other control systems over equity, finance and treasury, information technology and other operations. If we fail to remedy any material weakness in our internal controls, or fail to implement or maintain other effective control systems, our consolidated financial statements may be inaccurate, we may face restricted access to the capital markets and our stock price may be adversely affected.

Future sales of our common stock in the public market could cause our share price to fall.

Sales of substantial amounts of shares of our common stock by our employees and other shareholders, or the possibility of such sales, may adversely affect the price of our shares. As of December 31, 2010, our directors, executive officers and eight largest stockholders beneficially owned, in the aggregate, over 70% of the shares of our outstanding common stock. Such shareholders will be able to sell their shares in the public market from time to time without registering them, subject to certain limitations on the timing, amount and method of those sales imposed by Rule 144 under the Securities Act of 1933, as amended.

Pursuant to our existing contractual registration rights a number of our stockholders will have the right, subject to certain conditions, to require us to file registration statements covering all of the shares of common stock which they own or to include those shares in registration statements that we may file for ourselves or other stockholders. Following their registration and sale under the applicable registration statement, those shares will become freely tradable, subject to lock-up agreements described under the caption “Shares Eligible for Future Sale.” These lock-up agreements restrict transfers for 180 days after the date of this prospectus, subject to certain extensions. By exercising their registration rights and selling a large number of shares, these holders could cause the price of our shares to decline. In addition, the perception in the public markets that sales by them may occur could also adversely affect the market price of our shares.

If our existing stockholders sell or otherwise dispose of, or indicate an intention to sell or dispose of, substantial amounts of our common stock in the public market, the trading price of our common stock could decline. Although many shares are subject to certain restrictions on disposition under lock-up agreements, and some shares are subject to our insider trading policy during certain periods of each quarter, substantially all of the shares held by parties other than our affiliates will be freely tradable, after the expiration of the lock-up agreements. If a significant number of these shares are sold, or if it is perceived that a significant number will be sold, in the public market, the trading price of our common stock could decline.

The market price of our common stock could decline as a result of sales of a large number of shares of our common stock or the perception that these sales could occur. This may also make it more difficult for us to raise funds through the issuance of securities. We may issue and/or register additional shares, options, or warrants in the future in connection with acquisitions, employee compensation or otherwise.

Anti-takeover provisions contained in our certificate of incorporation, as well as provisions of Delaware law, could impair a takeover attempt.

Our certificate of incorporation and Delaware law contain provisions that could have the effect of rendering more difficult or discouraging an acquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions:

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authorizing blank check preferred stock, which could be issued by our board of directors, without stockholder approval, with voting, liquidation, dividend and other rights superior to our common stock;

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limiting the liability of, and providing indemnification to, our directors and officers;

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limiting the ability of our stockholders to call and bring business before special meetings and to take action by written consent in lieu of a meeting;

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requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors;

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controlling the procedures for the conduct and scheduling of board and stockholder meetings;

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providing the board of directors with the express power to postpone previously scheduled annual meetings and to cancel previously scheduled special meetings; and

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limiting the determination of the number of directors on our board and the filling of vacancies or newly created seats on the board to our board of directors then in office.

These provisions, alone or together, could delay hostile takeovers and changes in control or changes in our management.

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of our outstanding common stock.

Any provision of our certificate of incorporation or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

The initial public offering price per share is substantially higher than the pro forma net tangible book value per share of our common stock outstanding prior to this offering. As a result, investors purchasing common stock

in this offering will experience immediate dilution of $ per share. In addition, we have issued options to acquire common stock at prices significantly below the initial public offering price. To the extent outstanding options are ultimately exercised, there will be further dilution to investors in this offering. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of common stock. In addition, if the underwriters exercise their option to purchase additional shares from us or if we issue additional equity securities, you will experience additional dilution.

Our management will have broad discretion over the use of the proceeds we receive from this offering and may not apply these proceeds in ways that increase the value of your investment.

Our management will have broad discretion to use the net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. They may not apply the net proceeds of this offering in ways that increase the value of your investment. We intend to use the net proceeds of this offering primarily for general corporate purposes. In addition, if appropriate opportunities arise to acquire or invest in complementary companies, product lines, products or technologies, we may use a portion of the net proceeds for such an acquisition or investment. However, we are not currently discussing any such potential acquisition or investment with any third party. Our management may not be able to generate a significant return, if any, on any investment of these net proceeds.

We do not expect to declare any dividends in the foreseeable future.

We do not expect to pay cash dividends on our common stock in the foreseeable future following the closing of this offering. Any future dividend payments will be within the discretion of our board of directors and will depend on, among other things, our financial condition, results of operations, capital requirements, capital expenditure requirements, contractual restrictions, provisions of applicable law and other factors that our board of directors may deem relevant. We may not generate sufficient cash from operations in the future to pay dividends on our common stock. See “Dividend Policy.”

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, particularly the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements. All statements other than historical facts contained in this prospectus, including statements regarding our future results of operations and financial positions, business strategy, plans and our objectives for future operations, are forward looking statements. When used in this prospectus the words “anticipate,” “objective,” “may,” “might,” “should,” “could,” “can,” “intend,” “expect,” “believe,” “estimate,” “predict,” “potential,” “plan,” “is designed to” or the negative of these and similar expressions identify forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

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our expectation that our growth products will drive growth and offset the decline of revenue from our legacy products;

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the markets in which we compete and in which our products are sold;

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our plans for future products and markets and enhancements of existing products;

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our expectations regarding our expenses, sales and operations;

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our operating results;

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our customer concentrations;

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our anticipated cash needs and our estimates regarding our capital requirements and our need for additional financing;

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our ability to anticipate the future market demands and future needs of our customers;

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our ability to achieve new design wins;

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our growth strategy elements and our growth rate;

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our intellectual property, third-party intellectual property and claims related to infringement thereof;

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general economic conditions in our domestic and international markets;

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our anticipated trends and challenges in the markets in which we operate, including average selling price reductions, cyclicality in the networking industry and transitions to new process technologies; and

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our expectations regarding the use of proceeds from this offering.

These statements reflect our current views with respect to future events and are based on assumptions and subject to risk and uncertainties. We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. While we believe our plans, intentions and expectations reflected in those forward-looking statements are reasonable, we cannot assure you that these plans, intentions or expectations will be achieved. Our actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained in this prospectus, including those under the heading “Risk Factors.”

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth in this prospectus. Other than as required by applicable securities laws, we are under no obligation to update any forward-looking statement, whether as result of new information, future events or otherwise.

USE OF PROCEEDS

We estimate that the net proceeds from our sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, the midpoint of the price range set forth on the front cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses, will be approximately $ million, or $ million if the underwriters’ option to purchase additional shares is exercised in full. A $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) the net proceeds to us from this offering by $ million, assuming the number of shares offered by us, as set forth on the front cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions.

We will not receive any proceeds from the sale of shares of common stock by the selling stockholders although we will bear the costs, other than underwriting discounts and commissions, associated with the sale of these shares. The selling stockholders may include certain entities affiliated with or controlled by members of our board of directors.

We intend to use the net proceeds of this offering primarily for general corporate purposes.

In addition, if appropriate opportunities arise to acquire or invest in complementary companies, product lines, products or technologies, we may use a portion of the net proceeds for such an acquisition or investment. However, we are not currently discussing any such potential acquisition or investment with any third party. The amount and timing of these expenditures will vary depending on a number of factors, including competitive and technological developments and the rate of growth, if any, of our business.

Pending their use, we plan to invest our net proceeds from this offering in short-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.

DIVIDEND POLICY

We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our common stock in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that our board of directors may deem relevant.

CAPITALIZATION

The following table sets forth our consolidated cash and cash equivalents and capitalization as of March 31, 2011 on:

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an actual basis;

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a pro forma basis to reflect the conversion of all outstanding shares of our preferred stock into shares of common stock; and

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a pro forma as adjusted basis to reflect (1) the conversion of all outstanding shares of our preferred stock into shares of common stock; (2) our receipt of the net proceeds from our sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, the midpoint of the price range set forth on the front cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses; and (3) the application of the net proceeds of this offering as described under “Use of Proceeds.”

The information below is illustrative only and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes appearing elsewhere in this prospectus.


	As of March 31, 2011
	Actual			Pro Forma			Pro Forma As Adjusted
	(unaudited)
	(in thousands)
Cash, cash equivalents and marketable securities (1)	$	37,368		$			$

Convertible preferred stock, $0.001 par value: 87,500 shares authorized, 87,083 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma as adjusted		87,083			—			—
Series D redeemable convertible preferred stock, $0.001 par value: 170,000 shares authorized, 168,924 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma as adjusted		138,849			—			—
Stockholders’ equity (deficit):
Preferred stock, $0.001 par value; no shares authorized, issued or outstanding, actual; shares authorized, no shares issued or outstanding, pro forma as adjusted		—			—			—
Common stock, $0.001 par value; 370,000 shares authorized, 39,972 shares issued and outstanding, actual; shares authorized, shares issued and outstanding, pro forma as adjusted		39			295
Additional paid-in capital		15,028			240,704
Accumulated other comprehensive income		122			122
Accumulated (deficit)		(116,541	)		(116,541	)

Total stockholders’ equity (deficit)	$	(101,352	)	$	124,580		$

Total capitalization	$	124,580		$	124,580		$

(1)	Though cash, cash equivalents and marketable securities are not components of capitalization, we believe they provide valuable information to investors when considering capitalization.

Each $1.00 increase (decrease) in the assumed public offering price of $ per share, the mid-point of the initial public offering price range reflected on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $ , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $ , assuming that the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The as adjusted information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

The number of pro forma and pro forma as adjusted shares of common stock shown as issued and outstanding in the table is based on the number of shares of our common stock outstanding as of March 31, 2011 and excludes:

•

55,579,554 shares of common stock issuable upon exercise of stock options outstanding as of March 31, 2011, at a weighted average exercise price of $0.29 per share;

•

DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the amount per share paid by purchasers of shares of common stock in this initial public offering and the pro forma as adjusted net tangible book value per share of common stock immediately after completion of this offering. At March 31, 2011, our pro forma net tangible book value was approximately $ , or $ per share of common stock. Net tangible book value per share represents the amount of our tangible assets (total assets less intangible assets) less our liabilities, divided by the shares of common stock outstanding at March 31, 2011.

After giving effect to our sale of shares of common stock in this offering at an assumed initial public offering price of $ , the midpoint of the price range set forth on the front cover of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value at March 31, 2011 would have been $ , or $ per share of common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors. The following table illustrates this dilution:


Assumed initial public offering price per share		$
Net tangible book value per share as of March 31, 2011	$
Increase per share attributable to this offering

Pro forma as adjusted net tangible book value per share after this offering

Net tangible book value dilution per share to new investors in this offering		$

Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share would increase (decrease) our pro forma as adjusted net tangible book value by $ , or $ per share, and the pro forma as adjusted dilution per share to investors in this offering by $ per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase of shares in the number of shares offered by us would increase our pro forma as adjusted net tangible book value by approximately $ , or $ per share, and the pro forma as adjusted dilution per share to investors in this offering would be $ per share, assuming that the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, a decrease of shares in the number of shares offered by us would decrease our pro forma as adjusted net tangible book value by approximately $ , or $ per share, and the pro forma as adjusted dilution per share to investors in this offering would be $ per share, assuming that the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

If the underwriters exercise their option to purchase additional shares of our common stock in full in this offering, the pro forma as adjusted net tangible book value will increase to $ per share, representing an immediate increase to existing stockholders of $ per share and an immediate dilution of $ per share to new investors purchasing shares in this offering. If any shares are issued upon the exercise of outstanding stock options you will experience further dilution.

The following table summarizes, on a pro forma as adjusted basis as of March 31, 2011, the total number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid to us by existing stockholders and by new investors purchasing shares in this offering at the initial public offering

price of $ , the midpoint of the price range set forth on the front cover of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses:

Shares Purchased

Total Consideration

Average Price
Per Share

Number

Percent

Amount

Percent

Existing stockholders

New investors

Total

If the underwriters exercise their option to purchase additional shares of our common stock in full, our existing stockholders would own % and our new investors would own % of the total number of shares of our common stock outstanding upon completion of this offering. The total consideration paid by our existing stockholders would be approximately $ million, or %, and the total consideration paid by our new investors would be $ million, or %.

The above discussion and tables also assume no exercise of any outstanding stock options except as set forth above. As of March 31, 2011, there were:

•

55,579,554 shares of common stock issuable upon exercise of stock options outstanding at a weighted average exercise price of $0.29 per share;

•

Sales by the selling stockholders in this offering will cause the number of shares owned by the existing stockholders to be reduced by shares or % of the total number of shares of our common stock outstanding upon the closing of the offering.

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read together with our consolidated financial statements and notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. We have derived the following consolidated statement of operations data for the years ended December 31, 2008, 2009, and 2010 from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the three months ended March 31, 2010 and 2011 and the consolidated balance sheet data as of March 31, 2011 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have derived the consolidated statement of operations data for the years ended December 31, 2006 and 2007 and the consolidated balance sheet data as of December 31, 2006, 2007 and 2008 from our audited consolidated financial statements not included in this prospectus. The historical results presented below are not necessarily indicative of financial results to be achieved in future periods.


	Year Ended December 31,															Three Months Ended March 31,
	2006			2007			2008			2009			2010			2010			2011
																(unaudited)
	(in thousands, except per share data)
Consolidated statements of operations data:
Revenue	$	41,622		$	142,225		$	152,126		$	127,474		$	141,086		$	32,142		$	35,555
Cost of revenue:
Product cost of revenue (1)		23,275			73,407			65,725			53,522			52,920			12,198			13,601
Amortization of acquired developed technologies		4,162			18,067			18,604			18,796			18,716			4,679			4,679

Total cost of revenue		27,437			91,474			84,329			72,318			71,636			16,877			18,280

Gross profit		14,185			50,751			67,797			55,156			69,450			15,265			17,275
Operating expenses:
Research and development (1)		18,994			34,207			41,461			45,814			50,153			12,334			13,132
Sales, general and administrative (1)		8,554			23,104			29,278			28,509			29,648			7,257			7,584
Restructuring charges		—			—			—			554			—			—			—
Acquired in-process research and development		—			—			971			—			—			—			—

Total operating expenses		27,548			57,311			71,710			74,877			79,801			19,591			20,716

Operating loss		(13,363	)		(6,560	)		(3,913	)		(19,721	)		(10,351	)		(4,326	)		(3,441	)
Interest and other income		1,488			1,288			724			231			116			36			20
Interest and other expense		(183	)		(655	)		(682	)		(271	)		(130	)		(37	)		(30	)
Foreign currency translation gain (loss)		(54	)		(296	)		171			70			(173	)		(3	)		(4	)

Loss before income taxes		(12,112	)		(6,223	)		(3,700	)		(19,691	)		(10,538	)		(4,330	)		(3,455	)
Provision for income taxes		64			687			762			1,649			178			201			307

Net loss	$	(12,176	)	$	(6,910	)	$	(4,462	)	$	(21,340	)	$	(10,716	)	$	(4,531	)	$	(3,762	)

Net loss per common share—basic and diluted	$	(2.28	)	$	(0.45	)	$	(0.18	)	$	(0.63	)	$	(0.30	)	$	(0.13	)	$	(0.10	)
Weighted average shares used in computing net loss per common share—basic and diluted		5,336			15,501			25,450			33,918			35,308			34,807			39,168

(1)	Includes stock-based compensation expense as follows (in thousands):


	Year Ended December 31,										Three Months Ended March 31,
	2006		2007		2008		2009		2010		2010		2011
											(unaudited)
Cost of revenue	$	49	$	126	$	124	$	70	$	89	$	23	$	28
Research and development		168		616		954		666		701		183		176
Sales, general and administrative		212		388		711		671		810		182		234

Total stock-based compensation	$	429	$	1,130	$	1,789	$	1,407	$	1,600	$	388	$	438


	As of December 31,															As of March 31,
	2006			2007			2008			2009			2010			2011
																(unaudited)
	(in thousands)
Consolidated balance sheet data:
Cash, cash equivalents and marketable securities	$	25,712		$	22,160		$	40,974		$	31,012		$	40,924		$	37,368
Working capital (1)		29,296			37,159			49,726			51,114			62,904			64,867
Total assets (2)		161,381			188,597			186,467			159,236			151,952			150,047
Total debt (3)		—			5,333			1,333			119			—			—
Convertible preferred stock		86,195			87,083			87,083			87,083			87,083			87,083
Series D redeemable convertible preferred stock		129,617			138,886			138,849			138,849			138,849			138,849
Common stock and additional paid-in capital		1,607			3,836			10,461			12,099			14,040			15,067
Total stockholders’ deficit		(67,743	)		(72,425	)		(70,211	)		(89,953	)		(98,719	)		(101,352	)

(1)	Working capital is defined as total current assets less total current liabilities.

(2)	Total assets as of December 31, 2006, 2007 and 2008 do not give effect to the subsequent presentation of accounts receivable and deferred margin on shipments to distributors net of distributor price adjustments.

(3)	Total debt is defined as total long-term debt.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this prospectus.

Overview

We are a leading provider of high-performance communications semiconductor solutions enabling next generation network connectivity and efficient bandwidth delivery from the core network to the home network. Our broad product portfolio includes carrier-class semiconductor devices for next generation optical transport and passive optical network systems, as well as data center connectivity and digital home solutions. We are a supplier to the leading network equipment vendors in the communications space, which we refer to throughout this prospectus as our customers whether they purchase directly from us or through a distributor. We currently have over 800 customers, including leading global network equipment vendors such as Alcatel-Lucent, Ciena Corporation, Cisco Systems, Inc., Ericsson AB, FiberHome Technologies Group, Fujitsu Limited, Huawei Technologies Co., Ltd., Juniper Networks, Inc., Nokia Siemens Networks and ZTE Corporation. Our solutions are installed in many leading global service provider networks, including China Mobile Limited, China Telecom Corp. Ltd., China Unicom (HK) Limited, Deutsche Telecom AG, KT Corporation, Telecom Italia Group, Telefónica S.A., Telstra Corporation Limited and Vodafone Group plc.

We provide platform solutions, and our broad portfolio of carrier-class semiconductor devices addresses our customers’ key requirements for power, scalability and the flexibility to deliver feature-rich content and services. In addition, for the majority of these solutions, we are currently the sole source for our customers. Our differentiated system-on-a-chip solutions enable seamless deployment and network upgrades and incorporate highly integrated, high-performance analog, digital and mixed-signal semiconductor technologies, proprietary software algorithms, serial connectivity, advanced geometries, multi-protocol support and backward compatibility with existing network infrastructure.

The following are our significant corporate milestones:

•

In 2001, we were incorporated, first raised capital and started development of our first semiconductor solutions.

•

From 2001 to 2003, our primary activities were establishing our offices and research facilities, recruiting personnel, conducting research and development, securing design wins and raising capital.

•

In 2003, we shipped our first product.

•

In 2004, we acquired Azanda Network Devices, Inc., a company specializing in silicon solutions for traffic processing in metro, core and access markets. The acquisition of Azanda enabled us to broaden our communications semiconductor product portfolio.

•

In 2006, we acquired certain assets of the Optical Networking Devices, or OND, division of Intel Corporation. These assets included a portfolio of products complementary to our product lines, which the OND business had previously sold to many of our existing customers. The acquisition enabled us to address new markets, in particular the transport market, and to establish ourselves as a much larger supplier to our customers.

•

In 2007, we acquired Immenstar, Inc., a privately held provider of passive optical network devices. The acquisition of Immenstar expanded our presence in the access market and established our engineering team in China.

•

In 2008, we acquired Storm Semiconductor, Inc., a privately held semiconductor company, specializing in embedded network processing, triple-play services, or services that include voice, video and data, and storage solutions for both small and medium businesses and home networks. The acquisition of Storm laid the groundwork for our entrance into the digital home market, and established our presence in Taiwan.

Our strategy is to continue to expand our markets through both organic growth and acquisitions. In the case of our acquisitions of start-up companies like Immenstar and Storm, which had just begun to ship products, we were able to integrate their operations shortly after the acquisitions were completed and made further investments in engineering and sales and marketing to accelerate the introduction of new products.

We pursued a different strategy in the acquisition of the OND business, in which we acquired a broad portfolio of products already sold into multiple markets. The acquired products had widely varying potentials for future revenue growth. Products representing almost half the total portfolio revenue were in the later phase of their life cycle and were experiencing annual revenue declines. These product families, which we refer to as our legacy products, include Ethernet physical layer devices, known as Ethernet PHYs, that operate at low speeds, such as 10 Mbps or 100 Mbps. While we have continued to provide customer support for these products, we have made no further investment in research and development for these products. Revenue from these legacy products was $35.9 million in 2010 compared to $55.3 million in 2008 and these products contributed significantly to operating income. We expect the revenue from these products to continue to decline in future years.

The transport products acquired as part of the OND business had a much stronger market position. After the acquisition was completed, we made significant investments in the development and sales and marketing efforts for the transport products. For example, we introduced a device that operates at 40G and have other new products under development. It is our intention to continue to invest in our transport product portfolio.

A limited number of network equipment vendors supply the major global service providers because of the complexity of the technology and the requirement for high reliability. Consequently, our revenue is concentrated in a limited number of customers. Our network equipment vendor customers generally employ an outsourced manufacturing model, in which contract manufacturers assemble our products into the finished networking device, which is ultimately installed in the network of a service provider. These contract manufacturers purchase our devices either directly from us or from one of our distributors.

The complexity of these global networks results in long sales cycles for providers of semiconductor components. We engage in technical discussions with our customers, typically over a period of many months, as they design new products. If they select our device to be incorporated into their products, we must wait several more months for completion of the design process and commencement of prototype testing. When a customer notifies us of its intention to use one of our products and commences testing, we record that event as a design win. It may take several more months before the customer brings the finished product to market and we receive volume orders. However, the system complexity means that once a customer’s product is launched, there is a significant cost for them to substitute a competitor’s semiconductor for ours.

We are a fabless semiconductor company that employs an outsourced manufacturing model. We purchase some devices fully fabricated and warehouse them in our outsourced finished goods facility. For other devices, we purchase completed wafers from a fabrication facility and manage the production process as the inventory moves from sort to assembly to final test to finished goods storage to shipment. We sell our products to our customers directly or through distributors, with a large percentage of our revenue coming from distributors based in Asia. Most of our products are sold to customers outside the United States because many of our customers or their contract manufacturers are located in Asia.

Key Business Metrics

Revenue. We monitor revenue as a measure of our overall business performance. Our revenue consists of sales of semiconductor solutions to network equipment vendors in the communications industry.

Revenue of Growth Products. We have made significant investments in new products, including those derived from the technologies of our acquired companies and those developed organically, which we expect to drive growth and offset the decline of revenue from our legacy products. We expect our growth products to constitute an increasingly larger proportion of our revenue going forward.

Non-GAAP Gross Profit and Non-GAAP Gross Profit Percentage. We monitor gross profit and gross profit percentage to measure our cost efficiencies, including primarily whether our manufacturing costs are within expectations considering our revenue. These costs are subject to factors such as increases in vendor costs and also based on efficiencies gained or lost in a period. We monitor our non-GAAP gross profit and non-GAAP gross profit percentage because we believe these measures to be indicative of our core business operating results, and they are used by our investors to analyze the health of our business.

These measures are affected by our outsourced manufacturing costs, as well as by the average selling price of our products. The price that we charge to our customers is subject to a variety of factors, including prices charged by our competitors, our cost basis, the size of the order and our relationship with the relevant customer as well as general market and economic conditions. Average selling prices are also impacted to a significant extent by the stages of our products’ life-cycles, with average selling prices being higher early in the life-cycle and decreasing over time as products age and new products are introduced.

Non-GAAP Operating Income. Non-GAAP operating income is useful for planning purposes, including the preparation of annual operating budgets to determine appropriate levels of operating and capital investments.

Non-GAAP Net Income. Non-GAAP net income is also useful for planning purposes as described above under “—Non-GAAP Operating Income,” as it reflects the tax effects of non-GAAP adjustments.

We do not consider these non-GAAP financial measures to be a substitute for, or superior to, the information provided by GAAP financial results. In computing our non-GAAP financial measures, we exclude non-cash charges such as the amortization of acquired intangible assets and stock-based compensation expense and related tax effects. Please see the reconciliation of our GAAP metrics to our non-GAAP metrics in the section “—Non-GAAP Financial Measures” elsewhere in this Management Discussion and Analysis of Financial Condition and Results of Operations.

Additional details about these key metrics can be found in “—Key Components of Our Results of Operations” and “—Liquidity and Capital Resources.”

Key Components of Our Results of Operations

Revenue

We derive our revenue from sales of high performance communications semiconductor solutions to network equipment vendors in the communications industry. We sell our products to these customers directly or through distributors, with a large percentage of our revenue coming from distributors based in Asia. Most of our products are sold to customers outside the United States because many of our customers or their contract manufacturers are located in Asia. Percentage of our revenue by geographic region is as follows:


	Year Ended December 31,									Three Months Ended March 31,
	2008			2009			2010			2010			2011
United States		14	%		12	%		17	%		11	%		10	%
China, including Hong Kong		49			55			50			50			55
Rest of Asia		23			21			19			25			20
Europe		13			10			11			11			11
Other		1			2			3			3			4

Total		100	%		100	%		100	%		100	%		100	%

Revenue from our direct customers and distributors is as follows (in thousands):


	Year Ended December 31,						Three Months Ended March 31,
	2008		2009		2010		2010		2011
Direct customers	$	88,276	$	70,151	$	68,577	$	16,956	$	16,276
Distributors		63,850		57,323		72,509		15,186		19,279

Total	$	152,126	$	127,474	$	141,086	$	32,142	$	35,555

Revenue attributable to our growth and legacy products is as follows (in thousands):


	Year Ended December 31,						Three Months Ended March 31,
	2008		2009		2010		2010		2011
Growth products	$	96,827	$	84,747	$	105,230	$	23,083	$	28,446
Legacy products		55,299		42,727		35,856		9,059		7,109

Total	$	152,126	$	127,474	$	141,086	$	32,142	$	35,555

Cost of Revenue

Our cost of revenue consists of costs related to sales of our products, or cost of product revenue, and amortization of acquired developed technologies.

Cost of Product Revenue. Cost of product revenue includes the costs of purchased finished products, sorted wafers and outsourced packaging, assembly and test. To a lesser extent, cost of revenue includes expenses relating to depreciation, personnel costs associated with operations logistics and quality control, and write downs for excess and obsolete inventory. We expect cost of product revenue to increase in absolute dollars as we continue to sell more products to end user customers.

Amortization of Acquired Developed Technologies. Amortization of acquired developed technologies consists primarily of amortization expense recognized for developed and core technology intangible assets from our acquisition of Intel’s OND business. These intangible assets are amortized using the straight-line method over their estimated useful lives and will be fully amortized by September 2012.

Operating Expenses

Our operating expenses consist of research and development expenses, sales, general and administrative expenses, restructuring charges and acquired in-process research and development costs. Personnel costs are the most significant component of operating expenses and consist of costs such as salaries, benefits, bonuses and, with regard to our sales and marketing force, sales commissions. Personnel costs also include charges for stock-based compensation. We expect personnel costs to continue to increase in absolute dollars as we hire new employees.

Research and Development. Research and development expenses consist primarily of personnel costs for our engineers engaged in design and development of our products and technologies. Additional research and development expenses include non-recurring engineering expenses, product prototypes, external testing and characterization expenses, depreciation, amortization of design tool software licenses and facility-related expenses. We record all research and development expenses as incurred, except for capital equipment which is depreciated over the estimated useful life of the equipment. We have development teams in Canada, China, India, Taiwan and the United States. We expect research and development expenses to increase in absolute dollars as we continue to enhance our product features and offerings and decrease as a percentage of revenue as our business continues to grow.

Sales, General and Administrative. Sales, general and administrative expenses consist primarily of personnel costs for our sales, marketing, executive, finance, legal, human resources and information technology organizations. Additionally, sales, general and administrative expenses include promotional and other marketing expenses, external sales representative commissions, travel, professional service fees, depreciation and facility-related expenses. Our professional fees principally consist of outside legal, auditing, tax and accounting consultation services and information technology services. We also include amortization of intangible assets such as acquired customer relationships and non-compete agreements within sales, general and administrative expense. We intend to continue our sales and marketing efforts worldwide in order to obtain new customers and increase penetration within our existing customer base. We expect that sales, general and administrative expenses will increase in absolute dollars as our revenue grows and we hire additional personnel, make improvements to our infrastructure and incur significant additional costs for the compliance requirements of operating as a public company, including the costs associated with SEC reporting, Sarbanes-Oxley Act compliance and insurance.

Restructuring Charges. In July 2009, we initiated a restructuring plan that eliminated approximately 30 positions, or 7%, of our global workforce and which was substantially completed in the third quarter of 2009. We recorded $0.6 million in one-time employee termination costs related to the restructuring plan during 2009.

Acquired In-Process Research and Development. We acquired in-process research and development as part of our acquisition of Storm Semiconductor in July 2008. We recorded an in-process research and development charge of $1.0 million at that time.

Interest and Other Income

Interest and other income consists primarily of income earned on our cash, cash equivalents and marketable security investments. We have historically invested our cash in money-market funds and other short-term, investment-grade instruments.

Interest and Other Expense

Interest and other expense consists primarily of interest related to amortization of term loan and line of credit commitment fees and interest on outstanding debt.

Foreign Currency Translation Gain (Loss)

The functional currency of our foreign subsidiaries is the U.S. dollar and all of our revenue transactions are denominated in U.S. dollars. Monetary assets and liabilities denominated in foreign currencies of these subsidiaries are re-measured into U.S. dollars using exchange rates in effect at the balance sheet date, except for non-monetary assets, such as property and equipment, which are re-measured using historical exchange rates. Revenue and costs are re-measured using average exchange rates for the period, except for costs related to those balance sheet items that are re-measured using historical exchange rates. The resulting gains and losses from the re-measurement of foreign currency denominated balances into U.S. dollars are included in the consolidated statements of operations.

Provision for Income Taxes

Our effective tax rate could fluctuate significantly on a quarterly basis and could be adversely affected to the extent earnings are lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates. Our effective tax rate could also fluctuate due to changes in the valuation of our deferred tax assets or liabilities or by changes in tax laws or regulations. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. We benefited from tax holidays from our operations in India, which expired in March 2011, and continue to benefit from our tax holiday in Shanghai, which we expect will continue through 2013.

Critical Accounting Policies and Estimates

Our consolidated financial statements and the related notes included elsewhere in this prospectus are prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and any related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Changes in accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and our actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

We believe that the following accounting policies involve a greater degree of judgment and complexity than our other accounting policies. Accordingly, these are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations.

Revenue Recognition

Our revenue is generated by sales of semiconductor products. Our sales occur through two channels, a direct sales force and distributors. We recognize revenue upon meeting the following basic criteria: persuasive evidence of an arrangement exists; delivery of goods has occurred; the sales price is fixed or determinable; collectability is reasonably assured; and title to products has transferred to the customer which, based on the terms of our agreement with the customer, may occur upon shipment or customer receipt. For direct customers, the criteria are usually met at the time of product shipment to the customers, except for shipments to customers that do not accept title until delivery. In these instances, we do not record the transaction until final delivery has occurred. In addition, we record reductions to revenue for estimated allowances, such as returns and volume arrangements. If actual returns or pricing adjustments exceed our estimates, additional reductions to revenue would result. We defer the recognition of revenue and the related cost of revenue on shipments to distributors because we have granted them rights of return and price protection privileges. We recognize the revenue on shipments to distributors when the distributors have sold the products to end-user customers.

Allowance for Doubtful Accounts

Our revenue is concentrated in a relatively small number of customers and, as a result, we maintain individually significant receivable balances with these parties and we generally do not require collateral for sales on credit. Accordingly, we recognize an allowance for doubtful accounts for our estimate of future losses resulting from the inability of our customers to make required payments. If the financial condition or operations of any of these customers deteriorate substantially, we could be required to increase our allowance which could adversely affect our operating results. We use management judgment when performing periodic evaluations of our customers’ financial condition and evaluating the collectability of our accounts receivable based on known collection risks and historical experience. Management judgment is required because customer evaluations and historical experience may not be indicative of future losses. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to us (e.g., bankruptcy filings, substantial downgrading of credit ratings, significant deterioration in financial condition), we record a specific allowance for doubtful accounts against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we record reserves for doubtful accounts primarily based on the length of time the receivables are past due, but also based on our historical experience and future expectations.

Inventory Valuation

Inventories consist primarily of sorted wafers, products being assembled or tested by outsourced vendors and finished products. Inventories are stated at the lower of cost or market on a first-in, first-out method. We use management judgment to continually assess the recoverability of our inventory based on historical sales and assumptions about future demand, future product purchase commitments and market conditions.

We write down inventory to expected realizable value based on forecasted demand or potential obsolescence of technology and product life cycles. Estimates of realizable value are impacted by factors such as market and economic conditions, technology changes, new product introductions and changes in strategic business direction. In addition, customer orders are subject to revisions, cancellations and rescheduling. Actual demand may differ from forecasted demand and such differences may result in recording inventory write-downs that could have a material effect on our inventory values and gross profit.

Goodwill and Purchased Intangible Assets

We monitor changes in circumstances that could indicate carrying amounts of long-lived assets, including goodwill and intangible assets, may not be recoverable. Factors we consider in our impairment review include (i) significant underperformance relative to historical or projected future operating results, (ii) significant changes in the manner of the use of the acquired assets or the strategy for our overall business and (iii) significant negative industry or economic trends.

If impairment indicators exist for purchased intangible assets that will continue to be used in our operations, we test for impairment by comparing the carrying value of the affected assets to our estimate of related total future undiscounted net cash flows. If a purchased intangible asset’s carrying value is not recoverable through the related undiscounted cash flows, the asset is considered to be impaired. The impairment is measured by comparing the difference between the asset carrying value to its fair value which is determined based on a discounted net cash flows model.

We perform an annual impairment review of goodwill during the fourth quarter of each year, or more frequently if we believe indicators of impairment exist. In testing goodwill for impairment, we use a combination of the income approach, which is based on the present value of discounted cash flows and terminal value, and the market approach, which estimates fair value based on an appropriate valuation multiple of revenue or earnings derived from comparable companies, adjusted by an estimated control premium. If the estimated fair value of goodwill computed as described above exceeds net book value, we conclude that our goodwill is not impaired.

Otherwise, we compare the estimated implied fair value of goodwill to its carrying value. The excess carrying value of goodwill as compared to the implied fair value is recorded as goodwill impairment.

If our analysis results in impairment of our long-lived assets, including goodwill and acquired intangible assets, we would be required to record a charge to earnings in our financial statements during the period in which such impairment is determined to exist, which may negatively impact our results of operations for that period. These calculations necessary for measuring impairment of goodwill and purchased intangible assets are dependent on several subjective factors, including the timing of future cash flows, future growth rates, the discount rate and a selection of peer market transactions. The discount rate that we use in the income approach of valuation represents the weighted average cost of capital that we believe is reflective of the relevant risk associated with the projected cash flows. Long-lived assets, such as goodwill and purchased intangible assets, are considered non-financial assets, and are recorded at fair value only when an impairment charge is recognized.

Mask Set Costs

We capitalize the costs of purchased mask sets, design templates utilized in the photolithography phase of manufacturing our products, when technological feasibility and marketability have been established. This generally occurs upon the completion of a detailed design, the absence of significant development uncertainties and determination of market acceptance of the related products and design functionality. Such amounts are included in other long-term assets in the consolidated balance sheets and are amortized to cost of revenue over their estimated useful lives, which is generally two years based on historical experience and forecasted demand. If significant uncertainties exist regarding the future utility of a particular mask set, the related costs are expensed to research and development at the time the significant uncertainties are identified.

Income Taxes

We account for income taxes under the liability method. Under this method, we are required to estimate deferred tax assets and liabilities based on the differences between the financial reporting and tax bases of assets and liabilities measured using the enacted tax rates that will be in effect when the differences are expected to reverse. In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in our consolidated statements of operations become deductible expenses under applicable income tax laws or loss or credit carry forwards are utilized. Accordingly, realization of our deferred tax assets is dependent on future taxable income against which these deductions, losses and credits can be utilized. We use management judgment to assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not more likely than not, we must establish a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized.

We are subject to income taxes in the United States and foreign countries, and are subject to corporate income tax audits in many of these jurisdictions. We believe that our tax return positions are fully supported, but tax authorities may challenge certain positions, and these positions may not be fully sustained. However, our income tax expense includes provisions for amounts intended to satisfy income tax assessments that result from these challenges. We re-evaluate these uncertain tax positions on a quarterly basis. Determining the provisions for these uncertainties and evaluating these tax positions requires management judgment in evaluating the positions and the related jurisdictions needed to properly estimate the income tax expense. We believe that our provision for uncertain tax positions, including related interest and penalties, is adequate based on information currently available to us. The amount ultimately paid upon resolution of audits could be materially different from the amounts previously included in income tax expense and therefore could have a material impact on our tax provision, net income and cash flows.

Stock-Based Compensation

We recognize compensation costs related to stock options granted to employees based on the estimated fair value of the awards on the date of grant, net of estimated forfeitures. We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of the stock-based awards is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards.

The fair value of the stock-based awards granted to our employees was estimated on the grant dates using the Black-Scholes option-pricing model with the following assumptions:


	Year Ended December 31,									Three Months Ended March 31,
	2008			2009			2010			2010			2011
Expected term (weighted average, in years)		6.25			6.25			6.25			6.25			6.25
Risk-free interest rate		3.3	%		3.0	%		3.1	%		3.1	%		2.8	%
Expected volatility		52	%		59	%		56	%		56	%		55	%
Expected dividend rate		0	%		0	%		0	%		0	%		0	%

The Black-Scholes model requires the use of highly subjective and complex assumptions which determine the fair value of share-based awards. These assumptions include:

Expected Term. The expected term represents the period that our share-based awards are expected to be outstanding and was primarily determined using the simplified method in accordance with guidance provided by the SEC. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the awards. We will continue to utilize the simplified method for all “plain vanilla” awards until we have established a reasonable period of representative trading history as a public company, at which time, we will determine the expected term based on the historical option exercise behavior of our employees, expectations about future option exercise behavior and post-vesting cancellations.

Risk-Free Interest Rate. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to each award’s expected term.

Expected Volatility. As we have limited information on the volatility of our common stock because we have no active trading history, we have derived our expected volatility from historical volatilities of several peer public companies deemed to be comparable to our business. If in the future, we determine that other methods are more reasonable, or other methods for calculating these assumptions are prescribed by authoritative guidance, the fair value calculated for our stock options could change significantly. Higher volatility and longer expected lives would result in an increase to stock-based compensation expense determined at the date of grant.

Expected Dividend. The expected dividend was assumed to be zero as we have never paid dividends and have no current plans to do so.

In addition to assumptions used in the Black-Scholes option-pricing model, we must also estimate a forfeiture rate to calculate the stock-based compensation for our awards. Our forfeiture rate is based on an analysis of our actual forfeitures since the beginning of the option plan. We routinely evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover and expectations of future option exercise behavior. Quarterly changes in the estimated forfeiture rate can have a significant impact on our stock-based compensation expense as the cumulative effect of adjusting the forfeiture rate is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the stock-based compensation expense recognized in the financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the stock-based compensation expense recognized in the financial statements.

We will continue to use judgment in evaluating the expected term, expected volatility and forfeiture rate related to our stock-based compensation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may have refinements to the estimates of our expected volatility, expected terms and forfeiture rates, which could materially impact our future stock-based compensation expense as it relates to the future grants of our stock-based awards.

Fair Value of our Common Stock. The fair values of the common stock underlying our stock-based awards were estimated on each grant date by our board of directors, with input from management. Our board of directors is comprised of a majority of non-employee directors that we believe have the relevant experience and expertise to determine a fair value of our common stock on each respective grant date. Given the absence of a public trading market of our common stock, and in accordance with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, our board of directors exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our common stock including:

•

contemporaneous and retrospective valuations performed by unrelated third-party specialists;

•

rights, preferences and privileges of our convertible preferred stock and redeemable convertible preferred stock relative to those of our common stock;

•

actual operating and financial performance and forecast financial projections;

•

risks inherent in the development of our products and services;

•

likelihood of achieving a liquidity event, such as an initial public offering or a sale of our company given prevailing market conditions and the nature and history of our business;

•

analysis of peer public company valuations;

•

analysis of transactions involving companies that are comparable to us;

•

illiquidity of stock-based awards involving securities in a private company;

•

industry information such as market size and growth; and

•

macroeconomic conditions.

Determining the fair value of our common stock requires complex and subjective judgment. Our approach to valuation was based, in part, on a discounted future cash flow approach that used our estimates of revenue and costs, driven by assumed market growth rates, as well as appropriate discount rates. These estimates were consistent with the plans and estimates that we used to manage the business. There is inherent uncertainty in making these estimates. In valuing our common stock, we determined the equity value of our business by taking a weighted combination of the value indications under two valuation approaches, an income approach and a market approach. The income approach estimates the present value of future estimated cash flows based upon forecasted revenue and costs. These future cash flows are discounted to their present values using highly subjective assumptions such as a discount rate derived from an analysis of the cost of capital of comparable publicly traded companies in our industry or similar lines of business as of each valuation date and are adjusted to reflect the risks inherent in our cash flows. The market approach estimates the fair value of a company by applying market multiples of comparable publicly traded companies in our industry or similar lines of business which are based on key metrics implied by the enterprise values or acquisition values of these companies. The fair value of our business was then allocated to each of our classes of stock using either the Option Pricing Method or, more recently, the Probability Weighted Expected Return Method as certainty developed regarding possible discrete events, including an initial public offering, or IPO.

The Option Pricing Method, or OPM, treats common stock, redeemable convertible preferred stock and convertible preferred stock as call options on an enterprise value, with exercise prices based on the liquidation preference of the preferred stock. Therefore, the common stock has value only if the funds available for

distribution to the stockholders exceeds the value of the liquidation preference at the time of a liquidity event such as a merger, sale or initial public offering, assuming the enterprise has funds available to make a liquidation preference meaningful and collectible by the stockholders. The common stock is modeled to be a call option with a claim on the enterprise at an exercise price equal to the remaining value immediately after the preferred stock is liquidated. The OPM uses the Black-Scholes option-pricing model to price the call option. The OPM is appropriate to use when the range of possible future outcomes is so difficult to predict that forecasts would be highly speculative.

The Probability Weighted Expected Return Method, or PWERM, involves a forward-looking analysis of the possible future outcomes of the enterprise. This method is particularly useful when discrete future outcomes can be predicted at a high confidence level with a probability distribution. Discrete future outcomes considered under the PWERM included non-IPO market based outcomes as well as IPO scenarios. In the non-IPO scenarios, a large portion of the equity value is allocated to the preferred stock to incorporate higher aggregate liquidation preferences. In the IPO scenarios, the equity value is allocated pro rata among the shares of common stock and each series of preferred stock, which causes the common stock to have a higher relative value per share than under the non-IPO scenario. Determining the fair value of the enterprise using the PWERM requires us to estimate the probability of IPO and non-IPO scenarios and if different estimates are used, the fair value of the enterprise could be significantly different.

Over time, as certainty developed regarding possible discrete events, including an IPO, the methodology utilized to allocate our enterprise value to our common stock transitioned from the OPM to the PWERM. Specifically, the fair value of our common stock was based on valuations performed using the OPM in periods prior to June 30, 2009. Commencing in December 2009, the board determined that the blending of the OPM and PWERM methodologies was appropriate given the Company’s progress towards an IPO. The approach of blending the two valuation methods effectively discounted the probability of an IPO as applied in the PWERM. In performing the valuation of our common stock for the January 2011 and subsequent stock option grants, as a result of discussions with bankers and a scheduled IPO organizational meeting with underwriters, the board determined the PWERM methodology alone to be most appropriate.

Information regarding stock option grants to our employees since January 1, 2010 is summarized as follows:


Grant Date	Number of Options Granted		Exercise Price		Fair Value Per Share of Common Stock		Aggregate Grant Date Fair Value (1)
February 24, 2010		14,424,108	$	0.31	$	0.31	$	2,516,000
July 21, 2010		999,306		0.34		0.34		187,000
January 26, 2011		6,198,546		0.48		0.48		1,637,000
April 21, 2011		12,084,350		0.73		0.73		4,819,000

(1)	Aggregate grant date fair value was determined using the Black-Scholes option-pricing model.

February 2010. For stock option grants in February 2010, our board of directors determined the fair value of our common stock to be $0.31 per share. This fair value was based on a number of factors, including a December 31, 2009 contemporaneous valuation as the board determined that there were no events during the intervening period which would impact the fair value of our common stock on the date of grant. As noted previously, the OPM is preferred when future outcomes are difficult to predict and the PWERM becomes useful when discrete future outcomes become more predictable. In late 2009, we began to have initial discussions with a small number of investment banks regarding our prospects for an IPO. In determining the final valuation of our common stock, our board of directors weighted the two methods to address the risk of uncertainty related to our estimates of a probable IPO due to uncertainty in the IPO market during this period which was still recovering from the broader economic downturn that took place in 2008 and 2009.

The OPM determined the enterprise value using a market approach. In applying the OPM to the enterprise value during this period, the expected time to a liquidity event of two years was based on a reasonable time frame for us to achieve significant milestones in our business strategy and experience a liquidity event based on market and business conditions prevailing at that time. The volatility of 56% was based on the median volatility over the expected time to a liquidity event for comparable select group of peer publicly traded companies. The risk-free interest rate of 1.1% was based on the yield on a U.S. Treasury bond corresponding to the expected time to a liquidity event. Based on a lack of a public market for our common stock, a discount of 20% was based upon a protective put analysis using the same assumptions for the term, volatility and risk-free rate. The PWERM allocation used a risk adjusted discount rate of 23.5% based upon an adjusted capital asset pricing model and a lack of marketability discount of 20% in the remaining a private company scenario. The expected outcomes applied in the PWERM allocation were weighted as follows: (1) 40% towards IPO scenarios occurring during late 2011 and through 2012, valued using the market approach; (2) 20% towards a private sale occurring during late 2011 and through 2012, valued using the market approach; (3) 10% towards a liquidation scenario, valued using the income approach; and (4) 30% to remaining a private operating company, valued using the income approach. Based upon the equal weighting of the PWERM and OPM results, our board of directors determined the fair value of our common stock to be $0.31 per share.

July 2010. For stock option grants in July 2010, our board of directors determined the fair value of our common stock to be $0.34 per share. This fair value was based on a number of factors, including a June 30, 2010 contemporaneous valuation as our board of directors determined that there were no events during the intervening period which would impact the fair value of our common stock on the date of grant. In determining the final valuation of our common stock, our board of directors weighted the two methods to address the risk of uncertainty related to our estimates of a probable IPO as the market for IPOs was improving but still not strong during this period.

The OPM determined the enterprise value using a market approach. In applying the OPM to the enterprise value during this period, the expected time to a liquidity event of two years was based on a reasonable time frame for us to achieve significant milestones in our business strategy and experience a liquidity event based on market and business conditions prevailing at that time. The volatility of 56% was based on the median volatility over the expected time to a liquidity event for a select group of peer publicly traded companies. The risk-free interest rate of 0.6% was based on the yield on a U.S. Treasury bond corresponding to the expected time to a liquidity event. Based on a lack of a public market for our common stock, a discount of 20% was based upon a protective put analysis using the same assumptions for the term, volatility and risk-free rate. The PWERM allocation used a risk adjusted discount rate of 22.2% based upon an adjusted capital asset pricing model and a lack of marketability discount of 20% in the remaining a private company scenario. The expected outcomes applied in the PWERM allocation were weighted as follows: (1) 40% towards IPO scenarios occurring during late 2011 and through 2012, valued using the market approach; (2) 20% towards a private sale occurring during late 2011 and through 2012, valued using the market approach; (3) 10% towards a liquidation scenario, valued using the income approach; and (4) 30% to remaining a private operating company, valued using the income approach. Based upon the equal weighting of both valuations our board of directors determined the fair value of our common stock to be $0.34 per share. The increase in the fair value of our common stock from our December 31, 2009 valuation was primarily attributable to our progress towards an IPO, including discussions with investment banks regarding our potential IPO.

January 2011. As a result of discussions with bankers and an IPO organizational meeting with underwriters, our board of directors determined that it was no longer appropriate to apply a blending of the OPM and PWERM valuation methodologies and instead relied solely on the PWERM methodology to determine the fair value of our common stock. The blending of valuations using these two methods employed from the July 2010 valuation had the effect of lowering the probability of an IPO, resulting in a lower fair value of our common stock than would have been the case if we had used PWERM alone. For stock option grants in January 2011, our board of directors determined the fair value of our common stock to be $0.48 per share. This fair value was based on a number of factors, including a December 31, 2010 contemporaneous valuation as our of board of directors

determined that there were no events during the intervening period which would impact the fair value of our common stock on the date of grant. The December 31, 2010 contemporaneous valuation is based on the PWERM. The PWERM allocation used a risk adjusted discount rate of 24.5% based upon an adjusted capital asset pricing model and a lack of marketability discount of 15% in the remaining a private company scenario. The expected outcomes were weighted as follows: (1) 40% towards IPO scenarios occurring during late 2011, valued using the market approach; (2) 20% towards a private sale occurring during late 2011 and through 2012, valued using the market approach; (3) 10% towards a liquidation scenario, valued using the income approach; and (4) 30% to remaining a private operating company, valued using the income approach. Based upon the valuation, our board of directors determined the fair value of our common stock to be $0.48 per share. The increase in fair value of our common stock from our June 30, 2010 valuation was primarily attributable to our progress towards an IPO, planned new product introductions, the hiring of key employees and expanded discussions with investment bankers, including the scheduling of an organizational meeting to be held on January 13, 2011.

April 2011. For stock options granted in April 2011, our board of directors determined the fair value of our common stock to be $0.73 per share. This fair value was based on a number of factors, including a March 31, 2011 contemporaneous valuation as our board of directors determined that there were no events during the intervening period which would impact the fair value of our common stock on the date of grants. The March 31, 2011 contemporaneous valuation involved the use of both income and market approaches to estimate the total enterprise value of the Company as of the valuation date and the use of the PWERM to allocate the value among the share classes. The expected outcomes assumed in the PWERM were weighted as follows: (1) 65% towards IPO scenarios occurring during late 2011, valued using the market approach; (2) 20% towards a private sale occurring during late 2011 and through 2012, valued using the market approach; (3) 10% towards a liquidation scenario, valued using the market approach; and (4) 5% to remaining a private operating company, valued using both income and market approaches. A discount for lack of marketability of 13% was then applied to the preliminary estimate of fair value for the common stock. Based upon the valuation, our board of directors determined the fair value of our common stock to be $0.73 per share. The increase in the fair value of our common stock from our December 31, 2010 valuation was primarily attributable to our progress towards an IPO, including the filing of our initial registration statement on Form S-1 with the Securities and Exchange Commission on March 16, 2011, and planned new product introductions.

Our stock-based compensation expense for awards granted to our employees is as follows (in thousands):


	Year Ended December 31,						Three Months Ended March 31,
	2008		2009		2010		2010		2011
Cost of revenue	$	124	$	70	$	89	$	23	$	28
Research and development		954		666		701		183		176
Sales, general and administrative		711		671		810		182		234

Total stock-based compensation	$	1,789	$	1,407	$	1,600	$	388	$	438

As of March 31, 2011, we had $3.2 million of unrecognized stock-based compensation expense, net of estimated forfeitures, that is expected to be recognized over a weighted average period of 3.26 years. In future periods, our stock-based compensation expense is expected to increase as a result of our existing unrecognized stock-based compensation to be recognized as these awards vest and as we issue additional stock-based awards to attract and retain employees. Also upon completion of this IPO, our common stock will be publically traded and will therefore be subject to potential significant fluctuations in the market price. Such fluctuations, if they occur, could impact the volatility used in the fair value calculations which could also impact our future stock-based compensation, as increased volatility would increase the fair value of the related awards granted in future periods. In addition, increases and decreases in market price of our common stock will also increase and decrease the fair value of our stock-based awards granted in future periods.

Results of Operations

Comparison of the Three Months Ended March 31, 2010 and 2011


	Three Months Ended March 31,						Change
	2010			2011			$			%
	(in thousands)
	(unaudited)
Revenue	$	32,142		$	35,555		$	3,413			11	%
Cost of revenue:
Product cost of revenue		12,198			13,601			1,403			12
Amortization of acquired developed technologies		4,679			4,679			—			—

Total cost of revenue		16,877			18,280			1,403			8

Gross profit		15,265			17,275			2,010			13
Operating expenses:
Research and development		12,334			13,132			798			6
Sales, general and administrative		7,257			7,584			327			5

Total operating expenses		19,591			20,716			1,125			6

Operating loss		(4,326	)		(3,441	)		885			NM
Interest and other income		36			20			(16	)		(44	)
Interest and other expense		(37	)		(30	)		7			(19	)
Foreign currency translation gain (loss)		(3	)		(4	)		(1	)		(33	)

Loss before income taxes		(4,330	)		(3,455	)		875			NM
Provision for income taxes		201			307			106			53

Net loss	$	(4,531	)	$	(3,762	)	$	769			NM

NM	is not meaningful.

Revenue

Revenue increased $3.4 million, or 11% in the first quarter of 2011 compared to the same period in 2010. Revenue from our growth products increased by $5.3 million, or 23%, from $23.1 million to $28.4 million while revenue from our legacy products decreased by $2.0 million, or 22%. The increase was due primarily to growth in sales in the access and transport markets.

Cost of Revenue and Gross Profit

Total cost of revenue increased by $1.4 million, or 8%, from $16.9 million in the first quarter of 2010 to $18.3 million in the first quarter of 2011. Product cost of revenue increased by $1.4 million, or 12%, in the first quarter of 2011, at approximately the same rate of increase as revenue.

Total gross profit increased by $2.0 million, or 13%, from 47% of revenue in the first quarter of 2010 to 49% of revenue in the first quarter of 2011. The increase in gross profit was driven by lower unit costs resulting from lower negotiated wafer prices and improved manufacturing process efficiencies in addition to the increase in revenue.

Research and Development

Research and development expense increased by $0.8 million, or 6%, from $12.3 million in the first quarter of 2010 to $13.1 million in the first quarter of 2011 primarily due to a $1.3 million increase in research and development personnel costs and a $0.2 million increase in engineering consulting expenses. The increase in personnel and consulting expense was primarily driven by our strategy to expand our product offerings in the access and transport markets and new product development in the digital home market. These increases were partially offset by $0.9 million decrease in expenses for non-recurring engineering activities, and $0.1 million of income from non-recurring engineering activities we performed for others during the first quarter of 2011.

Sales, General and Administrative

Sales, general and administrative expense increased by $0.3 million, or 5%, from $7.3 million in the first quarter of 2010 to $7.6 million in the first quarter of 2010. The increase was primarily due to a $0.3 million increase in sales, general and administrative personnel costs as a result of increases in headcount and a $0.2 million increase in tax and other accounting-related expenses which was partially offset by a $0.2 million decrease in IT and marketing consulting expenses.

Interest and Other Income

Despite higher balances of cash, cash equivalents and short-term investments, interest income in the first quarter of 2011 decreased from the same period in 2010 primarily due to lower interest rates realized on cash, cash equivalents and marketable securities.

Interest and Other Expense

Interest and other expense in the first quarter in 2011 remained insignificant as compared to the same period in 2010.

Provision for Income Taxes

The provision for income taxes is comprised of foreign income taxes, U.S. federal alternative minimum tax and state taxes. The provision for income taxes increased $0.1 million from $0.2 million in the first quarter in 2010 to $0.3 million in the first quarter in 2011 primarily due to increases in foreign taxable income and a reduction in tax holiday benefits in Shanghai.

Comparison of the Years Ended December 31, 2009 and 2010


	Year Ended December 31,						Change
	2009			2010			$			%
	(in thousands)
Revenue	$	127,474		$	141,086		$	13,612			11	%
Cost of revenue:
Product cost of revenue		53,522			52,920			(602	)		(1	)
Amortization of acquired developed technologies		18,796			18,716			(80	)		—

Total cost of revenue		72,318			71,636			(682	)		(1	)

Gross profit		55,156			69,450			14,294			26
Operating expenses:
Research and development		45,814			50,153			4,339			9
Sales, general and administrative		28,509			29,648			1,139			4
Restructuring charges		554			—			(554	)		(100	)

Total operating expenses		74,877			79,801			4,924			7

Operating loss		(19,721	)		(10,351	)		9,370			NM
Interest and other income		231			116			(115	)		(50	)
Interest and other expense		(271	)		(130	)		141			(52	)
Foreign currency translation gain (loss)		70			(173	)		(243	)		(347	)

Loss before income taxes		(19,691	)		(10,538	)		9,153			NM
Provision for income taxes		1,649			178			(1,471	)		(89	)

Net loss	$	(21,340	)	$	(10,716	)	$	10,624			NM

NM is not meaningful.

Revenue

Revenue in 2010 increased by $13.6 million, or 11%, from $127.5 million in 2009 to $141.1 million in 2010 as we experienced a recovery from the global economic downturn in 2009. Revenue from our growth products increased by $20.5 million, or 24%, from $84.7 million in 2009 to $105.2 million in 2010. The increase was due primarily to growth in sales of new products in access, data center and transport markets. Revenue from our legacy products decreased by $6.8 million, or 16%, from $42.7 million in 2009 to $35.9 million in 2010.

Cost of Revenue and Gross Profit

Total cost of revenue decreased by $0.7 million, or 1%, from $72.3 million in 2009 to $71.6 million in 2010. Product cost of revenue decreased by $0.6 million, or 1%, from $53.5 million in 2009 to $52.9 million in 2010. Despite the increase in revenue during this period, product cost of revenue decreased as a result of lower unit costs associated with reduced silicon wafer pricing negotiated with our suppliers and higher yields from improved manufacturing efficiencies. In addition, we took significant write-downs for excess inventory associated with the global economic slowdown in 2009 for which similar write-downs did not occur in 2010.

Total gross profit increased by $14.3 million, or 26%, in 2010, or from 43% of revenue in 2009 to 49% of revenue in 2010. Our increase in gross profit was the result of increased unit shipments, yield improvements and negotiated cost savings with our suppliers, partially offset by lower average selling prices.

Research and Development

Research and development expenses increased $4.3 million, or 9%, from $45.8 million in 2009 to $50.2 million in 2010. In 2010, we had a $3.7 million increase in research and development personnel costs due to increased headcount and higher salaries, a $1.5 million increase in consulting expenses to support the

development of access and transport products and a $0.4 million increase in allocated facilities costs associated with the increased headcount during the period. These increases were partially offset by a $0.9 million decrease in other research and development related costs such as prototypes, testing and qualification expenses, a $0.5 million decrease in amortization of design tool software licenses and a $0.4 million decrease in depreciation expenses.

Sales, General and Administrative

Sales, general and administrative expenses increased $1.1 million, or 4%, from $28.5 million in 2009 to $29.6 million in 2010. The increase was primarily due to a $0.6 million increase in personnel costs as a result of increased headcount and a $0.3 million increase in bad debt expense as a result of increasing our allowance for doubtful accounts. These increases were partially offset by a $0.4 million decrease in accounting and legal expenses.

Restructuring Charges

During the third quarter of 2009, we recorded restructuring charges of $0.6 million for the severance and benefit costs incurred in connection with a workforce reduction. The affected employees were based in North America, Taiwan and India.

Interest and Other Income

Interest income decreased $0.1 million, or 50%, from $0.2 million in 2009 to $0.1 million in 2010. The decrease was primarily due to lower interest rates on cash and investment balances in 2010.

Interest and Other Expense

Interest expense decreased $0.1 million, or 52%, from $0.3 million in 2009 to $0.1 million in 2010. The decrease was primarily the result of repaying our outstanding term loan balance of $3.0 million in August 2009.

Provision for Income Taxes

Our effective tax rates have differed from the U.S. federal statutory rate primarily due to the tax impact of foreign operations, state taxes and research and development tax credits. Provision for income taxes decreased $1.5 million from $1.6 million in 2009 to $0.2 million in 2010. The decrease was due in part to amounts recorded in 2009 to provide for previously claimed foreign research and development tax credits for which no similar provisions were necessary in 2010. Additionally, in 2010 we realized a benefit from the release of the valuation allowance related to certain operating losses in a foreign jurisdiction and lower foreign taxes related to a tax holiday which was confirmed in 2010.

Comparison of the Years Ended December 31, 2008 and 2009:


	Year Ended December 31,						Change
	2008			2009			$			%
	(in thousands)
Revenue	$	152,126		$	127,474		$	(24,652	)		(16	)%
Cost of revenue:
Product cost of revenue		65,725			53,522			(12,203	)		(19	)
Amortization of acquired developed technologies		18,604			18,796			192			1

Total cost of revenue		84,329			72,318			(12,011	)		(14	)

Gross profit		67,797			55,156			(12,641	)		(19	)
Operating expenses:
Research and development		41,461			45,814			4,353			10
Sales, general and administrative		29,278			28,509			(769	)		(3	)
Restructuring charges		—			554			554			NM
Acquired in-process research and development		971			—			(971	)		(100	)

Total operating expenses		71,710			74,877			3,167			4

Operating loss		(3,913	)		(19,721	)		(15,808	)		NM
Interest and other income		724			231			(493	)		(68	)
Interest and other expense		(682	)		(271	)		411			(60	)
Foreign currency translation gain		171			70			(101	)		(59	)

Loss before income taxes		(3,700	)		(19,691	)		(15,991	)		NM
Provision for income taxes		762			1,649			887			116

Net loss	$	(4,462	)	$	(21,340	)	$	(16,878	)		NM

NM is not meaningful.

Revenue

Revenue in 2009 decreased by $24.7 million, or 16%, from $152.1 million in 2008 to $127.5 million in 2009. The decline in revenue was primarily driven by lower sales volume in 2009 compared to 2008 due to the adverse global economic conditions. As a result, revenue from our growth products decreased by $12.0 million, or 12%, from $96.8 million in 2008 to $84.7 million in 2009. Revenue from our legacy products decreased by $12.6 million, or 23%, from $55.3 million in 2008 to $42.7 million in 2009.

Cost of Revenue and Gross Profit

Total cost of revenue decreased by $12.0 million, or 14%, from $84.3 million in 2008 to $72.3 million in 2009, primarily due to decrease in revenue. Total cost of revenue decreased at a lesser rate than the decrease in revenue as the cost of revenue includes amortization of acquired developed technologies which does not vary proportionally with the fluctuation in revenue.

Total gross profit decreased by $12.6 million, or 19% in 2009, or from 45% of revenue in 2008 to 43% of revenue in 2009. Our decrease in gross profit was driven primarily by decrease in revenue and the structure of cost of revenue.

Research and Development

Research and development expenses increased $4.4 million, or 10%, from $41.5 million in 2008 to $45.8 million in 2009 to support our efforts in new product development and introduction. In 2009, we had an increase of $1.5 million in research and development personnel costs related to increased headcount, a $1.7 million increase in design tool software expenses and a $2.3 million increase in non-recurring engineering costs.

Sales, General and Administrative

Sales, general and administrative expenses decreased $0.8 million, or 3%, from $29.3 million in 2008 to $28.5 million in 2009. The decrease was primarily due to a $1.3 million decrease in consulting fees related to sales and information technology, a $0.9 million decrease in external commissions, a $0.4 million decrease in audit and tax fees and a $0.3 million decrease in bad debt expense. These decreases were partially offset by a $1.6 million increase in personnel costs resulting from increased headcount, a $0.3 million increase in legal expenses and a $0.2 million increase in allocated facilities costs.

Restructuring Charges

Acquired In-Process Research and Development

In July 2008, we acquired Storm Semiconductor, a Taiwan-based privately held semiconductor company. On the acquisition date, we recorded $1.0 million of charges for the acquired in-process research and development.

Interest and Other Income

Interest income decreased $0.5 million, or 68%, from $0.7 million in 2008 to $0.2 million in 2009. The decrease was primarily due to lower interest rates on lower cash and investment balances in 2009.

Interest and Other Expense

Interest expense decreased $0.4 million, or 60%, from $0.7 million in 2008 to $0.3 million in 2009. The decrease was primarily due to reduced loan balances as we repaid the entire balance of our term loan in August 2009.

Provision for Income Taxes

Provision for income taxes increased $0.9 million from $0.8 million in 2008 to $1.6 million in 2009 principally as a result of additional income tax expense recorded due to a reduction in benefits previously recognized on certain foreign research and development tax credits.

Quarterly Results of Operations

The following table sets forth our unaudited consolidated statements of operations data for each of the last eight quarters. The quarterly data have been prepared on the same basis as the audited consolidated financial statements included elsewhere in this prospectus. You should read this information together with our consolidated financial statements and related notes included elsewhere in this prospectus. The results of the quarterly historical periods presented below are not necessarily indicative of the results of operations for a full year or any future periods.


	Three Months Ended
	June 30, 2009			September 30, 2009			December 31, 2009			March 31, 2010			June 30, 2010			September 30, 2010			December 31, 2010			March 31, 2011
	(in thousands)
Revenue	$	32,705		$	34,329		$	34,964		$	32,142		$	35,431		$	35,877		$	37,636		$	35,555
Cost of revenue:
Product cost of revenue		13,512			13,448			14,082			12,198			13,468			13,562			13,692			13,601
Amortization of acquired developed technologies		4,701			4,701			4,693			4,679			4,679			4,679			4,679			4,679

Total cost of revenue		18,213			18,149			18,775			16,877			18,147			18,241			18,371			18,280

Gross profit		14,492			16,180			16,189			15,265			17,284			17,636			19,265			17,275

Gross profit percentage		44	%		47	%		46	%		47	%		49	%		49	%		51	%		49	%

Operating expenses:
Research and development	$	12,135		$	12,204		$	10,877		$	12,334		$	11,918		$	13,195		$	12,706		$	13,132
Sales, general and administrative		7,354			6,972			7,073			7,257			7,415			7,529			7,447			7,584
Restructuring charges		—			554			—			—			—			—			—			—

Total operating expenses		19,489			19,730			17,950			19,591			19,333			20,724			20,153			20,716

Operating loss		(4,997	)		(3,550	)		(1,761	)		(4,326	)		(2,049	)		(3,088	)		(888	)		(3,441	)
Interest and other income		30			46			41			36			40			25			15			20
Interest and other expense		(52	)		(69	)		(61	)		(37	)		(28	)		(32	)		(33	)		(30	)
Foreign currency translation gain (loss)		(26	)		78			74			(3	)		(8	)		(80	)		(82	)		(4	)

Loss before income taxes		(5,045	)		(3,495	)		(1,707	)		(4,330	)		(2,045	)		(3,175	)		(988	)		(3,455	)
Provision (benefit) for income taxes		151			210			526			201			11			(4	)		(30	)		307

Net loss	$	(5,196	)	$	(3,705	)	$	(2,233	)	$	(4,531	)	$	(2,056	)	$	(3,171	)	$	(958	)	$	(3,762	)


	Three Months Ended
	June 30, 2009			September 30, 2009			December 31, 2009			March 31, 2010			June 30, 2010			September 30, 2010			December 31, 2010			March 31, 2011
	(in thousands)
Non-GAAP Financial Measures (1):
Non-GAAP gross profit	$	19,213		$	20,900		$	20,900		$	19,967		$	21,989		$	22,337		$	23,962		$	21,982
Non-GAAP gross profit percentage		59	%		61	%		60	%		62	%		62	%		62	%		64	%		62	%
Non-GAAP operating income	$	447		$	1,892		$	3,658		$	1,108		$	3,389		$	2,341		$	4,508		$	1,962
Non-GAAP net income	$	179		$	1,913		$	3,036		$	899		$	3,327		$	2,241		$	4,444		$	1,722

(1)	See reconciliation of our non-GAAP measures in the section below “—Non-GAAP Financial Measures.”

Revenue has generally increased over the eight quarters presented due to continued new product introductions.

Our quarterly revenue has at times fluctuated, notably in the first quarters of each year. We believe this fluctuation may be influenced by seasonal factors such as the Chinese New Year where most of our customers shut down their operations. Also contributing to the decline in revenue in the first half of 2009 was the global financial and economic crisis, which resulted in reduced orders as our customers did not replenish inventories as expected.

In July 2009, we adopted a restructuring plan to realign our cost structure with the then prevailing macroeconomic business conditions. The plan eliminated approximately 30 positions, or 7%, of our global workforce and was substantially completed in the third quarter of fiscal year 2009.

Non-GAAP Financial Measures

We believe that the use of non-GAAP gross profit, non-GAAP gross profit percentage, non-GAAP operating income (loss) and non-GAAP net income (loss) is helpful for an investor to determine whether to invest in our common stock. In computing our non-GAAP financial measures, we exclude items included under GAAP that may not be indicative of our core business operating results, specifically, non-cash charges for the amortization of acquired intangible assets, which will be substantially amortized by September 2012, and stock-based compensation expense and related tax effects. We believe the exclusion of these non-cash charges is useful to investors because it is more indicative of our core business operating results and the health of our business.

Additionally, referring to these non-GAAP financial measures is helpful to us in assessing our performance and in planning, forecasting and analyzing future periods. These non-GAAP financial measures also facilitate our internal trending of historical performance and liquidity as well as comparisons to our competitors’ operating results. In addition, in years prior to 2010, when we had a profitability component of our performance-based cash bonus targets, we used non-GAAP operating income to determine attainment of targets for key employees and executive officers. Using these non-GAAP measures to evaluate our business also allows us and investors to assess our relative performance against our competitors and ultimately monitor our capacity to generate returns for our stockholders. Further explanation of the excluded items is provided below:

•

Amortization of Acquired Intangible Assets. Included in our financial results is the amortization of acquired intangible assets associated with prior acquisitions and which is non-cash in nature. We exclude these expenses from our non-GAAP financial measures because we believe they are not indicative of our current and expected core operating performance.

•

Stock-Based Compensation Expense. Included in our financial results are non-cash charges for the fair value of stock options granted to employees. We believe that excluding these charges from our non-GAAP financial measures provides for more accurate comparisons of our historical and current operating results to those of similar companies because various valuation methodologies with subjective assumptions may be used to calculate stock-based compensation expense.

•

Income Tax Effect of Non-GAAP Adjustments. This amount adjusts the provision for (benefit from) income taxes to reflect the effect of the non-GAAP adjustments on non-GAAP net income. The adjustments were calculated by applying our effective tax rate in the jurisdiction to which the non-GAAP item relates.

These non-GAAP financial measures may not provide information that is directly comparable to that provided by other companies in our industry, as other companies in our industry may calculate such financial results differently, particularly related to non-recurring, unusual items. Our non-GAAP financial measures are not measurements of financial performance under GAAP, and should not be considered as alternatives to gross profit, gross profit percentage, operating income (loss) and net income (loss) or as indications of operating performance or any other measure of performance derived in accordance with GAAP. We do not consider these non-GAAP financial measures to be a substitute for, or superior to, the information provided by GAAP financial results.

The following table reflects the reconciliation of GAAP financial measures to our non-GAAP financial measures.


	Three Months Ended
	June 30, 2009			September 30, 2009			December 31, 2009			March 31, 2010			June 30, 2010			September 30, 2010			December 31, 2010			March 31, 2011
	(in thousands)
Gross profit	$	14,492		$	16,180		$	16,189		$	15,265		$	17,284		$	17,636		$	19,265		$	17,275
Gross profit percentage		44	%		47	%		46	%		47	%		49	%		49	%		51	%		49	%

Non-GAAP adjustments:
Amortization of acquired developed technologies	$	4,701		$	4,701		$	4,693		$	4,679		$	4,679		$	4,679		$	4,679		$	4,679
Stock-based compensation		20			19			18			23			26			22			18			28

Non- GAAP gross profit	$	19,213		$	20,900		$	20,900		$	19,967		$	21,989		$	22,337		$	23,962		$	21,982

Non-GAAP gross profit percentage		59	%		61	%		60	%		62	%		62	%		62	%		64	%		62	%

Operating loss:	$	(4,997	)	$	(3,550	)	$	(1,761	)	$	(4,326	)	$	(2,049	)	$	(3,088	)	$	(888	)		(3,441	)
Non-GAAP adjustments:
Amortization of acquired intangible assets		5,094			5,094			5,083			5,046			5,017			5,017			5,017			4,965
Stock-based compensation		350			348			336			388			421			412			379			438

Non-GAAP operating income	$	447		$	1,892		$	3,658		$	1,108		$	3,389		$	2,341		$	4,508		$	1,962


Net loss	$	(5,196	)	$	(3,705	)	$	(2,233	)	$	(4,531	)	$	(2,056	)	$	(3,171	)	$	(958	)	$	(3,762	)
Amortization of acquired intangible assets		5,094			5,094			5,082			5,045			5,017			5,017			5,017			4,965
Stock-based compensation		350			348			336			388			421			412			379			438
Tax effects of non-GAAP adjustments		69			(176	)		150			4			55			17			(6	)		(81	)

Non-GAAP net income	$	179		$	1,913		$	3,036		$	899		$	3,327		$	2,241		$	4,444		$	1,722

Liquidity and Capital Resources

Our principal source of liquidity as of March 31, 2011 consisted of $37.4 million of our cash, cash equivalents and marketable securities. In addition, we have access to an unused line of credit in the amount of $15.0 million as of March 31, 2011. This credit facility is based on our eligible accounts receivable, has an interest rate of prime rate plus 0.25% and will expire in August 2011. Since inception, our operations have been financed primarily by net proceeds of $225.9 million from the sales of shares of our convertible preferred stock and convertible redeemable preferred stock and, in 2008 and 2010, by cash generated from operations. We believe our current cash, cash equivalents and marketable securities will be sufficient to satisfy our liquidity requirements for the next 12 months.

Our primary uses of cash are to fund operating expenses, purchases of inventory and the acquisition of property and equipment. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses as reflected in the change in our outstanding accounts payable and accrued expenses. We have also used cash to repay our outstanding indebtedness in the past.

Our primary sources of cash are customer payments from sales of our products. Aside from the growth in amounts billed to our customers, net cash collections of accounts receivable vary from period to period depending on the payment cycles of our customers.

Our cash flows were as follows (in thousands):


	Year Ended December 31,									Three Months Ended March 31,
	2008			2009			2010			2010			2011
										(unaudited)
Net cash provided by (used in) operating activities	$	29,574		$	(3,026	)	$	15,378		$	(1,050	)	$	(2,897	)
Net cash used in investing activities		(19,825	)		(2,226	)		(6,528	)		(1,269	)		(1,195	)
Net cash provided by (used in) financing activities		(3,935	)		(4,754	)		113			(88	)		530

Net increase (decrease) in cash and cash equivalents		5,814			(10,006	)		8,963			(2,407	)		(3,562	)
Cash and cash equivalents at beginning of period		22,160			27,974			17,968			17,968			26,931

Cash and cash equivalents at end of period	$	27,974		$	17,968		$	26,931		$	15,561		$	23,369

Net Cash Provided By (Used In) Operating Activities

Net cash used by operating activities during the three months ended March 31, 2011 primarily reflected our net loss of $3.8 million, which included net non-cash charges of $7.3 million, consisting primarily of depreciation and amortization of property and equipment and intangible assets and stock-based compensation. In addition, cash used by operations included increases in accounts receivable of $3.8 million, prepaid expenses and other current assets of $2.2 million and other long-term assets of $0.9 million and decreases in accrued payroll and related liabilities of $1.8 million. Accounts receivable increased due to higher revenue and a higher proportion of sales at the end of the first quarter of 2011 as compared to the fourth quarter of 2010. Prepaid expenses and other current assets increased due to capitalization of expenses related to the initial public offering. Other long-term assets increased principally due to the capitalization of a mask set during the three months ended March 31, 2011 as one of our new products completed its development cycle and went into production. Cash used by operations was partially offset by the increases in deferred margin on shipments to distributors of $2.1 million due to increases in distributor inventory on-hand.

Net cash used by operating activities during the three months ended March 31, 2010 primarily reflected our net loss of $4.5 million, which included net non-cash charges of $7.0 million, consisting primarily of depreciation and amortization of property and equipment and intangible assets and stock-based compensation. In addition, cash used by operations included increases in inventory of $2.7 million, accounts payable of $1.4 million and decreases in accounts receivable of $1.6 million and accrued payroll and related liabilities of $1.3 million. The decrease in accounts receivable in March 2010 is mainly attributable to our increased collection efforts and lower sales during the first quarter of 2010 as a result of the global economic slowdown. Inventory and accounts payable increased during the three months ended March 31, 2010 mainly due to inventory purchases committed prior to the global economic slowdown.

Net cash provided by operating activities in 2010 primarily reflected our net loss of $10.7 million, which included net non-cash charges of $28.0 million, consisting primarily of depreciation and amortization of property and equipment and intangible assets and stock-based compensation. In addition, cash provided by operations included an increase in accrued payroll and related benefits of $1.3 million due to increased headcount of 47 employees during 2010. Cash provided by operations was partially offset by decreases in accounts payable of $2.5 million mainly due to timing of payments.

Net cash used by operating activities in 2009 primarily reflected the net loss of $21.3 million, which included net non-cash charges of $27.9 million, consisting primarily of depreciation and amortization of property and equipment and intangible assets and stock-based compensation. In addition, cash used included increases in accounts receivable of $5.7 million, prepaid expenses and other current assets of $1.6 million and other long-term assets of $2.5 million and decreases in deferred margin on shipments to distributors of $1.5 million. Accounts receivable increased due to higher revenue and a higher proportion of sales at the end of the fourth

quarter of 2009. Prepaid expenses and other current assets increased due to prepayments required for certain software licenses for our research and development projects. Other long-term assets increased due to the capitalization of mask set costs during 2009 as our new products completed their development cycle and went into production.

Net cash provided by operating activities in 2008 primarily reflected the net loss of $4.5 million, which included net non-cash charges of $28.7 million, consisting primarily of depreciation and amortization of property and equipment and intangible assets, stock-based compensation and acquired in-process research and development expense. In addition, cash provided by operations included increases in accrued payroll and related benefits of $1.3 million due to increases in personal time off and bonuses and decreases in accounts receivable of $3.7 million and inventory of $5.1 million. Cash provided by operations was partially offset by decreases in accrued liabilities of $2.6 million and deferred margin on shipments to distributors of $2.0 million. Accounts receivable decreased in 2008 mainly attributed to the increase in our collection efforts and lower distributor purchases in December 2008 as a result of the global economic slowdown. Our inventory decreased during 2008 due to our efforts to maintain lower inventory levels, in anticipation of lower demand due to macroeconomic conditions.

Net Cash Used In Investing Activities

Net cash used in investing activities for the three months ended March 31, 2010 and 2011 represented purchases of property and equipment of $1.3 million and $1.2 million.

Net cash used in investing activities in 2008, 2009 and 2010 consisted of purchases of marketable securities of $12.8 million, $13.0 million and $14.0 million. In 2009 and 2010, proceeds from maturities of marketable securities were $13.0 million each. There were no proceeds from maturities of marketable securities in 2008. Purchases of property and equipment were $7.0 million, $2.2 million and $5.5 million in 2008, 2009 and 2010.

Net Cash Provided By (Used In) Financing Activities

Net cash used in financing activities for the three months ended March 31, 2010 consisted mainly of payments made under a loan agreement of $0.1 million. Net cash provided by financing activities for the three months ended March 31, 2011 consisted of net proceeds from the exercise of stock options of $0.6 million offset by principal payments on loan agreements of $0.1 million.

Net cash used in financing activities consisted of principal payments under a loan agreement with a financial institution of $4.0 million and $5.3 million during 2008 and 2009. During 2009, these payments were partially offset with proceeds from a note payable of $0.4 million. Net cash used in financing activities was offset by the net proceeds from the exercise of stock options of $0.1 million, $0.2 million and $0.3 million during 2008, 2009 and 2010.

Contractual Obligations, Commitments and Contingencies

Operating lease obligations consist of facilities leases and software design tool licenses. Purchase obligations consist of non-cancelable inventory and non-inventory purchase commitments. The following table summarizes our outstanding contractual obligations as of December 31, 2010 (in thousands):


	Payments Due by Period
	Total		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
Operating lease obligations	$	17,322	$	3,720	$	7,917	$	3,740	$	1,945
Purchase obligations		16,900		15,300		800		800		—

Total contractual obligations	$	34,222	$	19,020	$	8,717	$	4,540	$	1,945

There were no material changes to the obligation amounts above as of March 31, 2011.

In the normal course of our business, we periodically enter into agreements that require us to indemnify either customers or suppliers for specific risks, such as claims for property damage arising out of the use of our products or claims alleging that our products infringe third-party patents or other intellectual property. While our maximum exposure under these indemnification provisions cannot be estimated, and are not included in the table above, these indemnification obligations are not expected to have a material impact on our consolidated results of operations or financial condition.

Off-Balance Sheet Arrangements

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, or SPEs, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2009 and 2010, and for the three months ended March 31, 2011, we were not involved in any unconsolidated SPE transactions.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risks in the ordinary course of our business. These risks primarily include:

Interest Rate Risk

We had cash and cash equivalents of $18.0 million and $26.9 million as of December 31, 2009 and 2010 and $23.4 million as of March 31, 2011 which consist of bank deposits and money market funds. We also had short-term marketable securities of $13.0 million and $14.0 million as of December 31, 2009 and 2010 and $14.0 million as of March 31, 2011 which are invested in certificates of deposit and U.S government treasury bills with maturities of less than one year. Such interest-earning instruments carry a degree of interest rate risk. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. We have not been exposed nor do we anticipate being exposed to material risks due to changes in interest rates. A hypothetical 10% change in interest rates during the three months ended March 31, 2011 would not have had a material impact on our consolidated financial statements.

Foreign Currency Risk

Our exposure to adverse movements in foreign currency exchange rates is primarily related to our subsidiaries’ operating expenses, primarily in Canada, China, Taiwan and India, denominated in the respective local currency. A hypothetical change of 10% in foreign currency exchange rates would have less than a $1.0 million impact on our consolidated financial statements or results of operations. All of our sales and inventory purchases are transacted in U.S. dollars.

To date, we have used derivative financial instruments primarily to manage exposures to foreign currency risks, specifically forward exchange contracts, to hedge a portion of our forecasted Canadian-currency-denominated payroll transactions expected to occur within one to 12 months. The effect of exchange rate changes on forward exchange contracts is expected to offset the effect of exchange rate changes on the underlying hedged item. We do not use derivative financial instruments for speculative or trading purposes.

Recently Issued Accounting Pronouncements

Refer to Note 1 in the Notes to Consolidated Financial Statements included elsewhere in this prospectus for discussion of recently issued accounting pronouncements.

BUSINESS

Overview

The proliferation of video content, social networking and cloud computing has resulted in explosive growth of fixed and mobile network traffic. This growth in network traffic is creating fundamental business challenges as well as significant revenue opportunities for service providers and network equipment vendors. To capitalize on these opportunities, service providers are upgrading their networks to provide increased bandwidth, guaranteed service delivery, anytime-anywhere accessibility and network security. Network equipment vendors are increasingly utilizing communications semiconductors as the fundamental building blocks of these intelligent next generation networks. According to Gartner, the market for communications application specific integrated circuits and application specific standard products was $41 billion in 2010.

Our Industry

Network Traffic Is Growing at an Accelerating Rate as Connectivity Becomes Fundamental to Everyday Life

Global Internet Protocol, or IP, traffic is growing at an accelerating rate, placing a tremendous strain on global communications networks. According to Cisco’s Visual Networking Index of June 2, 2010, global IP traffic is expected to grow from 19.9 exabytes per month in 2010 to 62.4 exabytes per month in 2014, representing a compound annual growth rate, or CAGR, of 33%. The single largest driver of this growth is the increasing demand for video content, which typically requires more bandwidth than voice or data traffic. Cisco’s Visual Networking Index projects Internet video traffic, which includes Internet video, Internet video-to-TV, video calling and peer-to-peer sharing, to grow from 9.1 exabytes per month in 2010 to over 30.7 exabytes per month in 2014, constituting approximately 75% of total consumer Internet traffic in 2014.

Consumer demand for continuously available and customizable rich-media services, such as cloud-based services, social networking and killer, or popular, applications has changed the nature of network traffic. The proliferation of these new forms of content and media means consumers not only consume online content, but also increasingly create and share it over the Internet, personalizing the Internet experience.

The delivery model of services to end users is also changing with the proliferation of connected mobile devices such as smartphones, tablets, notebooks and e-readers and the widespread availability of wireless broadband. Consumers increasingly expect to access and share content anytime and anywhere, creating bottlenecks in every segment of global communications networks. According to Cisco’s Visual Networking Index of February 1, 2011, global mobile data traffic is expected to grow from 0.2 exabytes per month in 2010 to 3.6 exabytes per month in 2014, representing a CAGR of 99%. The convergence of these factors has fundamentally shifted the demands of the market, forcing communications service providers to adapt to changing market conditions.

Communications Service Providers Are Seeking New Revenue Opportunities to Manage Fundamental Business Challenges and Increased Competition

The communications industry has undergone a significant transformation over the last decade as traditional services have become increasingly commoditized and competition has intensified. Historically, voice, video, broadband and mobile services were delivered by separate service providers. The convergence of voice and data networks has enabled service providers to bundle services to generate new revenue and capture greater share of their customers’ spending. Service providers are facing competition from content providers as new entrants like Amazon.com, Inc., Google Inc., Netflix, Inc. and Skype S.à r.l. are increasingly seeking to offer over-the-top services, or content services directly to the consumer through the cloud. In addition, local and regional utility companies are starting to provide various communication services through smart meters and smart appliances.

To meet the increase in bandwidth demand and support the demand for expanded service offerings, service providers are investing significant amounts of capital, building next generation networks that have greater capacity and reach and are more intelligent and robust than networks of the past.

Communications Semiconductors: A Key Enabler of Next Generation Networks

Illustrative Network Infrastructure

LOGO

Global networks consist of multiple critical elements as illustrated in the diagram above. These elements are as follows:

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core networks, which move traffic between cities, countries and continents;

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metro networks, which connect large metropolitan networks, as well as the data center connectivity environments within them;

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central offices, which aggregate access traffic for delivery to the metro network; and

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access networks, which deliver traffic to endpoints of the network, including enterprises and homes.

Transport

Accelerating growth in network traffic is increasingly straining core and metro networks, driving demand for next generation, flexible and cost-effective solutions. In addition, capacity expansions in metro and access networks have created significant bottlenecks in transport networks, requiring upgrades to next generation technologies.

Network capacity build-outs by service providers have taken place on a regional scale, with North America, Korea and Japan being the early adopters of next generation networks followed by China and India, as well as other regions such as South America, the Middle East and Africa. In addition, service providers in developed countries have typically preferred to upgrade existing network infrastructure while those in emerging markets have been more likely to invest in greenfield networks. In some countries, such as China, service providers have chosen to build out network capacity through a combination of greenfield investments and upgrades.

The mainstream technology currently deployed by the industry was originally designed for voice services. To keep pace with the demand for bandwidth, the industry upgraded many legacy networks, making them capable of transmission at 10 Gbps, or 10G. However, as this transmission speed has become insufficient to accommodate the rapidly growing demand for bandwidth, service providers are accelerating deployments of next generation networks capable of transmission at 40 Gbps, or 40G, as well as trial deployments of networks capable of transmission at 100 Gbps, or 100G. For example, we believe that the transition from 10G to 40G is occurring at a faster rate than the prior transition from 2.5G to 10G, and the adoption rate of 100G is expected to be even faster. New generations of carrier-class communications semiconductor devices are the key enablers of faster speeds, longer reach and more reliable networks.

Infonetics, an independent research firm, forecasts the number of 10G, 40G and 100G wave division multiplexing transport ports, one of multiple types of optical carrier ports, to grow from approximately 73,000 ports in 2010 to 232,000 ports in 2014, representing a CAGR of 33%.

Access

As service providers increasingly roll out quad-play services, or services that combine voice, video, data and wireless, they are required to invest significant amounts of capital to expand capacity in access networks. In addition to enabling quad-play services, access networks have also become the gateway to monetizing a new generation of content delivery and services, creating new revenue opportunities for service providers. Access network build-outs and upgrades around the globe have accelerated as applications such as over-the-top video on demand, IPTV, social networking and Internet gaming drive the need for bandwidth.

Access networks are transitioning to optical fiber as copper lines, primarily used in legacy networks, have reached their bandwidth limitations. Optical fiber, and the communications semiconductor devices that enable bandwidth delivery over optical fiber, have emerged as the key components of high capacity next generation access networks. Passive Optical Network, or PON, fiber optic technology is the next evolutionary technology for broadband access, and enables 1 Gbps, or 1G, transmission speeds to the home, a 100-fold increase over legacy copper networks.

Service providers in Japan, China, Korea and Taiwan have been early adopters of PON technology and have aggressively deployed it in their home markets. In North America and Europe, service providers are starting to follow the migration to PON technology. China in particular is expected to be a significant market, as are North America and Europe.

Infonetics forecasts the total PON equipment market to grow from 13.6 million ports in 2010 to 31.9 million ports in 2014, representing a CAGR of 23%.

Data Center Connectivity

Ubiquitous broadband, the emergence of hosted solutions and an increasingly mobile workforce are driving widespread adoption of cloud computing technology by enterprises. This adoption, coupled with ongoing data center consolidation and an increasing focus on managing operating costs, has resulted in the rapid expansion of large-scale, virtualized data center deployments. Companies such as Amazon and Google have built large, cost-effective data centers not only for their own use, but also to provide computing capacity to their customers over the Internet.

Next generation data centers require cost-effective, carrier-class networking solutions that provide flexibility, high density, performance, resiliency and reliability. The ability to contain power in small footprints, connect a large mesh of computing nodes and deliver robust quality of service across these large data and storage domains requires the deployment of sophisticated solutions which incorporate analog and digital signal processing and software. The industry faces specific challenges such as enabling 10G connectivity and low

latency while keeping power consumption to a few hundred milli-watts per 10G port, as well as the ability to aggregate large volumes of data from many server elements into high speed and very dense aggregation media access control, or MAC, devices.

According to Gartner, an independent research firm, total enterprise 10G switched ports are expected to grow from 4.3 million in 2010 to 20.3 million in 2014, representing a CAGR of 47%.

Digital Home

The availability of quad-play services is transforming home offices into functional work environments and living rooms into sophisticated entertainment centers where families gather to enjoy feature-rich content. As a result, the home has become a tremendous revenue opportunity for service and content providers. Service providers are transitioning from providing uni-directional service delivery mechanisms to providing multi-directional, personalized and on-demand service platforms that support the delivery of quad-play and emerging broadcast services such as 3D and over-the-top video. The control and delivery of bandwidth and content in the home is migrating from one-way set-top boxes and first generation digital home gateways, to home servers and routing engines that enable user programmability, robust connectivity and quality of service. This transition will be facilitated by the next generation of digital home gateways which will distribute quad-play services throughout the home from a single access point. Over time, this digital home gateway will become an alternative to the traditional set-top box in the home.

This next generation architecture is also enabling service providers to deliver a broader spectrum of content and services such as home security, home automation and managed home applications. As tablets, smart phones and smart appliances are integrated around the core routing engine of the digital home, a new generation of killer applications is expected to become available that can be readily downloaded and used on these appliances, further increasing the demand for robust networks.

According to Infonetics, the market for residential gateways was $3.1 billion in 2010.

Challenges with Existing Solutions

Increased levels of network traffic, resulting from the proliferation of bandwidth-intensive content, are creating network bottlenecks and bandwidth constraints across every segment of the communications network.

While traditional communications semiconductor solutions were adequate for basic network processing, they are ineffective at addressing current levels of bandwidth. As a result, service providers and network equipment vendors are increasingly turning to next generation carrier-class semiconductor solutions for cost-effective and high-performance networking technologies.

Power Consumption, the Ever Growing Problem. Expanding network capabilities require increased processing performance, which necessitates low power solutions to support appropriate functionality and optimize total cost of ownership. Consequently, power efficiency has become a global focus point for service providers and network equipment vendors. Semiconductors requiring more power generate more heat, which not only directly impacts the life expectancy of the individual semiconductor components, but also affects the life expectancy and performance of the entire system. As a result, the networking device containing the semiconductor and the location where the network equipment is stored must be constantly cooled, adding a significant operating expense for service providers. In addition, many government agencies globally are proposing mandates for reductions in total network power consumption in service provider networks and enterprises. To effectively address enhanced performance requirements and adhere to lower power mandates, communications semiconductors must combine smaller geometries, incorporate new techniques for shutting down portions of the semiconductor not used for certain applications, integrate line cards and add functionality by incorporating mixed-signal design expertise and serial high-speed analog technology for communicating between circuits and device terminals.

Scaling Network Capacity. Network capacity must scale to match the growth in bandwidth, necessitating larger and more sophisticated networks. Network complexity increases as capacity scales, amplifying the potential risk for network breakdowns and deterioration of quality of service. To effectively scale, communications semiconductors must be able to maintain low power and low cost while providing high reliability and backward compatibility.

Rich Service Delivery. As content and services evolve from simple, discrete, uni-directional services to complex, multi-directional suites of services, service providers require new service delivery mechanisms. To deliver a customized, feature-rich experience, service providers require the ability to seamlessly tailor interactive content for each consumer, necessitating high levels of bandwidth-on-demand. To effectively deliver these multi-directional service platforms, service providers require the ability to measure bandwidth delivery, provide security across the network and remotely manage and monitor services.

These dynamic requirements and challenges across the network make it difficult for many semiconductor vendors to effectively address multiple network segments due to their focus on isolated segments of the network. To effectively address these challenges, communications semiconductor providers must have an end-to-end, carrier-class solution across multiple network segments.

Our Solutions

Our global expertise in developing carrier-class, platform solutions across multiple points of the communications network from the core network to the home network uniquely positions us to address the complex challenges and requirements of service providers and network equipment vendors. We are able to leverage our systems-level expertise, our relationships with leading network equipment vendors and global service providers, as well as multiple years of experience in communications networking technologies to identify and address emerging challenges in the network. Our solutions combine advanced geometries with our proprietary hardware, software algorithms and architectures to enable the delivery of cost-efficient bandwidth without compromising the quality of service. We have developed our solutions to run on multiple commonly used communications protocols.

Our broad product portfolio of carrier-class semiconductor devices addresses our customers’ key requirements for power, scalability and flexibility to deliver feature-rich content and services. Our differentiated system-on-a-chip solutions enable seamless deployment and network upgrades and incorporate highly integrated, high-performance analog, digital and mixed-signal semiconductor technologies, proprietary software algorithms, serial connectivity, advanced geometries, multi-protocol support and backward compatibility with existing network infrastructure. Additionally, we believe we are able to provide value for our customers with our proprietary software and algorithms that are integrated into our communications semiconductors. Our products’ ease of integration and our broad footprint throughout the network enable us to provide end-to-end solutions for both existing and greenfield networks, allowing us to deliver the following key benefits to our customers:

Solving Our Customers’ Most Significant Challenges — Performance, Power and Scalability. Our VLSI, or very large scale integration, technology employs high speed analog interconnect technologies integrated with very large digital processing systems-on-a-chip to create a robust architecture for our customers. Our unique 10G serial connectivity technology has been deployed across multiple networks, data centers and enterprises around the world. This innovative technology has been designed to minimize power consumption and increase the speed of serial connectivity between network equipment and network components. We have incorporated signal processing and innovative design methodologies as well as creative packaging and noise reduction techniques to overcome some of the most difficult problems facing our customers, including power and total cost of ownership requirements.

We have developed large-scale semiconductor devices that enable new network devices to interoperate seamlessly with devices already installed in the network. One of the biggest challenges facing service providers and large network equipment vendors is managing the transition from legacy networks to new, high capacity

networks. Our proprietary software and algorithms enable service providers to interoperate with their existing networks. This is critical for enabling our customers to maintain their existing networks while upgrading to new technologies. Our solutions provide support for multiple protocols and enable high speeds while preserving quality of service and the integrity of the network.

Enabling Feature-Rich Service Delivery Platforms. Our solutions enable service providers to migrate to new multi-directional service platforms which allow them to measure bandwidth delivery, provide security across the network and remotely manage and monitor services. This enables service providers to seamlessly tailor interactive content for each individual end user and deliver high levels of bandwidth-on-demand.

Transport. Our solutions enable network equipment vendors to use denser and lower cost optical systems throughout the core network and the metro network, allowing them to deliver greater and more efficient bandwidth to end users. Additionally, our proprietary forward error correction technology incorporates a unique algorithm that extends the reach of our solution, is backward compatible and has the highest speed transport capabilities.

Access. We leverage our expertise and technology in building large scale transport networks across multiple regions to provide low power and cost-effective access solutions. Our solutions are compatible with a variety of communication protocols and support our customers’ requirements for interoperability, one of the key challenges associated with building access networks. This allows us to provide service providers with cost-effective, high bandwidth solutions. Our footprint in the network and our ability to provide products to a large number of central offices enables us to interoperate with multiple vendors’ equipment at different access and terminal points. Our robust algorithms facilitate efficient subscriber-based service provisioning downstream from the central office. This enables service providers to tailor their networks to individual user needs.

Data Center Connectivity. We provide low power, low latency 10G optical devices solving data center connectivity and power challenges. Our extensive engineering expertise enables us to incorporate the signal processing characteristics of digital technologies into analog architectures, enabling lower power and more cost efficient means of transmission within the enterprise data center.

Digital Home. We are developing technologies that enable the convergence of multiple disparate applications for use in the home, including broadband router and gateway functions, content sharing and streaming, network storage, backup and encryption. Our technology enables the delivery of multiple content-rich, high bandwidth, data streams within the home. Our extensive knowledge of networks and networking systems enables us to bring robust and sophisticated technologies that have traditionally been deployed in the enterprise and access networks into the home network. We believe our next generation of multi-core processors, when integrated with sophisticated networking engines that have been traditionally used in large scale enterprise and core routers, will enable new ways of managing data communication in the home. For example, our configurable video transport system integrated with security engines will enable users to transfer and share content rapidly and easily. Our low cost and low power technology employs techniques such as auto-discovery, security and authentication, content protection and seamless integration with fixed and mobile delivery systems.

Our Key Competitive Strengths

We believe our key competitive strengths include the following:

Global Tier 1 Customer Base. We currently have over 800 customers, including leading global network equipment vendors such as Alcatel-Lucent, Ciena Corporation, Cisco Systems, Inc., Ericsson AB, FiberHome Technologies Group, Fujitsu Limited, Huawei Technologies Co., Ltd., Juniper Networks, Inc., Nokia Siemens

Networks and ZTE Corporation. Our solutions are installed in many leading global service provider networks, including China Mobile Limited, China Telecom Corp. Ltd., China Unicom (HK) Limited, Deutsche Telecom AG, KT Corporation, Telecom Italia Group, Telefónica S.A., Telstra Corporation Limited and Vodafone Group plc. Our multi-year relationships with our network equipment vendor customers and their service provider customers enable us to work with them on their future plans and requirements and collaborate with standards bodies.

Leading Provider of Platform Solutions From the Core Network to the Home Network. Our broad product portfolio of carrier-class semiconductor devices addresses bottlenecks from the core network to the home network, enabling us to provide significant value for our network equipment vendor customers and their service provider customers. Our extensive knowledge and experience across communications networking segments enable us to identify bottlenecks and design solutions to address them, differentiating us from our competitors that are focused on point solutions for specific applications. In addition, our suite of products addresses our customers’ performance, density and flexibility requirements with state-of-the-art, high-speed, analog-digital integration technology.

Incumbency Creates Barriers to Entry. Our platform solutions are essential elements of our customers’ complex communications networking systems, making our customers more likely to continue to sole source from us and reluctant to switch suppliers during the life of a system. Additionally, our pipeline of design wins with our Tier 1 customer base creates multiple points of contact and familiarity with the market needs of our customers, making it difficult for competitors to displace us. These points of contact provide a barrier to entry due to the highly integrated nature of our architectures and software algorithms, the long design in and product life cycles of our products, the extensive qualification process of our products and high switching costs.

Our Extensive Technology Leadership. Our VLSI, or very large scale integration, technology implements complex and challenging analog interconnect technologies integrated with very large digital processing systems-on-a-chip to create a robust architecture for our customers. We have also incorporated signal processing and innovative design methodologies as well as creative packaging and noise reduction techniques to overcome some of the most difficult problems facing our customers, including power and total cost of ownership requirements. This has enabled our customers to build systems much faster and in a more robust fashion, resulting in many key design wins for us. Our leadership in, and extensive knowledge of, the transport market have created one of the earliest deployments of 10G and 40G technologies across the network with algorithms that enable backward compatibility and the longest reach among currently available solutions. We have been able to bring together our knowledge of building very large scale networks with our expertise in processing large scale data in the access and home networks to create multiple platforms for our customers that are robust, upgradable and that enable seamless migration and interoperability among multiple vendors.

Proven Track Record of Acquiring and Integrating Businesses. In addition to organic growth, we have undertaken acquisitions to accelerate our growth by expanding our addressable market and increasing our scale and relevance to service providers and network equipment vendors. Since our inception, we have acquired and successfully integrated three private companies and a division of Intel Corporation. Our proven ability to find and integrate innovative founding teams and complementary technologies as well as our ability to realize value from under-appreciated assets has created another growth dimension and helped further our research and development efforts. We believe our ability to identify and integrate these acquisitions in a systematic and disciplined way enhances our success and the rate of our growth.

Strong Management Team with Proven Ability to Execute. We have a highly experienced management team with deep industry knowledge and a strong track record of execution. Our executive team has an average of over 25 years of experience in the technology industry and has significant experience and domain knowledge in networking, signal processing, processor development and large-scale computer and network systems. Our executives have been executives and principal research and development leaders at companies such as Cisco Systems, Inc., Intel Corporation and Nortel Networks. Our entrepreneurial founders have numerous successes to their credit, including having previously built and sold successful businesses in the networking industry.

Our Strategy

Our objective is to be the leading global communications semiconductor provider from the core network to the home network. Key elements of our strategy include:

Leveraging Our Carrier-Class Platform and Current Installed Base to Drive Growth

We intend to leverage our platform solutions and our broad product portfolio of carrier-class semiconductor devices, expertise in service provider solutions, and large installed base to grow our revenue and strengthen our position as a leading communications semiconductor provider. We believe our extensive and long-standing customer relationships and our reputation as a dependable supplier gives us visibility into future market trends and enhances our ability to secure future design wins. We believe that the broad range of our technology competencies, including analog, digital, mixed-signal, physical layer, software algorithms and systems expertise, and our carrier-class know-how enables us to generate demand for future designs as customers seek to complement our existing installed products with our next generation technologies.

Extending Our Leadership Position in Existing and New Markets

Our position as a leader in multiple critical segments of the communications network creates demand for our platform solutions across all network infrastructure segments. For example, the deployment of our 40G and 100G technologies in the core of the network generates demand for our 10G technology in the access market in order to address bottlenecks in the network. We intend to utilize this pull-through effect to extend our leadership position across our current markets as well as penetrate new markets by developing additional highly innovative products. We believe our position in the access market will generate pull-through demand for our platform in the home network, including the digital home.

Extending Our Technology Leadership through Continuous Innovation

We intend to extend our technology leadership by continuing to innovate new products. We are one of the leading innovators in high speed analog semiconductor technologies for both transport and data center platforms. Our innovative analog technologies enable high data rates, maximize distance, operate with a very low error rate and minimize distortion within a low power footprint, which allows us to efficiently manage multiple protocol rates and be a leader in 10G and 40G connectivity. We believe this will allow us to extend our leadership in next generation 100G technologies and into other segments of the network. For example, by utilizing hardware-assist technology coupled with software algorithms, we are able to provide low cost and low power platforms which enable efficient bandwidth management from the central office to network endpoints. Additionally, when our innovative multi-core technologies are coupled with networking and security engines, we are able to solve bottlenecks at the end point of home network delivery systems.

Utilizing Our Global Footprint to Further Penetrate High Growth Markets

Our success in Asian economies that are investing in technology innovation, such as Korea and China, validates and enhances our ability to deploy new technologies and expand into new regions, including India, South America and Russia. We have established, and intend to further expand, research and development and sales efforts in certain markets, such as China and India, which will enable us to take advantage of attractive growth opportunities in these large and growing markets.

Opportunistically Pursuing Complementary Acquisitions

We plan to opportunistically pursue acquisitions of intellectual property, design teams and companies that complement our strengths and help us execute our strategies. Our acquisition strategy is designed to accelerate our revenue growth, expand our platform technologies, grow our addressable market and create shareholder value. We believe our experience with successful integration of past acquisitions provides us an advantage in assessing and integrating companies we may pursue in the future.

Our Products

Our broad product portfolio of carrier-class semiconductor devices addresses our customers’ key requirements for power, scalability and flexibility to deliver feature-rich content and services.

Transport

Our optical transport processors and framers, or devices that format incoming signals for processing, offer complete solutions for delivery of traffic across metro, long-haul, and submarine networks. Our transport product family supports synchronous optical networking and synchronous digital hierarchy, or SONET/SDH, and optical transport networks, or OTN. We develop products that enable network equipment vendors to support and connect OTN and SONET/SDH networks, and facilitate the convergence of circuit and packet based networks.


Product Family	Description	Applications
40G/10G Optical Transport Network (OTN) Processors	40G and 10G processor and framer family with strong forward error correction support	Used to carry data, voice and video over metro, regional or long haul networks

10G/2.5G Optical Transport Network (OTN) Processors	10G and 2.5G processor and framer family	Used to carry data, voice and video over access and metro networks

SONET/SDH Framers	Data processing products for SONET/SDH and Ethernet	Switch and router platforms for edge and core applications

Access

Our family of Ethernet passive optical network solutions, or EPON, links optical networking units at customer premises with optical line terminals at the central office. Our access products embed multiple components in a single chip including Serializer/Deserializer, or SerDes, on-chip memory for optical networking units, and microprocessors for control and management. These products also incorporate multi-layer protocol functionality and packet processing into a single chipset.


Product Family	Description	Applications
Optical Network Unit (ONU)	1G EPON optical network unit	Customer premise equipment

Optical Line Terminal (OLT)	10G EPON optical line terminal	10G EPON line cards Scalable chassis system or stackable rack mount systems

Data Center Connectivity

We offer standards-based solutions to support connectivity in 10G and gigabit Ethernet switching and routing equipment. Our physical layer devices remove dispersion allowing service providers to extend their network links. Our media access control, or MAC, products handle basic network functions from network processors and application-specific integrated circuits, or ASICs, located in routers, multi-service switches, and network processor-based enterprise equipment.


Product Family	Description	Applications
High Speed Input/Output (HSIO)	10G Ethernet integrated circuits	Backplanes, switches, routers and optical modules

Ethernet components	10G Ethernet MAC	Switches and routers

	24 gigabit Ethernet MAC	Multi-service switches, router and aggregation platforms

	System Packet Interface Level 3 gigabit Ethernet MAC	Access and edge aggregation systems

Digital Home

We are focused on developing next generation digital home semiconductor solutions that will deliver broadband router and gateway functions, content sharing and streaming, network storage, backup and encryption, and will offer an alternative to the traditional set top-box. Our current network processor applications include router gateways, wireless access points, network-attached storage, or NAS, voice over Internet protocol, or VoIP, and triple-play-capable customer premise telecommunication equipment.

Product Family

Description

Applications

Digital Home

Network-attached storage and
gateway system on a chip

Router gateways

Network-attached storage

IP set top boxes

VoIP

Legacy

Our legacy product family consists of products that were acquired with Intel’s OND business and are sold into multiple markets. Such devices include Ethernet physical layer devices, or Ethernet PHYs, that operate at low speeds, such as 10 Mbps or 100 Mbps. These products offer energy saving modes and support commercial temperature ranges.


Product Family	Description	Applications
PHY devices	Single port fast Ethernet transceiver	Layer 1 network connectivity for fast Ethernet
	Low power 8 port fast Ethernet transceiver	Layer 1 network connectivity for fast Ethernet

Research and Development

We view our technology as a competitive advantage, and devote substantial resources to the research and development of new products and improvement of existing products. We have assembled a team of highly skilled hardware and software design engineers who are located in Sunnyvale, California; Raleigh, North Carolina; Bangalore, India; Ottawa, Canada; Shanghai, China; and Hsinchu, Taiwan. As of March 31, 2011, we had 281 full-time employees engaged in research and development. Our research and development expenses were $41.5 million, $45.8 million and $50.2 million for the years ended December 31, 2008, 2009 and 2010, respectively and $13.1 million for the three month period ended March 31, 2011.

Manufacturing

We operate a fabless business model and rely on third parties for substantially all of our manufacturing operations, including sorting, assembly, testing, warehousing and shipping. In addition, we sometimes outsource the entire manufacturing process to third parties. For example, we rely on Toshiba America Electronic Components, Inc. for the manufacture of one of our transport products, and most of our silicon wafers are produced by Taiwan Semiconductor Manufacturing Company, Ltd. We do not have any long-term supply agreements with our manufacturing suppliers. This outsourced manufacturing approach allows us to focus our resources on the design, sale and marketing of our products. In addition, we believe outsourcing our manufacturing and assembly activities provides us the flexibility needed to respond to variations in customer demand, simplifies our operations and significantly reduces our capital requirements.

Sales and Marketing

Our sales strategy involves the use of a combination of our direct sales force, including our field applications engineers, and external sales representatives and our distribution partners. Each of these sales channels is supported by our customer service and marketing organizations. We have sales and customer support personnel in the Americas, Canada, EMEA, Japan, China, Taiwan and Korea.

We operate a sales model that focuses on the close collaboration and coordination between our sales and product engineering teams and our customers. Our sales and marketing strategy is to achieve design wins with industry leaders and emerging participants in the networking systems market and to maintain these design wins by continuing to provide leading-edge products and superior customer service. Our sales cycles typically require a significant amount of time and a substantial expenditure of resources before we can realize revenue from the sale of products. Our design cycle from initial engagement to volume shipment can be from six months to two years, with product life cycles in the markets we serve ranging from three to ten years or more. For many of our products, we are required to engage with network equipment vendors early in the sales process to increase our chance of success. To ensure an adequate level of early engagement, our application and development engineers closely collaborate with network equipment vendors to identify and propose solutions to their system challenges. We believe that by providing applications support at the early stages of the design process, we are able to reduce time-to-market and minimize the potential for costly redesigns for our customers.

We rely on a number of distributors to help generate customer demand, provide technical support and other value-added services to our customers, fill customer orders and stock products. We believe that our distribution sales network provides an opportunity for us to offer our products and services to a wider array of customers. We believe these distributors are able to leverage existing relationships and understanding of our customers’ products to effectively sell our products. No distributor has contracted to sell our products exclusively.

Our distributors are located all over the world and are of various sizes and financial conditions. Worldwide revenue through distributors accounted for 51% of our revenue during 2010. Arrow Electronics, Inc. and Dragon Technology Distribution (HK) Ltd. are our primary distributors, and represented 13% and 18%, respectively, of our revenue for the year ended December 31, 2009 19% and 18%, respectively, of our revenue for the year ended December 31, 2010 and 15% and 24%, respectively, for the three months period ending March 31, 2011.

Customers

Our global customer base of network equipment vendors includes Alcatel-Lucent, Ciena Corporation, Cisco Systems, Inc., Ericsson AB, FiberHome Technologies Group, Fujitsu Limited, Huawei Technologies, Co., Ltd., Juniper Networks, Inc., Nokia Siemens Networks and ZTE Corporation. Sales to our top ten customers represented 70% of our revenue for the year ended December 31, 2009, 64% of our revenue for the year ended December 31, 2010 and 89% of our revenue for the three months ended March 31, 2011. A substantial portion of our revenue is generated from customers outside of North America, and we anticipate that such revenue will continue to comprise a significant portion of our revenue. For the year ended December 31, 2010, 17%, 69%, and 11% of our revenue was attributed to customers based in the United States, Asia and Europe, respectively and for the three month period ended March 31, 2011, 10%, 75% and 11% of our revenue was attributed to customers based in the United States, Asia and Europe, respectively.

Competition

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our success in identifying new and emerging markets, applications and technologies;

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our products’ performance, including products with price-performance advantages;

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our ability to provide a broad range of communications semiconductor products and services;

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our ability to deliver products in large volume on a timely basis at a competitive price;

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our success in utilizing new and proprietary technologies to offer products and features previously not available in the marketplace;

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our ability to recruit design and application engineers and sales and marketing personnel; and

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our ability to protect our intellectual property.

We expect competition to intensify in the future, especially as the industry consolidates. There has been a trend toward industry consolidation among communications integrated circuit companies, network equipment companies and telecommunications companies, and we expect this trend to continue. Companies that are strategic alliance partners in some areas of our business may acquire or form alliances with our competitors, thereby reducing their business with us. Consolidation may result in stronger competitors and fewer customers.

In addition, our customers generally have substantially greater resources than us. Some customers have used these resources to internally develop their own communications semiconductors. Our future success is dependent upon the continued acceptance of our products as more attractive alternatives to our customers’ internal development efforts. Network equipment vendors may also decide to acquire components, technologies or products that are similar to, or that may be substituted for, our products.

Intellectual Property

Our success and future revenue growth depend, in part, on our ability to protect our intellectual property. We control access to and use of our proprietary technology, software and other confidential information through

the use of internal and external controls, including contractual protections with employees, contractors, customers and partners. We rely primarily on patent, copyright, trademark and trade secret laws, as well as confidentiality procedures, to protect our proprietary technologies and processes. All employees and consultants are required to execute confidentiality agreements in connection with their employment and consulting relationships with us. We also require them to agree to disclose and assign to us all inventions conceived or made in connection with the employment or consulting relationship.

We have 32 issued and 16 pending patent applications in the United States, and seven pending foreign patent applications. Our U.S. patents have expiration dates from 2014 through 2028. We focus our patent efforts in the United States, and, when justified by cost and strategic importance, we file corresponding foreign patent applications in strategic jurisdictions such as China, Japan and Europe. Our patent strategy is designed to provide a balance between the need for coverage in our strategic markets and the need to maintain costs at a reasonable level.

We obtained a registration for our CORTINA SYSTEMS mark in the United States and Canada. Additionally, we have obtained a registration for the CORTINA mark in Hong Kong and a registration for the CORTINA mark is pending in the United States and China.

We cannot assure you that any patents will issue from any of our pending applications. Any rights granted under any of our existing or future patents may not provide meaningful protection or any commercial advantage to us. With respect to our other proprietary rights, it may be possible for third parties to copy or otherwise obtain and use our proprietary technology or marks without authorization or to develop similar technology independently.

The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights or positions, which have resulted in often protracted and expensive litigation. We may in the future initiate claims or litigation against third parties to determine the validity and scope of proprietary rights of others. In addition, we may in the future initiate litigation to enforce our intellectual property rights or the rights of our customers or to protect our trade secrets. We have received notices from time to time that claim we have infringed upon or misappropriated intellectual property rights owned by others. We typically respond when appropriate and as advised by legal counsel.

Our customers could become the target of litigation relating to the patent or other intellectual property rights of others. This could trigger technical support and indemnification obligations in some of our distribution or customer agreements. These obligations could result in substantial expenses, including the payment by us of costs and damages related to claims of patent infringement. In addition to the time and expense required for us to provide support or indemnification to our customers, any such litigation could disrupt the businesses of our customers, which in turn could hurt our relations with our customers and cause the sale of our products to decrease. We do not have any insurance coverage for intellectual property infringement claims for which we may be obligated to provide indemnification.

Additional information about the risks relating to our intellectual property is described above in this prospectus under the caption “Risk Factors.”

Employees

As of March 31, 2011, we had 193 full-time employees located in the United States, 37 full-time employees located in Canada, 200 full-time employees located in Asia and 2 full-time employees located in Europe. Our employees were grouped as follows: 276 employees in engineering, 26 employees in operations, 41 employees in general and administrative, and 89 employees in sales and marketing.

Facilities

Our principal executive offices are located at 1376 Bordeaux Drive, Sunnyvale, California, consisting of 61,921 square feet of office space under lease that expires in April 2017. We also occupy space in Folsom, California, consisting of 14,254 square feet under a lease that expires in May 2015, and space in Raleigh, North Carolina, consisting of 15,440 square feet under a lease that expires in September 2015. Our Canada subsidiary currently leases 13,951 square feet in Ottawa, Canada under a lease that expires in October 2013. Our India subsidiary currently leases 18,500 square feet in Bangalore, India under a lease that expires in March 2013. We also lease 15,475 square feet in Hsinchu, Taiwan under a lease that expires in January 2016, and 19,343 square feet in Shanghai under a lease expiring in March 2013. We do not own any real property. We believe that our leased facilities are suitable and adequate to meet our current needs and that additional facilities are available for lease on acceptable, commercially reasonable terms to meet foreseeable future needs.

Legal Proceedings

From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not a party to any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on our business, financial condition or operating results.

MANAGEMENT

Executive Officers and Directors

The following table sets forth the names, ages and positions of our executive officers and directors as of March 31, 2011:


Name	Age		Position
Executive Officers:
Amir Nayyerhabibi		55	President, Chief Executive Officer & Director
Bruce M. Margetson		65	Chief Financial Officer
Zeineddine Chair, Ph.D.		54	Vice President and General Manager
Hojjat Salemi		50	Vice President and General Manager
John P. Livingston		58	Vice President of Operations
Richard W. Walther		49	Vice President of Sales
Judith R. Onton		61	Vice President of Human Resources
James Mao		43	General Manager APAC

Independent Directors:
Carlton G. Amdahl (2)		59	Director
J. Thomas Bentley (1)(3)		61	Director
Eric P. Buatois (3)		51	Director
Norman A. Fogelsong (2)(3)		59	Director
Ammar H. Hanafi (2)		44	Director
Harold E. Hughes, Jr. (1)		65	Chairman of the Board
Andrew S. Lanza (1)		54	Director
Eric A. Young (2)		55	Director

(1)	Member of the audit committee

(2)	Member of the compensation committee

(3)	Member of the nominating and corporate governance committee

Executive Officers

Amir Nayyerhabibi co-founded Cortina in June 2001. Mr. Nayyerhabibi has served as our President, Chief Executive Officer and a member of our board of directors since June 2001. From January 1998 to August 1999, Mr. Nayyerhabibi was the Chief Operating Officer of StratumOne Communications, Inc., a fabless semiconductor company for framer technology for router applications which he co-founded and which was acquired by Cisco Systems, Inc. in September 1999. Mr. Nayyerhabibi has also held various senior executive positions at Cisco Systems, Silicon Graphics, Inc., MIPS Technologies, Inc. and Intel Corporation. Mr. Nayyerhabibi holds an M.S. in Information and Electrical Engineering from the University of Illinois. We believe that Mr. Nayyerhabibi possesses specific attributes that qualify him to serve as a member of our board of directors, including the perspective he brings as our Chief Executive Officer and his more than twenty-five years of industry experience leading semiconductor and large scale computer and networking systems.

Bruce M. Margetson has served as our Chief Financial Officer since April 2004. Prior to joining Cortina, Mr. Margetson served as Chief Financial Officer of several Silicon Valley start-ups, most recently Luminous Networks, Inc., a network equipment manufacturer, from March 2003 to March 2004. From January 1996 to March 2000, Mr. Margetson was an employee with Cisco Systems, Inc. From April 1991 to January 1996, Mr. Margetson served as a Senior Director of Finance for Silicon Graphics Inc. Mr. Margetson holds a B.A. in Economics and Political Science from the University of British Columbia and an M.B.A. in Finance from Stanford University.

Zeineddine Chair, Ph.D. co-founded Cortina in June 2001. Dr. Chair has served as our Vice President and General Manager since August 2010 and previously as our Vice President of Marketing and Business Development from June 2001 until August 2010. From 1997 to 1999, Dr. Chair was Vice President of Marketing of StratumOne Communications, Inc., a fabless semiconductor company for framer technology for router applications which he co-founded and which was acquired by Cisco Systems in September 1999. Dr. Chair continued on with Cisco Systems after the acquisition as head of the Metro Ethernet marketing team. Dr. Chair holds a Ph.D. in Electrical Engineering from Syracuse University.

Hojjat Salemi co-founded Cortina in June 2001. Mr. Salemi has served as our Vice President and General Manager since September 2010 and previously as our Chief Technology Officer and Vice President of Engineering from June 2001 until September 2010. Prior to founding the company, Mr. Salemi was Chief Technology Officer of Skystone Systems Corp. that was acquired by Cisco Systems in June 1997. Mr. Salemi holds a B.S. and an M.S. in Engineering from Ottawa University.

John P. Livingston has served as our Vice President of Operations since July 2006. From April 2005 through July 2006, Mr. Livingston was an independent consultant for various technology companies providing consulting services on manufacturing strategies. From August 2000 through April 2005, Mr. Livingston served as Vice President of Operations and Chief Information Officer at Luminous Networks, Inc. Prior to Luminous Networks, Mr. Livingston was Vice President of Operations as Auspex, Inc.

Richard W. Walther has served as our Vice President of Sales since October 2006. From September 1999 to September 2006, Mr. Walther was Marketing Director of the Optical Networking Components Division of Intel Corporation. Prior to Intel, Mr. Walther held various marketing positions at Avnet Electronics Marketing, Integrated Device Technology Inc. and Raytheon Semiconductor. Mr. Walther holds a B.S. in Electrical Engineering from California Polytechnic State University.

Judith R. Onton has served as our Vice President of Human Resources since February 2007. Prior to joining Cortina, Ms. Onton had an independent consulting business specializing in high technology start-up companies. Ms. Onton holds a B.A. in Geology, an M.A. in Administration and Higher Education from San Jose State University and an M.B.A. from Santa Clara University.

James Mao has served as our General Manager APAC since July 2007. From November 2003 to June 2007, Mr. Mao served as Vice President and General Manager of the Broadband Business Unit for UTStarcom, Inc. Mr. Mao holds an M.S. in Electrical and Computer Engineering from University of Waterloo, and an M.B.A. from the University of Southern California.

Independent Directors

Carlton G. Amdahl has been a member of our board of directors since March 2009. Mr. Amdahl has been an employee at DCM, a venture capital firm, since August 2001, and a general partner since January 2007. Mr. Amdahl has twenty-five years of experience as a senior executive in the information technology industry. During this period, he was a founder of three publicly traded companies. Mr. Amdahl is a Stanford Sloan Fellow and holds a B.S. degree in Electrical Engineering and Computer Science from the University of California, Berkeley and an M.S. in Management from Stanford University. We believe that Mr. Amdahl possesses specific attributes that qualify him to serve as a member of our board of directors, including his experience building publicly traded companies.

J. Thomas Bentley has been a member of our board of directors since April 2008 and has served as the chairman of the audit committee since May 2008. Mr. Bentley has served on the board of directors of Nanometrics Incorporated, a provider of metrology and process equipment, since April 2004, and Rambus Inc., a chip interface technology company, since March 2005. Mr. Bentley was a Managing Director of Alliant Partners,

a technology M&A advisory firm that he helped found in April 1990 and sold to Silicon Valley Bank in September 2001. Prior to founding Alliant, Mr. Bentley worked in leveraged buyouts with Berkeley International and Citicorp, and prior to that worked in economic development with the World Bank. Mr. Bentley holds a B.A. in Economics from Vanderbilt University and an M.S. in Management from the Massachusetts Institute of Technology. We believe that Mr. Bentley possesses specific attributes that qualify him to serve as a member of our board of directors, including financial expertise and years of business and leadership experience, including fifteen years as a co-founder of a financial advisory firm, which allow him to provide strategic guidance.

Eric P. Buatois has been a member of our board of directors since March 2009. Since August 2001, Mr. Buatois has been a General Partner of Sofinnova Ventures, a venture capital firm, where he specializes in software and semiconductor investments in the wireless field. Prior to Sofinnova Ventures, Mr. Buatois held several positions in general management and executive operations at Hewlett-Packard, Ericsson and Texas Instruments. Mr. Buatois holds an M.S. in Computer Science and Communications Engineering from Ecole Nationale Superieure des Telecommunications in France. We believe that Mr. Buatois possesses specific attributes that qualify him to serve as a member of our board of directors, including his more than twenty years of international experience in the wireless industry.

Norman A. Fogelsong has been a member of our board of directors since September 2006 and has served as the chairman of the nominating and corporate governance committee since May 2009. Since March 1989, Mr. Fogelsong has been a General Partner of Institutional Venture Partners, a venture capital firm, where he currently specializes in investments in private later-stage companies and in select public market opportunities. Mr. Fogelsong holds a B.S. in Management Science & Engineering from Stanford University, an M.B.A. from the Harvard Business School and a J.D. from the Harvard Law School. We believe that Mr. Fogelsong possesses specific attributes that qualify him to serve as a member of our board of directors, including more than thirty years of high-technology venture capital experience.

Ammar H. Hanafi has been a member of our board of directors since March 2009. Since February 2005, Mr. Hanafi has been a General Partner at Alloy Ventures, a venture capital firm, where he focuses on investments in communications and IT infrastructure, as well as Internet-enabled consumer and enterprise applications and services. Prior to Alloy, Mr. Hanafi served as Vice President of New Business Ventures at Cisco Systems, Inc., a networking and telecommunications company from October 2002 to February 2005, where he led new product efforts in the enterprise datacenter market and, from January 2000 to October 2002, served as Vice President of Corporate Business Development, where he was responsible for Cisco’s acquisitions, acquisition integration, investment and joint venture activity on a global basis. Mr. Hanafi holds a B.S. in Applied and Engineering Physics from Cornell University and an M.B.A. from Stanford University. We believe that Mr. Hanafi possesses specific attributes that qualify him to serve as a member of our board of directors, including over a decade of financial and operational management experience in the communications and technology industry.

Harold E. Hughes, Jr. has been a member of our board of directors since June 2004 and Chairman of our board of directors since December 2008. Mr. Hughes has served as a director of Rambus Inc., a chip interface company, since June 2003 and as its Chief Executive Officer and President since January 2005. Prior to joining Rambus, Mr. Hughes served as a United States Army Officer from December 1969 to April 1972 before starting his private sector career at Intel Corporation. Mr. Hughes held a variety of positions within Intel Corporation from June 1974 to August 1997, including Treasurer, Vice President of Intel Capital, Chief Financial Officer, and Vice President of Planning and Logistics. Following his tenure at Intel, Mr. Hughes was the Chairman and Chief Executive Officer of Pandesic, LLC. Mr. Hughes has served on the board of directors of Berkeley Technology Limited, a venture capital consulting company, since January 1987 and served on the board of directors of Xilinx, Inc., a supplier of programmable logic devices, from June 2003 until June 2006. Mr. Hughes holds a B.A. in Liberal Arts from the University of Wisconsin and an M.B.A. from the University of Michigan. We believe that Mr. Hughes possesses specific attributes that qualify him to serve as a member of our board of directors, including his prior leadership experience at Intel and his ability to provide deep and valuable operational and strategic insight to the board of directors.

Andrew S. Lanza has been a member of our board of directors since December 2001. From February 2001 to August 2010, Mr. Lanza was a General Partner at Morgenthaler Ventures, a venture capital firm, investing in hardware companies and with a special emphasis on wireless and communications integration circuits. Prior to joining Morgenthaler, Mr. Lanza spent fifteen years in various senior operating positions in the optical telecommunications industry. Mr. Lanza was a founder of four component and system companies in that sector and is considered a pioneer of the fiber-to-the-home market having managed the program that delivered the world’s first commercial PON system in 1992. Mr. Lanza holds a B.S. in Electrical Engineering and an M.S. in Mechanical Engineering from Stanford and an M.B.A. from the Harvard Business School. We believe that Mr. Lanza possesses specific attributes that qualify him to serve as a member of our board of directors, including his expertise in the fiber-to-the-home market and his experience growing companies in the industry.

Eric A. Young has been a member of our board of directors since August 2005 and has served as chairman of our compensation committee since May 2009. Mr. Young co-founded Canaan Partners, a venture capital firm, in October 1987 and has served as a General Partner since October 1987 where he focuses on opportunities in communications systems and enterprise automation. Mr. Young holds a B.S. in Mechanical Engineering from Cornell University and an M.B.A. in Finance from Northwestern University. We believe that Mr. Young possesses specific attributes that qualify him to serve as a member of our board of directors, including his years of experience and expertise in the venture finance industry.

There are no family relationships among any of our executive officers or directors.

Board Composition

Director Independence

Upon the completion of this offering, our common stock will be listed on The NASDAQ Global Market. Under the rules of The NASDAQ Stock Market, independent directors must comprise a majority of a listed company’s board of directors within a specified period of the completion of this offering. In addition, the rules of The NASDAQ Stock Market require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and corporate governance committees be independent. Audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended. Under the rules of The NASDAQ Stock Market, a director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

In order to be considered to be independent for purposes of Rule 10A-3, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee: (1) accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the listed company or any of its subsidiaries; or (2) be an affiliated person of the listed company or any of its subsidiaries.

In April 2011, our board of directors undertook a review of its composition, the composition of its committees and the independence of each director. Based upon information requested from and provided by each director concerning his background, employment and affiliations, including family relationships, our board of directors has determined that none of Messrs. Amdahl, Bentley, Buatois, Fogelsong, Hughes and Lanza, who will be directors upon completion of this offering, has a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is “independent” as that term is defined under the rules of The NASDAQ Stock Market. Our board of directors also determined that Messrs. Bentley, Hughes and Lanza, who comprise our audit committee, Messrs. Lanza, Amdahl and Fogelsong, who comprise our compensation committee, and Messrs. Fogelsong, Bentley and Buatois, who comprise our nominating and corporate governance committee, satisfy the independence standards for those committees established by applicable SEC rules and the rules of The NASDAQ Stock Market. In making this

determination, our board of directors considered the relationships that each non-employee director has with our company and all other facts and circumstances our board of directors deemed relevant in determining their independence.

Board Leadership Structure

The positions of chairman of the board and chief executive officer are presently separated and have been separated at our company for some time. We believe that separating these positions allows our chief executive officer to focus on our day-to-day business, while allowing the chairman of the board to lead our board of directors in its fundamental role of providing advice to and independent oversight of management. Our board of directors recognizes the time, effort and energy that the chief executive officer is required to devote to his position in the current business environment, as well as the commitment required to serve as our chairman, particularly as our board of directors’ oversight responsibilities continue to grow. While our amended and restated bylaws, which will become effective upon the completion of this offering, and our corporate governance guidelines do not require that our chairman and chief executive officer positions be separate, our board of directors believes that having separate positions is the appropriate leadership structure for us at this time and demonstrates our commitment to good corporate governance.

Role of the Board in Risk Oversight

One of the key functions of our board of directors is informed oversight of our risk management process. The board of directors does not have a standing risk management committee, but rather administers this oversight function directly through the board of directors as a whole, as well as through various board of directors standing committees that address risks inherent in their respective areas of oversight. In particular, our board of directors is responsible for monitoring and assessing strategic risk exposure, our audit committee has the responsibility to consider and discuss our major financial risk exposures and the steps our management has taken to monitor and control these exposures, including guidelines and policies to govern the process by which risk assessment and management is undertaken. The audit committee also monitors compliance with legal and regulatory requirements, in addition to oversight of the performance of our internal audit function. Our nominating and corporate governance committee monitors the effectiveness of our corporate governance guidelines, including whether they are successful in preventing illegal or improper liability-creating conduct. Our compensation committee assesses and monitors whether any of our compensation policies and programs has the potential to encourage excessive risk-taking.

Board Committees

Our board has an audit committee, a compensation committee and a nominating and corporate governance committee, each of which has the composition and the responsibilities described below.

Audit Committee

Our audit committee oversees our corporate accounting and financial reporting process and assists the board of directors in monitoring our financial systems and our legal and regulatory compliance. Our audit committee is responsible for, among other things:

•

appointing, compensating and overseeing the work of our independent auditors;

•

approving engagements of the independent auditors to render any audit or permissible non-audit services;

•

reviewing the qualifications and independence of the independent auditors;

•

monitoring the rotation of partners of the independent auditors on our engagement team as required by law;

•

reviewing our financial statements and reviewing our critical accounting policies and estimates;

•

reviewing the adequacy and effectiveness of our internal controls; and

•

reviewing and discussing with management and the independent auditors the results of our annual audit, our quarterly financial statements and our publicly filed reports.

Upon completion of this offering, the members of our audit committee will be Messrs. Bentley, Hughes and Lanza. Mr. Bentley will be our audit committee chairman and our audit committee financial expert. We believe that the functioning of our audit committee complies with the applicable requirements of The NASDAQ Stock Market and SEC rules and regulations.

Compensation Committee

Our compensation committee oversees our corporate compensation policies, plans and programs. The compensation committee is responsible for, among other things:

•

reviewing and recommending policies, plans and programs relating to compensation and benefits of our directors, officers and employees;

•

reviewing and recommending compensation and the corporate goals and objectives relevant to compensation of our Chief Executive Officer;

•

reviewing and approving compensation and corporate goals and objectives relevant to compensation for executive officers other than our Chief Executive Officer;

•

evaluating the performance of our executive officers in light of established goals and objectives; and

•

administering our Company’s equity compensation plans for our employees and directors.

Upon completion of this offering, the members of our compensation committee will be Messrs. Lanza, Amdahl and Fogelsong. Mr. Lanza will be the chairman of our compensation committee. We believe that the composition of our compensation committee meets the requirements for independence under, and the functioning of our compensation committee complies with, any applicable requirements of The NASDAQ Stock Market and SEC rules and regulations.

Nominating and Corporate Governance Committee

Our nominating and corporate governance committee oversees and assists our board of directors in reviewing and recommending corporate governance policies and nominees for election to our board of directors. The nominating and corporate governance committee is responsible for, among other things:

•

evaluating and making recommendations regarding the organization and governance of the board of directors and its committees;

•

assessing the performance of members of the board of directors and making recommendations regarding committee and chair assignments;

•

recommending desired qualifications for board of directors membership and conducting searches for potential members of the board of directors; and

•

reviewing and making recommendations with regard to our corporate governance guidelines.

Upon completion of this offering, the members of our nominating and corporate governance committee will be Messrs. Fogelsong, Bentley and Buatois. Mr. Fogelsong will be the chairman of our nominating and corporate governance committee. Our board of directors has determined that each member of our nominating and corporate governance committee is independent within the independent director guidelines of The NASDAQ Stock Market.

Our board of directors may from time to time establish other committees.

Code of Business Conduct and Ethics

Prior to the completion of this offering, we will adopt a code of business conduct that is applicable to all of our employees, officers and directors, and includes a code of ethics that is applicable to our chief executive and senior financial officers.

Compensation Committee Interlocks and Insider Participation

None of the members of our compensation committee is an officer or employee of our company. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee.

Summary of Independent Director Compensation

The following table sets forth the total compensation for each person who served as a non-employee member of our board of directors during 2010. Other than as set forth in the table and described more fully below, in 2010 we did not pay any fees to, reimburse any expense of, make any equity awards or non-equity awards to, or pay any other compensation to the non-employee members of our board of directors. Mr. Nayyerhabibi, who is President and Chief Executive Officer, receives no compensation for his service as a director, and is not included in this table. The compensation received by Mr. Nayyerhabibi as an employee is presented in “Executive Compensation — 2010 Summary Compensation Table.”


Name	Fees Earned or Paid in Cash ($)		Option Awards ($) (1)		Total ($)
J. Thomas Bentley	$	65,000	$	4,358	$	69,358
Harold E. Hughes, Jr.	$	65,000		—	$	65,000

(1)

The amounts reported in the Option Awards column represent the grant date fair value of the stock options granted to the non-employee directors during 2010, computed in accordance with ASC Topic 718. The amounts reported in this column reflect the accounting cost for these stock-based awards, and do not correspond to the actual economic value that may be received by the non-employee directors from the awards.

The following table lists the aggregate number of stock options held by each person who served as a non-employee member of our board of directors at December 31, 2010:

Name

Grant Date

Number of
Shares Held
Under Stock
Option

Option
Expiration Date

J. Thomas Bentley

02/24/2010

(1)

25,000

02/24/2020

07/11/2008

(2)

130,000

07/11/2018

Harold E. Hughes, Jr.

12/02/2008

(3)

300,000

12/02/2018

06/24/2004

(4)

200,000

06/24/2014

(1)

Mr. Bentley was granted an option on February 24, 2010 to purchase up to 25,000 shares of our common stock at a price per share of $0.31. The option began vesting April 15, 2009 and vests as to ¹/48^th of the shares subject to the option per month thereafter. Vesting is subject to Mr. Bentley’s continued service through each vesting date.

(2)

Mr. Bentley was granted an option on July 11, 2008 to purchase up to 130,000 shares of our common stock at a price per share of $0.30. The option began vesting April 15, 2008 and vests as to ¹/48^th of the shares subject to the option per month thereafter. Vesting is subject to Mr. Bentley’s continued service through each vesting date.

(3)

Mr. Hughes was granted an option on December 2, 2008 to purchase up to 300,000 shares of our common stock at a price per share of $0.26. The option began vesting May 22, 2008 and vests as to ¹/4^th of the shares subject to the option after one year of the option commencement date, and as to ¹/48^th of the shares subject to the option per month for the subsequent three years. Vesting is subject to Mr. Hughes’s continued service through each vesting date.

(4)	Mr. Hughes was granted an option on June 24, 2004 to purchase up to 200,000 shares of our common stock at a price per share of $0.15. The option is fully vested.

To date, the non-employee members of our board of directors have been compensated in stock options and cash compensation, if at all. Only two non-employee members of our board of directors received cash compensation for their services in 2010. In addition, the non-employee members of our board of directors are reimbursed for their reasonable travel expenses in attending board of directors’ and board committee meetings.

EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

This Compensation Discussion and Analysis provides information about the material components of our executive compensation program for:

•

Amir Nayyerhabibi, our President and Chief Executive Officer;

•

Bruce M. Margetson, our Chief Financial Officer;

•

Zeineddine Chair, Ph.D., our Vice President and General Manager;

•

John P. Livingston, our Vice President of Operations; and

•

Hojjat Salemi, our Vice President and General Manager.

We refer to these executive officers collectively in this prospectus as the “Named Executive Officers.”

Specifically, this Compensation Discussion and Analysis provides an overview of our executive compensation philosophy, the overall objectives of our executive compensation program, and each compensation component that we provide. In addition, we explain how and why the compensation committee of our board of directors arrived at specific compensation policies and decisions involving our executive officers during 2010.

This Compensation Discussion and Analysis contains forward-looking statements that are based on our current plans, considerations, expectations, and determinations regarding future compensation plans and arrangements. The actual compensation plans and arrangements that we adopt may differ materially from the currently anticipated plans and arrangements as summarized in this Compensation Discussion and Analysis.

Executive Summary

Cortina Systems, Inc. is a technology company with $141 million in annual revenue. We are a leading provider of high-performance communications semiconductor solutions enabling next generation network connectivity and efficient bandwidth delivery from the core network to the home network.

2010 Business Results. Although the volatility in the global economic environment over the past two fiscal years presented several challenges for us, in 2010 we achieved several significant business and financial results:

•

Revenue of our growth products increased 24%, from $84.7 million in 2009 to $105.2 million in 2010.

•

Our non-GAAP gross profit percentage continued to increase, reaching 63% in 2010, and our non-GAAP net income increased by $10.5 million in 2010 from 2009.

•

Our 40G transport device, introduced in 2009, became the market leader at that speed, shipping to twelve network equipment vendors.

•

We introduced new products for the access and data center connectivity markets to lay the foundation for continued revenue growth.

Consequently, we believe that we are well-positioned to execute on our long-term strategic objectives.

Significant Executive Compensation Actions. As reflected in our compensation philosophy, we set the compensation of our executive officers, including the Named Executive Officers, based on their ability to achieve annual operational objectives that further our long-term business objectives and to create sustainable long-term shareholder value. Accordingly, our 2010 compensation actions and decisions were based on our executive officers’ accomplishments in these two areas.

For 2010, the compensation committee took the following actions with respect to the compensation of our executive officers, including the Named Executive Officers:

•

maintained base salaries at their 2009 levels;

•

funded the pool for annual cash incentive awards at 100% of the target level established at the beginning of the year, resulting in incentive award payouts that reflected a 98% achievement level; and

•

approved stock options to satisfy competitive market concerns and reward individual performance during 2009 and to satisfy our post-initial public offering retention objectives.

Significant Corporate Governance Practices. We endeavor to maintain good governance standards in our executive compensation practices. The following policies were in effect in 2010:

•

We do not view perquisites or other personal benefits as a significant component of our executive compensation program. From time to time, we have provided limited perquisites, such as reimbursement of relocation expenses, to certain executive officers. Our executive officers participate in broad-based company-sponsored health and welfare benefits programs on the same basis as our other salaried employees.

•

We have operated with the roles of chairman of the board and chief executive officer separated for several years.

•

We do not currently offer, nor do we have plans to provide, pension arrangements, retirement plans, or nonqualified deferred compensation plans or arrangements to our executive officers, other than pursuant to our Section 401(k) plan.

•

The compensation advisors to management and the compensation committee do not provide any services to Cortina other than executive and director compensation advisory services.

Executive Compensation Philosophy and Objectives. We operate in a highly competitive business environment which is characterized by frequent technological advances, rapidly changing market requirements, and the emergence of new market entrants. To succeed in this environment, we must continually develop and refine new and existing products and services, devise new business models and demonstrate an ability to quickly identify and capitalize on new business opportunities. To achieve these objectives, we need a highly talented and seasoned team of technical, sales, marketing, operations and other business professionals.

We compete with many other companies in seeking to attract and retain a skilled management team. To meet this challenge, we have embraced a compensation philosophy of offering our executive officers competitive compensation and benefits packages that are focused on long-term value creation and rewarding them for achieving our financial and strategic objectives.

We have developed our executive compensation program to:

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provide total compensation opportunities that enable us to recruit and retain executive officers with the experience and skills to manage the growth of the Company and lead us to the next stage of development;

•

establish a clear alignment between the interests of our executive officers and the interests of our stockholders;

•

reinforce a culture of ownership, excellence, and responsiveness; and

•

offer total compensation that is competitive and fair.

Compensation Program Design

To date, the compensation of our executive officers, including the Named Executive Officers, has typically consisted of base salary, a cash bonus and equity compensation in the form of stock options. The key component

of our executive compensation program has been equity awards for shares of our common stock. As a private company, we have emphasized the use of equity to incent our executive officers to focus on the growth of our overall enterprise value and, correspondingly, to create value for our stockholders. In 2010 and prior years, we have used stock options as our primary equity award vehicle. Going forward, we may use stock options, restricted stock units and other types of equity-based awards, as we deem appropriate, to offer our employees, including our executive officers, long-term equity incentives that align their interests with the long-term interests of our stockholders.

We also offer cash compensation in the form of base salaries and cash bonuses that we believe appropriately recognize and reward our executive officers for their individual contributions to our business. Typically, cash bonuses are determined after the end of the year and reflect both a formulaic and discretionary component. When making bonus decisions, the compensation committee considers our financial and operational performance as well as each executive officer’s individual performance and contributions. Historically, the total cash compensation levels of our executive officers were low relative to those of the executive officers at the publicly-traded companies with whom we compete for executive talent. Beginning in 2008, we increased the total cash compensation of our executive officers to be competitive with the market practices of publicly-traded companies of similar size.

Compensation-Setting Process

The compensation committee is responsible for overseeing our executive compensation program, as well as determining the ongoing compensation arrangements for our CEO and other executive officers, including the other Named Executive Officers. Typically, our chief executive officer, or CEO, will make recommendations to the compensation committee regarding compensation matters, except with respect to his own compensation. Following its deliberations, the compensation committee makes recommendations on the compensation of our executive officers to our board of directors for its consideration and approval.

The compensation committee is authorized to retain the services of one or more executive compensation advisors, as it sees fit, in connection with the establishment of our compensation programs and related policies. The compensation committee has engaged Compensia, Inc., a national compensation consulting firm, to provide executive compensation advisory services to the compensation committee. Compensia serves at the discretion of the compensation committee and did not provide any other services to us in 2010.

In 2010, Compensia conducted the following projects at the request of the compensation committee:

•

a review of and recommendations related to our executive officers’ equity compensation levels and plan structures for 2010; and

•

a review of our director compensation program.

In 2010, the compensation committee, with the assistance of Compensia, identified the following publicly-traded companies to help us define the competitive market for purposes of determining the appropriate level of overall compensation, as well as assess each separate component of compensation, for our executive officers, with a goal of ensuring that the compensation we offer to them is competitive and fair:


Advanced Analogic Technologies Incorporated		Lattice Semiconductor Corporation
Applied Micro Circuits Corporation		MaxLinear, Inc.
BigBand Networks, Inc.		Mellanox Technologies, Ltd.
Cavium Networks, Inc.		Mindspeed Technologies, Inc.
Cirrus Logic, Inc.		NetLogic Microsystems, Inc.
Entropic Communications, Inc.		Pericom Semiconductor Corporation
Exar Corporation		PLX Technology, Inc.
Hittite Microwave Corporation		Semtech Corporation
Ikanos Communications, Inc.		Silicon Image, Inc.
Infinera Corporation		Volterra Semiconductor Corporation
Integrated Silicon Solution, Inc.

In the future, we anticipate that our compensation committee will conduct an annual review of our executive officers’ compensation and consider adjustments in executive compensation levels to ensure alignment with our compensation strategy and competitive market practices.

Executive Compensation Program Components

The following describes each component of our executive compensation program, the rationale for each, and how compensation amounts are determined.

Base Salary. In the course of their employment, our executive officers, including the Named Executive Officers, have developed unique sets of skills and experience that reflect our business. They are particularly attractive to our competitors and other large organizations because of this skill set. Accordingly, even though we are a private company, generally, we have established and maintained their base salaries with reference to the competitive market for similar publicly-traded companies as reflected by the peer group described above.

From time to time, the compensation committee conducts a review of each executive officer’s base salary, with input from our CEO, except with respect to his own base salary, and makes adjustments as it determines to be reasonable and necessary to reflect the scope of an executive officer’s performance, individual contributions and responsibilities, position in the case of a promotion, and market conditions.

For 2010, the compensation committee determined that, to better manage costs, the base salaries of our executive officers, including the Named Executive Officers, should be maintained at their 2009 levels.

The base salaries paid to the Named Executive Officers during 2010 are set forth in the “—2010 Summary Compensation Table” below.

Cash Bonuses. We use annual cash bonuses to motivate our executive officers to achieve our short-term financial and strategic objectives while making progress towards our longer-term growth and other goals. Each year, we adopt a cash bonus plan to align the financial incentives of our executive officers, including the Named Executive Officers, with our short-term operating plan and long-term strategic objectives and the interests of our stockholders.

The compensation committee approves the design, structure and performance measures, as well as each measure’s relative weighting, under the cash bonus plan. Typically, the bonuses for our executive officers are linked to the achievement of our annual financial and operational objectives and individual performance

objectives. These bonus opportunities allow us to make a significant portion of each executive officer’s total cash compensation performance-based and “at risk,” consistent with our compensation philosophy.

Target Bonus Opportunities. The target bonus opportunities for our executive officers, including the Named Executive Officers, are determined by the compensation committee based on each executive officer’s anticipated contributions during 2010, the market rate of compensation for executives in comparable positions, job functions, internal pay equity and business unit performance. The target bonus opportunities, which were expressed as a percentage of base salary, for the Named Executive Officers for 2010 were as follows:


Named Executive Officer	Target Bonus Opportunity (as a percentage of base salary)
Amir Nayyerhabibi		100	%
Bruce M. Margetson		55	%
Zeineddine Chair, Ph. D.		65	%
John P. Livingston		55	%
Hojjat Salemi		50	%

At the outset, it should be noted that the target bonus opportunities for the Named Executive Officers in 2010 were the same as the opportunities established under our annual bonus plan in late 2008 for 2009. The compensation committee did not re-evaluate the target bonus opportunities for each Named Executive Officer when setting the terms and conditions of the 2010 bonus plan. At the time the matter was last considered in 2008, the compensation committee determined that, with respect to Mr. Nayyerhabibi, a target bonus opportunity of 100% of his base salary was appropriate given his extensive employment history with the Company, his success in guiding the growth of the Company, his role and responsibilities as our CEO, and its assessment of the target bonus opportunities of the chief executive officers of companies reflected in the competitive data reviewed by the compensation committee.

With respect to the other Named Executive Officers, the compensation committee determined that their target bonus opportunities should be at least half of the target bonus opportunity of our CEO, be market competitive, and be approximately equivalent to promote internal equity within our executive team, with some differences to reflect the individual contributions and responsibilities of each individual.

Accordingly, Dr. Chair’s target bonus opportunity was set at 65% of his base salary, in recognition of his role as a co-founder of the Company where, along with our CEO he was responsible for setting the strategic direction of the Company, his responsibilities, at the time, as our Vice President of Marketing and his success during 2008 in helping to drive our revenue growth and numerous design wins.

The target bonus opportunity of Mr. Margetson was set at 55% of his base salary in recognition of his organization-wide responsibilities as Chief Financial Officer, his ongoing success in helping us to effectively manage our costs, and to bring his bonus opportunity into line with the target bonus opportunities of the chief financial officers of companies reflected in the competitive data reviewed by the compensation committee, while Mr. Livingston’s target bonus opportunity was also set at 55% of his base salary in recognition of his organization-wide responsibilities as Vice President of Operations and his success in overseeing the manufacturing, assembly, and delivery of our products to customers.

Finally, the target bonus opportunity of Mr. Salemi was set at 50% of his base salary in recognition of his responsibilities, at the time, as our Chief Technology Officer and Vice President of Engineering in overseeing our engineering operations in Canada and North Carolina and his success in overseeing the design and development of our core products.

Corporate Performance Measures. For 2010, the compensation committee established revenue as the corporate financial measure (weighted 50% of the target bonus opportunity). Revenue was selected as the most significant financial measure for 2010, as it is a leading indicator of our ability to capture a significant share of the various markets in which we sell our products. The compensation committee set the target revenue level from our annual operating plan (which, in 2010, was $140.2 million) as the target performance level for this measure. It also determined that, for each percentage point of revenue above our annual operating plan target, the amount payable under this measure would increase by five percent, up to a maximum amount payable of 125%. Achievement of at least 95% of the annual operating plan target revenue was required for any payout under this measure. Finally, the compensation committee determined that, before any bonus would be payable, we would have to be profitable for the year on a pre-tax, non-GAAP basis. We exclude certain items included under GAAP that may not be indicative of our recurring core business operating results, specifically, certain non-cash charges such as the amortization of acquired intangible assets and stock-based compensation.

These objectives involved:

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maintaining and extending our leadership in the transport product category;

•

becoming a leading provider in the access product category;

•

becoming the strategic vendor to key network equipment vendors in one or more target market segments;

•

winning a key customer design and obtaining our first purchase order with a top-tier Asian customer using our EPON product;

•

gaining a commitment from a top-tier Asian customer to take our newest Access product to production;

•

maintaining our leadership position with a key North American customer using our HSIO products; and

•

obtaining a memorandum of understanding from a top-tier Asian customer to design in our newest Digital Home product.

These objectives were selected because of their significance in supporting our annual operating plan and enhancing long-term value creation for our stockholders. The bonus payout with respect to this measure was based on our ability to achieve the quantitative and qualitative targets established for each of these seven objectives. Although this was the first year in which the compensation committee introduced strategic corporate objectives into the bonus plan, it believed that the use of such objectives was important to ensuring that management maintained focus on the Company’s long-term strategic goals as well as our short-term financial growth. The compensation committee set the targets for each of these objectives at levels that it believed to be reasonably challenging to achieve in the anticipated economic environment for 2010. That the compensation committee considered these objectives to be “stretch” goals (that is, goals that would be difficult to achieve) is reflected in the fact that it did not expect that the management team would achieve the targets established for all seven objectives and, accordingly believed that the successful achievement of five of seven objectives was sufficient to warrant to 100% payout for this measure.

Achievement of the target level for at least three of these strategic objectives was required for any payout. Achievement of the target levels for at least five of these strategic objectives would result in a 100% payout for this measure, and achievement of the target levels for all seven strategic objectives would result in a 200% payout.

Individual Performance Measures. To achieve our compensation objective of rewarding individual performance, each executive officer’s target bonus opportunity was also subject to his performance against one or more individual performance objectives, or MBOs, as determined by our CEO. This measure was weighted 20% of the target bonus opportunity. In the case of our CEO, his MBOs were established by our board of directors. For 2010, the MBOs of the Named Executive Officers were as follows:

•

Mr. Nayyerhabibi — Mr. Nayyerhabibi was evaluated on the basis of the overall performance of Cortina, including successful achievement of revenue, market leadership and product development goals.

•

Mr. Margetson — Mr. Margetson was evaluated on the management of financial operations and achievement of goals related to operating margin, SOX compliance, implementation of legal controls and other business processes.

•

Dr. Chair — Dr. Chair was evaluated on the performance of the access and digital home business units including achieving design win targets, opening new markets and developing new products.

•

Mr. Livingston — Mr. Livingston was evaluated based upon the achievement of cost reduction, inventory turns, on-time delivery and ISO certification of the company’s Shanghai, Taiwan and Bangalore sites.

•

Mr. Salemi — Mr. Salemi was evaluated on the overall performance of the transport and data center connectivity businesses including achieving design win targets, developing new products and introducing new products into the market.

With respect to each of these individual performance objectives, our CEO assessed each Named Executive Officer’s performance with respect to his MBOs to determine the payout, if any, with respect to this portion of the executive officer’s target bonus opportunity, with a maximum payout of 100% for exceptional performance.

Bonus Decisions. Bonus awards were calculated and paid after the end of 2010. The award payments with respect to the corporate performance measures were based solely on our actual performance as measured against each of the specified financial and operational measures. The award payments with respect to the individual performance measures were based on the evaluation of our CEO (or, in the case of his award, our board of directors) and subject to the discretion of our board of directors.

In January 2011, the compensation committee reviewed our financial and operational results for 2010 for purposes of determining the actual bonus awards payable to our executive officers, including the Named Executive Officers. With respect to the corporate financial measure, the compensation committee evaluated our financial results and determined that we had exceeded the revenue level established in our annual operating plan, resulting in a 103% payout with respect to this performance measure.

With respect to the corporate operational measures, the compensation committee determined that we had achieved four of the seven strategic objectives established for 2010, resulting in a 90% payout with respect to this performance measure. The four completed objectives were: (1) achieving first year revenue goal for a flagship 40G transport product, (2) passing interoperability testing with a PON product for a major service provider, (3) winning a major PON customer in China and (4) maintaining the lead position in a strategic account for the HSIO business.

In addition, the compensation committee reviewed our CEO’s evaluation of each Named Executive Officer’s performance with respect to his individual MBOs for 2010 and, following its deliberations, decided to approve these evaluations for purposes of determining the portion of each Named Executive Officer’s cash bonus attributable to individual performance measures. These evaluations resulted in payouts ranging from 72% to 100%, depending upon the Named Executive Officer involved, with respect to this performance measure. The compensation committee also evaluated our CEO’s performance with respect to his individual MBOs and determined that, based on our financial performance for 2010 and his leadership in furthering the development of our key products, our CEO had satisfied his MBOs at a 90% level.

Based on the foregoing determinations, the compensation committee recommended and our board of directors considered and approved the following bonus awards for the Named Executive Officers pursuant to the 2010 cash bonus plan:


Named Executive Officer	Target Bonus Opportunity (as a Percentage of Base Salary)			Target Bonus Opportunity ($)		Payout (103%) With Respect to Corporate Financial Measure (50%)		Payout (90%) With Respect to Corporate Operational Measures (30%)		Payout with Respect to Individual Performance Measures		Total 2010 Cash Bonus Plan Awards
Amir Nayyerhabibi		100	%	$	350,000	$	180,229	$	94,500		$63,000 (90%)	$	337,729
Bruce M. Margetson		55	%	$	129,250	$	66,556	$	34,898		$21,456 (83%)	$	122,910
Zeineddine Chair, Ph.D.		65	%	$	146,250	$	75,310	$	39,488		$21,060 (72%)	$	135,858
John P. Livingston		55	%	$	130,350	$	67,122	$	35,195		$26,070 (100%)	$	128,387
Hojjat Salemi		50	%	$	119,238	$	61,400	$	32,194		$17,886 (75%)	$	111,480

Discretionary Cash Bonuses. In connection with its evaluation of our financial and operational results for 2010, the compensation committee noted that we had successfully secured a significant customer contract that has not been anticipated at the beginning of the year. In addition, the compensation committee determined that it was appropriate to recognize the extraordinary efforts of our executive officers in exceeding our revenue objectives and achieving profitability, on a non-GAAP basis as defined in our plan, in a year of economic uncertainty where a greater emphasis had been placed on cost containment rather than profitability. As a result, the compensation committee recommended and our board of directors considered and approved, in addition to the bonus awards paid pursuant to the 2010 cash bonus plan, discretionary cash bonuses in amounts equal to 2.5% of their target cash bonus opportunities under the 2010 cash bonus plan. This decision resulted in additional payments to the Named Executive Officers as follows: Mr. Nayyerhabibi, $8,750; Mr. Margetson, $3,231; Mr. Chair, $3,656; Mr. Livingston, $3,259; and Mr. Salemi, $2,981.

The total cash bonuses paid to the Named Executive Officers for 2010 are set forth in the “—2010 Summary Compensation Table” below.

The compensation committee is in the process of developing a new annual cash incentive plan that will reward our executive officers for the achievement of pre-established corporate and individual performance objectives. We anticipate that this plan will provide the amount of each executive officer’s annual target bonus opportunity, as well as the performance measures and target levels of achievement that will be required for payment.

Equity Compensation. We use equity awards to incent and reward our executive officers, including the Named Executive Officers, for long-term corporate performance based on the value of our common stock and, thereby, to align the interests of our executive officers with those of our stockholders.

Historically, the size and form of the initial equity awards for our executive officers have been established through arm’s-length negotiation at the time the individual executive was hired. In making these awards, we considered, among other things, the prospective role and responsibility of the individual executive, competitive factors, the amount of equity-based compensation held by the executive officer at his or her former employer, the cash compensation received by the executive officer, and the need to create a meaningful opportunity for reward predicated on the creation of long-term stockholder value.

In addition, we have periodically granted equity awards to our executive officers, including the Named Executive Officers, to ensure that their overall equity position was consistent with our compensation objectives. Typically, our board of directors approves the equity awards granted to our executive officers, including the Named Executive Officers. In the case of the equity awards granted to our executive officers in February 2010, as described below, our board of directors delegated authority to the compensation committee to approve such awards within specific parameters established by the board of directors.

In February 2010, we made two equity awards to our executive officers, including the Named Executive Officers. The first award was made as a result of the compensation committee’s review of their equity positions and was intended to align the equity holdings of our executive officers with their recent performance, reward performance during 2009 and achieve our retention objectives. Our CEO recommended the size of these awards to the compensation committee after evaluating our financial results, an evaluation of the expected and actual performance of each executive officer, his or her individual contributions and responsibilities, and market conditions. In formulating his recommendations, our CEO noted that equity awards had not been made to our executives in either 2008 or 2009 and that, as of October 2009, each of the Named Executive Officers was vested in nearly three-quarters of his outstanding equity awards, creating a retention risk for the Company. After taking into consideration the costs associated with replacing each Named Executive Officer if he were to leave the Company, he determined that it would be in the best interests of the Company to set the size of the proposed equity awards at levels commensurate with those that would be necessary to induce an external candidate to join the Company.

Accordingly, with respect to the awards for Messrs. Chair and Salemi, our CEO based the recommended size of the awards on his assessment of our historic and projected rate of revenue growth and anticipated profitability, their past contributions as co-founders of the Company, their performance during 2008 and 2009 (years in which the Company made no equity awards to its executives), and their anticipated contributions to the effective management of our business operations (which he believed was better incented through equity, rather than cash, compensation).

With respect to the awards for Messrs. Margetson and Livingston, our CEO based the recommended size of the awards on his assessment of the financial considerations described in the preceding sentence, their performance in helping to manage the Company’s growth in 2008 and 2009 (years in which the Company made no equity awards to its executives), and their ongoing critical role in helping to prepare the Company for its initial public offering of securities.

Upon consideration of our CEO’s recommendations, the compensation committee agreed with his overall assessment of each Named Executive Officer’s past performance and expected future contributions, but determined that the size of their option grants should be commensurate with those of an award to a continuing executive (rather than a new hire) consistent with the Company’s past practice and the competitive data reviewed by the committee for companies that had recently conducted an initial public offering of securities.

After considering these recommendations, the compensation committee approved the awards in the form of stock options consistent with the reasons underlying our CEO’s recommendations and within the parameters established by our board of directors. The compensation committee recommended the size of our CEO’s award after evaluating his performance in managing the Company’s growth in 2009 and determining that his continued effective management of our business was critical to a successful initial public offering of securities. In formulating its recommendation, the compensation committee also took into consideration the value of recent equity awards granted to the chief executive officers of companies that had recently conducted an initial public offering of securities. After considering this recommendation, our board of directors approved the award. These stock option grants, or “refresher” awards, were subject to our standard four-year service-based vesting schedule, subject to vesting acceleration upon termination upon or within twelve months of a change in control of the Company.

The second award was made in recognition of our plans to pursue an initial public offering and to ensure our retention of our executive officers, including the Named Executive Officers, in a publicly-traded company environment. To achieve these objectives, our compensation committee recommended that the size of these awards equal the size of the “refresher” awards described above for the CEO and the Named Executive Officers after evaluating our financial results, an evaluation of the expected and actual performance of each executive officer, his or her individual contributions and responsibilities, and market conditions. After considering these recommendations and noting that these awards, as well as a similar award to our CEO, would be comparable in

size to the “refresher” awards, the board of directors approved the “second-tranche” awards in the form of stock options. These retention-based stock options were to have a vesting commencement date of the earlier of (i) our initial public offering or (ii) the second anniversary of the date of grant. At that time, the options would be subject to our standard four-year service-based vesting schedule, subject to acceleration of fifty percent of unvested options upon a change in control of the Company in the event vesting commencement has not occurred.

The stock options granted to the Named Executive Officers in 2010 were as follows:


Named Executive Officer	Refresher Stock Option Grant (# of Shares)		Retention Stock Option Grant (# of Shares)		Total Number of Shares		Grant Date Fair Value
Amir Nayyerhabibi		1,500,000		1,500,000		3,000,000	$	522,900
Bruce M. Margetson		525,000		525,000		1,050,000	$	183,015
Zeineddine Chair		562,500		562,500		1,125,000	$	196,088
John P. Livingston		412,500		412,500		825,000	$	143,798
Hojjat Salemi		562,500		562,500		1,125,000	$	196,088

The equity awards granted to the Named Executive Officers during 2010 are set forth in the “—2010 Summary Compensation Table” and the “—2010 Grants of Plan-Based Awards Table” below.

Retirement and Other Benefits. We have established a tax-qualified Section 401(k) retirement savings plan for our employees, including the Named Executive Officers, who satisfy certain eligibility requirements. Currently, we do not match contributions made by participants in the plan. We intend for the plan to qualify under Section 401(a) of the Internal Revenue Code, as amended, or the Code, so that contributions by participants to the plan, and income earned on plan contributions, are not taxable to participants until withdrawn from the plan.

Additional benefits received by our executive officers, including the Named Executive Officers, include medical, dental and vision benefits, medical and dependent care flexible spending accounts, short-term and long-term disability insurance, accidental death and dismemberment insurance and basic life insurance coverage. These benefits are provided to our executive officers on the same general terms as to all of our full-time U.S. employees.

We design our employee benefits programs to be affordable and competitive in relation to the market, as well as compliant with applicable laws and practices. We adjust our employee benefits programs as needed based upon regular monitoring of applicable laws and practices and the competitive market.

In the future, we may provide perquisites or other personal benefits in limited circumstances, such as where we believe it is appropriate to assist an individual executive in the performance of his or her duties, to make our executive officers more efficient and effective, and for recruitment, motivation or retention purposes. All future practices with respect to perquisites or other personal benefits will be approved and subject to periodic review by the compensation committee.

Post-Employment Compensation

The initial terms and conditions of employment of each of the Named Executive Officers are set forth in written offer letters. With the exception of his own arrangement, each of these offer letters was negotiated on our

behalf by our CEO, with the oversight and approval of our board of directors and/or the compensation committee. For a summary of the material terms and conditions of the offer letters for the Named Executive Officers, see “— Employment Arrangements” below.

In hiring our executive officers, we recognized that it would be necessary to recruit candidates from outside our company with the requisite experience and skills. Accordingly, we sought to develop competitive compensation packages to attract qualified candidates who could fill our most critical positions. At the same time, we were sensitive to the need to integrate new executive officers into our executive compensation structure, balancing both competitive and internal equity considerations.

In June 2010, the compensation committee adopted an Executive Severance Plan for the payment of severance and change in control benefits to our executive officers. We believe that the Executive Severance Plan is in the best interests of our company and the stockholders as it will enable our executive officers to maintain continued focus and dedication to their responsibilities to help maximize stockholder value if there is a potential transaction that could involve a change in control of Cortina. The Executive Severance Plan eliminates the need to negotiate separation benefits on a case-by-case basis. It also helps assure an executive officer that his or her severance benefits are comparable to those of other executives with similar levels of responsibility and tenure.

The Executive Severance Plan contemplates that benefits payable in the event of a change in control of the company are payable only upon a “double trigger;” that is, only if there is a change in control and an executive officer’s employment is terminated within a specified period of time of the change in control.

For a summary of the material terms and conditions of the Executive Severance Plan, see “— Potential Payments Upon Termination or Change in Control.”

Company Evaluation of Risks Relating to its Executive and Non-Executive Programs

Our Chief Financial Officer, Vice President of Human Resources and Vice President of Legal Affairs engaged with our outside executive compensation and employee benefits counsel, Wilson, Sonsini, Goodrich & Rosati, to evaluate the risk inherent in the Company’s executive and non-executive compensation programs and policies. Following this analysis, Wilson, Sonsini, Goodrich & Rosati provided a report to the compensation committee. The report concluded that, among other things:

•

Sales commission plans are all capped at a multiple of target, mitigating risk in this area.

•

The Company has tight controls in order to determine that its employees are properly classified as exempt or non-exempt employees, and

•

The Company has tight controls in order to determine that its workers are properly classified as workers or independent contractors.

Tax and Accounting Considerations

Deductibility of Executive Compensation. Generally, Section 162(m) of the Code disallows a tax deduction to any publicly-held corporation for any remuneration in excess of $1 million paid in any taxable year to its chief executive officer and each of its other named executive officers, other than its chief financial officer. Remuneration in excess of $1 million may be deducted if, among other things, it qualifies as “performance-based compensation” within the meaning of the Code. In this regard, the compensation income realized upon the exercise of stock options granted under a stockholder-approved stock option plan generally will be deductible so long as the options are granted by a committee whose members are non-employee directors and certain other conditions are satisfied.

As we are not currently publicly-traded, the compensation committee has not previously taken the deductibility limit imposed by Section 162(m) into consideration in setting compensation for our executive

officers. We expect that, where reasonably practicable, we will seek to qualify the variable compensation paid to our executive officers for the “performance-based compensation” exemption from the deductibility limit. As such, in approving the amount and form of compensation for our executive officers in the future, we will consider all elements of the cost to us of providing such compensation, including the potential impact of Section 162(m). The compensation committee may, in its judgment, authorize compensation payments that do not comply with an exemption from the deductibility limit when it believes that such payments are appropriate to attract and retain executive talent.

Taxation of “Parachute” Payments. Sections 280G and 4999 of the Code provide that executive officers and directors who hold significant equity interests and certain other service providers may be subject to an excise tax if they receive payments or benefits in connection with a change in control that exceeds certain prescribed limits, and that the company, or a successor, may forfeit a deduction on the amounts subject to this additional tax. We did not provide any executive officer, including any Named Executive Officer, with a “gross-up” or other reimbursement payment for any tax liability that he or she may owe as a result of the application of Sections 280G or 4999 during 2010 and we have not agreed and are not otherwise obligated to provide any Named Executive Officer with such a “gross-up” or other reimbursement.

Accounting Treatment. We follow Financial Accounting Standards Board Accounting Standards Codification Topic 718, or ASC Topic 718, for our stock-based awards. ASC Topic 718 requires companies to measure the compensation expense for all share-based payment awards made to employees and directors, including stock options and restricted stock awards, based on the grant date “fair value” of these awards. This calculation is performed for accounting purposes and reported in the compensation tables below, even though our executive officers may never realize any value from their awards. ASC Topic 718 also requires companies to recognize the compensation cost of their stock-based compensation awards in their income statements over the period that an executive officer is required to render service in exchange for the option or other award.

2010 Summary Compensation Table

The following table presents, for services rendered to the company for the fiscal year ended December 31, 2010, summary information regarding the total compensation awarded to, earned by or paid to each of the Named Executive Officers in 2010.


Name and Principal Position	Year		Salary ($)		Bonus ($)		Option Awards (1)($)		Non-Equity Incentive Plan Compensation ($)		All Other Compensation (2)($)		Total ($)
Amir Nayyerhabibi		2010	$	350,000	$	8,750	$	522,900	$	337,729		—	$	1,219,379
President and Chief Executive Officer

Bruce M. Margetson		2010	$	235,000	$	3,231	$	183,015	$	122,909		—	$	544,155
Chief Financial Officer

Zeineddine Chair, Ph.D.		2010	$	225,000	$	3,656	$	196,088	$	135,857		—	$	560,601
Vice President and General Manager

John P. Livingston		2010	$	237,000	$	3,259	$	143,798	$	128,387		—	$	512,444
Vice President of Operations

Hojjat Salemi (3)		2010	$	238,475	$	2,981	$	196,088	$	111,480	$	25,000	$	574,024
Vice President and General Manager

(1)

The amounts reported in the Option Awards column represent the grant date fair value of the stock options granted to the Named Executive Officers during 2010 as computed in accordance with ASC Topic 718. The assumptions used in calculating the grant date fair value of the stock options reported in the Option Awards column are set forth in Note 15 in the Notes to Consolidated Financial Statements included in this prospectus. Note that the amounts reported in this column reflect the accounting cost for these stock options, and do not correspond to the actual economic value that may be received by the Named Executive Officers from the options.

(2)	The amounts reported in the All Other Compensation column represent the reimbursement of relocation expenses.

(3)

For the period from January 1, 2010 to September 15, 2010, Mr. Salemi was based in Canada. During that period, his compensation was paid in Canadian Dollars. In calculating the United States dollar equivalent for disclosure purposes, his compensation during this period was converted into U.S. dollars based on the exchange rate in effect at September 15, 2010. This exchange rate was $0.97371 per Canadian dollar.

2010 Grants of Plan-Based Awards Table

The following table presents, for each of the Named Executive Officers, information concerning each grant of a cash or equity award made during 2010. This information supplements the information about these awards set forth in the 2010 Summary Compensation Table.


Name	Grant Date		All Other Option Awards: Number of Securities Underlying Options(#) (1)		Exercise or Base Price of Option Awards($/sh)		Grant Date Fair Value of Option Awards (2)
Amir Nayyerhabibi		02/24/2010		1,500,000	$	0.31	$	261,450
		02/24/2010		1,500,000	$	0.31	$	261,450
Bruce M. Margetson		02/24/2010		525,000	$	0.31	$	91,508
		02/24/2010		525,000	$	0.31	$	91,508
Zeineddine Chair, Ph.D.		02/24/2010		562,500	$	0.31	$	98,044
		02/24/2010		562,500	$	0.31	$	98,044
John P. Livingston		02/24/2010		412,500	$	0.31	$	71,899
		02/24/2010		412,500	$	0.31	$	71,899
Hojjat Salemi		02/24/2010		562,500	$	0.31	$	98,044
		02/24/2010		562,500	$	0.31	$	98,044

(1)

The stock option grants to purchase shares of our common stock were made under our 2001 Equity Incentive Plan. The exercise price of these options is equal to the fair market value of our common stock on the date of grant. Under the 2001 Equity Incentive Plan, the exercise price may be paid in cash or in shares of our common stock having a fair market value on the date of exercise equal to the aggregate exercise price of the shares being purchased.

(2)

The amounts reported represent the grant date fair value of the stock options granted in 2010, calculated in accordance with ASC Topic 718. See note (1) in the “—2010 Summary Compensation Table” for information about the assumptions made in determining the grant date fair value and compensation expense of the stock options. Note that the amounts reported in this column reflect the accounting cost for these stock options, and do not correspond to the actual economic value that may be received by the Named Executive Officers from the options.

2010 Outstanding Equity Awards at Fiscal Year-End Table

The following table presents, for each of the Named Executive Officers, information regarding outstanding stock options held as of December 31, 2010.


	Option Awards
Name	Number of Securities Underlying Unexercised Options (#) Exercisable		Number of Securities Underlying Unexercised Options (#) Unexercisable		Option Exercise Price ($)		Option Expiration Date
Amir Nayyerhabibi		1,100,000		—	$	0.15		03/19/2013
		850,000		—	$	0.15		05/26/2015
		500,000		—	$	0.22		02/02/2016
		3,083,333		616,667 (1)	$	0.30		08/02/2017
		—		1,500,000 (2)	$	0.31		02/24/2020
		—		1,500,000 (3)	$	0.31		02/24/2020
Bruce M. Margetson		504,300		—	$	0.15		04/14/2014
		250,000		—	$	0.15		05/26/2015
		350,000		—	$	0.22		02/02/2016
		416,666		83,334 (1)	$	0.30		08/02/2017
		—		525,000 (2)	$	0.31		02/24/2020
		—		525,000 (3)	$	0.31		02/24/2020
Zeineddine Chair, Ph.D.		400,000		—

CORTINA SYSTEMS INC S-1/A