UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 30, 2007

OR

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 0-51532

IKANOS COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

Delaware	73-1721486
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

47669 Fremont Boulevard

Fremont, California 94538

(Address of principal executive offices) (Zip Code)

(510) 979-0400

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, $0.001 par value	The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨    No  x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

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

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

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant as of July 1, 2007 (the last day of Registrant’s second quarter of fiscal 2007), was approximately $171,609,990, based upon the June 29, 2007 closing price of the Common Stock as reported on the Nasdaq Global Market. Shares of Common Stock held by each executive officer and director and by each person who owns more than 5% of the outstanding Common Stock have been excluded in that such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of January 29, 2008, there were 29,517,961 shares of the Registrant’s common stock, par value $ 0.001, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant has incorporated by reference into Part III of this annual report on Form 10-K portions of its Proxy Statement for the 2008 Annual Meeting of Stockholders.

IKANOS COMMUNICATIONS, INC.

Table of Contents

		Page No.
PART I.
Item 1.	Business	2
Item 1A.	Risk Factors	20
Item 1B.	Unresolved Staff Comments	37
Item 2.	Properties	37
Item 3.	Legal Proceedings	37
Item 4.	Submission of Matters to a Vote of Security Holders	37
PART II.
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	38
Item 6.	Selected Financial Data	40
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	54
Item 8.	Financial Statements and Supplementary Data	56
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	90
Item 9A.	Controls and Procedures	90
Item 9B.	Other Information	90
PART III.
Item 10.	Directors, Executive Officers and Corporate Governance	91
Item 11.	Executive Compensation	91
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	91
Item 13.	Certain Relationships and Related Transactions, and Director Independence	93
Item 14.	Principal Accountant Fees and Services	93
PART IV.
Item 15.	Exhibits and Financial Statement Schedules	94
Signatures		98

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K, particularly in the sections entitled “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “potential,” or the negative of these terms or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions described under the caption “Risk Factors” and elsewhere in this prospectus, regarding, among other things:

• our limited operating history and history of losses;

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

• decreased demand for our semiconductors;

• selling prices of products being subject to declines;

• our dependence on a few customers;

• market acceptance of new products and technologies;

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

• the future growth of the Fiber Fast^TM broadband and network processing markets;

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

• future costs and expenses and financing requirements.

These risks are not exhaustive. Other sections of this annual report on Form 10-K may include additional factors that could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we, nor any other person, assume responsibility for the accuracy and completeness of the forward-looking statements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this annual report on Form 10-K to conform these statements to actual results or to changes in our expectations.

1

ITEM 1. BUSINESS

The following information should be read in conjunction with audited consolidated financial statements and the notes thereto included in Part II, Item 8 of this annual report on Form 10-K.

Overview

We are a leading global provider of high-performance silicon and software for interactive broadband. We develop and market end-to-end solutions for the last mile and the digital home, which enable carriers to offer enhanced triple play services, including voice, video and data. Our solutions power Digital Subscriber Line Access Multiplexers, (DSLAMs), optical network units (ONUs), concentrators, customer premises equipment (CPE), modems and residential gateways for leading network equipment manufacturers. Our products have been deployed by carriers in Asia, Europe and North America. We believe that we can offer advanced products by continuing to push existing limits in silicon, systems and software. We have developed programmable, scalable chip architectures, which form the foundation for deploying and delivering triple play services. Expertise in the creation and integration of unique digital signal processing (DSP) algorithms with advanced digital, mixed signal and analog semiconductors enables us to offer high-performance, high-density and low power very-high-bit-rate digital subscriber line (VDSL and VDSL2) products. Our flexible network processor architecture with wire-speed packet processing capabilities enables high-performance residential gateways for distributing advanced services in the home. These industry-leading solutions thus support carriers’ triple play deployment plans to the digital home while keeping their capital and operating expenditures low.

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

We offer multiple product lines including our high-performance residential gateways for distributing advanced services in the home that are targeted at customer premise equipment (CPE) for fiber, VDSLx and ADSL2+ markets; our VDSL2 access infrastructure and CPE products that are targeted at the broadband over copper market and provide transmission rates up to 100 Mbps downstream and upstream; and our ADSL/ADSL2+ PHY products that are targeted at ADSL2+ USB modems. Our product lines are designed to address different segments of the Fiber Fast broadband communications semiconductor market for both carrier networks and customer premises equipment. Carriers and OEMs choose amongst the Fusiv^® family of residential gateway semiconductors based upon the services and functions they wish to provide to their customers. Moreover, carriers and OEMs choose from our multiple PHY product lines based upon many factors such as the design of carrier networks, the required performance, and the length of the copper loop between the fiber termination point and the customer premise.

Corporate Information

Our principal executive office is located at 47669 Fremont Boulevard, Fremont, CA 94538. Our telephone number at that location is (510) 979-0400. Our website address is www.ikanos.com. This is a textual reference only. We do not incorporate the information on our website into this annual report on Form 10-K, and you should not consider any information on, or that can be accessed through, our website as part of this annual report on Form 10-K. We were incorporated in 1999 as Velocity Communications and changed our name to Ikanos Communications in December 2000. When we reincorporated in Delaware in September 2005, our name changed to Ikanos Communications, Inc.

Acquisitions

In February 2006, we acquired the broadband products product line from Analog Devices, Inc. (ADI), which we refer to as the NPA acquisition, which consists of network processing and ADSLx assets, for $32.7 million in

2

cash, including transaction costs of $1.8 million. The NPA acquisition enabled us to enter the residential gateway semiconductor market, allowing us to diversify our product offerings and sell into new markets worldwide.

In February 2008, we purchased DSL technology and related assets from Centillium Communications, Inc. for approximately $12 million in cash. The team of engineers, DSL products, technology, patents and other intellectual property will allow us to extend our market leadership as well as accelerate our digital home initiatives and next generation VDSL2 development.

Industry Background

Demand for Fiber Fast Broadband Services

The growth of the Internet, the proliferation of advanced digital media and the advancement of communications infrastructure have fundamentally changed the way people work, shop, entertain and communicate. According to In-Stat, a communications industry market analyst, worldwide broadband subscribers will nearly double between 2007 and 2011, growing from about 285 million in 2007 to more than 565 million by 2011. By 2011, In-Stat estimates that worldwide DSL subscribers will account for 58% of all worldwide broadband connections and that there will be over 55 million households using a fiber-to-the-home (FTTH) architecture to provide broadband access. These broadband connections will enable much faster bandwidth than dial-up access, and therefore, provide carriers with the opportunity to offer revenue-enhancing advanced services. Of the online households, the majority continued to access the Internet through dial-up connections. Dial-up connections provide transmission rates of up to 56 Kbps, allowing for basic applications such as e-mail and low bandwidth Internet access. Comparatively, the households accessing the Internet through broadband connections were utilizing first generation broadband, such as DSL, ADSL or cable modems, for faster downloading of data. We believe that typical first generation broadband transmission rates are 1 Mbps downstream and 256 Kbps upstream, which limit users to sending and receiving emails with attachments utilizing low-bandwidth Internet access and some multi-media applications. Today, we believe consumers and businesses are increasingly demanding access to advanced digital media, video, communications and interactive broadband applications, including:

• Broadcast television;

• High definition television (HDTV);

• Internet protocol television (IPTV);

• Video on demand (VOD);

• Interactive television;

• Peer-to-peer file sharing;

• Sending and receiving advanced digital media such as music, photos and video;

• Video conferencing;

• Video surveillance;

• Streaming video and audio;

• Online gaming and game hosting; and

• Voice over internet protocol (VoIP).

Additionally, users are increasingly creating, interacting with and transmitting advanced digital media. As a result, the ability to send information upstream has become equally as important as the ability to receive information downstream. For example, applications such as peer-to-peer file sharing or online gaming have the same high bandwidth requirements for both upstream and downstream transmissions. As data and media files

3

increase in size, we believe users will become increasingly dissatisfied with their existing dial-up connections and first generation broadband technology, which do not maintain sufficient transmission rates for satisfactory delivery of these advanced digital media, video, communications and interactive broadband applications.

The table below compare times to upload based on different upstream bandwidths, and show the typical Fiber Fast broadband requirements for triple play:

Interactive Services	Upload Requirement	Time Required (284 Kbps)	Time Required (100 Mbps)
Digital Photo Sharing	20 photos (5 MB each)	Greater than 20 minutes	Less than 1 minute
Video Phones	Broadcast Quality	Not possible	Possible
Music Sharing	Transfer 30 songs (5 MB each)	Greater than 60 minutes	Less than 1 minute
Video Publishing	Upload one 50 MB file	Greater than 20 minutes	Less than 1 minute
Services		Downstream (Mbps)	Upstream (Mbps)
HDTV (2-3 per household)		20-50	1-1.5
High Speed Internet		20-30	10-20
Video Conferencing		2-5	2-5
On-line Gaming		1-3	1-3
Video Blogging		1-3	1-3
Total Required		44-91	15-33

The Carrier Market Opportunity for Fiber Fast Broadband Services and Residential Gateways

Historically, carriers have used their copper lines primarily for providing basic voice services. While demand for Internet access has increased, traditional basic voice service revenue has experienced little growth. Carriers’ legacy voice revenue has also been under pressure due to increased competition from cable operators and other alternative service providers.

Anticipating a significant increase in advanced communications traffic, carriers upgraded their core and metro area networks with millions of miles of high-capacity optical fiber in the 1990s. However, broadly deploying fiber directly to the end user on the access network to provide Fiber Fast broadband is cost prohibitive and time consuming. As a result, there is an enormous disparity between bandwidth in the fiber network and the bandwidth available to the end user. Given that the majority of Internet users are connected to carriers’ copper lines, the most practical means available to the carriers for delivering Fiber Fast broadband services is to utilize their existing copper lines.

In an attempt to meet the growth in demand for Internet access and to supplement their legacy voice revenues, carriers have been deploying first generation broadband technologies in the form of DSL solutions over copper lines. First generation DSL typically offers transmission rates that are becoming inadequate for providing the bandwidth necessary for advanced digital media, video and communications applications.

Second-generation broadband offerings, specifically the ADSL2 and ADSL2+ standards, were introduced to provide carriers with the ability to offer basic video, voice and data services, and provided speed improvement over first-generation broadband technologies. While second-generation broadband technologies do not offer the high maximum upstream and downstream data rates of third-generation, or VDSLx-based technologies, second-generation broadband technology offerings have achieved market acceptance in early deployments of triple play services.

Third-generation interactive broadband provides a richer user experience through the combination of higher upstream and downstream transmission rates, which, together with customizable applications, such as interactive

4

television, provides more personalized services than broadcast-oriented networks. Moreover, Fiber Fast broadband enables telephone carriers to offer triple play and interactive services that may surpass the services currently provided by cable operators.

To accommodate the requirements of triple play and interactive services, a number of carriers are deploying Fiber Fast broadband services over their existing copper infrastructure. Fiber Fast broadband technology bridges the bandwidth gap between fiber and copper while avoiding the costs and time of deploying fiber all the way to the premises. This enables carriers to quickly meet the needs of their users and increase their revenues through the delivery of advanced digital media, video, communications and interactive broadband applications while minimizing costs and capital expenditures.

In order to deliver triple play and interactive services, carriers are increasingly offering customers residential gateway equipment that implements some or all of the following key functions:

• Wide area network PHY: VDSLx, ADSLx, FTTx;

• Voice over IP (VoIP);

• Internet protocol (IP) routing;

• Local area networking (LAN), such as Ethernet, 802.11a,b,g,n, and Home Networking;

• Quality of Service (QoS);

• Connectivity for external devices like printers, USB drive, hard disk drive (HDD); and

• Network security.

According to Infonetics Research, worldwide IP-based DSLAMs VDSLx ports are estimated to grow from 10.0 million in 2007 to 29.4 million in 2010, and VDSLx modems and gateways are estimated to grow from 2.5 million units in 2007 to 12.9 million units in 2010.

The Ikanos Solution

We are a leading developer and provider of highly programmable semiconductors that enable Fiber Fast broadband services over telephone companies’ existing copper lines as well as residential gateways in the home. We have developed these semiconductors using our proprietary semiconductor design techniques, specific purpose digital signal processor and advanced mixed-signal semiconductor design capabilities. Our network processors are used in triple play gateways for the digital home, and offer high-performance, integrated VoIP, wireless and DSL, as well as the flexibility and programmability for advanced services such as security, firewall and routing.

Our products are incorporated in communications systems that are deployed by carriers in their infrastructure, as well as in the home to enable subscribers to access data, voice and video. We offer highly programmable products that support the multiple international standards used in Fiber Fast broadband deployments worldwide, including VDSL, VDSL2, ADSL, ADSL2 and ADSL2+, as well as network processing semiconductors. Our Residential gateway processors come in multiple modes—physical layer agnostic and physical layer integrated fashion. Our physical layer agnostic gateway processors are geared to handle gigabit passive optical networks (GPON) and ethernet passive optical networks (EPON) fiber to the home interfaces and provide wire speed switching performance for FTTH deployments.

We have incorporated features and functions into our products that previously had to be developed by our OEM customers as part of their own systems. We refer to these features and functions as our systems-level capabilities, which enable our OEM customers to reduce costs, accelerate time-to-market and enhance the flexibility of their systems.

5

We believe that our key competitive advantages include our system-level expertise, the programmability of our products, our ability to integrate complex analog hardware, digital hardware, algorithms, systems and software into a complete product, our distributed accelerator processor architecture and our technology leadership and experience working directly with carriers in mass deployment of this technology. Our products are deployed by several leading carriers and are also being evaluated by other leading carriers.

Key Features of Our Technology

Integrated analog technology. One of the key technology differentiations of our semiconductors is our analog technology that is incorporated into our integrated analog products. The analog products perform the high-precision analog-to-digital and digital-to-analog conversion and the various analog functions necessary to interface between the digital signal processor and the physical transmission medium. Our integrated analog technology includes programmable transmit and receive filters, low-noise amplifiers, and a power-optimized line driver with synthesized impedance and hybrid cancellation. Our analog technology enables systems to increase performance, adapt to noisy signal conditions, reduce power consumption and be programmed for multiple international standards. Additionally, our analog technology eliminates the need for a large number of discrete components and hence reduces costs for our OEM customers and increases the number of connections, or ports, in OEM systems.

Highly programmable platform and software. We provide a highly programmable platform for the Fiber Fast broadband industry that enables significant customization of reach, transmission rates and other specifications to optimize transmission performance. Our software enables the programmability of our digital signal processor as well as provides an interface to an external processor for diagnostic testing and configuration of key functions. Our software can be remotely downloaded into our semiconductors incorporated into modem located in the residence. This capability allows the carriers to upgrade portions of their existing systems without having to replace them, thereby enabling carriers to protect their investments and reduce costs. In addition, we provide application software that can be used by our OEM customers to facilitate the incorporation of our semiconductors into their systems.

High-performance digital signal processing and advanced algorithms. Communications algorithms are special techniques used to transform between digital data streams and specially conditioned analog signals suitable for transmission over copper lines. In order to reliably transmit and receive signals at Fiber Fast transmission rates, it is critical to execute advanced algorithms in real time. Algorithm processing is typically performed by the digital signal processor. We have designed high-performance, low power usage digital signal processors for high transmission rate applications that utilize our proprietary software. Our processing algorithms enable reliable transmission and recovery of signals at Fiber Fast transmission rates over the existing copper lines even under noisy signal conditions. We believe the combination of speed and programmability of our digital signal processor and our advanced algorithms provides us a competitive advantage.

Flexible network interfaces. Carriers globally use multiple communications protocols for transmitting data, voice and video over their networks. Such protocols include Asynchronous Transfer Mode, or ATM, and Internet Protocol, or IP. Our semiconductors have the capability to support multiple network protocols and interfaces, including ATM and IP, to a variety of different OEM systems. For example, carriers in Japan and Korea typically deploy IP-based line cards and platforms that use our semiconductors while carriers in Europe and North America have historically deployed ATM-based systems and are in the process of migrating to IP-based systems.

High-performance network processing. The delivery of high-quality video and other triple play services requires a high-performance residential gateway to process the digital data streams that travel in both the upstream and downstream directions from the subscriber’s home. Common data processing functions include routing of IP based packets, providing voice, video and data streams with different classes of priority within the system and implementing VoIP, network security and wireless LAN functionality. Our products include high-performance network processing semiconductors that are designed to perform residential gateway functions at

6

rates of up to 200 Mbps, which is equal to the rates of our VDSL2 PHY solutions and 1 Gbps on the Local Area Network (LAN) side. We believe the combination of our high-performance network processing products and our broad range of VDSLx and ADSL2+ PHY solutions provides us a competitive advantage.

Key Benefits of Our Technology for Our Customers

Enabling the delivery of advanced digital media, video, communications and interactive broadband applications. Our PHY solutions provide Fiber Fast transmission rates of up to 100 Mbps downstream and upstream. These transmission rates enable carriers to deliver advanced digital media, video, communications and interactive broadband applications such as broadcast television, HDTV, IPTV, VOD, interactive television, peer-to-peer file sharing, sending and receiving advanced digital media, video conferencing, video surveillance, streaming audio and video, online gaming and game hosting and VoIP, as well as traditional telephony services.

Improving time-to-market with programmable systems-level products. Our solutions are programmable through our software, which enables our OEM customers to provide a single line card, instead of multiple line cards, to support multiple international standards. Our systems-level capabilities enable us to design our semiconductors to accelerate our OEM customers’ time-to-market. Because of the programmability of our products, carriers can deliver multiple service packages and charge different amounts for these packages.

Cost-effective, Fiber Fast transmission over existing copper lines. Our semiconductors minimize carriers’ capital expenditures and costs because they enable transmission of signals at Fiber Fast transmission rates over their existing copper lines. As a result, carriers can leverage their previous investments in their access network infrastructure to deliver advanced revenue-generating services to their customers. Our solutions are also compatible with carriers’ existing systems, enabling these carriers to add line cards without having to replace existing systems, thus lowering upfront capital expenditures and reducing inventory costs. Moreover, we offer semiconductors for both ADSL2 and ADSL2+ broadband solutions, as well as VDSLx broadband solutions, thereby providing our customers with a convenient single source from which to purchase a wide range of broadband access semiconductors.

End-to-end solutions. We offer semiconductors for carrier networks as well as for CPE including modems and residential gateways. We ensure seamless interoperability by providing end-to-end solutions from the carrier network to the customer premises.

Proven technology. To date, we have shipped products to enable well over 35 million DSL ports. Our solutions are already deployed or in field testing at several leading carriers worldwide such as Belgacom, France Telecom, Hanaro-Telecom, KDDI Corp., Korea Telecom Corp., KPN International, Nippon Telegraph And Telephone East Corp., Nippon Telegraph And Telephone West Corp., Softbank BroadBand, Swisscom and Telecom Italia (France). Our OEM customers and the carriers they serve conduct extensive system-level testing and field qualification of a new semiconductors generally over a six to 18 month period to ensure that it meets performance, standards compliance and stability requirements before that semiconductor is approved for mass deployment. Our semiconductors have been designed into systems offered by leading OEMs including: Alcatel-Lucent, Dasan Networks, Inc., Innomedia, Inc., Millinet Co., Ltd., Motorola, Inc., NEC Corporation, Sagem Communications, Softbank BB Corporation, Sumitomo Electronic Industries, Ltd., Ubiquoss ISP, and ZyXEL Communications, Inc.

7

Our Strategy

Our objective is to be the leading developer and provider of highly programmable semiconductors that deliver triple play and interactive services over Fiber Fast broadband using telephone copper lines and that distribute these services in the digital home. In addition, we intend to further expand into new applications and adjacent markets. The principal elements of our strategy are:

Leverage our market and technology leadership positions. We believe we have achieved a leadership position in the Fiber Fast broadband market as well as in the triple play residential gateway markets. We have been a leader in the development of the standards for Fiber Fast broadband over copper lines and our solutions are compliant with many of those standards. Our solutions have been deployed by several leading carriers, which we believe provides us with an incumbent position with these carriers. We intend to leverage our incumbent position to accelerate the deployment of our products around the world.

Capitalize on our existing carrier and OEM relationships. Broadband technology requires customization for the specific needs of carriers. We intend to continue to capitalize on our close relationships with leading carriers and OEMs to accelerate the deployment of our products. We believe that our close relationships with carriers and OEMs provide us with a deep understanding of their needs and enable us to continue to develop customized technology to meet their requirements.

Continue to pursue acquisitions, strategic partnerships and joint ventures. We intend to continue to pursue acquisitions, strategic partnerships and joint ventures that we believe may allow us to complement our growth strategy, increase market share in our current markets and expand into adjacent markets, broaden our technology and intellectual property and strengthen our relationships with carriers and OEMs. For example, in February 2006, we completed the NPA acquisition, which we believe enabled us to become a leading developer and provider of residential gateway semiconductors.

Leverage our technology capabilities to pursue new market opportunities. We have developed expertise in technologies that are key to Fiber Fast broadband, including analog and mixed-signal semiconductor design, digital signal processing, advanced-signal processing algorithms, firmware and software. We also have expertise in developing and designing high-performance network processing semiconductors and related software that enables us to integrate key residential gateway functions into a single chipset that consists of multiple semiconductors. We plan to further extend our technology expertise by devoting engineering resources to research and development in analog and mixed-signal, digital signal and network processing as well as by exploring potential technology acquisition opportunities. We intend to use our core technologies and establish partnerships to develop new complementary products that incorporate additional functionality to our current semiconductors to expand our addressable market.

Expand our geographic presence. We have sales presence in Europe, Japan, Korea, Taiwan (also serving China) and the United States. We intend to continue to expand our sales team, technical support organization and third-party sales channels to broaden our customer reach on a global basis. Particularly, we intend to achieve growth in key countries such as Belgium, Canada, China, Germany, Italy, The Netherlands, Sweden, Switzerland, Taiwan, the United Kingdom and the United States. We believe that such geographic expansion provides significant potential for additional long-term growth for our company.

Capitalize on our fabless operating model. We intend to continue to operate as a fabless semiconductor company by outsourcing all the manufacturing, assembling and testing of our semiconductors to reliable outsourcing partners. We also intend to continue working closely with our third-party outsourcing partners to achieve higher performance and lower cost for our semiconductors. We believe that our fabless operating model has enabled us to continue to focus on innovation, integration and the marketing and selling of our products. This enables us to maximize our growth opportunities while minimizing our need for capital and increasing our flexibility.

8

Our Target Markets and Products

We offer multiple product lines that are designed to address different segments of the Fiber Fast broadband and residential gateway semiconductor markets. Using equipment based on our programmable semiconductors, carriers deploy advanced digital media, video, communications and interactive broadband applications over their existing copper infrastructure. Carriers and OEMs choose our semiconductors from these multiple product lines based on a variety of factors such as the design of their networks, the distance between the fiber termination point and the customer premises, the technology that they want to deploy, the services that they want to offer and system design constraints such as performance, density and power consumption.

Our products are generally located at both ends of the copper line. DSLAMs and concentrators, which are located in the carrier infrastructure, use semiconductors from the Access product family. Residential gateways and modems, which are located at the subscriber’s premise, use semiconductors from our Gateway product family.

Access Infrastructure Markets

Carrier networks generally connect to their customers through fiber followed by copper lines. The fiber termination point can be located in the carrier central office (Fiber to the Exchange), in a remote terminal in the field (Fiber to the Remote—FTTR or Fiber to the Node—FTTN), or inside or just outside a large building (Fiber to the Building—FTTB) and in a home (Fiber to the Home—FTTH, in which case the in-home distribution may or may not be over copper lines). Such markets are collectively referred to as FTTx and the growth in these markets is fueled by carriers pushing their fiber capabilities deeper into their infrastructure and closer to the end user.

As carriers extend fiber closer to the customer, the length of the copper line shortens. With copper lines of 3,000 feet or shorter, carriers can provide Fiber Fast transmission rates over existing copper lines. Carriers have been increasing the deployment of fiber and bringing it closer to the customer. However, we believe that deploying fiber directly to the customer can be cost prohibitive and time consuming. By providing Fiber Fast transmission rates over existing copper lines, carriers enable the provisioning of advanced digital media, video, communications and interactive broadband applications including broadcast television, HDTV, IPTV, VOD, interactive television, peer-to-peer file sharing, sending and receiving advanced digital media, video conferencing, video surveillance, streaming video and audio, online gaming and game hosting and VoIP, as well as traditional telephony services.

As the length of the copper loop between the fiber termination point and the end-user grows, the bandwidth that is available on this copper loop decreases. Various versions of ADSL (ADSL, ADSL2, ADSL2+ — henceforth ADSLx) are currently the predominant technologies worldwide to deploy broadband using existing copper lines for such longer loop applications. Standards-based ADSLx transmission rates currently range up to 25 Mbps downstream and 2 Mbps upstream, with many subscribers typically achieving transmission rates of up to 1 Mbps downstream and 256 Kbps upstream. With the advent of the VDSL2 standards, we believe that carriers that are looking to upgrade their infrastructure will consider VDSL2 products that offer similar performance in longer loops as ADSLx products, and significantly higher performance in shorter loops. Additional criteria for carrier selection may be the capability to work with deployed ADSLx CPE, which can potentially ease the carrier’s upgrade to VDSL2 technology.

Our multi-mode central office (CO) access infrastructure products enable carriers to quickly and cost-effectively offer triple play services. The Access products comply with a broad range of international standards, support both Ethernet and ATM connectivity and fully complement carriers’ fiber deployments by leveraging existing copper infrastructure. We believe that this product line offers the industry’s best performance with the lowest power consumption and the highest port density.

9

Access Infrastructure Products

Fx^™ Family

The Fx family of multi-mode (VDSL2, VDSL, ADSL2+, ADSL2, ADSL per port) products enable carriers to deliver a full suite of revenue-generating interactive broadband services and features from a single platform and offer up to 100/100 Mbps performance. These products utilize fifth generation technology and consist of an 8-port DSP engine, a 4-port Analog Front End, a 4-port Integrated Front End and a 2-port, 20.5 dBm line driver. These chipsets are targeted for CO equipment (DSLAMs, ONUs and other broadband concentrators) and are compliant to all mandatory features of the VDSL2 (G.993.2) standard.

• Fx100100-5 chipsets are targeted for triple play, IPTV deployments from multi-dwelling unit and remote terminals that require up to 100 mbps in the downstream and up to 100 mbps in the upstream and up to 48-port line card density. The chipsets support all VDSL2 profiles and are optimized for 30 MHz of spectrum operation to offer 100/100 mbps performance.

• Fx10050-5 chipsets are targeted for triple play, IPTV deployments from remote terminals and central offices that require up to 100 mbps in the downstream and up to 50 mbps in the upstream and up to 48-port line card density. The chipsets support all 8, 12 and 17 MHz profiles and are optimized for 17.6 MHz of spectrum operation to offer 100/50 mbps performance.

SmartLeap^™ Family

The SmartLeap family of multi-mode products utilize up to 12MHz of spectrum, providing highly dense solutions with up to 60Mbps downstream and 30Mbps upstream performance. They are used in up to 48-port line cards for multi-mode systems and can interoperate with deployed VDSL2, VDSL, ADSL2+ and ADSL modems on a per port basis thus enabling system vendors to develop a single system for worldwide applications. These chipsets are targeted for VDSL2 and VDSL based Broadband Access Concentrators, Remote Units, Mini-RAMs, ATM and IP DSLAMs.

• SmartLeap 9400 chipsets are targeted for multi-mode VDSLx DSLAM line cards and concentrators with up to 24 port density.

• SmartLeap 9450 chipsets are targeted for multi-mode VDSLx DSLAM line cards and concentrators with up to 48 port density.

Reference Platforms

• The FasTrack™ Reference System is a versatile, programmable platform that allows equipment vendors to rapidly and cost-effectively develop an array of fiber-based systems and broadband products and is available in many different versions that is based on the chipset used and the geographic region at which the platform is targeted.

Software Features

• Ikanos Programmable Operating System™ (iPOS) integrates a Real-time Operating System (RTOS) kernel and management Application Programming Interfaces (APIs) that enable equipment vendors to easily tailor chipsets to specific application requirements and is applicable to Multi-mode Central office, MDU and Remote Terminal DSLAM deployments.

• Single Ended Loop Testing (SELT) and Dual Ended Loop Testing (DELT) capabilities are designed to help service providers roll out new broadband services quickly and reliably. This advanced and innovative software offers loop qualification and characterization capabilities for estimating loop capacity, length, and mixed gauges and detecting bridged taps, and loop termination. In addition, the software measures signal-to-noise-ratio (SNR) and generates loop noise profiles. This software is applicable to Multi-mode CO DSLAM, MDU and Remote Terminal deployments.

10

• Ikanos’ RRA™ (Rapid Rate Adaptation) is an automated, intelligent solution allowing service providers to enhance link robustness, reliability and availability under severe and time-varying noise environments. RRA is an advanced technology that minimizes disconnections and subsequent retrains on the DSL link in the presence of sudden, large wideband noise changes.

Gateway Markets

Customers demand a wide array of services from their broadband providers. They want VoIP telephony, IPTV, wireless connectivity, Personal Video Recorder (PVR) services, security, file and photo sharing, gaming and a host of other advanced offerings. But carriers face a significant challenge delivering triple-play offerings. Not only is there a greater need for bandwidth, but carriers also need to provide an end-user device that has the processing power to handle triple-play offerings while managing their operating expenses.

We believe that the Residential Gateway is poised to become the centerpiece of the digital home. Whether the access infrastructure is copper, fiber, or wireless, the residential gateway must have adequate bandwidth to distribute triple play applications, with appropriate security and other functionality. As each carrier rolls out higher bandwidth services, they are moving to residential gateways from simple modems. As IPTV and other services grow, VDSL2 and PON infrastructure deployment have begun to pick up to meet increasing bandwidth requirements. iSuppli projects that within the next five years, the number of VDSL and FTTH subscribers will grow from 10 million at the end of 2006 to more than 120 million by the end of 2011.

Our Fusiv gateway processors enable carriers to efficiently and cost-effectively deliver triple-play services to the residential, small office/home office and small to medium enterprise markets. These processors utilize Ikanos’ unique distributed architecture, which includes multiple accelerator processors that offload switching, routing and other tasks from the host central processing unit. As a result, we provide 2.7 GHz of network processing power for combined advanced services including but not limited to VoIP, PVR, multi-mode DSL and security, while supporting best-in-class QoS and wire speed performance across all LAN and WAN interfaces.

Our Gateway products are primarily targeted at the residential gateway market, but may also be utilized in adjacent applications including but not limited to routers and security appliances for small and medium enterprises, analog telephone adapters and small IP-based private branch exchanges, or PBXs.

Gateway Products

Fusiv Vx Family

Fusiv Vx products are incorporated in customer premises equipment including VoIP gateways, integrated access devices, residential gateways, routers and IP-based PBXs. The Fusiv architecture utilizes a distributed processing model using a central RISC engine and accelerator processors to provide wire-speed packet processing performance.

• Fusiv Vx150 gateway processor provides an integration of voice, signal and network protocol processing on a single chip, targeted at a broad range of residential gateway and small and medium enterprise (SME) gateway products. The Fusiv Vx150 has an on chip digital signal processor (DSP)/voice engine for handling up to four channels of full-chain voice. This processor is targeted at the residential gateway and Voice over Internet Protocol (VoIP) analog telephone adapters (ATA) gateway applications.

• Fusiv Vx155 gateway processor provides an integration of voice, signal and network protocol processing on a single chip for developing triple play gateways. The Vx155 can be used in a variety of topologies such as PON, DSL, WiMAX or Ethernet for WAN; Wifi, Ethernet, MOCA, HPNA or PLC for LAN. The Fusiv Vx155 has an on chip DSP/voice engine for handling up to four channels of full-chain VoIP. Fusiv architecture integrates a general purpose RISC processor and several programmable accelerator processors (APUs) to create a high performance distributed processor architecture. This processor is targeted at data gateway, VoIP and data gateway, triple play gateway and FTTH residential gateway applications.

11

• Fusiv Vx160 ADSL residential gateway processor offers a high-performance, fully integrated, cost-effective solution for carriers. The Fusiv Vx160 supports ADSL2+/ADSL, VoIP, DSPs and network processing capability. Fusiv architecture integrates a general purpose RISC processor and several programmable accelerator processors to offload the main processor, the Fusiv Vx160 meets the growing requirements of the residential gateway market. This processor is targeted at ADSL2+ residential gateway applications.

• Fusiv Vx170 gateway processor, with 2.7 GHz of processing power, drives gigabit packet processing and enables integrated security, voice and wire speed QoS, making it an ideal choice for meeting the emerging requirements of next-generation FTTH. Used in FTTH deployments, this product can support next-generation services such as IPTV, video on demand and online gaming.

• Fusiv Vx180 single chip, multi-mode VDSL2 gateway processor provides 2.7 GHz of processing power, VoIP, multi-mode DSL and security, while supporting best-in-class QoS and wire speed performance. The Vx180 integrated VDSL2 gateway processor for FTTB and FTTN deployments is designed to enable the development of a high performance, integrated residential gateway platform for triple-play applications. This processor is targeted at VDSL2 residential gateways and VDSL2 small office/home office (SoHo)/SME gateways.

• Fusiv Vx200 gateway/SME processor provides on-chip voice processing, built-in security engine for IPSec enabled data and voice, and supports networking operations at ethernet wire speeds. This processor is targeted at Security Gateways, and SoHo/SME gateways applications.

FxS^™ Family

FxS chipsets are incorporated into equipment located at the customer premises, also referred to as Subscriber Located Equipment (SLE), or the Optical Network Terminal (ONT), and are integral to the delivery of Fiber Fast broadband services. FxS chipsets provide multi-mode VDSLx PHY connectivity using existing copper lines at transmission rates of up to 100 Mbps downstream and upstream;

• Fx100100S-5: 100/100 VDSLx (profile 8a,b,c,d/12a,b/17a/30a) and ADSLx applications for Customer Premises Equipment (CPE).

• Fx10050S-5: 100/50 VDSLx (profile 8a,b,c,d/12a,b/17a) and ADSLx applications for Customer Premises Equipment (CPE).

CleverConnect^™

CleverConnect chipsets are incorporated into the equipment located at the customer premises. CleverConnect chipsets provide VDSLx PHY connectivity.

• CleverConnect CC600: 60/30 VDSLx (profile 8a,b,c,d/12a,b) for Customer Premises Equipment (CPE) applications.

Eagle^®

Eagle chipsets are incorporated into the ADSL / ADSL2 / ADSL2+ Modem equipment located at the customer premises.

• Eagle IV: ADSL/ADSL2/ADSL2+ USB bus powered modem applications.

Software

• Ikanos Programmable Operating System™ (iPOS) integrates a Real-time Operating System (RTOS) kernel and management Application Programming Interfaces (APIs) that enable equipment vendors to easily tailor platforms to specific application requirements.

12

• The Ikanos Linux based middleware includes full voice chain, and microcode for the Fusiv Accelerator Processors, routing, bridging, NAT, Firewall and QoS over Ethernet, xDSL and Wireless interfaces.

Gateway Reference Systems

The Ikanos Reference Systems allow equipment vendors to rapidly and cost-effectively develop an array of fiber-based and broadband (ADSLx, VDSLx) products, and address numerous markets:

• FasTrack Reference System (SmartLeap and Fx based)

• VDSL2 Gateway Reference Platform with 802.11n WLAN (Fusiv Vx180 based)

FTTH Residential Gateway Reference Platform with 802.11n WLAN (Fusiv Vx170 based)

VDSLx Residential Gateway Platform (Vx155 & Fx based)

• ADSL2+ Residential Gateway Platform (Vx160 based)

• Residential Gateway/SME Platforms (Vx150, Vx200 or Vx155 based)

• ADSL/ADSL2/ADSL2+ USB Modem (Eagle IV based)

Customers and Carriers

Customers

The markets for systems utilizing our products and services are mainly served by large OEMs, ODMs and CMs. We work directly with OEMs to understand their requirements and the requirements of the carriers they serve to provide the OEMs with semiconductors that can be qualified for use within the carriers’ networks. Below is the list of our OEM customers who have purchased at least $1.0 million of our products directly from us, through a CM or a sales representative identified during the year ended December 30, 2007.

OEM customer	CM or sales representative, if any
Alcatel-Lucent	tbp electronics Belgium nv, Flextronics
Dasan Networks, Inc.	Uniquest Corporation
Innomedia, Inc.	—
Millinet Co., Ltd.	Uniquest Corporation
Motorola, Inc.	—
NEC Corporation	—
Sagem Communications	—
Softbank BB Corporation	—
Sumitomo Electronic Industries, Ltd.	Altima Corporation, Paltek Corporation
Ubiquoss ISP	Uniquest Corporation
ZyXEL Communications, Inc.	—

In 2007, NEC Corporation accounted for 29%, Sagem Communications accounted for 20%, Uniquest Corporation accounted for 11%, and Altima accounted for 12% of our revenue. In 2006, Sagem Communications accounted for 23%, NEC Corporation accounted for 23%, Uniquest Corporation accounted for 22% and Altima accounted for 19% of our revenue. In 2005, NEC Corporation accounted for 44%, Uniquest Corporation accounted for 24% and Altima accounted for 28% of our revenue.

Historically, substantially all of our sales have been to customers outside the United States. Sales to customers in Asia accounted for 67% in 2007, 70% in 2006 and 98% in 2005.

13

Carriers

We work directly with various major carriers and their OEMs worldwide in connection with the optimization of our technology for mass deployment or trials into the carriers’ networks. Our OEM customers have sold products that include our semiconductors to major carriers, including:

• Belgacom (Belgium);

• France Telecom (France);

• Hanaro-Telecom (Korea);

• Korea Telecom Corp. (Korea);

• KPN International (The Netherlands);

• Nippon Telegraph & Telephone Corporation (Japan);

• Softbank BroadBand (Japan);

• Swisscom (Switzerland);

• Reliance Communications (India); and

• Telecom Italia (France).

Our Service and Support for Customers and Carriers

To accelerate design and development of our OEM customers’ systems and the qualification and mass deployment of our technology, we have a customer engineering team and a field application engineering team. These customer engineers and field application engineers work closely with the OEMs as well as directly with the carriers. Customer engineers have expertise in hardware, software and have access to the various expertise within our company to ensure proper service and support for our OEM customers and the carriers.

Our service and support involves multiple stages beginning with the carriers’ evaluation of our technology through utilization of our reference platforms and optimizing our technology to meet the carriers’ performance and other requirements.

In parallel, our engineers help our OEM customers with the design and review of their system designs. Our application engineers and field application engineers help the OEM engineers design their systems by providing the necessary reference designs, gerber files, schematics, data sheets, sample software codes and other documentation. By doing this, we assist our OEM customers and the carriers they serve in meeting their deployment requirements. Once the hardware incorporating our chipset solutions is built by the OEMs, we work closely with the OEMs’ engineers to integrate our software into the OEMs’ systems through site visits and extensive field-testing with the carriers. This entire cycle may take six to eighteen months depending upon the region, carrier requirements and deployment plans.

Sales and Marketing

Our sales and marketing strategy is to achieve design wins with leading OEMs and mass deployment with carriers worldwide. We consider a design win to occur when an OEM notifies us that it has selected our solution to be incorporated into its system. We refer to our sales and marketing strategy as “direct touch” since we have significant contact directly with the customers of our OEMs, the carriers. We believe that applications support at the early stages of design is critical to reducing time to deployment and minimizing costly redesigns for our OEM customers and the carriers. By simultaneously working with our OEM customers and the carriers, we are able to use the pull of carrier network compatibility and interoperability to push design wins with our OEM customers, which is further augmented by our support and service capabilities.

14

We market and sell our products worldwide through a combination of direct sales and third-party sales representatives. We utilize sales representatives to expand the impact of our sales team. We have strategically located our sales personnel, field applications engineers and sales representatives near our major customers in Japan, Korea, Taiwan (serving Taiwan and China), Europe and the United States.

Our marketing teams focus on our product strategy and management, product development road maps, product pricing and positioning, new product introduction and transition, demand assessment, competitive analysis and marketing communications and promotions. Our marketing teams are also responsible for ensuring that product development activities, product launches, channel marketing program activities and ongoing demand and supply planning occur on a well-managed, timely basis in coordination with our development, operations and sales groups, as well as our OEM customers and sales representatives.

Competition

The semiconductor industry and the broadband communications markets are intensely competitive. In the VDSLx or VDSL-like technology, PON and network processing markets, we currently compete or expect to compete with, among others, Aware, Inc., Broadcom Corporation, Broadlight, Cavium Networks, Conexant Systems, Inc., Freescale Semiconductor, Inc., Infineon Technologies A.G., Intel Corporation, Marvell Technology Group Ltd., PMC-Sierra, Inc., Realtek Semiconductor Corp., Teknovus, Thomson S.A., and TrendChip Technologies Corp. We expect competition to continue to increase. Competition has resulted and may continue to result in declining average selling prices for our products and market share. We believe that our products are not easily interchangeable with the products of our competitors, due to the level of collaboration in product design and development that is typically demanded by our customers from the earliest stages of development, but nonetheless we must constantly maintain our technology developments in order to continue to achieve design wins with our customers.

We also consider other companies that have access to discrete multi-tone (DMT) or network processing technology as potential future competitors. In addition, we may also face competition from newly established competitors, suppliers of products based on new or emerging technologies, and customers who choose to develop their own technology.

We compete primarily with respect to the following factors:

• product performance;

• compliance and influencing industry standards;

• price and cost effectiveness;

• functionality;

• time-to-market; and

• customer service and support.

We believe that we are competing effectively with respect to these factors.

Technology and Architecture

We believe that one of our key competitive advantages is in the integration of our broad base of core technologies encompassing the complete space from systems, algorithms, hardware and software to silicon. We believe this vertical integration of core competencies enables us to make optimal architectural choices in designing and developing cost-effective, high-performance, and programmable semiconductors. Our products are

15

manufactured on standard low-cost, complementary metal-oxide semiconductor, or CMOS, or bi-polar complementary metal-oxide semiconductor, or Bi-CMOS, processes or Bi-Polar processes. We have the following core competencies:

• ability to develop system-level solutions that incorporate analog and digital processing, as well as software and algorithms;

• a programmable analog and digital architecture that allows our semiconductor solutions to be programmed for multiple standards and applications;

• highly optimized digital signal processing algorithms;

• highly optimized packet processing engine;

• carrier deployed VoIP digital signal processing capability;

• digital design, verification, and back-end capability for leveraging advancements in process technologies;

• analog design capability in CMOS, Bi-CMOS and Bi-Polar processes; and

• knowledge of the carrier network, which enables us to help carriers with their network planning and deployment of services.

Where cost-effective, we purchase designed and verified specific functional blocks, such as real time operating systems, from third-party vendors.

Our VDSLx/CO and VDSLx/CPE products utilize DMT line coding technology. Starting in June 2003, DMT was globally adopted for VDSL2 by three standards committees. In North America, by Committee T1E1.4 (now known as NIPP-NAI) of the Alliance for Telecommunications Industry Solutions (ATIS is accredited by the American National Standards Institute (ANSI)), and worldwide by both the Institute of Electrical and Electronics Engineers (IEEE) and the International Telecommunications Union (ITU-T). In May 2005, the VDSL2 standard was consented by the ITU-T and in February 2006 the standard was approved. The VDSL2 standard represents an advance in capability over the VDSL standard and defines a series of “profiles” for high-speed DMT-based transmission in both the upstream and downstream directions for a variety of deployment models.

VDSL and VDSL2 are the highest-rate forms of DSL technology available today and can enable Fiber Fast broadband services using existing copper lines. VDSL2 transmits aggregate data at rates of 60 Mbps and over for a reach of 3,000 feet. At lower transmission rates, VDSL2 also offers longer reach of up to 15,000 feet. VDSL and VDSL2 are significantly faster than alternative DSL technologies and enable carriers to provide revenue enhancing multiple services to respond to competitive and industry pressures from cable operators and other carriers. We provide a portfolio of products which support some or all of the following standards: VDSL2, VDSL, ADSL2+, ADSL2 and ADSL.

Our networking processor products have high-performance packet processing capacity and implement a broad suite of protocol functionality, VoIP and networking security. These products are capable of up to 2 Gbps packet processing throughput. This complements our high-performance PHY products to accommodate the requirements of triple play and interactive services, and provides carriers the scalability and flexibility to add additional broadband applications in the future.

Research and Development

Our research and development efforts are focused on the development of advanced semiconductors and related software. We have experienced engineers who have significant expertise in Fiber Fast broadband and network processing technologies. These areas of expertise include communication systems, system architecture,

16

digital signal and network processing, data networking, analog design, digital and mixed signal, very large scale integration development, software development, reference boards and system design. In addition, we work closely with the research and development teams of our OEM customers and carriers. As of December 30, 2007, we had 184 persons engaged in research and development, of whom 95 are employed in Bangalore and Hyderabad, India and 89 in North America. Our research and development expenses were $51.1 million in 2007 as compared to $53.7 million in 2006 and $28.4 million in 2005.

Operations

Semiconductor Fabrication

We do not own or operate a semiconductor fabrication, packaging or testing facility, except for some of the test equipment that we place at our subcontractors sites for our own usage. By owning some of the test equipment, we gain some cost benefits and assurance of capacity. We depend on third-party subcontractors to manufacture, package and test the products. By outsourcing manufacturing, we are able to substantially avoid the cost associated with owning and operating a captive manufacturing facility. This allows us to focus efforts on the design and marketing of the products. We currently outsource all semiconductor wafer manufacturing to Taiwan Semiconductor Manufacturing Company, Austriamicrosystems AG, Silterra Malaysia Sdn Bhd., Tower Semiconductor Ltd, and NXP Semiconductors. We work closely with the foundries to forecast on a monthly basis the manufacturing capacity requirements. Our semiconductors are currently fabricated in several advanced, sub-micron manufacturing processes. Because finer manufacturing processes lead to enhanced performance, smaller silicon chip size and lower power requirements, we continually evaluate the benefits and feasibility of migrating to smaller geometry process technologies in order to reduce cost and improve performance. We believe that the fabless manufacturing approach provides the benefits of superior manufacturing capability as well as flexibility to move the manufacturing, assembly and testing of the products to those subcontractors that offer the best capability at an attractive pricing. Nevertheless, because we do not have formal, long-term pricing agreements with any of the subcontracting partners, the wafer costs and services are subject to sudden price fluctuations based on the cyclical demand for semiconductors. Our engineers work closely with the foundries and other subcontractors to increase yields, lower manufacturing costs and improve quality.

Assembly and Test

Our products are shipped from the third-party foundries to third-party sort, assembly and test facilities where they are assembled into finished semiconductors and then fully tested. We outsource all product packaging and all testing requirements for these products to several assembly and test subcontractors, including Advanced Semiconductor Engineering, Inc. in Taiwan and Malaysia, United Test and Assembly Center Ltd. in Singapore and STATSChipPAC Ltd. in Singapore and Korea. Our products are designed to use low cost, standard packages and to be tested with widely available test equipment. In addition, we specifically design our semiconductors for ease of testability, further reducing production costs.

Quality Assurance

Our quality assurance program begins with the design and development process. Our designs are subjected to extensive circuit simulation under extreme conditions of temperature, voltage and processing before being committed to be manufactured. We pre-qualify each of the subcontractors and conduct periodic quality audits. We closely monitor foundry production to ensure consistent overall quality, reliability and yield levels. All of the independent foundries and assembly and test subcontractors have been awarded ISO 9000 certification as well as other internationally accepted quality standards. In August 2006, we were certified to ISO9001 standards.

Environmental Regulation

We are also focusing on managing the environmental impact of the products. The manufacturing flow at all the subcontractors used by us are registered to ISO14000, the international standard related to environmental

17

management. We believe that the products are compliant with the Restriction of Hazardous Substance (RoHS) directives and that materials will be available to meet these emerging regulations.

Intellectual Property

Our success and future growth will depend on our ability to protect our intellectual property. We rely primarily on patent, copyright, trademark and trade secret laws, contractual provisions and licenses to protect our intellectual property. We also attempt to protect our trade secrets and other proprietary information through agreements with our customers, suppliers, employees and consultants, and through other security measures.

As of December 30, 2007, we held a total of 49 issued patents in the US and abroad; we also had a number of provisional patents and applications pending. Our patents and patent applications cover features, arts and methodology employed in each of our existing product families. The expiration dates are generally 2019 and beyond. We continue to actively pursue the filing of additional patent applications.

We claim copyright protection for the proprietary documentation used in our products and for the firmware and software components of our products. Ikanos Communications, Ikanos, the Ikanos logo, SmartLeap, Eagle, Fusiv, CleverConnect, Ikanos Programmable Operating System, Fx, FxS, VLR, FasTrack, RRA and Fiber Fast are among the trademarks or registered trademarks of Ikanos.

Employees

As of December 30, 2007, we had a total of 281 full-time employees, of whom 184 were involved in research and development, 12 in operations, and 85 in sales and marketing, finance and administration. None of our employees are represented by a labor union. We have not experienced any work stoppages and believe that our relationships with our employees are good.

Backlog

Our sales are made pursuant to short term purchase orders. These purchase orders are made without deposits and may be rescheduled, canceled or modified on relatively short notice, and in most cases without substantial penalty. Therefore, we believe that the purchase orders are not a reliable indicator of future sales.

Executive Officers of the Registrant

The following table sets forth the names, ages and positions of our executive officers as of February 21, 2008:

Name	Age	Position
Michael Ricci	53	President and Chief Executive Officer
Cory Sindelar	39	Chief Financial Officer
Shekhar Khandekar	51	Vice President, Operations and Corporate Quality
Noah Mesel	47	Vice President and General Counsel
Nick Shamlou	47	Vice President, Worldwide Sales and Customer Engineering

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

Michael A. Ricci has served as our President and Chief Executive Officer since June 2007. Mr. Ricci comes to Ikanos from JDS Uniphase Corp., where he was a senior vice president and general manager of the Optical Communications Group. Previously, Mr. Ricci served as a vice president and general manager at Intel Corporation’s Communications Group. During his five year tenure there, he led the Business Development Group, the Optical Products Group and the Telecom Products Division. Prior to Intel, Mr. Ricci served in executive management roles at Level One Communications and Advanced Micro Devices, Inc. Mr. Ricci holds a bachelor’s degree in Electrical Engineering from Stanford University.

18

Cory J. Sindelar has served as our Chief Financial Officer since October 2006. Mr. Sindelar joined Ikanos in September 2006 as Vice President of Finance. Prior to joining Ikanos, Mr. Sindelar served as Director of Finance and Accounting at EMC Corporation, an information infrastructure solutions company. Mr. Sindelar was the Vice President, Corporate Controller and Principal Accounting Officer of Legato Systems, Inc., a software company from December 2000 until October 2003, at which time it was acquired by EMC Corporation. Prior to joining EMC/Legato, Mr. Sindelar served as Senior Manager at PricewaterhouseCoopers LLP, a global assurance and business advisory firm in San Jose, California. Mr. Sindelar holds a B.S.B.A in Accounting from Georgetown University.

Shekhar Khandekar has served as our Vice President of Operations and Corporate Quality since July 2007. Prior to joining Ikanos, Mr. Khandekar was vice president of assembly operations at JDSU Corp., where he managed worldwide assembly operations for optical communications products as well as global quality assurance. Before JDSU, he was vice president of quality and reliability assurance for PMC-Sierra Inc., and held several key positions at Intel Corp., Level One Communications, Compaq Computer Corp. and Texas Instruments. He earned a B.S. in Electrical Engineering from the University of Indore in Indore, India, and a Master’s of Science from Northwestern University.

Noah D. Mesel has served as our Vice President and General Counsel since June 2007 and human resources in September 2007. He previously served as general counsel at Legato Systems and Riverstone Networks, and was corporate counsel at Lucent Technologies, supporting their global outsourcing business unit. Mr. Mesel was an attorney at the Palo Alto law firm Wilson Sonsini Goodrich & Rosati from 1989 to 1998. He holds a J.D. from the University of Virginia School of Law and a B.A. in Political Science and Literature from Claremont McKenna College.

Nicholas Shamlou has served as our Vice President of Worldwide Sales and Customer Engineering since September 2006. Prior to joining Ikanos, Mr. Shamlou served as Vice President of Asia sales at Broadcom Corporation and as representative director for Broadcom Japan KK. Mr. Shamlou held several key positions at Motorola Inc., including director of sales for the Semiconductor Products Sector (SPS) Japan, director of Asia sales for the SPS-Imaging and Entertainment Division and director of global sales for the SPS-Advanced Digital Consumer Division. Mr. Shamlou earned a B.S. degree in Electrical Engineering from the University of Florida.

Where Can You Find Additional Information

With respect to the statements contained in this annual report on Form 10-K regarding the contents of any agreement or any other document, in each instance, the statement is qualified in all respects by the complete text of the agreement or document, a copy of which has been filed as an exhibit to the registration statement. You may inspect a copy of the reports and other information we file without charge at the Public Reference Room of the Securities and Exchange Commission (SEC) at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain copies of all or any part of this annual report on Form 10-K from such offices at prescribed rates. You may also obtain information on the operation of the Public reference Room by calling the SEC at 1-800-SEC-0300. The SEC maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding issuers, including our information which we file electronically with the SEC.

We are subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and, in accordance therewith, file periodic reports, proxy statements and other information with the SEC. Such periodic reports, proxy statements and other information are available for inspection and copying at the public reference room and web site of the SEC referred to above. We maintain a web site at www.Ikanos.com. You may access our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act with the SEC, free of charge at our web site as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The reference to our web address does not constitute incorporation by reference of the information contained at this site.

19

ITEM 1A. RISK FACTORS

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

Risks Related to Our Business

Our quarterly operating results, including revenue and expense levels, have fluctuated significantly over time and are likely to continue to do so, principally due to the nature of telecommunication carriers’ capital spending cycles as well as other factors. As a result, we may fail to meet or exceed our forecasts or the expectations of securities analysts or investors, which could cause our stock price to decline.

The telecommunications semiconductor industry is highly cyclical and subject to rapid change and, from time to time, has experienced significant downturns. As was widely reported in the first half of this decade, the telecommunications industry experienced, and may again experience, a pronounced downturn. These downturns are characterized by decreases in product demand and excess inventories held by our customers, OEMs, and their customers, the telecommunications service providers (also called “carriers”). To respond to these downturns, many carriers slow their capital expenditures, cancel or delay new developments, reduce their workforces and inventories and take a cautious approach to acquiring new equipment and technologies from OEMs.

As a result of the carriers slowing or ceasing their capital spending, periodically and usually without significant notice, carriers will reduce orders with OEMs for new equipment, and OEMs in turn will reduce orders for our products, which can adversely impact the quarterly demand for our products, even when deployment rates may be increasing. These factors have in the past, and could in the future cause substantial fluctuations in our revenue and in our operating results. Since we began shipping in volume in 2002, our quarterly revenue and operating results have varied significantly and are likely to continue to vary from quarter to quarter due to these industry cycles, which are not within our control. For example, in the first quarter of 2005, our revenue decreased by $6.2 million, or 33%, from the preceding quarter, but then increased by $7.0 million, or 57%, in the following quarter. In the fourth quarter of 2006, our revenue declined by $15.7 million, or 43%, from the third quarter of 2006. Furthermore, as a general trend, capital spending by carriers tends to be flat in the first calendar quarter of the year. Quarterly fluctuations in revenue are characteristic of our industry. And given the concentration of our revenue among a few significant customers and given their buying patterns, we have experienced, and are likely to experience again, significant quarterly fluctuations of revenue.

Any future downturns may be severe and prolonged, and any failure of this industry or the broadband communications markets to fully recover from downturns could harm our business. The semiconductor industry also periodically experiences increased demand and production capacity constraints, which may affect our ability to ship products. Accordingly, our operating results may vary significantly as a result of the general conditions in the semiconductor or broadband communications industry, which could cause our stock price to decline.

In addition, our expenses are also subject to quarterly fluctuations resulting from factors including the costs related to new product releases. If our operating results do not meet the expectations of securities analysts or investors for any quarter or other reporting period, the market price of our common stock may decline. Fluctuations in our operating results may be due to a number of factors, including, but not limited to, changes in the mix of products we develop, acquire and sell as well as those identified throughout this “Risk Factors” section. As a result, you should not rely on quarter to quarter comparisons of our operating results as an indicator of future performance.

20

We have a history of losses, and future losses may cause the market price of our common stock to decline. We may not be able to reduce our expenses or generate sufficient revenue in the future to achieve or sustain profitability.

Since inception, we have only been profitable on a GAAP basis in the third and fourth quarter of 2005. Prior to the third quarter of 2005, we incurred significant net losses, and we incurred losses in the past eight quarters. Beginning in 2006, accounting rules required us to report stock-based compensation as an expense, which has comprised a substantial portion of our quarterly and annual losses, as reported on a GAAP basis. In addition, we had sequential decreases in revenue in the third and fourth quarters of 2006, and we incurred a net loss of $33.3 million for the year ended December 30, 2007 and have an accumulated deficit of $142.6 million as of December 30, 2007. To achieve profitability again, we will need to generate and sustain higher revenue, while maintaining cost and expense levels appropriate and necessary for our business. Because many of our expenses are fixed in the short term, or are incurred in advance of anticipated sales, we may not be able to continue to hold down our costs and expenses in a timely manner to offset any lower-than-forecasted revenue shortfall as we experienced in the fourth quarter of 2006. We may not be able to achieve profitability again, and even if we were able to attain profitability again, we may not be able to sustain profitability on a quarterly or an annual basis in the future.

We recently completed a purchase of certain DSL assets from Centillium Communications, and if we are not successful in integrating the technology and employees from the acquisition into our existing business, then our operating results may be harmed.

In February 2008, we completed the acquisition of DSL assets from Centillium Communications, Inc. Through this acquisition, we added approximately 30 employees, acquired Centillium’s DSL business, including nearly 60 patents and patent applications, and assumed responsibility for filling orders and supporting installed products with customers principally in Japan and Europe. This acquisition, and the associated integration of people, technology and customers, has taken a considerable amount of management’s time and may require further effort. The revenue of the acquired business has been highly concentrated among a limited number of customers, some of which were Ikanos customers prior to the acquisition. If our efforts to integrate people and technology, if we are unable to retain the newly acquired customers, or if this acquisition negatively impacts our relationship with our current customers, our financial results could be adversely affected.

Acquisitions, strategic partnerships, joint ventures or investments may impair our capital and equity resources, divert our management’s attention or otherwise negatively impact our operating results.

We intend to continue to pursue acquisitions, strategic partnerships and joint ventures that we believe may allow us to complement our growth strategy, increase market share in our current markets and expand into adjacent markets, broaden our technology and intellectual property and strengthen our relationships with carriers and OEMs. For example, in 2006, we completed the NPA acquisition. This transaction consumed significant management attention, added to our expenses and used $32.7 million in cash. In January 2008, we announced the purchase of certain DSL assets from Centillium for approximately $12.0 million in cash. Any future acquisition, partnership, joint venture or investment may require that we pay significant cash, issue stock, thereby diluting existing stockholders, or incur substantial debt. Acquisitions, partnerships or joint ventures may also require significant managerial attention, which may divert our focus. These capital, equity and managerial commitments may impair the operation of our business. Furthermore, acquired businesses may not be effectively integrated, may be unable to maintain key pre-acquisition business relationships, may result in the loss of key personnel, may contribute to increased fixed costs and may expose us to unanticipated liabilities and otherwise harm our operating results.

If demand for our semiconductor products declines or does not grow, we will be unable to increase or sustain our revenue; and our operating results will be harmed.

We currently expect the semiconductor products we have already announced to account for substantially all of our revenue for the foreseeable future. If we are unable to develop new products or to successfully integrate

21

acquired products and technology to meet our customers’ demand in a timely manner, if demand for our semiconductors declines or fails to grow, or if the xDSL, GPON or network processor markets do not materialize as expected, it would harm our business. The markets for our products are characterized by frequent introduction of new semiconductors, short product life cycles and significant price competition. If we or our OEM customers are unable to manage product transitions in a timely and cost-effective manner, our revenue would suffer. In addition, frequent technology changes and introduction of next generation products may result in inventory obsolescence, which would increase our cost of revenue and adversely affect our operating performance.

Our products typically have lengthy sales cycles, which may cause our operating results to fluctuate and result in volatility in the price of our common stock. An OEM customer or a carrier may decide to cancel, delay or change its product plans, which could cause us to lose or delay anticipated sales.

After we have delivered a product to an OEM customer, the OEM will usually test and evaluate our product with its carrier customer prior to the OEM completing the design of its own equipment that will incorporate our product. Our OEM customers and the carriers may take several months to test, evaluate and adopt our product and several additional months to begin volume production of equipment that incorporates our product. This entire process can take from six months to over a year to complete. Due to this lengthy sales cycle, we may experience significant delays from the time we increase our operating expenses and make investments in inventory until the time that we generate revenue from these products. It is possible that we may never generate any revenue from these products after incurring these expenditures and investments. Even if an OEM customer selects our product to incorporate into its equipment, we have no assurances that the customer will ultimately market and sell its equipment or that such efforts by our customer will be successful. The delays inherent in our lengthy sales cycle increases the risk that an OEM customer or carrier will decide to cancel or change its product plans. From time to time, we have experienced changes and cancellations in the purchase plans of our OEM customers. A cancellation or change in plans by an OEM customer or carrier could cause us to not achieve anticipated revenue and result in volatility of the price of our common stock. In addition, our anticipated sales could be lost or substantially reduced if a significant OEM customer or carrier reduces or delays orders during our sales cycle or chooses not to release equipment that contains our products.

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

The products we develop and sell are subject to rapid declines in average selling prices due to competitive pressures and business objectives, including lowering average selling prices in order to increase market share. We have lowered our prices significantly at times to gain market share, and we expect that we will reduce prices again in the future. Offering reduced prices to one customer could likely impact our average selling prices to all customers. Our financial results will suffer if we are unable to offset any future reductions in our average selling prices by increasing our sales volumes, or by reducing our cost and expenses or by developing new or enhanced products on a timely basis that bear higher selling prices.

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

Our product margins vary widely by product. As a result, a change in the sales mix of our products could have an impact on the forecasted revenue and margins for the quarter. Our modem only products within the Gateway product family generally have lower margins as compared to our Access product family. Furthermore, the product margins within our Access product line can vary based on the type and performance of deployment being used as customers typically pay higher selling prices for higher performance. While we make estimates of what we believe the product mix will be in a given quarter, actual results can be materially different than our estimates.

22

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

We derive a substantial portion of our revenue from sales to a relatively small number of customers. As a result, the loss of any significant customer or a decline in business with any significant customer would materially and adversely affect our financial condition and results of operations. The following customers accounted for more than 10% of our revenue for any one of the years indicated. We have indicated the OEM customer based on information that we receive at the time of ordering.

Our Direct Customer	OEM Customer	2005	2006		2007
NEC Corporation (USA)	NEC Corporation (Magnus)	44%	23	%	29	%
Altima	Sumitomo Electric Industries, Ltd.	28%	19	%	12	%
Sagem Communications	Sagem Communications	—	23	%	20	%
Uniquest	Various	24%	22	%	11	%

A small group of OEM customers historically has accounted for a substantial portion of our revenue; the composition of this group has varied, and we expect will continue to vary, over time. Further, we expect that this small group of customers will continue to account for a substantial portion of our revenue for the foreseeable future. Accordingly, our future operating results will continue to depend on the success of our largest OEM customers and on our ability to sell existing and new products to these customers in significant quantities. Demand for our semiconductor products is based on carrier demand for our OEM customers’ systems products. Accordingly, a reduction in growth of carrier deployment of product that use our semiconductors would adversely affect our product sales and business.

In addition, our relationships with some of our larger OEM customers may also deter other potential customers who compete with these customers from buying our products. To attract new customers or retain existing OEM customers, we have offered and may continue to offer certain customers favorable prices on our products. If these prices are lower than the prices paid by other existing OEM customers, we may have to offer the same lower prices to certain of these customers. In that event, our average selling prices would decline. The loss of a key customer, a reduction in sales to any major customer, or our inability to attract new significant customers in the absence of any offsetting sales would harm our business.

We have historically derived a substantial amount of our revenue from Asia and a majority of our network processing revenue comes from a single customer in Europe. If we fail to further diversify the geographic sources and customer base of our revenue in the future, our operating results could be harmed.

A substantial portion of our revenue is derived from sales into Japan and France; and our revenue has been heavily dependent on market growth in these countries. As a result, our sales are subject to economic downturns, decrease in demand and overall negative market conditions in a very few number of specific economies. For instance, a slow down in growth of fiber extension over copper and broadband over copper subscribers in Asia has caused our revenue in that market to decline, and may prevent that revenue stream from returning to historical levels. While part of our strategy is to continue to diversify the geographic sources and customer base of our revenue, our failure to successfully penetrate markets other than those served by our existing customers, and diversify our customer base could harm our business and operating results.

23

Since June 2007, we experienced a turnover in several senior management positions, and we may be unable to attract, retain and motivate key senior management and technical personnel, which could harm our development of technology and ability to be competitive.

Our Chief Executive Officer, Michael Ricci, joined the company in early June 2007. In addition, in June and July of 2007, we hired a General Counsel, a Vice President of Operations and a Vice President of Engineering. Also in January 2008, our Vice President and General Manager of Gateway Products Group resigned. Further, as required, we seek out highly-qualified candidates to fill positions throughout our business. We will continue to examine ways to improve the Company’s processes, productivity and results.

Our future success depends to a significant extent upon the continued service of our senior executives and key technical personnel as well as the integration of new senior executives. We do not have employment agreements with any of these executives or any other key employees that govern the length of their service. Changes in the services of senior management or technical personnel could impact our customer relationships, employee morale, our ability to operate in compliance with existing internal controls and regulations and harm our business.

Furthermore, our future success depends on our ability to continue to attract, retain and motivate other senior management and qualified technical personnel, particularly software engineers, digital circuit designers, mixed-signal circuit designers and systems and algorithms engineers. Competition for these employees is intense. Restricted stock units and stock options generally comprise a significant portion of our compensation packages for all employees, and the expected volatility in the price of our common stock may make it more difficult for us to attract and retain key employees, which could harm our ability to provide technologically competitive products. Additionally, a reduction in staff could negatively affect employee moral. For example, in November 2006, we reduced the number of employees and contractors in our workforce by approximately 30 people. Additionally, in September 2007, we decided to reduce the number of employees by approximately 15 people, including several senior executives. These reductions were principally in our engineering departments and have resulted in reallocations of employee duties. Workforce reductions and job reassignments could negatively affect employee morale and make it difficult to motivate and retain the remaining employees and contractors, which would affect our ability to deliver our products in a timely fashion and otherwise negatively affect our business.

Because of the rapid technological development in our industry and the intense competition we face, our products tend to become outmoded or obsolete in a relatively short period of time, which requires us to provide frequent updates and/or replacements to existing products. If we do not successfully manage the transition process to next generation semiconductor products, our operating results may be harmed.

Our industry is characterized by rapid technological innovation and intense competition. Accordingly, our success depends in part on our ability to develop next generation semiconductor products in a timely and cost-effective manner. The development of new semiconductor products is expensive, complex and time consuming. If we do not rapidly develop our next generation semiconductor products ahead of our competitors, we may lose both existing and potential customers to our competitors. Further, if a competitor develops a new, less expensive product using a different technological approach to delivering broadband services over existing networks, our products would no longer be competitive. Conversely, even if we are successful in rapidly developing new semiconductor products ahead of our competitors and we do not cost-effectively manage our inventory levels of existing products when making the transition to the new semiconductor products, our financial results could be negatively affected by high levels of obsolete inventory. If any of the foregoing were to occur, then our operating results would be harmed.

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

We rely on third parties for technologies that are integrated into some of our products, including our memory cells, input/output cells and core processor logic. If we are unable to continue to use or license these

24

technologies on reasonable terms, or if these technologies fail to operate properly, we may not be able to secure alternatives in a timely manner and our ability to remain competitive would be harmed. Failure to use the technologies we have purchased could also result in unfavorable impairment costs. In addition, if we are unable to successfully license technology from third parties to develop future products, we may not be able to develop such products in a timely manner or at all.

We are a fabless semiconductor company and may rely on one wafer foundry and one assembly and test subcontractor to manufacture, package and test each of our products, and our failure to secure and maintain sufficient capacity with these subcontractors could impair our relationships with customers and decrease sales, which would negatively impact our market share and operating results.

We are a fabless semiconductor company in that we do not own or operate a fabrication or manufacturing facility. Currently, five wafer foundries and three outside factory subcontractors, located in Austria, China, Israel, Korea, Malaysia, Singapore, Taiwan and the United States, manufacture, assemble and test all of our semiconductor devices in current production. While we work with multiple suppliers, only one foundry and one assembly and test subcontractor may be used for a single product. Accordingly, we are greatly dependent on a limited number of suppliers to deliver quality products on time.

In past periods of high demand in the semiconductor market, we have experienced delays in meeting our capacity demand and as a result were unable to deliver products to our customers on a timely basis. In addition, we have experienced similar delays due to technical and quality control problems. Furthermore, our costs for manufacturing services or components have increased from time to time without significant notice. In the future, if any of these events occur, or if the facilities of any of our subcontractors suffer any damage, power outages, financial difficulties or any other disruption due to natural disasters, terrorist acts or otherwise, we may be unable to meet our customer demand on a timely basis, or at all; and we may be required to incur additional costs and may need to successfully qualify an alternative facility in order to not disrupt our business. We typically require several months or more to qualify a new facility or process before we can begin shipping products. If we cannot accomplish this qualification in a timely manner, we would experience a significant interruption in supply of the affected products which could in turn cause our costs of revenue to increase and our overall revenue to decrease. If we are unable to secure sufficient capacity at our subcontractors’ existing facilities, or in the event of a closure or significant delay at any of these facilities, our relationships with our customers would be harmed and our market share and operating results would suffer as a result. In addition, we do not have formal pricing agreements with our subcontractors regarding the pricing for the products and services that they provide us. If their pricing for the products and services they provide increases and we are unable to pass along such increases to our OEM customers, our operating results would be adversely affected.

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

As indicated above, our use of five independent wafer foundries to manufacture all of our semiconductor products exposes us to risks of delay, increased costs and customer dissatisfaction in the event that any of these foundries were unable to provide us with our semiconductor requirements. Particularly during times when semiconductor manufacturing capacity is limited, we may seek to qualify additional wafer foundries to meet our requirements. In order to bring these new foundries on-line, our customers may need to qualify product from the new facility, which could take several months or more. Once qualified, these new foundries would then require an additional number of months to actually begin producing semiconductors to meet our needs, by which time the temporary requirement for additional capacity may have passed or the opportunities we previously identified may have been lost to our competitors. Furthermore, even if these new foundries offer better pricing than our existing manufacturers, if they prove to be less reliable than our existing manufacturers, we would not achieve some or all of our anticipated cost reductions.

25

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

The ability of each of our subcontractors’ manufacturing facilities to provide us with semiconductors is limited by its available capacity and existing obligations. Although we have purchase order commitments to supply specified levels of products to our OEM customers, we do not have a guaranteed level of production capacity from any of our subcontractors’ facilities that we depend on to produce our semiconductors. Facility capacity may not be available when we need it or at reasonable prices. We place our orders on the basis of our OEM customers’ purchase orders or our forecast of customer demand, and our subcontractors may not be able to meet our requirements in a timely manner. For example, in the second half of 2005 and in the first half of 2006, general market conditions in the semiconductor industry resulted in a significant increase in demand at these facilities. The demand for some of our OEM customers’ products increased significantly, and we were asked to produce significantly higher quantities than in the past and to deliver on short notice. In addition, our subcontractors have also allocated capacity to the production of other companies’ products and reduced deliveries to us on short notice. It is possible that our subcontractors’ other customers that are larger and better financed than we are, or that have long-term agreements with our subcontractors, may have induced our subcontractors to reallocate capacity to them. If this reallocation were to occur again, it would impair our ability to deliver products on a timely basis.

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

• option payments or other prepayments to a subcontractor;

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

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

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

• issuance of our equity securities to a subcontractor; and

• other contractual relationships with subcontractors.

We may not be able to make any such arrangements in a timely fashion or at all, and any arrangements may be costly, reduce our financial flexibility and not be on terms favorable to us. Moreover, if we are able to secure facility capacity, we may be obligated to use all of that capacity or incur penalties. These penalties and obligations may be expensive and require significant capital and could harm our business.

If our subcontractors’ manufacturing facilities do not achieve satisfactory quality or yields, our relationships with our customers and our reputation will be harmed, our revenue, gross margin and operating results could decline.

Manufacturing defects may not be always detected by the testing process performed by our subcontractors. If defects are discovered after we have shipped our products, we have and could continue to experience warranty and consequential damages claims from our customers. In January 2007, a significant customer notified us that they were experiencing a high defect rate on a certain product that was manufactured and shipped in the last month of 2006. In February 2007, we entered into a settlement agreement releasing us of all liabilities associated with this claim in exchange for a payment and providing replacement parts. The settlement was recorded as an offset to revenue and as accrued rebates within accrued liabilities in the fourth quarter of 2006. Such claims as this one or others may have a significant adverse impact on our revenue and operating results. Furthermore, if we are unable to deliver quality products, our reputation would be harmed, which could result in the loss of, future orders and business with these OEMs. If any of these adverse risks are realized and we are not able to offset the lost opportunities, our revenue, margins and operating results would decline.

26

The fabrication of semiconductors is a complex and technically demanding process. Minor deviations in the manufacturing process can cause substantial decreases in yields; and in some cases, cause production to be stopped or suspended. We have experienced difficulties in achieving acceptable yields on some of our products, particularly with new products, which frequently involve newer manufacturing processes and smaller geometry features than previous generations. Maintaining high numbers of shippable die per wafer is critical to our operating results, as decreased yields can result in higher per unit cost, shipment delays and increased expenses associated with resolving yield problems. Although we work closely with our subcontractors to minimize the likelihood of reduced manufacturing yields, their facilities have from time to time experienced lower than anticipated manufacturing yields that have resulted in our inability to meet our customer demand. For instance, in the third quarter of 2006, we were unable to fulfill a certain amount of our customers’ orders due to difficulties in attaining acceptable yields on one of our products. While we solved the manufacturing process issue in the fourth quarter of 2006, we cannot assure you that we will be successful in improving yields on any future product or in correcting manufacturing problems with our subcontractors.

It is common for yields in semiconductor fabrication facilities to decrease in times of high demand or due to poor workmanship or operational problems at these facilities. When these events occur, especially simultaneously, as happens from time to time, we may be unable to supply our customers’ demand. Many of these problems are difficult to detect at an early stage of the manufacturing process and, regardless of when the problems are detected, they may be time consuming and expensive to correct. In addition, because we purchase wafers, our exposure to low wafer yields from our subcontractors’ wafer foundries are increased. Poor yields from the wafer foundries or defects, integration issues or other performance problems in our products could cause us significant customer relations and business reputation problems, or force us to sell our products at lower gross margins and therefore harm our financial results. Conversely, unexpected yield improvements could result in us holding excess inventory that would also increase our product cost and negatively impact our profitability.

We base orders for inventory on our forecasts of our OEM customers’ demand and if our forecasts are inaccurate, our financial condition and liquidity would suffer.

We place orders with our suppliers based on our forecasts of our OEM customers’ demand. Our forecasts are based on multiple assumptions, each of which may introduce errors into our estimates. In the past, when the demand for our OEM customers’ products increased significantly, we were not able to meet demand on a timely basis, and we expended a significant amount of time working with our customers to allocate limited supply and maintain positive customer relations. If we underestimate customer demand, we may forego revenue opportunities, lose market share and damage our customer relationships. Conversely, if we overestimate customer demand, we may allocate resources to manufacturing products that we may not be able to sell. As a result, we would have excess or obsolete inventory, resulting in a decline in the value of our inventory, which would increase our cost of revenue and create a drain on our liquidity. Our failure to accurately manage inventory against demand would adversely affect our financial results.

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

We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometrical processes, which are measured in microns or nanometers. We have designed our products to be manufactured in 0.8 micron, 0.25 micron, 0.18 micron, 0.13 micron, 0.09 micron (or 90 nanometer) and 0.065 micron (or 65 nanometer) geometrical processes. We are currently migrating some of our products to an even smaller geometrical process technology, and over time, we are likely to migrate to even smaller geometries. The smaller geometry generally reduces our production and packaging costs, which may enable us to be competitive in our pricing. The transition to smaller geometries requires us to work with our subcontractors to modify the manufacturing processes for our products, to develop new and more complex quality assurance tests and to redesign some products. In the past, we have experienced some difficulties in shifting to smaller geometry process technologies or new manufacturing processes, which resulted in reduced manufacturing yields, delays in

27

product deliveries and increased product costs and expenses. We may face similar difficulties, delays and expenses as we continue to transition our products to smaller geometry processes, all of which could harm our relationships with our customers, and our failure to do so would impact our ability to provide competitive prices to our customers, which would have a negative impact on our sales. Additionally, upfront expenses associated with smaller geometry process technologies such as for masks and tooling can be significantly higher than those for the processes that we currently use, and our migration to these newer process technologies can result in significantly higher research and development expenses.

The complexity of our products could result in unforeseen delays or expenses and in undetected defects or bugs, which could damage our reputation with current or prospective customers and adversely affect the market acceptance of new products.

Highly complex products such as those that we offer frequently contain defects (commonly referred to as “bugs”), particularly when they are first introduced or as new versions are released. In the past, we have experienced, and may in the future experience, defects or bugs in our products. These defects or bugs may originate in third party intellectual property incorporated into our products as well as in technology designed by Ikanos’ engineers. If any of our products contains defects or bugs, or have reliability, quality or compatibility problems, our reputation may be damaged; and our OEM customers may be reluctant to buy our products, which could harm our ability to retain existing customers and attract new customers. In addition, these defects or bugs could interrupt or delay sales or shipment of our products to our customers.

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

The semiconductor industry and the broadband communications markets are intensely competitive. In the VDSLx or VDSL-like technology, PON and network processing markets, we currently compete or expect to compete with, among others, Aware, Inc., Broadcom Corporation, Broadlight, Cavium Networks, Conexant Systems, Inc., Freescale Semiconductor, Inc., Infineon Technologies A.G., Intel Corporation, Marvell Technology Group Ltd., PMC-Sierra, Inc., Realtek Semiconductor Corp., Teknovus, Thomson S.A. and TrendChip Technologies Corp. We expect competition to continue to increase.

Competition has resulted and may continue to result in declining average selling prices for our products and market share.

We consider other companies that have access to DMT technology as potential competitors in the future, and we also may face competition from newly established competitors, suppliers of products based on new or emerging technologies and customers who choose to develop their own semiconductors. To remain competitive, we need to provide products that are designed to meet our customers’ needs. Our products must:

• achieve optimal product performance;

• comply with industry standards;

• be cost-effective for our customers’ use in their systems;

• meet functional specifications;

• be introduced timely to the market; and

• be supported by a high-level of customer service and support.

Many of our competitors operate their own fabrication facilities or have stronger manufacturing partner relationships than we have. In addition, many of our competitors have extensive technology libraries that could enable them to incorporate fiber-fast broadband or network processing technologies into a more attractive product line than ours. Many of them also have longer operating histories, greater name recognition, larger customer bases, and significantly greater financial, sales and marketing, manufacturing, distribution, technical

28

and other resources than we do. These competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. In addition, current and potential competitors have established or may establish financial or strategic relationships among themselves or with existing or potential customers, resellers or other third parties. Accordingly, new competitors or alliances among competitors could emerge and rapidly acquire significant market share. Existing or new competitors may also develop alternative technologies that more effectively address our markets with products that offer enhanced features and functionality, lower power requirements, greater levels of semiconductor integration or lower cost. We cannot assure you that we will be able to compete successfully against current or new competitors, in which case we may lose market share in our existing markets and our revenue may fail to increase or may decline.

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

Our revenue currently is dependent upon the increase in demand for carrier services that use xDSL broadband technology and integrated residential gateways. Besides VDSLx and other DMT-based technologies, carriers can decide to deploy PON or fiber. In this case, fiber is used to connect directly to the residence instead of using the existing copper phone line. As such, if a carrier decides to deploy fiber-to-the-home, our VDSL solutions are not required. For example, a major carrier in Korea announced its intention to use more fiber-to-the-home deployments in the future. Such deployments of fiber may be in lieu of VDSLx solutions. If more carriers decide to use fiber-to-the-home deployments, it could harm our business.

Furthermore, residential gateways compete against a variety of different data distribution technologies, including Ethernet routers, set-top boxes provided by cable and satellite providers, wireless (WiFi and WiMax) and emerging power line and multimedia over coax alliance technologies. If any of these competing technologies proves to be more reliable, faster or less expensive than, or has any other advantages over the Fiber Fast broadband technologies we provide, the demand for our products may decrease and our business would be harmed.

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

Our future success depends on our ability to develop new semiconductor products and transition to new products, introduce these products in a cost-effective and timely manner and convince OEMs to select our products for design into their new systems. Our historical quarterly results have been, and we expect that our future results will continue to be, dependent on the introduction of a relatively small number of new products and the timely completion and delivery of those products to customers. The development of new semiconductor products is complex, and from time to time we have experienced delays in completing the development and introduction of new products. We have in the past invested substantial resources in emerging technologies that did not achieve the market acceptance that we had expected. Our ability to develop and deliver new semiconductor products successfully will depend on various factors, including our ability to:

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

• accurately predict market requirements and evolving industry standards;

• accurately define new semiconductor products;

• timely complete and introduce new product designs or features;

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

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

29

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

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

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

Our success is dependent upon achieving design wins into commercially successful OEM systems.

Our products are generally incorporated into our OEMs customers’ systems at the design stage. As a result, we rely on OEMs to select our products to be designed into their systems, which we refer to as a “design win.” We often incur significant expenditures over multiple fiscal quarters in attempting to obtain a design win without any assurance that an OEM will select our product for design into its own system. Additionally, in some instances, we are dependent on third parties to obtain or provide information that we need to achieve a design win. Some of these third parties may not supply this information to us on a timely basis, if at all. Furthermore, even if an OEM designs one of our products into its system offering, we cannot be assured that its equipment will be commercially successful or that we will receive any orders and, accordingly, revenue as a result of that design win. Our OEM customers are typically not obligated to purchase our products and can choose at any time to stop using our products if their own systems are not commercially successful, if they decide to pursue other systems strategies, or for any other reason. If we are unable to achieve design wins or if our OEM customers’ systems incorporating our products are not commercially successful, our revenue would suffer.

Our products include a significant amount of firmware. If we are unable to deliver the firmware in a timely manner, we may have to delay revenue recognition at the end of a quarter, which could lead to significant unplanned fluctuations in our quarterly revenue. As a result, we may fail to meet or exceed our forecasts or the expectations of securities analysts or investors, which could cause our stock price to decline.

In connection with new product introductions in a given market, we release production quality code to our OEM customers. This firmware is required for our products to function as intended. If the production-ready firmware is not released in a timely manner, we may have to defer all revenue related to the semiconductors that we may have already shipped during the quarter, and therefore, cause us to miss our revenue guidance. In addition, a customer may demand a specific future software feature as part of its order. As such, we may have to delay recognition on some or all of our revenue related to that customer’s order until the future software feature is delivered. Such delays or deferrals in revenue recognition could lead to significant fluctuations in our quarterly revenue and operating results and cause us to fail to meet or exceed our quarterly revenue guidance.

We recently took steps to outsource our physical back-end semiconductor design process to a third-party. If this transition is unsuccessful, we could delay the release of upcoming products or incur more costs related to the design and manufacturing of our products.

In September 2007, we decided to outsource our physical back-end design process resulting in the impairment and write-off of $2.9 million in software design tools and the termination of approximately 15 employees. Loss of their knowledge and expertise may harm our development efforts, and transition to a third-party could result in production delays and increased costs. Furthermore, outsourcing our back-end semiconductor design could result in longer design cycles and an inefficient semiconductor design layout, resulting in an increase in manufacturing costs and a decrease in the performance of our products.

30

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

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

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

Our success will depend, in part, on our ability to protect our intellectual property. We rely on a combination of patent, copyright, trademark and trade secret laws, confidentiality procedures and licensing arrangements to establish and protect our proprietary rights. With limited exceptions, we do not currently have any applications on file in any foreign jurisdictions with respect to our intellectual property notwithstanding the fact nearly all of our revenue is generated outside of the United States. Our pending patent applications may not result in issued patents, and our existing and future patents may not be sufficiently broad to protect our proprietary technologies or may be held invalid or unenforceable in court. While we are not currently aware of misappropriation of our existing technology, policing unauthorized use of our technology is difficult and we cannot be certain that the steps we have taken will prevent the misappropriation or unauthorized use of our technologies, particularly in foreign countries where we have not applied for patent protections and, even if such protections were available, the laws may not protect our proprietary rights as fully as United States law. The patents we have obtained or licensed, or may obtain or license in the future, may not be adequate to protect our proprietary rights. Our competitors may independently develop or may have already developed technology similar to ours, duplicate our products or design around any patents issued to us or our other intellectual property. In addition, we have been, and may be, required to license our patents as a result of our participation in various standards organizations. If competitors appropriate our technology and we are not adequately protected, our competitive position would be harmed, our legal costs would increase and our revenue would be harmed.

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

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

31

Any potential dispute involving our patents or other intellectual property could also include our manufacturing subcontractors and OEM customers and/or carriers using our products, which could trigger our indemnification obligations to them and result in substantial expense to us.

In any potential dispute involving our patents or other intellectual property, our manufacturing subcontractors and OEM customers could also become the target of litigation. Because we often indemnify our customers for intellectual property claims made against them for products incorporating our technology, any litigation could trigger technical support and indemnification obligations in some of our license agreements, which could result in substantial expenses such as increased legal expenses, damages for past infringement or royalties for future use. From time to time, we receive notices that customers have received potential infringement notices from third parties. While we have not incurred any indemnification expenses as a result of notices received to date, any future indemnity claim could adversely affect our relationships with our OEM customers and result in substantial costs to us.

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

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

Recent changes to environmental laws and regulations applicable to manufacturers of electrical and electronic equipment are causing us to redesign our products, and may result in increases to our costs and greater exposure to liability.

The implementation of new environmental regulatory legal requirements, such as lead free initiatives, impacts our product designs and manufacturing processes. The impact of such regulations on our product designs and manufacturing processes could affect the timing of compliant product introductions as well as their commercial success. For example, the European Union banned the use of lead and other heavy metals in electrical and electronic equipment after July 1, 2006. As a result, some of our customers selling products in Europe are demanding product from component manufacturers that do not contain these banned substances. Because most of our existing assembly processes (as well as those of most other manufacturers) utilized a tin-lead alloy as a soldering material in the manufacturing process, we redesigned many of our products to meet customer demand.

In January 2007, a customer could not get a certain number of lead free semiconductors to properly bond on the printed circuit board. We believe the lead-free substrates may have contributed to the bonding problem. In addition, given the limited experience and knowledge with the materials and processes used to manufacture lead-free parts, we may incur quality issues or production delays. Furthermore, the products that we manufacture that comply with the new regulatory standards may not perform as well as our current products. Moreover, if we are unable to successfully and timely redesign existing products and introduce new products that meet the standards set by environmental regulation and our customers, sales of our products could decline, which could materially adversely affect our business, financial condition and results of operations.

32

Compliance with the requirements imposed by Section 404 of the Sarbanes-Oxley Act could harm our operating results, our ability to operate our business and our investors’ view of us.

If we do not maintain the adequacy of our internal controls, as standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of Sarbanes-Oxley. There is a risk that neither we, nor our independent registered public accounting firm, will be able to conclude that our internal control over financial reporting is effective as required by Section 404 of Sarbanes-Oxley. In addition, during the course of our testing we may identify deficiencies that we may not be able to remediate in time to meet the deadline imposed by Sarbanes-Oxley for compliance with the requirements of Section 404. Effective internal controls, particularly those related to revenue recognition, valuation of inventory and warranty provisions, are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop significantly.

We are highly dependent on manufacturing, development and sales activities outside of the United States; and as our international manufacturing, development and sales operations expand, we will be increasingly exposed to various legal, business, political and economic risks associated with our international operations.

We currently obtain substantially all of our manufacturing, assembly and testing services from suppliers and subcontractors located outside the United States, and have a significant portion of our research and development team located in Bangalore and Hyderabad, India. In addition, 94% of our revenue for the year ended December 30, 2007 and 96% of our revenue for the year ended December 31, 2006 was derived from sales to customers outside the United States. We have expanded our international business activities and may open other design and operational centers abroad. International operations are subject to many other inherent risks, including but not limited to:

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

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

• natural disasters and public health emergencies;

• trade and travel restrictions;

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

• burdens of complying with a variety of foreign laws;

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

• foreign technical standards;

• changes in tariffs;

• difficulties in staffing and managing international operations;

• fluctuations in currency exchange rates;

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

• potentially adverse tax consequences.

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

33

Fluctuations in exchange rates between and among the Euro, the Indian rupee, the Japanese yen, the Korean won, the Singapore dollar and the U.S. dollar, as well as other currencies in which we do business, may adversely affect our operating results.

We maintain extensive operations internationally. We have large offices in Bangalore and Hyderabad, India and other offices in France, Japan, Korea, Singapore and Taiwan. We incur a portion of our expenses in currencies other than the U.S. dollar, including the Euro, the Indian rupee, the Japanese yen, the Korean won, Singapore dollar and the Taiwanese dollar. As a result, we may experience foreign exchange gains or losses due to the volatility of these currencies compared to the U.S. dollar. Because we report our results in U.S. dollars, the difference in exchange rates in one period compared to another directly impacts period to period comparisons of our operating results. In addition, our sales have been historically denominated in U.S. dollars; if recent trends were to change, an increase in the U.S. dollar relative to the currencies of the countries that our customers operate in could materially affect our Asian and European customers’ demand for our products, thereby forcing them to reduce their orders, which would adversely affect our business. Furthermore, currency exchange rates have been especially volatile in the recent past and these currency fluctuations may make it difficult for us to predict and/or provide guidance on our results.

Currently, we have not implemented any strategies to mitigate risks related to the impact of fluctuations in currency exchange rates. Even if we were to implement hedging strategies, not every exposure is or can be hedged, and, where hedges are put in place based on expected foreign exchange exposure, they are based on forecasts which may vary or which may later prove to have been inaccurate. Failure to hedge successfully or anticipate currency risks properly could adversely affect our operating results. We cannot predict future currency exchange rate changes.

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

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

Our investments in marketable securities may experience a permanent decline in value, which would require us to recognize a charge and adversely affect our operating results.

Our marketable securities portfolio, which totals $26.0 million at December 30, 2007, includes auction rate securities of $7.2 million (at cost). Auction rate securities are securities that are structured with short-term interest rate reset dates of generally less than ninety days, but with contractual maturities that can be well in excess of ten years. At the end of each interest reset period, which occurs every seven to thirty-five days, investors can sell or continue to hold the securities at par. In the third quarter of 2007, certain auction rate securities with a cost value of $7.2 million failed auction and did not sell. We recorded a temporary impairment within other comprehensive income (loss), a component of stockholders’ equity, of approximately $0.2 million at December 30, 2007 related to these auction rate securities. Although we believe that the decline in the fair market value of these securities is temporary, there is a risk that the decline in value may ultimately be deemed to be permanent, which would result in a loss being recognized in our statement of operations.

34

Changes in our tax rates could affect our future results.

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

Risks Related to Our Common Stock

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

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

• quarter-to-quarter variations in our operating results;

• announcements of changes in our senior management;

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

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

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

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

• continuing international conflicts and acts of terrorism;

• changes in earnings estimates or investment recommendations by analysts;

• changes in investor perceptions;

• changes in product mix; or

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

The closing sale price of our common stock on the NASDAQ Global Market for the period of January 1, 2006 to December 30, 2007 ranged from a low of $5.25 to a high of $24.55.

In addition, the market prices of securities of semiconductor and other technology companies have been volatile, particularly companies, like ours, with low trading volumes. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to the operating performance of the specific companies. Accordingly, you may not be able to resell your shares of common stock at or above the price you paid.

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

In November 2006, three putative class action lawsuits were filed in the United States District Court for the Southern District of New York against the Company, our directors and two former executive officers, as well as the lead underwriters for our initial and secondary public offerings. The lawsuits were consolidated and an amended complaint was filed on April 24, 2007. The amended complaint alleges certain material misrepresentations and omissions by us in connection with our initial public offering in September 2005 and the follow-on offering in March 2006 concerning our business and prospects, and seek unspecified damages. On June 25, 2007, we filed

35

motions to dismiss the amended complaint; plaintiffs opposed our motions, and a hearing on our motions were heard on January 16, 2008. As of the time this annual report was filed, the matter was pending a decision by the Court. We cannot predict the likely outcome of this litigation. If we are not successful in our defense of the lawsuits, we could be forced to make significant payments to class members and their lawyers, and such payments could have a material adverse effect on our business, financial condition, cash flows and results of operations, if not covered by our insurance carriers. Even if such claims are not successful, the litigation could result in substantial expenses and the diversion of management’s attention, which could have an adverse effect on our business.

If securities or industry analysts do not continue to publish research or reports about our business, or if they issue an adverse opinion regarding our stock, our stock price and trading volume could decline.

The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of the analysts who cover us issue an adverse opinion regarding our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

Substantial future sales of our common stock in the public market could cause our stock price to fall.

As of January 29, 2008, we had approximately 29.5 million shares of common stock outstanding. Of these shares, 6.4 million were sold in our initial public offering in September 2005 and an additional 2.5 million were sold in a follow-on public offering in March 2006. All of these shares are freely tradable under federal and state securities laws without further registration under the Securities Act, except that any shares held by our “affiliates” (as that term is defined under Rule 144 of the Securities Act) may be sold only in compliance with the limitations under Rule 144. The remaining outstanding shares are “restricted securities” and generally are available for sale in the public market at various times upon qualification for exemption pursuant to Rules 144 and/or 701 of the Securities Act.

In the future, we intend to issue additional shares to our employees, directors or consultants, and may issue shares in connection with corporate alliances or acquisitions, as well as in follow-on offerings to raise additional capital. Due to these factors, sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales could reduce the market price of our common stock.

Delaware law and our corporate charter and bylaws contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable.

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

• the right of the board of directors to elect a director to fill a vacancy created by the expansion of the board of directors;

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

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

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

• the ability of the board of directors to alter our bylaws without obtaining stockholder approval;

• the ability of the board of directors to issue, without stockholder approval, up to 5,000,000 shares of preferred stock with terms set by the board of directors, which rights could be senior to those of common stock;

36

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

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

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

We are also subject to provisions of the Delaware General Corporation Law that, in general, prohibit any business combination with a beneficial owner of 15% or more of our common stock for three years after the point in time that such stockholder acquired shares constituting 15% or more of our shares, unless the holder’s acquisition of our stock was approved in advance by our board of directors.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

ITEM 2. PROPERTIES

Facilities

Our headquarters are located at 47669 Fremont Boulevard, Fremont, California. We lease approximately 74,500 square feet of space under our lease agreements expiring in April 2011. We also lease approximately 28,600 square feet of space in Bangalore, and 18,400 square feet in Hyderabad, India. We believe that our facilities are adequate for the next 12 months and that, if required, suitable additional space will be available on commercially reasonable terms to accommodate expansion of our operations. In addition to our headquarters, we lease office space in Tokyo, Japan, Seoul, Korea, Taipei, Taiwan and Singapore.

ITEM 3. LEGAL PROCEEDINGS

Legal Proceedings

In November 2006, three putative class action lawsuits were filed in the United States District Court for the Southern District of New York against the Company, our directors and two former executive officers, as well as the lead underwriters for our initial and secondary public offerings. The lawsuits were consolidated and an amended complaint was filed on April 24, 2007. The amended complaint alleges certain material misrepresentations and omissions by us in connection with our initial public offering in September 2005 and the follow-on offering in March 2006 concerning our business and prospects, and seek unspecified damages. On June 25, 2007, we filed motions to dismiss the amended complaint; plaintiffs opposed our motions, and a hearing on our motions were heard on January 16, 2008. As of the time this filing, the matter was pending a decision by the Court. We cannot predict the likely outcome of this litigation, and an adverse result could have a material effect on our financial statements.

Additionally, from time to time we are a party to various legal proceedings and claims arising from the normal course of business activities. Based on current available information, we do not expect that the ultimate outcome of any currently pending unresolved matters, individually or in the aggregate, will have a material adverse effect on our results of operations, cash flows or financial position.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No stockholder votes took place during the fourth quarter of 2007.

37

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Price Range of Common Stock

Our common stock is quoted on the Nasdaq Global Market under the symbol “IKAN”. The following tables sets forth the high and low sales prices of our common stock as reported on the Nasdaq Global Market for the periods indicated.

	High		Low
2006:
First quarter	$	24.97	$	14.20
Second quarter	$	20.83	$	12.06
Third quarter	$	15.72	$	9.00
Fourth quarter	$	12.02	$	7.23
2007:
First quarter	$	9.45	$	7.31
Second quarter	$	8.30	$	6.70
Third quarter	$	7.90	$	5.50
Fourth quarter	$	6.97	$	5.21

As of January 29, 2008, there were approximately 483 holders of record of our common stock.

Dividend Policy

We have never declared or paid any cash dividends on our common stock or other securities. We currently anticipate that we will retain all of our future earnings for use in the expansion and operation of our business and do not anticipate paying any cash dividends in the foreseeable future. We also may incur indebtedness in the future that may prohibit or effectively restrict the payment of dividends on our common stock. Any future determination related to our dividend policy will be made at the discretion of our board of directors.

Equity Compensation Plan Information

The information required by this item regarding equity compensation plans is incorporated by reference to the information set forth in Part III, Item 12 of this annual report on Form 10-K.

Sale of Unregistered Securities

For the three years ended December 30, 2007, we issued 177,380 shares of unregistered common stock to Sam Heidari.

We claimed exemption from registration under the Securities Act for the issuance of securities in the transaction described above by virtue of Section 4(2) and/or Regulation D promulgated thereunder as a transaction not involving any public offering. The purchaser of the unregistered securities for which we relied on Regulation D and/or Section 4(2) was an accredited investor as defined under the Securities Act. We claimed such exemption on the basis that (a) the purchaser represented that he intended to acquire the securities for investment only and not with a view to the distribution thereof and that he either received adequate information about us or had access, through employment or other relationships, to such information and (b) appropriate legends were affixed to the stock certificates issued in such transactions. The recipient either received adequate information about us or had adequate access, through their relationships with us, to information about us.

38

Performance Graph

The performance graph below is required by the SEC and shall not be deemed to be incorporated by reference by any general statement incorporating by reference this annual report on Form 10-K into any filing under the Securities Act or the Securities Exchange Act except to the extent we specifically incorporate this information by reference and shall not otherwise be deemed soliciting material or filed under such acts.

The following graph shows a comparison of cumulative total stockholder return, calculated as of the end of each six month period on a dividend-reinvested basis, for Ikanos Communications, the Nasdaq Stock Market (U.S.) Index, and the Philadelphia Semiconductor Index. The graph assumes that $100 was invested in Ikanos Communications common stock, the Nasdaq Stock Market (U.S.) Index and the Philadelphia Semiconductor Index from the date of our initial public offering on September 22, 2005 through December 30, 2007. Note that historic stock price performance is not necessarily indicative of future stock price performance.

	22-Sep-05		01-Jan-06		02-Jul-06		31-Dec-06		01-Jul-07		30-Dec-07
Ikanos Communications	$	100	$	123	$	127	$	72	$	63	$	45
Philadelphia Semiconductor Index	$	100	$	105	$	97	$	102	$	110	$	89
Nasdaq Stock Market (U.S.)	$	100	$	105	$	103	$	115	$	123	$	126

39

ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this annual report on Form 10-K. Our fiscal years are the 52 or 53 week periods ended on the Sunday nearest the end of December. Our fiscal quarters reported are the consecutive 13th or 14th week periods ending on the Sunday nearest to the end of the month. Historical results are not necessarily indicative of the results to be expected in the future.

	Year Ended
	December 28, 2003			January 2, 2005			January 1, 2006		December 31, 2006			December 30, 2007
	(In thousands, except per share data)
Consolidated Statements of Operations Data:
Revenue	$	29,045		$	66,676		$	85,071	$	134,685		$	107,467
Cost and operating expenses:
Cost of revenue(1)		28,677			40,215			39,281		81,352			63,264
Research and development(1)		21,419			21,732			28,439		53,733			51,056
Selling, general and administrative(1)		8,841			13,299			15,532		25,082			27,398
Restructuring charges		—			—			—		1,691			3,661
Common stock offering expenses		—			—			—		954			—
Total costs and operating expenses		58,937			75,246			83,252		162,812			145,379
Income (loss) from operations		(29,892	)		(8,570	)		1,819		(28,127	)		(37,912	)
Interest income, net		22			106			1,218		4,970			4,942
Income (loss) before income taxes		(29,870	)		(8,464	)		3,037		(23,157	)		(32,970	)
Provision for income taxes		—			—			295		280			294
Income (loss) before cumulative change in accounting principle		(29,870	)		(8,464	)		2,742		(23,437	)		(33,264	)
Cumulative effect of change in accounting principle, net of tax(2)		—			—			—		638			—
Net income (loss)(3)(4)	$	(29,870	)	$	(8,464	)	$	2,742	$	(22,799	)	$	(33,264	)
Basic net income (loss) per share:
Prior to cumulative effect of change in accounting principle, net of tax	$	(43.16	)	$	(5.59	)	$	0 .14	$	(0.88	)	$	(1.16	)
Cumulative effect of change in accounting principle, net of tax		—			—			—		0.02			—
Net income (loss) per share(5)(6)	$	(43.16	)	$	(5.59	)	$	0.14	$	(0.86	)	$	(1.16	)
Weighted average number of shares		692			1,515			19,002		26,627			28,626
Diluted net income (loss) per share:(6)
Prior to cumulative effect of change in accounting principle, net of tax	$	(43.16	)	$	(5.59	)	$	0.13	$	(0.88	)	$	(1.16	)
Cumulative effect of change in accounting principle, net of tax		—			—			—		0.02			—
Net income (loss) per share(5)(6)	$	(43.16	)	$	(5.59	)	$	0.13	$	(0.86	)	$	(1.16	)
Weighted average number of shares		692			1,515			21,161		26,627			28,626

40

(1) Amounts include stock-based compensation as follows:

	Year Ended
	December 28, 2003		January 2, 2005		January 1, 2006		December 31, 2006		December 30, 2007
Cost of revenue	$	74	$	40	$	271	$	267	$	271
Research and development		2,415		1,054		3,832		4,920		7,917
Selling, general and administrative		3,154		3,876		4,120		4,471		5,686

(2) The cumulative effect of the change in accounting principle arises from the adoption Statement of Financial Accounting Standards No. (SFAS) 123 (revised 2004), Share-Based Payment (SFAS 123(R)).

(3) Net income for 2006 and 2007 included stock-based compensation expense under SFAS 123(R) of $9.7 million and $13.9 million, respectively. Because we implemented SFAS 123(R) as of January 2, 2006 using the modified prospective transition method, prior periods do not reflect stock-based compensation expense related to this new accounting standard. See “Note 11. Stock-Based Compensation” to the consolidated financial statements included in this report.

(4) Net income for 2006 includes acquired company results of operations beginning on the date of acquisition. See “Note 2. Business Combinations” to the consolidated financial statements included in this report for a summary of recent significant acquisitions.

(5) Net income (loss) per share have been retroactively adjusted to give effect to our September 20, 2005, 1-for-12 reverse stock split.

(6) The basic and diluted net loss computation exclude potential shares of common stock issuable upon conversion of convertible preferred stocks and exercise of options and warrants to purchase common stock when their effect would be antidilutive. See “Note 1. Ikanos and Summary of Significant Accounting Policies” to the consolidated financial statements included in this report.

	December 28, 2003			January 2, 2005			January 1, 2006		December 31, 2006		December 30, 2007
	(In thousands)
Balance Sheet Data:
Cash, cash equivalents and short-term investments	$	11,236		$	25,428		$	93,920	$	109,638	$	83,972
Working capital		8,919			18,297			95,627		108,685		89,047
Total assets		20,758			42,031			125,595		175,857		153,156
Debt and capital lease obligations		1,835			2,695			1,964		1,805		—
Convertible preferred stock		84,963			101,633			—		—		—
Total stockholders’ equity (deficit)		(73,999	)		(76,685	)		103,976		142,890		124,933

41

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, risks and uncertainties, including the risk factors set forth in this discussion, as more fully described in Part I, Item 1.A “Risk Factors” in this annual report on Form 10-K. Generally, the words “anticipate”, “expect”, “intend”, “believe” and similar expressions identify forward-looking statements. These forward-looking statements include, without limitation, our expectation that a small number of OEMs will continue to account for a substantial portion of our revenue; our existing and expected cash, cash equivalents and cash flows will be sufficient to meet our anticipated cash needs for at least the next twelve months; our belief in the effectiveness of our internal controls; our expectation that significant customer concentration in a small number of OEM customers will continue for the foreseeable future; our expectation that our foreign currency exposure will increase as our operations in India and other countries expand; and future costs and expenses and financing requirements. The forward-looking statements made in this Form 10-K are made as of the filing date with the Securities and Exchange Commission and future events or circumstances could cause results that differ significantly from the forward-looking statements included here. Accordingly, we caution readers not to place undue reliance on these statements and, except as required by law, we assume no obligation to update any such forward-looking statements.

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes that are included elsewhere in this annual report on Form 10-K.

Overview

We are a leading global provider of high-performance silicon and software for interactive broadband. We develop and market end-to-end solutions for the last mile and the digital home, which enable carriers to offer enhanced triple play services, including voice, video and data. Our solutions power DSLAMs, ONUs, concentrators, customer premise equipment, modems and residential gateways for leading network equipment manufacturers. Our products have been deployed by carriers in Asia, Europe and North America. We believe that we can offer advanced products by continuing to push existing limits in silicon, systems and software. We have developed programmable, scalable chip architectures, which form the foundation for deploying and delivering triple play services. Expertise in the creation and integration of unique DSP algorithms with advanced digital, mixed signal and analog semiconductors enables us to offer high-performance, high-density and low power VDSLx products. Flexible network processor architecture with wire-speed packet processing capabilities enables high-performance residential gateways for distributing advanced services in the home. These industry-leading solutions thus support carriers’ triple play deployment plans to the digital home while keeping their capital and operating expenditures low.

We outsource all of our semiconductor fabrication, assembly and test functions, which enable us to focus on design, development, sales and marketing of our products and reduce the level of our capital investment. Our customers consist primarily of ODMs, CMs and OEMs, who in turn sell our semiconductors as part of their product solutions to carriers. We also sell to third-party sales representatives, who in turn sell to ODMs, CMs and OEMs. We were incorporated in April 1999 and through December 31, 2001, we were engaged principally in research and development. We began commercial shipment of our products in the fourth quarter of 2002. Over the last three years, our revenue was $85.1 million in 2005, $134.7 million in 2006 and $107.5 million in 2007. Our revenue can fluctuate significantly, even on a quarterly basis. For instance, in the first quarter of 2005, our revenue decreased $6.2, million or 33%, from the fourth quarter of 2004, yet in the second quarter of 2005, our revenue increased $7.0 million, or 57%, from the first quarter of 2005. In the fourth quarter of 2006, our revenue declined by $15.7 million, or 43%, from the third quarter of 2006. Quarterly fluctuations in revenue are a characteristic of our industry. And given our concentration of revenue among a few significant customers and given their buying patterns, we have experienced, and are likely to experience again, significant quarterly fluctuations of revenue. Specifically, carriers purchase equipment based on expected deployment and OEMs

42

may occasionally manufacture equipment at rates higher than equipment is deployed. As a result, periodically and usually without significant notice, carriers will reduce orders with OEMs for new equipment and OEMs in turn will reduce orders for our products, which will adversely impact the quarterly demand for our products, even when deployment rates may be increasing.

In September 2005, we sold 6.4 million shares of our common stock in our initial public offering at $12.00 per share. Aggregate net proceeds from our initial public offering, after deducting underwriting discounts and commissions and issuance costs, were $67.9 million. We also had 15.3 million shares of redeemable convertible preferred stock outstanding that automatically converted into the same number of shares of our common stock upon the closing of our initial public offering.

In February 2006, we acquired network processing and ADSL assets from ADI for $32.7 million in cash and began deriving revenue relating to network processing and ADSL products in the same quarter. This acquisition enabled us to enter the growing residential gateway semiconductor market and diversified our product offerings, allowing us to sell into new markets worldwide. As a result of this acquisition, we incurred significant additional expenses related to the addition of employees and related expenses of developing and marketing products as well as non-cash acquisition-related charges.

In March 2006, we sold 2.5 million shares of our common stock in a follow-on offering at $20.75 per share. Aggregate net proceeds from the follow-on offering, after deducting underwriting discounts and commissions and issuance costs, were $48.5 million. In the follow-on offering, selling stockholders including members of our senior management sold 3.3 million shares of common stock held by them. We did not receive any proceeds from the sale of shares by the selling stockholders.

In February 2008, we purchased the DSL technology and related assets from Centillium Communications, Inc. for approximately $12 million in cash. The team of engineers, DSL products, technology, patents and other intellectual property will allow us to extend our market leadership as well as accelerate our digital home initiatives and next generation VDSL2 development.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and the results of operations are based on our consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. In preparing our consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on amounts reported in our consolidated financial statements. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates and make changes accordingly. We also discuss our critical accounting estimates with the Audit Committee of the Board of Directors. We believe that the assumptions, judgments and estimates involved in the accounting for revenue, cost of revenue, inventories, income taxes, impairment of goodwill, acquisitions and stock-based compensation expense have the greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies. We discuss below the critical accounting estimates associated with these policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.

Revenue Recognition

The performance of our semiconductor products is reliant upon firmware. Accordingly, revenue from the sale of semiconductors is recognized in accordance with Emerging Issues Task Force Issue No. (EITF) 03-05, Application of AICPA Statement of Position 97-2 to non-software deliverables in an arrangement containing more-than-incidental software. Revenue from sales of semiconductors is recognized upon shipment when

43

persuasive evidence of an arrangement exists, the required firmware is delivered, legal title and risk of ownership has transferred, the price is fixed or determinable and collection of the resulting receivable is probable. In instances where semiconductors are shipped prior to the release of the related production level firmware, revenue is deferred as we have not established vendor-specific objective evidence of fair value for the undelivered firmware. Revenue related to these products is recognized when the firmware is delivered or otherwise made available to the customer. In addition, we record reductions to revenue for estimated product returns and pricing adjustments, such as volume purchase incentives, in the same period that the related revenue is recorded. The amount of these reductions is based on historical sales returns, analysis of credit memo data, specific criteria included in volume purchase incentives agreements, and other factors known at the time. Additional reductions to revenue would result if actual product returns or pricing adjustments exceed our estimates or if we settle any claims brought by our customers that are in excess of our standard warranty terms for cash payments.

Marketable Securities

We account for our marketable securities in accordance with SFAS 115, Accounting for Certain Investments in Debt and Equity Securities. We classify our marketable securities as available-for-sale at the time of purchase and re-evaluate such designation as of each consolidated balance sheet date. Our marketable securities include commercial paper, corporate bond and government securities and auction rate securities. Our marketable securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of shareholders’ equity. Realized gains or losses on the sale of marketable securities are determined using the specific-identification method. We evaluate our investments periodically for possible other-than-temporary impairment by reviewing factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and our ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery of market value. We record an impairment charge to the extent that the carrying value of our available for sale securities exceeds the estimated fair market value of the securities and the decline in value is determined to be other-than-temporary.

Accounts Receivable Allowance

We perform ongoing credit evaluations of our customers and adjust credit limits, as determined by our review of current credit information. We continuously monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience, our anticipation of uncollectible accounts receivable and any specific customer collection issues that we have identified. While our credit losses have historically been low and within our expectations, we may not continue to experience the same credit loss rates that we have in the past. Our receivables are highly concentrated in a relatively few number of customers. Therefore, a significant change in the liquidity, financial position, or willingness to pay timely, or at all, of any one of our significant customers would have a significant impact on our results of operations and cash flows.

Inventories

We value our inventories at the lower of cost or estimated market value. We estimate market value based on our current pricing, market conditions and specific customer information. We write down inventory for estimated obsolescence of unmarketable inventories and quantities on hand in excess of estimated future demand and market conditions. If actual shipments are less favorable than expected, additional charges may be required. Once inventory is written down, a new accounting basis is established, and it is not written back up in future periods.

Warranty

We provide for the estimated cost of product warranties at the time revenue is recognized based on our historical experience of similar products. While we engage in product quality programs and processes, including

44

monitoring and evaluating the quality of our suppliers, our warranty accrual is affected by our contractual obligations, product failure rates, the estimated and actual cost incurred by us and our customers for replacing defective parts. Costs may include replacement parts, labor to rework and freight charges. We monitor product returns for warranty and maintain an accrual for the related warranty expenses. Should actual failure rates, cost of product replacement and inbound and outbound freight costs differ from our estimates, revisions to the estimated warranty reserve would be required.

Acquisitions

We are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired, liabilities assumed, as well as purchased in-process research and development (IPR&D) based on the estimated fair values. We use various models to determine the fair values of the assets acquired and liabilities assumed. These models include the discounted cash flow (DCF), the royalty savings method and the cost savings approach. The valuation requires management to make significant estimates and assumptions, especially with respect to long-lived and intangible assets.

Critical estimates in valuing certain of the intangible assets include, but are not limited to, future expected cash flows from customer contracts, customer lists, distribution agreements and acquired developed technologies and patents; expected costs to develop the IPR&D into commercially viable products and estimating cash flows from the projects when completed; the acquired company’s brand awareness and market position as well as assumptions about the period of time the brand will continue to be used in the combined company’s product portfolio; and discount rates. We derive our discount rates from our internal rate of return based on our internal forecasts and we may adjust the discount rate giving consideration to specific risk factors of each asset. Management’s estimates of fair value are based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur.

Accounting for Impairment of Goodwill

During the fourth quarter of 2007, we assessed the fair value of the goodwill that resulted from the NPA acquisition for impairment in accordance with SFAS 142, Goodwill and Other Intangible Assets, which requires that goodwill be tested for impairment on a periodic basis. The process of evaluating the potential impairment of goodwill is highly subjective and requires significant management judgment to forecast future operating results, projected cash flows and current period market capitalization levels. In estimating the fair value of the business, we make estimates and judgments about the future cash flows. Although our cash flow forecasts are based on assumptions that are consistent with the plans and estimates we are using to manage our business, there is significant judgment in determining such future cash flows. We also consider market capitalization on the date we perform the analysis. Based on our annual impairment test performed for 2007, we concluded that there was no impairment of goodwill. However, there can be no assurance that we will not incur charges for impairment of goodwill in the future, which could adversely affect our earnings.

Accounting for Income Taxes

We record the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the balance sheets, as well as operating loss and tax credit carry forwards. We have recorded a full valuation allowance against our deferred tax asset. Based on our historical losses and other available objective evidence, we determined it is more likely than not that the deferred tax asset will not be realized. While we have considered potential future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the full valuation allowance, in the event that we were to determine that we would be able to realize our deferred tax assets in the future, an adjustment to the deferred tax asset would increase net income in the period such determination was made. In addition, the calculation of our tax

45

liabilities involves dealing with uncertainties in the application of complex tax regulations. As a result of the implementation of the Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109, we recognize liabilities for uncertain tax positions based on the two-step process prescribed within the interpretation. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

Stock-Based Compensation Expense

We account for share-based compensation related to share-based transactions in accordance with the provisions of SFAS 123(R), Share-Based Payment. Under the fair value recognition provisions of SFAS 123(R), share-based payment expense is estimated at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period of the award. Determining the appropriate fair value model and calculating the fair value of stock-based awards requires judgment, including estimating stock price volatility, forfeiture rates and expected life. We elected to use the modified prospective transition method as permitted by SFAS 123(R) and therefore we have not restated our financial results for prior periods.

We have estimated the expected volatility as an input into the Black-Scholes valuation formula when assessing the fair value of options granted. Our current estimate of volatility was based upon a blend of average historical volatilities of our stock price and that of our peer group. To the extent volatility of our stock price increases in the future, our estimates of the fair value of options granted in the future could increase, thereby increasing share-based payment expense in future periods. In addition, we apply an expected forfeiture rate when amortizing share-based payment expense. Our estimate of the forfeiture rate was based primarily upon historical experience of employee turnover. To the extent we revise this estimate in the future; our share-based payment expense could be materially impacted in the quarter of revision, as well as in following quarters. Our expected term of options granted was derived from the average midpoint between vesting and the contractual term, as described in the SEC’s Staff Accounting Bulletin No. (SAB) 107, Share-Based Payment. In the future, as empirical evidence regarding these input estimates is able to provide more directionally predictive results, we may change or refine our approach of deriving these input estimates. These changes could impact our fair value of options granted in the future.

Previously, we elected to account for these share-based payment awards under Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and elected to only disclose the pro forma impact of expensing the fair value of stock options in the notes to the financial statements.

The above items are not a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP with no need for our management’s judgment in their application. There are also areas in which our management’s judgment in selecting any available alternative would not produce a materially different result. See our consolidated financial statements and related notes thereto included elsewhere in this annual report on Form 10-K that contain accounting policies and other disclosures required by GAAP.

Results of Operations

Revenue

Our revenue is primarily derived from sales of our semiconductor products. Revenue from product sales is generally recognized upon shipment, net of sales returns, rebates and allowances. As is typical in our industry, the selling prices of our products generally decline over time. Therefore, our ability to increase revenue is dependent upon our ability to increase unit sales volumes of existing products and to introduce and sell new products in greater quantities. Our ability to increase unit sales volume is dependent primarily upon our ability to increase and fulfill current customer demand and obtain new customers.

46

Revenue decreased by $27.2 million, or 20%, to $107.5 million in 2007 from $134.7 million in 2006. The majority of the decrease relates to an overall decline in volume of units sold relating to a number of factors, including an equipment correction in Japan as carriers slowed orders as they lowered their existing equipment levels, a product transition in Korea as carriers move to our 5^th generation product platform as well as some market share loss to PON technologies and a lower volume of ADSL-based gateways being sold in Europe. A portion of the revenue decrease also related to a product shift in Japan from Access to Gateway products, whereby the Gateway products have a lower selling price than the Access products.

Revenue for 2006 was $134.7 million as compared to $85.1 million for 2005, an increase of $49.6 million, or 58%. The majority of the increase in 2006, or $38.1 million, relates to products acquired in the NPA acquisition. Revenue from our VDSLx semiconductors increased by $11.5 million, or 13%, in this timeframe due to an increase in the number of port shipments as a result of continued demand of VDSLx based products by carriers in primarily Asia and Europe, offset by a decrease in average selling prices per port of such semiconductors. The decrease in average selling prices was due to a overall price declines as well as a shift in the product mix as carriers began to deploy more subscriber or residential located equipment, which typically have lower selling prices than products installed into carrier networks and the central office, and as carriers outside of Japan deployed lower bandwidth solutions, which also generally have lower selling prices as compared to our 100/100 Mbps solutions. The increase in our revenue was the result of increased port shipments offset by slight decreases in average selling prices per port.

We generally sell our products to OEMs through a combination of our direct sales force and third-party sales representatives. Sales are generally made under short-term, non-cancelable purchase orders. We also have volume purchase agreements, and certain customers who provide us with non-binding forecasts. Although certain OEM customers may provide us with rolling forecasts, our ability to predict future sales in any given period is limited and subject to change based on demand for our OEM customers’ systems and their supply chain decisions.

Historically, a small number of OEM customers, the composition of which has varied over time, have accounted for a substantial portion of our revenue, and we expect that significant customer concentration will continue for the foreseeable future, but it may diversify across more carrier customers as we expect more carriers world-wide to begin deployments of Fiber Fast broadband solutions and Gateway products. The following direct customers accounted for more than 10% of our revenue for the years indicated. Sales made to OEMs is based on information that we receive at the time of ordering.

Direct Customer	OEM Customer	2007	2006	2005
NEC Corporation (USA)	NEC Corporation (Magnus)	29%	23%	44%
Sagem Communications	Sagem Communications	20	23	—
Altima	Sumitomo Electric Industries	12	19	28
Uniquest	Various	11	22	24

Revenue by Country as a Percentage of Total Revenue

	2007		2006		2005
Japan	48	%	42	%	72	%
France	23		24		2
Korea	11		22		24
Other	18		12		2

The table above reflects sales to our direct customers based on where they are headquartered. It does not necessarily reflect carrier deployment of our products as we do not sell direct to them. For the year ended December 30, 2007 compared to the year ended December 31, 2006, revenue from Korea decreased by $17.8 million, which represents the greatest geographical decline for this period. The decrease is due to an OEM that

47

ceased to manufacture product for carriers in Japan in 2006, a product transition to our 5^th generation products in early 2007 and a loss of a portion of the market to PON-based technology. Although Japan revenue increased as a percentage of total revenue, it decreased by $5.4 million in absolute dollars as overall volume declined and as we experienced a shift from Access to Gateway products, which have lower average sales price. Revenue in France decreased $8.0 million due to lower volume shipped, mainly attributed to decreased gateway sales. In 2006, we added a significant customer in Europe as a result of our NPA acquisition, which resulted in the change in mix between 2006 and 2005.

Revenue by Product Family as a Percentage of Total Revenue

	2007		2006		2005
Access	58	%	53	%	82	%
Gateway	42		47		18

For 2007 as compared to 2006, the decline in Gateway revenue exceeded the decline in Access revenue, resulting in Access being a greater percentage of revenue. Gateway revenue was lower in Europe and Korea in 2007 as compared to 2006. The change in mix between 2006 and 2005 is due to the addition of the gateway products from ADI as well as an increase in the number of VDSLx CPE semiconductors sold.

Cost and Operating Expenses

							% Change
	2007		2006		2005		2007/2006		2006/2005
	(In millions)
Cost of revenue	$	63.3	$	81.4	$	39.3	(22	)%	107	%
Research and development		51.1		53.7		28.4	(5	)	89
Sales, general and administrative		27.4		25.1		15.5	9		62
Restructuring charges		3.7		1.7		—
Common stock offering expenses		—		1.0		—

Operating Expenses as a Percent of Total Revenue:

	2007		2006		2005
Cost of revenue	59	%	60	%	46	%
Research and development	48		40		33
Sales, general and administrative	25		19		18

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

Cost of revenue decreased to $63.3 million during 2007 as compared to $81.4 million in 2006. The decrease is primarily due to decreased sales in 2007 as compared to 2006. Our gross margins were 41% in 2007 as compared to 40% in 2006.

48

Cost of revenue increased to $81.4 million during 2006 as compared to $39.3 million in 2005. The increase is primarily due to higher volumes of products shipped including three full quarters of cost of products sold related to the NPA acquisition. Our gross margins were 40% in 2006 as compared to 54% in 2005. The decrease in gross margins is primarily a result of price decreases on our Access semiconductors that exceeded our cost decreases on those same products; sales of Access products into new markets at lower average selling prices; and the introduction of the NPA products, which generally have lower gross margins. Also during 2006, in connection with the NPA and Doradus acquisitions, we charged to cost of revenue $6.1 million related to the amortization of intangibles, including $4.6 million related to the favorable supply agreement, and $1.0 million related to the fair value adjustment to the acquired inventory. Under purchase accounting, acquired inventory is recorded at fair value, that is the selling price less the direct selling expense. As such, when these products are sold, they have almost no gross margin. The impact of this accounting treatment was to increase cost of revenue by $1.0 million in 2006.

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

Research and development expenses decreased $2.6 million, or 5%, to $51.1 million in 2007 as compared to $53.7 million in 2006. The decrease was primarily due to in process research and development costs of $3.5 million in 2006 related to the acquisitions that were not included in 2007, a $3.1 million decrease in testing and tape-out costs, and a $1.0 million decrease in personnel costs. These decreases were partially offset by increases in intellectual property costs and design tools of $1.5 million, stock-based compensation of $3.0 million and depreciation expense of $0.4 million.

Research and development expenses increased $25.3 million, or 89%, to $53.7 million in 2006 as compared to $28.4 million in 2005. The increase was due to several reasons. First, our personnel and personnel related costs increased by $8.5 million resulting from the increase in headcount. Second, our outside engineering service and support costs increased by $6.3 million due to an increase in the number of new product introductions and related tape-outs. Third, facilities cost increased by $1.4 million as a result of the expansion of our primary research and development facility and the addition of new facilities relating to the NPA acquisition. Fourth, depreciation increased by $2.6 million due to the growth in our asset base. Finally, in connection with the acquisitions in 2006, we expensed $3.5 million of in-process research and development expenses and incurred $0.7 million in amortization of related intangibles, whereas we did not incur these costs in 2005. Stock-based compensation was $4.9 million in 2006 as compared to $3.8 million in 2005.

As of December 30, 2007, we had 184 people engaged in research and development of whom 95 were located in India and 89 were located in North America. As of December 31, 2006, we had 182 people engaged in research and development of whom 94 were located in India and 88 were located in North America. As a result of our acquisitions, we added over 80 people engaged in research and development in 2006. At the end of 2005, we had 130 people in research and development of whom 55 were located in India and 75 were located in the United States.

Selling, general and administrative expenses. Selling, general and administrative (SG&A) expenses increased by $2.3 million in 2007, or 9%, to $27.4 million as compared to $25.1 million in 2006. The increase is primarily attributable to additional personnel costs of $2.3 million, stock-based compensation expense of $1.2 million, depreciation expense of $0.6 million, and facilities expense of $0.3 million. These increases were offset by decreases in amortization of NPA acquisition intangibles of $1.4 million and professional fees of $0.5 million.

49

In 2006, SG&A expenses increased $9.6 million, or 62%, to $25.1 million as compared to $15.5 million in 2005. Personnel expenses increased by $3.2 million due to a 33% increase in headcount in 2006 as compared to 2005. This was partially offset by a decrease in recruiting and external commission expense of $1.1 million as we replaced external sales representatives with full time employees. We incurred stock-based compensation of $4.5 million in 2006 as compared to $4.1 million in 2005.

As of December 30, 2007, SG&A headcount was 85, which compares to 73 at the end of 2006 and 48 at the end of 2005. The increase in headcount is largely due to the conversion of contracted labor to employees.

Restructuring charges. During the third and fourth quarters of 2007, we incurred restructuring and severance expenses of $3.7 million as we outsourced our back-end physical semiconductor design process and terminated four members of senior management. The restructuring charges consist of approximately $2.9 million in contract termination costs and asset impairments and $0.8 million in severance costs.

During the fourth quarter of 2006, we incurred restructuring and severance expenses of $1.7 million as we realigned and reduced our overall expenditures based on the expectations for revenue and gross margins at the time. The restructuring plan involved reducing our engineering workforce by 15% of which approximately half of the reduction was from India and half was from North America. In addition, we decided to close our Canadian office and began transitioning those responsibilities to the United States through a combination of relocations and hiring. We incurred facility related expenses in relation to the lease termination of our Canadian office.

Common stock offering expenses. We incurred $1.0 million of common stock offering expenses in 2006 related to the proportionate share of expenses incurred by us on behalf of the selling stockholders in our common stock offering in March 2006.

Interest Income, Net

Interest income, net consists primarily of interest income earned on our cash, cash equivalents and investments, which is partially offset by interest expense and other non-operating expenses. Interest income, net was $4.9 million for 2007 as compared to $5.0 million in 2006 and $1.2 million in 2005. The increase in interest income between 2006 and 2005 was due to interest earned on the $67.9 million of net proceeds raised in our initial public offering.

Provision for Income Taxes

The provision for income taxes was $0.3 million for each of the years ended 2007, 2006 and 2005, relating to foreign income taxes and federal and state alternative minimum income taxes.

Cumulative Effect of Change in Accounting Principle

The adoption of SFAS 123(R) in 2006 resulted in a cumulative benefit of $0.6 million, which reflects the net cumulative impact of estimating future forfeitures in the determination of period expense, rather than recording forfeitures when they occur, as previously permitted.

Net Income/Loss

As a result of the above factors, we reported a net loss of $33.3 million in 2007 as compared to a net loss of $22.8 million in 2006 and net income of $2.7 million in 2005.

Liquidity and Capital Resources

Cash, cash equivalents and investments decreased $18.7 million to $91.0 million at December 30, 2007 as compared to $109.6 million at the end of 2006. This decrease was primarily due to our cash used in operations of

50

$15.4 million. As of December 30, 2007, we have funded our operations primarily through cash from private and public offerings of our common stock, cash generated from the sale of our products and proceeds from the exercise of stock options and stock purchased under our employee stock purchase plan. Our uses of cash include payroll and payroll-related expenses, manufacturing costs, purchases of equipment, tools and software and operating expenses, such as tape outs, marketing programs, travel, professional services and facilities and related costs. We believe there will be additional working capital requirements to fund and operate our business. We expect to finance our operations primarily through operating cash flows and existing cash and investment balances.

The following table summarizes our statement of cash flows for the years ended December 30, 2007, December 31, 2006 and January 1, 2006 (in millions):

	2007			2006			2005
Statements of Cash Flows Data:
Cash and cash equivalents—beginning of year	$	49.3		$	91.9		$	25.4
Net cash provided by (used in) operating activities		(15.4	)		12.9			6.6
Net cash provided by (used in) investing activities		29.7			(105.6	)		(7.2	)
Net cash provided by financing activities		1.5			50.0			67.1
Effect of exchange rates on cash and cash equivalents		—			0.1			—
Cash and cash equivalents—end of year	$	65.1		$	49.3		$	91.9

Operating Activities

During 2007, we used $15.4 million in net cash from operating activities, while incurring a net loss of $33.3 million. Included in the net loss was approximately $26.3 million in various non-cash expenses and charges consisting of depreciation and amortization, loss on disposal of property and equipment, stock-based compensation expense and amortization of intangible assets and acquired technology. The non-cash items were offset by a decrease in accounts payable and liabilities of $4.7 million, and increases in accounts receivable of $1.9 million and prepaid and other assets of $1.6 million. The decrease in accounts payable and liabilities was attributed to timing of purchases and payments in the ordinary course of business. The increase in accounts receivable was due to increased sales in the fourth quarter of 2007 as compared to 2006. The increase in prepaid and other assets was primarily due to prepaid royalties and term-based software licenses.

During 2006, we generated $12.9 million of net cash from operating activities, while incurring a net loss of $22.8 million. Included in the net loss was approximately $27.6 million in various non-cash expenses and charges consisting of depreciation and amortization, stock based compensation expense, amortization of intangible assets and acquired technology, purchased IPR&D and the cumulative effect of change in accounting principles. Operating cash flows also benefited from an increase in accounts payable and accrued liabilities of $11.0 million. The increase in accounts payable and accrued liabilities related principally to inventory purchases required to support a broader product portfolio and our transition to our 5^th generation Access products and the timing of our payments to our suppliers. These sources of operating cash flows were partially offset by a $4.1 million increase in accounts receivable caused primarily by the payments terms associated with the addition of a significant European customer in 2006 and the generally longer collection cycle in this region.

Our operating activities generated $6.6 million in cash during 2005. The primary source of these cash flows was $13.9 million in net income before depreciation of $2.9 million and stock-based compensation expense of $8.2 million. Operating cash flows also benefited from an increase in accounts payable and accrued liabilities of $5.3 million. This increase related principally to an increase in inventory purchases required to support our increased revenues and the timing of payment for these inventory purchases to our suppliers. These sources of operating cash flows were partially offset by a $10.9 million increase in accounts receivable caused by the increase in sales volume, the timing of our sales and subsequent cash collections.

51

Investing Activities

We generated cash from investing activities of $29.7 million in 2007, primarily from the net sale of investments totaling $34.3 million, offset by $4.6 million in purchases of property and equipment. We used net cash of $105.6 million in 2006, which related primarily to the NPA and Doradus acquisitions of $34.9 million, the purchase of property and equipment of $12.4 million and the net purchase of short-term investments totaling $58.3 million. Cash used in investing activities in 2005 related to the acquisition of property and equipment and purchase of short-term investments.

We anticipate that we will continue to purchase necessary property and equipment in the normal course of our business. The amount and timing of these purchases and the related cash outflows in future periods depend on a number of factors, including the hiring of employees, the rate of change of computer hardware and software used in our business and our business outlook. We have classified our investment portfolio as “available for sale,” and our investment objectives are to preserve principal and provide liquidity, while maximizing yields without significantly increasing risk. We may sell an investment at any time if the quality rating of the investment declines; the yield on the investment is no longer attractive; or we are in need of cash. Beginning in the third quarter of 2007, $7.2 million of our auction rate securities failed to sell at auction and we believe are temporarily not liquid. We have recorded a $0.2 million unrealized holding loss related to these securities within accumulated other comprehensive income (loss) as a separate component of stockholders’ equity. Depending on future facts and circumstances as they occur, we may increase this unrealized holding loss or we may record a realized loss if we believe the decrease in the fair value of the securities is not other than temporary. We have used cash to acquire businesses and technologies that enhance and expand our product offerings, we anticipate that we will continue to do so in the future. In February 2008 we purchased the DSL technology and related assets from Centillium Communications, Inc., for $12 million in cash plus certain assumed liabilities. The nature of these transactions makes it difficult to predict the amount and timing of such cash requirements.

Financing Activities

Our financing activities provided $1.5 million in 2007 as compared to $50.0 million in 2006 and $67.1 million in 2005. Cash generated by financing activities during 2007 was primarily from proceeds of the exercises of employee stock options offset by payments made on capital lease obligations. Cash generated by financing activities during 2006 was primarily due to the completion of our secondary offering in which we raised $48.5 million of net proceeds. We have used, and continue to intend to use, the net proceeds for working capital and general corporate purposes, which may include the acquisition of businesses, products, product rights or technologies, strategic investments or purchases of common stock. Cash generated by financing activities in 2005 was primarily due to the completion of our initial public offering in which we received $67.9 million of net proceeds.

We believe that our existing cash, cash equivalents and cash flows expected to be generated from future operations, if any, will be sufficient to meet our anticipated cash needs for at least the next twelve months. Our future capital requirements will depend on many factors including our rate of revenue growth, our ability to develop future revenue streams, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, the costs to ensure access to adequate manufacturing capacity and the continuing market acceptance of our products. Additionally in the future, we may become party to agreements with respect to potential investments in, or acquisitions of, complementary businesses, products or technologies, which could also require us to seek additional equity or debt financing. The sale of additional equity securities or convertible debt securities would result in additional dilution to our stockholders. Additional debt would result in increased interest expenses and could result in covenants that would restrict our operations. We have not made arrangements to obtain additional financing, and there is no assurance that such financing, if required, will be available in amounts or on terms acceptable to us, if at all.

52

Contractual Commitments and Off Balance Sheet Arrangements

We do not use off balance sheet arrangements with unconsolidated entities or related parties, nor do we use other forms of off balance sheet arrangements such as special purpose entities and research and development arrangements. Accordingly, our liquidity and capital resources are not subject to off balance sheet risks from unconsolidated entities.

We lease certain office facilities, equipment and software under non-cancelable operating leases. The following table summarizes our contractual obligations as of December 30, 2007, and the effect those obligations are expected to have on our liquidity and cash flow in future periods (in millions):

	Total		2008		2009 and 2010		2011 and Thereafter
Operating lease payments	$	4.0	$	1.9	$	1.9	$	0.2
Restructuring payments		1.7		1.7		—		—
Inventory purchase obligations		3.1		3.1		—		—
Access to technology		2.4		1.9		0.5		—
Minimum royalty obligation		0.7		0.7		—		—
Software development agreement		0.5		0.5		—		—
	$	12.4	$	9.8	$	2.4	$	0.2

For the purpose of this table, purchase obligations for the purchase of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on our current manufacturing needs and are fulfilled by our vendors within short time horizons. In addition, we have purchase orders that represent authorizations to purchase rather than binding agreements. We do not have significant agreements for the purchase of raw materials or other goods specifying minimum quantities or set prices that exceed our expected requirements. Access to technology represents an agreement under which we have the right to use specific technology from a third party for a period of three years. Other obligations represent minimum royalty payments with a suppliers.

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

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines fair value, provides a framework for measuring fair value, and expands the disclosures required for fair value measurements. SFAS 157 applies to other accounting pronouncements that require fair value measurements; it does not require any new fair value measurements. We are required to apply the provisions of SFAS 157 beginning in 2008. The adoption of SFAS 157 is not expected to have a material effect on our consolidated statements of financial position, operations or cash flows.

In February 2007, the FASB issued SFAS 159, the Fair Value Option for Financial Assets and Financial Liabilities, which expands the standards under SFAS 157 to provide the one-time election (Fair Value Option) to measure financial instruments and certain other items at fair value and also includes an amendment of SFAS 115, Accounting for Certain Investments in Debt and Equity Securities. SFAS 159 will be effective for the Company beginning in 2008. The adoption of SFAS 159 is not expected to have a material effect on our consolidated statements of financial position, operations or cash flows.

53

In June 2007, the FASB ratified EITF 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities. This issue provides that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. Such amounts should be recognized as an expense as the related goods are delivered or the related services are performed. EITF 07-3 will be effective for the Company beginning in 2008. The adoption of this EITF is not expected to have a material impact on the our consolidated financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations, which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree in a business combination. SFAS 141R also establishes principles around how goodwill acquired in a business combination or a gain from a bargain purchase should be recognized and measured, as well as provides guidelines on the disclosure requirements on the nature and financial impact of the business combination. SFAS 141R will be effective for the Company beginning in 2009. The adoption of SFAS 141R is not expected to have a material effect on our consolidated statements of financial position, operations or cash flows.

In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51. This statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. It requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. This statement establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation. SFAS 160 will be effective for the Company beginning in 2009. The adoption of SFAS 160 is not expected to have a material effect on the Company’s consolidated statements of financial position, operations or cash flows.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

All market risk sensitive instruments were entered into for non-trading purposes. We do not use derivative financial instruments for speculative trading purposes, nor do we hedge our foreign currency exposure in a manner that entirely offsets the effects of changes in foreign exchange rates. As of December 30, 2007, we did not hold derivative financial instruments.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. The primary objective of our investment activities is to preserve principal and meet liquidity needs, while maximizing yields and without significantly increasing risk. Our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure to any single issue, issuer, or type of investment. Our investments consist primarily of U.S. government notes and bonds, auction rate securities and commercial paper. All investments are carried at market value, which approximates cost.

As of December 30, 2007, we had cash, cash equivalents and investments totaling $91.0 million. These amounts were invested primarily in money market funds and short-term investments that are held for working capital purposes. We do not enter into investments for trading or speculative purposes. If the return on our cash equivalents and investments were to change by one percent, the effect would be to increase/decrease investment income by $0.3 million.

54

Investment Risk

Auction rate securities are securities that are structured with short-term interest rate reset dates of generally less than ninety days but with contractual maturities that can be well in excess of ten years. At the end of each reset period, which occurs every seven to thirty-five days, investors can sell or continue to hold the securities at par. These securities are subject to fluctuations in fair value depending on the supply and demand at each auction. In the third quarter of fiscal year 2007, certain auction rate securities failed auction and did not sell. Based on an analysis of other-than-temporary impairment factors, we recorded a temporary impairment within other comprehensive income (loss) of approximately $0.2 million at December 30, 2007 related to these auction rate securities. Our marketable securities portfolio as of December 30, 2007 was $26.0 million. The portfolio includes $7.2 million (at cost) invested in auction rate securities all of which are currently associated with failed auctions and have been in a loss position for less than 12 months. The funds associated with the securities for which auctions have failed will not be accessible until a successful auction occurs, a buyer is found outside of the auction process or the underlying securities have matured.

Foreign Currency Risk

Our revenue and cost, including subcontractor manufacturing expenses, are predominately denominated in U.S. dollars. An increase of the U.S. dollar relative to the currencies of the countries that our customers operate in would make our products more expensive to them and increase pricing pressure or reduce demand for our products. We also incur a portion of our expenses in currencies other than the U.S. dollar, including the Euro, the Japanese yen, Korean won, Indian rupee, Singapore dollar and the Taiwanese dollar. We do not currently enter into forward exchange contracts to hedge exposure denominated in foreign currencies or any other derivative financial instruments for trading or speculative purposes. In the future, if we feel our foreign currency exposure has increased, we may consider entering into hedging transactions to help mitigate that risk. We expect that our foreign currency exposure will increase as our operations in India and other countries expand.

55

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

IKANOS COMMUNICATIONS, INC.

INDEX TO FINANCIAL STATEMENTS

	Page
Consolidated Financial Statements for the Years Ended December 30, 2007, December 31, 2006 and January 1, 2006
Report of Independent Registered Public Accounting Firm	57
Consolidated Balance Sheets	58
Consolidated Statements of Operations	59
Consolidated Statements of Stockholders’ Equity (Deficit) and Comprehensive Income (Loss)	60
Consolidated Statements of Cash Flows	62
Notes to Consolidated Financial Statements	63

56

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Ikanos Communications, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income, stockholder’s equity and cash flows present fairly, in all material respects, the financial position of Ikanos Communications, Inc. and its subsidiaries at December 30, 2007 and December 31, 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 30, 2007 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 30, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Item 9A. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits (which were integrated audits in 2007 and 2006). We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 11 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” as of January 2, 2006 and changed the manner in which it accounts for stock-based compensation in fiscal 2006.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/    PricewaterhouseCoopers LLP

San Jose, California

February 22, 2008

57

IKANOS COMMUNICATIONS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

	December 30, 2007			December 31, 2006
Assets
Current assets:
Cash and cash equivalents	$	65,126		$	49,329
Short-term investments		18,846			60,309
Accounts receivable, net of allowances of $64 and $149, respectively		17,081			15,140
Inventories		13,025			12,801
Prepaid expenses and other current assets		3,192			3,086
Total current assets		117,270			140,665
Long-term investments		7,001			—
Property and equipment, net		13,916			18,073
Intangible assets, net		6,564			10,212
Goodwill		6,247			6,247
Other assets		2,158			660
	$	153,156		$	175,857
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	12,852		$	14,466
Accrued liabilities		15,371			16,696
Capital lease obligations, current portion		—			818
Total current liabilities		28,223			31,980
Capital lease obligations		—			987
Total liabilities		28,223			32,967
Commitments and contingencies (Note 13)
Stockholders’ equity:
Preferred stock; $0.001 par value; 5,000 shares authorized; none issued and outstanding		—			—
Common stock: $0.001 par value; 100,000 shares authorized; 29,412 and 27,710 issued and outstanding, respectively		29			28
Additional paid-in capital		267,662			251,336
Warrants		—			914
Notes receivable from stockholders		—			(19	)
Deferred stock-based compensation		—			(43	)
Accumulated other comprehensive income (loss)		(118	)		50
Accumulated deficit		(142,640	)		(109,376	)
Total stockholders’ equity		124,933			142,890
	$	153,156		$	175,857

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

58

IKANOS COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Year Ended
	December 30,			December 31,			January 1,
	2007			2006			2006
Revenue	$	107,467		$	134,685		$	85,071
Cost and operating expenses:
Cost of revenue(1)		63,264			81,352			39,281
Research and development(2)		51,056			53,733			28,439
Selling, general and administrative(3)		27,398			25,082			15,532
Restructuring charges		3,661			1,691			—
Common stock offering expenses		—			954			—
Total cost and operating expenses		145,379			162,812			83,252
Income (loss) from operations		(37,912	)		(28,127	)		1,819
Interest income, net		4,942			4,970			1,218
Income (loss) before provision for income taxes		(32,970	)		(23,157	)		3,037
Provision for income taxes		294			280			295
Income (loss) before cumulative effect of change in accounting principle		(33,264	)		(23,437	)		2,742
Cumulative effect of change in accounting principle, net of tax		—			638			—
Net income (loss)	$	(33,264	)	$	(22,799	)	$	2,742
Basic net income (loss) per share:
Prior to cumulative effect of change in accounting principle, net of tax	$	(1.16	)	$	(0.88	)	$	0.14
Cumulative effect of change in accounting principle, net of tax		—			0.02			—
Net income (loss) per share	$	(1.16	)	$	(0.86	)	$	0.14
Weighted average number of shares		28,626			26,627			19,002
Diluted net income (loss) per share:
Prior to cumulative effect of change in accounting principle, net of tax	$	(1.16	)	$	(0.88	)	$	0.13
Cumulative effect of change in accounting principle, net of tax		—			0.02			—
Net income (loss) per share	$	(1.16	)	$	(0.86	)	$	0.13
Weighted average number of shares		28,626			26,627			21,161

Includes stock-based compensation expense as follows:

(1) Cost of revenue	$       271	$       267	$      271
(2) Research and development	7,917	4,920	3,832
(3) Selling, general and administrative	5,686	4,471	4,120

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

59

IKANOS COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS)

(In thousands)

	Convertible Preferred Stock					Common Stock
	Shares		Amount			Shares	Amount		Additional Paid in Capital		Warrants		Notes Receivable from Stockholders			Deferred Stock-based Compensation			Accumulated Other Comprehensive Gain (Loss)			Accumulated Deficit			Total Stockholders’ Equity (Deficit)			Comprehensive Income (Loss)
Balance at January 2, 2005	15,312		$	101,633		1,812	$	2	$	16,131	$	914	$	(137	)	$	(4,255	)	$	(21	)	$	(89,319	)	$	(76,685	)
Net income	—			—		—		—		—		—		—			—			—			2,742			2,742		$	2,742
Cumulative translation adjustment	—			—		—		—		—		—		—			—			(59	)		—			(59	)		(59	)
Unrealized gains on marketable securities	—			—		—		—		—		—		—			—			15			—			15			15
Comprehensive income																												$	2,698
Deferred stock-based compensation	—			—		—		—		9,088		—		—			(9,088	)		—			—			—
Amortization of deferred stock based compensation	—			—		—		—		—		—		—			7,658			—			—			7,658
Stock based compensation	—			—		23		—		413		—		—			(14	)		—			—			399
Issuance of common stock for stockholders’ notes receivable	—			—		1		—		125		—		(1	)		—			—			—			124
Issuance of common stock for public offering	—			—		6,400		6		67,901		—		—			—			—			—			67,907
Issuance of common stock upon exercise of warrants	—			—		14		—		—		—		—			—			—			—			—
Conversion of preferred stock	(15,312	)		(101,633	)	15,312		15		101,618		—		—			—			—			—			101,633
Net issuance of common stock under stock option plans	—			—		7		—		46		—		—			—			—			—			46
Common stock subject to repurchase	—			—		151		1		76		—		—			—			—			—			77
Repayment of notes receivable from stockholders	—			—		—		—		—		—		119			—			—			—			119
Balance at January 1, 2006	—		$	—		23,720	$	24	$	195,398	$	914	$	(19	)	$	(5,699	)	$	(65	)	$	(86,577	)	$	103,976

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

60

IKANOS COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFECIT) AND COMPREHENSIVE INCOME (LOSS)

(In thousands) (CONTINUED)

	Common Stock			Additional Paid in Capital			Warrants			Notes Receivable from Stockholders			Deferred Stock-based Compensation			Accumulated Other Comprehensive Gain (Loss)			Accumulated Deficit			Total Stockholders’ Equity (Deficit)			Comprehensive Income (Loss)
	Shares	Amount
Balance at January 1, 2006	23,720	$	24	$	195,398		$	914		$	(19	)	$	(5,699	)	$	(65	)	$	(86,577	)	$	103,976
Net loss	—		—		—			—			—			—			—			(22,799	)		(22,799	)	$	(22,799	)
Cumulative translation adjustment	—		—		—			—			—			—			80			—			80			80
Unrealized gains on marketable securities	—		—		—			—			—			—			35			—			35			35
Comprehensive loss																									$	(22,684	)
Adoption of SFAS 123(R)	—		—		(4,220	)		—			—			4,220			—			—			—
Amortization of deferred stock based compensation	—		—		—			—			—			1,436			—			—			1,436
Stock-based compensation	—		—		8,222			—			—			—			—			—			8,222
Tax benefit from stock options exercised and vested restricted stock	—		—		135			—			—			—			—			—			135
Cumulative effect of change in accounting principle	—		—		(638	)		—			—			—			—			—			(638	)
Issuance of common stock for public offering	2,500		3		48,535			—			—			—			—			—			48,538
Net issuance of common stock under stock option plans	1,490		1		3,904			—			—			—			—			—			3,905
Balance at December 31, 2006	27,710		28		251,336			914			(19	)		(43	)		50			(109,376	)		142,890
Net loss	—		—		—			—			—			—			—			(33,264	)		(33,264	)	$	(33,264	)
Unrealized loss on marketable securities	—		—		—			—			—			—			(168	)		—			(168	)		(168	)
Comprehensive loss																									$	(33,432	)
Repayment of notes receivable from stockholders	—		—		—			—			19			—			—			—			19
Stock-based compensation	—		—		13,831			—			—			43			—			—			13,874
Net issuance of common stock under stock option plans	1,702		1		1,581			—			—			—			—			—			1,582
Cancellation of warrants	—		—		914			(914	)		—			—			—			—			—
Balance at December 30, 2007	29,412	$	29	$	267,662		$	—		$	—		$	—		$	(118	)	$	(142,640	)	$	124,933

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

61

IKANOS COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Year Ended
	December 30, 2007			December 31, 2006			January 1, 2006
Cash flows from operating activities:
Net income (loss)	$	(33,264	)	$	(22,799	)	$	2,742
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Depreciation and amortization		7,305			6,302			2,903
Stock-based compensation expense		13,874			9,658			8,223
Amortization of intangible assets and acquired technology		3,648			8,897			—
Purchased in-process research and development		—			3,512			—
Cumulative effect of change in accounting principle		—			(638	)		—
Restructuring related asset write-downs		1,485			—			—
Tax benefit from stock options and restricted stock		—			(135	)		—
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable, net		(1,941	)		(4,125	)		(10,888	)
Inventories		(224	)		1,770			(1,131	)
Prepaid expenses and other assets		(1,604	)		(572	)		(559	)
Accounts payable and accrued liabilities		(4,650	)		11,046			5,345
Net cash provided (used) by operating activities		(15,371	)		12,916			6,635
Cash flows from investing activities:
Purchases of property and equipment		(4,633	)		(12,400	)		(5,219	)
Purchases of investments		(102,015	)		(89,621	)		(1,973	)
Maturities and sales of investments		136,309			31,335			—
Acquisitions, net of cash acquired		—			(34,925	)		—
Net cash provided (used) by investing activities		29,661			(105,611	)		(7,192	)
Cash flows from financing activities:
Net proceeds from public offerings		—			48,538			67,907
Net proceeds from issuances of common stock and exercise of stock options		2,385			3,919			71
Repurchases of common stock		—			(48	)		(25	)
Payments of obligations under capital lease		(897	)		(1,106	)		(910	)
Tax benefit from stock options and restricted stock		—			135			—
Collection of notes receivable from stockholders		19			—			119
Borrowing under notes payable		—			—			552
Payment of notes payable		—			(1,426	)		(628	)
Net cash provided by financing activities		1,507			50,012			67,086
Net increase (decrease) in cash and cash equivalents		15,797			(42,603	)		66,504
Effect of foreign exchange rate changes on cash and cash equivalents		—			80			(25	)
Cash and cash equivalents at beginning of year		49,329			91,932			25,428
Cash and cash equivalents at end of year	$	65,126		$	49,329		$	91,932
Supplemental disclosure of cash flow information:
Cash paid for interest expense	$	84		$	146		$	138
Cash paid for income taxes		440			534			—
Supplemental disclosures of non-cash investing and financing activities:
Property and equipment acquired under capital leases	$	—		$	2,373		$	255
Conversion of redeemable convertible preferred stock into common stock		—			—			101,633

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

62

IKANOS COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Ikanos and Summary of Significant Accounting Policies

The Company

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

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

Basis of Presentation

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

As discussed in Note 12, the Company adopted Statement of Financial Accounting Standards No. (SFAS) 123 (revised 2004), Share-Based Payment (SFAS 123(R)), on January 2, 2006, using the modified prospective transition method. Accordingly, the Company’s loss from operations for the years ended 2007 and 2006 includes approximately $13.9 million and $9.7 million, respectively in stock-based employee compensation expense for stock options and its employee stock purchase plan (ESPP). Because the Company elected to use the modified prospective transition method, results for prior periods have not been restated.

Use of Estimates

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

Adoption of New Pronouncements

In the first quarter of 2007, the Company adopted the Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109. See “Note 16. Income Taxes” for further discussion.

63

Revenue Recognition

The performance of the Company’s semiconductor products is reliant upon firmware. Accordingly, revenue from the sale of semiconductors is recognized in accordance with Emerging Issues Task Force Issue No. (EITF) 03-05, Application of AICPA Statement of Position 97-2 to non-software deliverables in an arrangement containing more-than-incidental software. Revenue from sales of semiconductors is recognized upon shipment when persuasive evidence of an arrangement exists, the required firmware is delivered, legal title and risk of ownership has transferred, the price is fixed or determinable and collection of the resulting receivable is probable. In instances where semiconductors are shipped prior to the release of the related production level firmware, revenue is deferred as we have not established vendor-specific objective evidence of fair value for the undelivered firmware. Revenue related to these products is recognized when the firmware is delivered or otherwise made available to the customer.

The Company records reductions to revenue for estimated product returns and pricing adjustments, such as competitive pricing programs and volume purchase incentives, in the same period that the related revenue is recorded. The amount of these reductions is based on historical sales returns, analysis of credit memo data, specific criteria included in volume purchase incentives agreements, and other factors known at the time. Additional reductions to revenue would result if actual product returns or pricing adjustments exceed our estimates or if we settle any claims brought by our customers that are in excess of our standard warranty terms for cash payments.

Cash, Cash Equivalents and Investments

The Company considers all highly liquid investments with an original maturity of 90 days or less at the date of purchase to be cash equivalents. Short-term investments consist of highly liquid securities with original maturities in excess of 90 days. Non-liquid investments with original maturities in excess of one year are classified as long term.

The Company accounts for its marketable securities in accordance with SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, and classifies the marketable securities as available-for-sale at the time of purchase and re-evaluates such designation as of each consolidated balance sheet date. The marketable securities include commercial paper, corporate bond and government securities and auction rate securities. The Company’s marketable securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of shareholders’ equity. Realized gains or losses on the sale of marketable securities are determined using the specific-identification method. The Company evaluates it investments periodically for possible other-than-temporary impairment by reviewing factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and the Company’s ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery of market value. The Company records an impairment charge to the extent that the carrying value of our available for sale securities exceeds the estimated fair market value of the securities and the decline in value is determined to be other-than-temporary.

Fair Value of Financial Instruments

The carrying amounts of certain of the Company’s financial instruments including, cash and cash equivalents, accounts receivables, accounts payable and accrued liabilities, approximate fair value due to the relatively short maturity periods.

Inventories

Inventories are stated at the lower of cost or market value. Cost is determined by the first-in, first-out method and market represents the estimated net realizable value. The Company records inventory write-downs for estimated obsolescence of unmarketable inventory based upon assumptions about future demand and market

64

conditions. Additionally, the Company specifically reserves for lower of cost or market if pricing trends or forecasts indicate that the carrying value of inventory exceeds its estimated selling price. Once inventory is written down, a new accounting basis is established and accordingly, it is not written back up in future periods.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the term of the lease. Equipment held under capital lease is classified as a capital asset and amortized using the straight-line method over the term of the lease or the estimated useful life, whichever is shorter. All repairs and maintenance costs are expensed as incurred.

The depreciation and amortization periods for property and equipment categories are as follows:

Computer equipment	2 to 3 years
Furniture and fixtures	4 to 5 years
Machinery and equipment	2 to 5 years
Software	2 to 6 years

Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. Intangible assets resulting from the acquisitions of entities accounted for using the purchase method of accounting are estimated by management based on the fair value of assets received. Identifiable intangible assets are comprised of existing and core technology, patents, order backlog, customer relationships, trademarks and other intangible assets. Identifiable intangible assets that have finite useful lives are being amortized over their useful lives. The Company follows the provisions of SFAS 142, Goodwill and Other Intangible Assets, under which goodwill is not amortized. Rather, goodwill is subject to at least an annual assessment for impairment (more frequently if certain indicators are present) by applying a fair-value based test. In the event that management determines that the value of goodwill has become impaired, the Company will incur an accounting charge for the amount of impairment during the year in which the determination is made.

Impairment of Long-Lived Assets

In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company evaluates long-lived assets, other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on expected undiscounted cash flows attributable to that asset. The amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.

Software Development Costs

In accordance with SFAS 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, software development costs are capitalized beginning when technological feasibility has been established and ending when a product is available for general release to customers. To date, the period between achieving technological feasibility and the issuing of such software has been short and software development costs qualifying for capitalization have been insignificant.

65

Research and Development

Research and development costs consist primarily of compensation and related costs for personnel as well as costs related to materials, supplies and equipment depreciation. All research and development costs are expensed as incurred.

Advertising Costs

Advertising costs are expensed as incurred. To date, advertising costs have been insignificant.

Concentration of Credit Risk

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

Credit risk with respect to accounts receivable is concentrated due to the number of large orders recorded in any particular reporting period. Three customers represented 28%, 18% and 14% of accounts receivable at December 30, 2007. Three customers represented 47%, 25% and 10% of accounts receivable at December 31, 2006. Three customers represented 33%, 30% and 30% of accounts receivable at January 1, 2006. Four customers accounted for 29%, 20%, 12% and 11% of revenue for the year ended December 30, 2007. Four customers accounted for 23%, 23%, 22% and 19% of revenue for the year ended December 31, 2006. Three customers accounted for 44%, 28% and 24% of revenue for the year ended January 1, 2006.

Concentration of Suppliers

The Company subcontracts all of the manufacture, assembly and tests of its products to third-parties located primarily in Asia. As a result of this geographic concentration, a disruption in the manufacturing process resulting from a natural disaster or other unforeseen event could have a material adverse effect on the Company’s financial position and results of operations. Additionally, a small number of sources manufacture, assemble and test the Company’s products, with which the Company has no long-term contracts. Also, each product generally has only one foundry and one assembly and test provider. An inability to obtain these products and services in the amounts needed and on a timely basis or at commercially reasonable prices could results in delays in product introductions, interruptions in product shipments or increases in product costs, which could have a material adverse effect on the Company’s financial position and result of operations.

Concentration of Other Risk

The semiconductor industry is characterized by rapid technological change, competitive pricing pressures and cyclical market patterns. The Company’s results of operations are affected by a wide variety of factors, including general economic conditions; economic conditions specific to the semiconductor industry; demand for the Company’s products; the timely introduction of new products; implementation of new manufacturing technologies; manufacturing capacity; the availability of materials and supplies; competition; the ability to safeguard patents and intellectual property in a rapidly evolving market; and reliance on assembly and wafer fabrication subcontractors and on independent distributors and sales representatives. As a result, the Company may experience substantial period-to-period fluctuations in future periods due to the factors mentioned above or other factors.

66

Warranty

The Company generally warrants its products against defects in materials and workmanship and non-conformance to its specifications for varying lengths of time, generally one year. If there is a material increase in customer claims compared with historical experience, or if costs of servicing warranty claims are greater than expected, the Company may record additional charges against cost of revenue.

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in equity of a business during a period from transactions and other events and circumstances from non-owner sources. The difference between the Company’s net income (loss) and its total comprehensive income (loss) for the years ended December 30, 2007, December 31, 2006 and January 1, 2006 was not material and related to foreign currency translation and unrealized gains (losses), net on marketable securities.

Net Income (Loss) Per Share

Under the provisions of SFAS 128, Earnings per Share, basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Potentially dilutive securities have been excluded from the computation of diluted net income (loss) per share if their inclusion is anti-dilutive.

The calculation of basic and diluted net income (loss) per common share is as follows (in thousands, except per share amounts):

	Year Ended
	December 30, 2007			December 31, 2006			January 1, 2006
Net income (loss)	$	(33,264	)	$	(22,799	)	$	2,742
Weighted average shares outstanding		28,626			26,645			19,084
Weighted average unvested shares of common stock subject to repurchase		—			(18	)		(82	)
Total shares—basic		28,626			26,627			19,002
Effect of dilutive securities:
Stock options and warrants		—			—			2,043
Unvested common shares subject to repurchase		—			—			82
Redeemable convertible preferred participating stock warrants		—			—			34
Total shares—diluted		28,626			26,627			21,161
Basic net income (loss) per share	$	(1.16	)	$	(0.86	)	$	0.14
Diluted net income (loss) per share	$	(1.16	)	$	(0.86	)	$	0.13

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

	Year Ended
	December 30, 2007	December 31, 2006	January 1, 2006
Anti-dilutive securities:
Weighted average redeemable convertible preferred stock	—	—	4,333
Warrants to purchase common stock	—	6	6
Weighted average restricted stock units	1,326	361	—
Weighted average options to purchase common stock	2,943	3,455	104
	4,269	3,822	4,443

67

Income Taxes

The Company accounts for income taxes under the liability method, whereby deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. In addition, the calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations. As a result of the implementation of FIN 48, the Company recognizes liabilities for uncertain tax positions based on the two-step process prescribed within the interpretation. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

Note 2. Business Combinations

Doradus Acquisition

In August 2006, the Company acquired Doradus, a developer of advanced signal processing products for communications and digital TV applications, for $2.1 million in cash, including $0.1 million in transaction costs, and the assumption of liabilities of $0.1 million, options to purchase approximately 0.2 million shares of Ikanos common stock and approximately 0.2 million shares of restricted stock. The agreement provides for additional consideration of up to $0.5 million in cash based on the achievement of certain revenue milestones. The results of Doradus’ operations have been included in the consolidated financial statements since the acquisition date.

The acquisition was accounted for as a purchase business combination. The fair value of the assets acquired, including identified intangible assets and in-process research and development expense (IPR&D), was determined to be $5.8 million, which exceeded the purchase price by $3.6 million. The fair value in excess of the purchase price was allocated ratably to the identified intangible assets and IPR&D. The allocation of the purchase price for this acquisition is as follows (in thousands):

Net tangible assets acquired	$	23
Purchased in-process research and development		612
Customer relationships		70
Developed technology		1,545
Liabilities assumed		(92	)
Total purchase price	$	2,158

The fair value of the restricted stock issued and the intrinsic value of the unvested options assumed is being recognized as compensation expense over the respective future service periods. Pro forma results of operations have not been presented, because the historical results of operations of Doradus are not material to the consolidated results of operations of the Company.

Of the total purchase price, $0.6 million was allocated to IPR&D and was expensed in the year ended December 31, 2006. Projects that qualify as IPR&D represent those that have not yet reached technological feasibility and which have no alternative future use. Of the three main IPR&D projects at the date of acquisition, all have been discontinued as of December 30, 2007.

The developed technology comprised products that have reached technological feasibility and were valued utilizing a discounted cash flow (DCF) model. This intangible asset was originally amortized on a straight-line basis over three years. Customer relationships relate to the ability to sell products to existing customers and have been estimated using a DCF model. This asset was originally amortized on a straight-line basis over one year. Because all projects have been discontinued, the remaining developed technology, which totals $0.6 million, will be expensed when the remaining $0.6 million of deferred revenue related to the technology is recognized to revenue in 2008.

68

NPA Acquisition

In February 2006, the Company completed the NPA acquisition for $32.7 million in cash, including transaction costs of $1.8 million. The acquisition has been accounted for as a purchase business combination. The results of operations from the assets acquired in the NPA acquisition have been included in the Company’s consolidated statement of operations from the date of the acquisition.

Under the purchase method of accounting, the total estimated purchase price as shown in the table has been allocated to the net tangible and intangible assets acquired based on their estimated fair values as of the date of the acquisition. Subsequent to the acquisition, certain adjustments were made to the carrying value of certain tangible and intangible assets. The allocation of the purchase price for this acquisition, as of December 31, 2006 is as follows (in thousands):

	As of date of acquisition			Adjustments			December 31, 2006
Amortizable acquired intangible assets:
Existing technology	$	4,600		$	—		$	4,600
Patents/core technology		2,000			—			2,000
Trademarks		1,000			—			1,000
Customer relationships		3,000			—			3,000
Order backlog		1,200			—			1,200
Non-competition agreement		100			—			100
Transition services		1,000			(406	)		594
Favorable supply arrangement		5,000			—			5,000
Total acquired intangible assets		17,900			(406	)		17,494
Tangible assets acquired		7,475			(811	)		6,664
Assumed liabilities		(308	)		(230	)		(538	)
Goodwill		4,741			1,447			6,188
Purchased in-process research and development		2,900			—			2,900
Total purchase price	$	32,708		$	—		$	32,708

The amount of the total purchase price allocated to the tangible assets acquired of $6.7 million was assigned based on the fair values as of the date of acquisition. The identified intangible assets acquired were assigned fair values in accordance with the guidelines established in SFAS 141, Business Combinations, FIN 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method, and other relevant guidance. The Company believes that these identified intangible assets have no residual value.

Amortizable Acquired Intangible Assets and Goodwill

Existing Technology: The existing technology comprises products that have reached technological feasibility and includes the Eagle and Fusiv products. The Company valued the existing technology utilizing a DCF model, which uses forecasts of future revenue and expense related to the intangible asset. The Company utilized a discount rate of 20% for existing technology and is amortizing the intangible assets on a straight-line basis over their estimated useful life of three to four years.

Patents/Core Technology: The patents/core technology represents a series of awarded patents, filed patent applications, and core architectures that are used in the products and form a major part of the architecture of both current and planned future releases. The Company valued patents/core technology using the royalty savings method, which represents the benefit of owning this intangible asset rather than paying royalties for its use. The Company utilized a royalty rate of 2% and a discount rate of 26% for the patents/core technology and is amortizing this intangible asset on a straight-line basis over its estimated useful life of four years.

69

Trademarks: The trademark assets were determined using the royalty savings method, which represents the benefit of owning an intangible asset rather than paying royalties for its use. The Company utilized a royalty rate of 0.5% and a discount rate of 22% for the trademark and is amortizing this intangible asset on a straight-line basis over its estimated useful life of three to five years.

Customer Relationships: The customer relationships asset relates to the ability to sell existing and future versions of products to existing customers and has been estimated using the income method. The Company valued customer relationships utilizing a DCF model and a discount rate of 22% and is amortizing this intangible asset on a straight-line basis over its estimated useful life of five years.

Order Backlog: The order backlog asset represents the value of the sales and marketing costs required to establish the order backlog and was valued using the cost savings approach. The order backlog was fully amortized as of the year ended December 31, 2006 as the orders were delivered and billed.

Non-competition Agreement: The Company valued the non-competition agreement with ADI by estimating the effect on our future revenue and cash flows if a non-compete were not in place, thereby allowing ADI to re-enter the market and compete with us. The Company utilized a discount rate of 22% for the non-compete agreement and is amortizing this intangible asset on a straight-line basis over the three year term of the agreement.

Transition Services: The transition services asset represents the $1.0 million of transition services that the Company is entitled to receive from ADI with no obligation to pay through August of 2006. As of December 31, 2006, the Company utilized $0.6 million of the transition services, and the remaining $0.4 million of transition services were re-allocated to goodwill.

Favorable Supply Agreement: The favorable supply arrangement represents a $5.0 million credit for future purchases from a supplier which was amortized in proportion to the value of related purchases from that supplier.

Purchased IPR&D: Of the total purchase price, $2.9 million has been allocated to IPR&D, and was recorded as research and development expense for the year ended December 31, 2006, in accordance with FIN 4. Projects that qualify as IPR&D represent those that have not yet reached technological feasibility and which have no alternative future use. Technological feasibility is established when an enterprise has completed all planning, designing, coding, and testing activities that are necessary to establish that a product can be produced to meet its design specifications including functions, features and technical performance requirements. The value of IPR&D was determined by considering the importance of each project to our overall development plan, estimating costs to develop the purchased IPR&D into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value based on the percentage of completion of the IPR&D projects. The Company utilized the DCF model to value the IPR&D using discount rates ranging from 28% to 35%, depending on the estimated useful life of the technology. Of the three main IPR&D projects at the date of acquisition, one project was terminated and two projects were completed as of December 30, 2007.

Goodwill: During the fourth quarter of 2006, goodwill was increased by an additional $1.5 million as a result of reducing the fair value of acquired inventory by $0.6 million as it was not sold by the end of 2006, the reduction of the fair value of certain acquired equipment by $0.2 million as it was unusable or damaged equipment, the assumption of pre-merger liabilities not previously identified of $0.3 million and unutilized transition services of $0.4 million. The Company anticipates that none of the $6.2 million of the goodwill recorded in connection with the NPA acquisition will be deductible for income tax purposes. Also during the fourth quarter of both 2007 and 2006, the Company assessed the fair value of the goodwill that resulted from the NPA acquisition for impairment and determined that there was no impairment.

70

Pro forma Financial Information

The following unaudited pro forma financial information presents the combined results of operations of the Company and the stand alone business of the network processing and ADSL assets as if the NPA acquisition had occurred as of the beginning of year 2005, after giving effect to certain adjustments, including amortization of intangibles. The operating results for the period from January 1, 2006 to February 22, 2006 (date of close) related to NPA were not readily available and were not considered practical to include. The unaudited pro forma financial information does not necessarily reflect the results of operations that would have occurred had the combined businesses constituted a single entity during such periods, and is not necessarily indicative of results which may be obtained in the future (in thousands, except per share amounts):

	Year Ended
	December 31, 2006			January 1, 2006
Pro forma total revenue	$	134,685		$	138,311
Pro Forma net loss before cumulative change in accounting principles		(23,437	)		(12,324	)
Pro forma net loss		(22,799	)		(12,324	)
Pro forma net loss per share—basic and diluted		(0.86	)		(0.65	)
Pro forma weighted average basic and diluted shares		26,627			19,002

Note 3. Investments and Marketable Securities

The following is a summary of the Company’s investments (in thousands):

	December 30, 2007
	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. treasury and other U.S. government agencies	$	8,496	$	14	$	—		$	8,510
Corporate bonds and notes		10,269		67		—			10,336
Total short-term investments	$	18,765	$	81	$	—		$	18,846
Long-term investments—auction rate securities	$	7,200	$	—	$	(199	)	$	7,001

	December 31, 2006
	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. treasury and other U.S. government agencies	$	18,353	$	—	$	(19	)	$	18,334
Auction rate securities		41,906		69		—			41,975
Total short-term investments	$	60,259	$	69	$	(19	)	$	60,309

The contractual maturities of investments held at December 30, 2007 are as follows (in thousands):

	December 30, 2007
	Cost		Estimated Fair Value
Due within one year	$	12,582	$	12,613
Due after one year through 5 years		6,183		6,233
Due after 17 years through 42 years		7,200		7,001
Total	$	25,965	$	25,847

71

Unrealized losses on investments at December 30, 2007 and December 31, 2006 by investment category and length of time the investment has been in a continuous unrealized loss position are as follows (in thousands):

	December 30, 2007
	Less than 12 months					12 months or greater				Total
	Estimated Fair Value		Gross Unrealized Loss			Estimated Fair Value		Gross Unrealized Loss		Estimated Fair Value		Gross Unrealized Loss
Auction rate securities	$	7,001	$	(199	)	$	—	$	—	$	7,001	$	(199	)

	December 31, 2006
	Less than 12 months					12 months or greater				Total
	Estimated Fair Value		Gross Unrealized Loss			Estimated Fair Value		Gross Unrealized Loss		Estimated Fair Value		Gross Unrealized Loss
U.S. treasury and other U.S. government agencies	$	18,334	$	(19	)	$	—	$	—	$	18,334	$	(19	)

The Company’s marketable securities are classified as available-for-sale as of the balance sheet date and are reported at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income (loss) in stockholders’ equity, net of tax. Realized gains and losses and permanent declines in value, if any, on available-for-sale securities are reported in other income or expense as incurred. Estimated fair values were determined for each individual security in the investment portfolio. The declines in value of these investments are primarily related to changes in interest rates and are considered to be temporary in nature.

A portion of the Company’s available-for-sale portfolio is composed of auction rate securities. In prior years the Company classified these securities as short-term investments even though the stated maturity dates of these investments may be one year or more beyond the balance sheet dates. In accordance with Accounting Research Bulletin No. 43, Chapter 3A, Working Capital—Current Assets and Current Liabilities, the Company viewed its available-for-sale portfolio as available for use in its current operations. Based upon historical experience in the financial markets as well as the Company’s specific experience with these investments, the Company believed there was a reasonable expectation of completing a successful auction within the subsequent twelve-month period. Beginning in the third quarter of 2007, $7.2 million of auction rate securities have failed to sell at auction and are now classified as long-term investments because the Company can not determine whether a successful auction will occur in the next twelve-month period. The funds related to these securities will not be available until a successful auction occurs, a buyer is found outside of the auction process or the underlying securities have matured. In accordance with SFAS 115, the Company has recorded an unrealized holding loss of $0.2 million with accumulated other comprehensive income (loss) as a separate component of stockholders’ equity as it believes that the impairment is temporary and that it has the intent and ability to hold the securities until a successful auction occurs.

Note 4. Allowance for Doubtful Accounts

The following table summarizes the activity related to the allowance for doubtful accounts (in thousands):

Allowance for Doubtful Accounts for Year Ended	Balance at Beginning of Year		Charged (Released) to Expenses			Write-Offs			Balance at End of Year
2007	$	149	$	(85	)	$	—		$	64
2006		60		146			(57	)		149
2005		56		4			—			60

72

Note 5. Inventories

Inventories consisted of the following (in thousands):

	2007		2006
Finished goods	$	3,966	$	4,858
Work-in-process		8,734		7,359
Purchased parts and raw materials		325		584
	$	13,025	$	12,801

Note 6. Property and Equipment

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

	2007			2006
Machinery and equipment	$	18,081		$	14,083
Software		12,400			14,883
Computer equipment		4,289			4,984
Furniture and fixtures		865			850
Leasehold improvements		795			872
Construction in progress		268			372
		36,698			36,044
Less: Accumulated depreciation and amortization		(22,782	)		(17,971	)
	$	13,916		$	18,073

Depreciation expense for property and equipment was $7.3 million, $6.3 million and $2.9 million for the years ended December 30, 2007, December 31, 2006 and January 1, 2006, respectively. Included in property and equipment are assets acquired under capital lease obligations, mostly software and machinery and equipment, with an original cost of $3.8 million, $6.1 million and $3.5 million as of December 30, 2007, December 31, 2006 and January 1, 2006, respectively. Related accumulated depreciation and amortization of these assets was $3.5 million, $4.0 million and $2.9 million as of December 30, 2007, December 31, 2006 and January 1, 2006, respectively.

Note 7. Purchased Intangible Assets

SFAS 142 requires purchased intangible assets other than goodwill to be amortized over their expected useful lives unless these lives are determined to be indefinite. Purchased intangible assets are carried at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets. The carrying amount of intangible assets as of December 30, 2007 is as follows (in thousands):

	Gross Carrying Amount		Accumulated Amortization			Net Amount		Weighted average useful life (Years)
Existing technology	$	6,145	$	(3,156	)	$	2,989	4
Patents/core technology		2,000		(938	)		1,062	4
Trademarks		1,000		(400	)		600	5
Customer relationships		3,070		(1,195	)		1,875	5
Order backlog		1,200		(1,200	)		—	0.5
Non-competition agreement		100		(62	)		38	3
Transition services		594		(594	)		—	1
Favorable supply arrangement		5,000		(5,000	)		—	1
	$	19,109	$	(12,545	)	$	6,564

73

The amortization of technology is charged to cost of revenue; the favorable supply arrangement was capitalized on to inventory at the time of purchase and is charged to cost of revenue as the related inventory is sold; the amortization of patents is charged to research and development; and the amortization of trademarks, customer relationships, order backlog and non-competition is charged to selling, general and administrative. Transition services were charged to cost of revenue, research and development and/or selling, general and administrative based on the actual services performed.

During the years ended December 30, 2007 and December 31, 2006, the amortization of intangible assets was $3.6 million and $8.9 million, respectively. The estimated future amortization of purchased intangible assets as of December 30, 2007 is as follows (in thousands):

Fiscal Year Ending
2008	$	3,257
2009		2,251
2010		958
2011		98
2012		—
	$	6,564

Note 8. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

	2007		2006
Accrued compensation and related benefits	$	4,089	$	3,601
Accrued rebates		3,876		3,586
Restructure		1,660		1,055
Accrued professional fees		1,590		1,473
Warranty accrual		1,055		2,774
Accrued royalties		487		1,019
Other accrued liabilities		2,614		3,188
	$	15,371	$	16,696

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

	2007			2006
Balance, beginning of year	$	2,774		$	2,189
Provision warranties during the year		998			1,444
Usage during the year		(2,717	)		(859	)
Balance, end of year	$	1,055		$	2,774

Note 9. Restructuring Charges

During the fourth quarter of 2006, the Company implemented a restructuring program of its development operations to reduce its cost structure. The restructuring plan involved reducing the Company engineering workforce by approximately 40 employees of which approximately half were from India and half were from North America. In addition, the Company closed its Canadian office and transitioned those responsibilities to the United States through a combination of relocations and hiring. The Company incurred facility related expenses in relation to the lease termination of its Canadian office.

74

During the third quarter of 2007, the Company implemented a second restructuring program. The restructuring plan involved outsourcing the back-end physical semiconductor design process and terminating approximately 15 employees, including four members of senior management. The Company expects the remaining severance and benefits and software tool costs to be paid in 2008.

A summary of the Company’s restructuring activity is as follows (in thousands):

	Severance and Benefits			Excess Facilities			Software Tools			Total
Balance as of January 1, 2006	$	—		$	—		$	—		$	—
Restructuring charges		1,500			191			—			1,691
Cash payments		(627	)		(9	)		—			(636	)
Balance as of December 31, 2006		873			182			—			1,055
Restructuring charges		578			—			2,890			3,468
Cash payments		(1,562	)		(132	)		(238	)		(1,932	)
Asset write-off		—			—			(2,207	)		(2,207	)
Liability write-off		—			—			1,083			1,083
Adjustments to the provision		243			(50	)		—			193
Balance as of December 30, 2007	$	132		$	—		$	1,528		$	1,660

Note 10. Stockholders’ Equity

Common Stock Reserved

As of December 30, 2007, the Company has reserved 6.2 million shares of common stock for future issuance under its various stock plans.

Common Stock Offering

In September 2005, the Company sold 6.4 million shares of its common stock in its initial public offering at an offering price of $12 per share resulting in net proceeds of $67.9 million, after deducting underwriting discounts and commissions and offering costs totaling $8.9 million. Upon the closing of the initial public offering 15.3 million shares of redeemable convertible preferred stock outstanding automatically converted into 15.3 million shares of common stock.

In March 2006, the Company sold 2.5 million shares of its common stock in a follow-on offering at $20.75 per share. Aggregate net proceeds from the follow-on offering were $48.5 million, after deducting underwriting discounts and commissions and issuance costs of $3.4 million. In the follow-on offering, selling stockholders including members of the Company senior management sold 3.3 million shares of common stock held by them. The Company did not receive any proceeds from the sale of shares by the selling stockholders.

Reverse Stock Split

On September 20, 2005, the Company filed an amendment to its Amended and Restated Certificate of Incorporation to effect a 1-for-12 reverse stock split of its common and preferred stock. All information related to common stock, preferred stock, options and warrants to purchase preferred stock and earnings (loss) per share included in the accompanying consolidated financial statements has been retroactively adjusted to give effect to the reverse stock split.

75

Preferred Stock

The Company is authorized to issue 5.0 million shares of undesignated preferred stock at a $0.001 par value per share. The Board of Directors may determine the rights, preferences, privileges, qualifications, limitations and restrictions granted or imposed upon any series of preferred stock. As of December 30, 2007, no preferred stock was outstanding.

Note 11. Stock-Based Compensation

Summary of Equity Plans

1999 Stock Plan

In September 1999, the Company adopted the 1999 Stock Plan (1999 Plan) under which 2.2 million shares of the Company’s common stock have been reserved for issuance to employees, directors and consultants. Options granted under the 1999 Plan may be incentive stock options or non statutory stock options. Incentive stock options may only be granted to employees. Options to purchase shares of the Company’s common stock are granted at a price equal to the fair market value of the stock at the date of grant, as determined by the Board of Directors. Options generally vest at a rate of 25.0% on the first anniversary of the grant date and ¹/48 per month thereafter. Generally, options terminate ten years after the date of grant. Incentive stock options granted to employees who own more than ten percent of the total combined voting power of all classes of stock of the Company terminate five years from the date of the grant. Should an employee subsequently leave, the Company has the right to repurchase the shares that had not vested at the departure date. Upon completion of the Company’s initial public offering, the 1999 Plan was terminated and no shares are available for future issuance under the 1999 Plan. As of December 30, 2007, the Company had 0.9 million options outstanding .

2004 Equity Incentive Plan

In September 2005, the Company adopted the 2004 Equity Incentive Plan, (2004 Plan), upon the closing of its initial public offering. The 2004 Plan allows for the issuance of incentive and nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights, deferred stock units, performance units and performance shares to the Company’s employees, directors and consultants. Options generally vest at a rate of 25% on the first anniversary of the grant date and ¹/48 per month thereafter. Generally, options terminate seven to ten years after the date of grant and are non-statutory stock options. Restricted stock units represent the right to receive shares of common stock in the future, with the right to future delivery of the shares subject to a risk of forfeiture or other restrictions that will lapse upon satisfaction of specified conditions. Awards of restricted stock units general vest over a two year period.

The 2004 Equity Incentive Plan provides for the automatic grant of nonstatutory stock options to our non-employee directors. Each non-employee director appointed to the board will receive an initial option to purchase 30,000 shares upon such appointment except for those directors who become non-employee directors by ceasing to be employee directors. Initial option grants shall vest as to 25% of the shares on the first anniversary of the date of grant and as to 1/48th of the shares each month thereafter, subject to the director continuing to serve as a director on each vesting date. In addition, non-employee directors who have been directors for at least six months will receive a subsequent option to purchase 12,000 shares on the date of each annual meeting of our stockholders. These subsequent option grants shall vest as to 1/12th of the shares each month following the date of grant, subject to the director continuing to serve as a director on each vesting date. All options granted under these automatic grant provisions have a term of ten years and an exercise price equal to the fair market value of our common stock on the date of grant.

The 2004 Equity Incentive Plan provides for an annual increase to the shares authorized under the plan on the first day of the Company’s fiscal year beginning in 2006, equal to the least of (i) 4.4% of the Company’s outstanding shares of common stock on such date, (ii) 3.0 million shares or (iii) an amount determined by the Board of the Directors. The shares may be authorized, but unissued, or reacquired common stock. As of

76

December 30, 2007, the Company had 2.3 million options and awards outstanding and 0.7 million options and awards available for future grant under the 2004 plan.

2004 Employee Stock Purchase Plan

In September 2005, the Company adopted the 2004 Employee Stock Purchase Plan (ESPP), upon the closing of its initial public offering. As of December 30, 2007, the Company had 1.8 million shares available for grant under the ESPP. All of the Company’s employees are eligible to participate if they are customarily employed by us or any participating subsidiary for at least 20 hours per week and more than 5 months in any calendar year. The Company’s 2004 ESPP is intended to qualify under Section 423 of the Internal Revenue Code and provides for consecutive, overlapping 24-month offering periods. Each offering period includes four 6-month purchase periods. The offering periods generally start on the first trading day on or after May 1 and November 1 of each year. On the first day of the Company’s fiscal year starting in 2005 and ending in 2014, the number of authorized shares under the ESPP will be increased by the lesser of (i) 2.5% of the Company’s outstanding shares of common stock on such date, (ii) 1.5 million shares, or (iii) an amount determined by the Board of the Directors.

Doradus 2004 Amended and Restated Stock Option Plan

In August 2006, in connection with Doradus acquisition, the Company assumed Doradus’ 2004 Amended and Restated Stock Option Plan (Doradus Plan). Each unvested option to acquire shares of Doradus common stock outstanding under the Doradus Plan immediately prior to the closing date was converted into the right to acquire 0.079365 shares of Ikanos common stock. As of December 30, 2007, the Company has reserved approximately 0.1 million shares of its common stock for options outstanding and approximately 0.1 million shares for future issuance. Options granted under the Doradus Plan may be incentive stock options or non statutory stock options. Options generally vest at a rate of 25% on the first anniversary of the grant date and 1/12th per quarter thereafter and terminate ten years after the date of grant.

Stock Option Agreement for Michael A. Ricci

In July 2007, the Company adopted the Stand-alone Stock Option Agreement for Michael A. Ricci, under which 300,000 shares of the Company’s common stock have been reserved for issuance to the Company’s CEO, Michael A. Ricci, in connection with his employment with the Company in June 2007.

On June 4, 2007, the Board of Directors of the Company granted an option to purchase 300,000 shares of the Company’s common stock (Inducement Grant) to Mr. Ricci pursuant to his offer letter dated May 1, 2007, a copy of which was filed on May 8, 2007 as Exhibit 10.1 to the Company’s Current Report on Form 8-K announcing his appointment. The Inducement Grant was granted outside of the Ikanos Amended and Restated 2004 Equity Incentive Plan and without stockholder approval pursuant to NASDAQ Marketplace Rule 4350(i)(1)(A). The Inducement Grant has the following terms: the option has been classified as a non-statutory stock option, has an exercise price equal to the fair market value on the grant date, has a 10-year term and will vest over four years with 25 percent of the shares subject to such option vesting one year after June 4, 2007 and 1/48 ^th of the shares subject to the option vesting monthly thereafter, subject to Mr. Ricci’s continued employment with the Company through each date. Pursuant to the terms of the offer letter with Mr. Ricci, the Inducement Grant will have accelerated vesting if Mr. Ricci is terminated without cause or resigns for good reason in connection with a change of control. As of December 30, 2007, 300,000 options were outstanding.

Changes in Accounting Principle

On January 2, 2006, the Company adopted SFAS 123(R), which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative to financial statement recognition. The Company

77

elected to use the modified prospective transition method as permitted by SFAS 123(R) and therefore has not restated its financial results for prior periods. Under this transition method, the post adoption share-based payment includes compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of January 2, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123. For these awards, the Company has continued to recognize compensation expense using the accelerated amortization method. The fair value of all share-based payment transactions granted subsequent to January 2, 2006 will be based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). The Company recognizes compensation expense for post adoption share-based awards on a straight-line basis over the requisite service period of the award.

Prior to the adoption of SFAS 123(R), the intrinsic value of unvested common stock options issued prior to the initial public offering was recorded as unearned stock-based compensation as of January 2, 2006. Upon the adoption of SFAS 123(R) in January 2006, the unearned stock-based compensation balance of approximately $4.5 million was reclassified to additional-paid-in-capital. The deferred-stock based compensation as of December 31, 2006 represents the unamortized stock-based compensation which related to awards granted prior to the Company’s initial Form S-1 registration statement filed with the SEC on June 25, 2004. These awards were valued under the minimum value method and are fully amortized as of December 30, 2007. Stock-based compensation expense related to all stock-based compensation awards under SFAS 123(R) was $13.9 million and $ 9.7 million for the years ended December 30, 2007 and December 31, 2006 respectively. Stock-based compensation expense under the intrinsic value method was $8.2 million for the year ended January 1, 2006.

The adoption of SFAS 123(R) also resulted in a cumulative benefit from accounting change of $0.6 million (net of tax), which reflects the net cumulative impact of estimating future forfeitures in the determination of period expense, rather than recording forfeitures when they occur as previously permitted.

As of December 30, 2007, there was $17.4 million of total unrecognized stock-based compensation cost related to unvested share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 1.9 years

Summary of Assumptions

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table.

	2007		2006		2005
Option Grants:
Expected volatility	59-61	%	63	%	90	%
Expected dividends	—		—		—
Expected term of options (in years)	4.8-6.1		4.8		4.0
Risk-free interest rate	4.7-4.9	%	4.8	%	3.9	%
ESPP:
Expected volatility	40-55	%	58	%	90	%
Expected dividends	—		—		—
Expected term of ESPP (in years)	0.5-2.0		1.25		0.5
Risk-free interest rate—ESPP	3.8-5.0	%	4.9	%	4.1	%

Expected volatility: The expected volatility is based on a blend of the volatility of the Company’s peer group in the industry in which it does business and the Company’s historical volatility.

Expected term: The expected term is based on several factors including historical observations of employee exercise patterns during the Company’s history, peer company employee exercise behavior and expectations of employee exercise behavior in the future giving consideration to the contractual terms of the stock-based awards.

78

The expected term of options granted is derived from the average midpoint between vesting and the contractual term, as described in the SEC’s Staff Accounting Bulletin No. (SAB) 107, Share-Based Payment.

Risk-free interest rate: The yield on zero-coupon U.S. treasury securities for a period that is commensurate with the expected term assumption for each group of employees is used as the risk-free interest rate.

Pre-vesting forfeitures: Estimates of pre-vesting option forfeitures are based on Company experience and industry trends. The Company will adjust its estimate of forfeitures over the requisite service period based on the extent to which actual forfeitures differ. For purposes of calculating pro forma information under SFAS 123 for periods prior to 2006, the Company accounted for forfeitures as they occurred.

Equity Plan Activity

A summary of option activity is presented below (in thousands, except per share amounts):

	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding at January 1, 2007	3,498		$	6.95
Granted	693			7.24
Exercised	(975	)		1.33
Forfeited or expired	(863	)		10.74
Outstanding at December 30, 2007	2,353		$	7.97	6.85	$	2,081
Exercisable at December 30, 2007	1,183		$	7.31	5.76	$	1,648

The weighted average grant date fair value of options granted during the years ended December 30, 2007, December 31, 2006 and January 1, 2006 was $4.33, $8.08 and $6.75 option, respectively. The total intrinsic value of options exercised during the years ended December 30, 2007, December 31, 2006 and January 1, 2006 was $5.8 million, $17.2 million and $0.3 million, respectively.

The following table summarizes information about stock options as of December 30, 2007 (in thousands, except per share amounts):

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number of Options	Weighted- Average Remaining Contractual Term (Years)	Weighted Average Exercise Price per Share		Number of Options	Weighted Average Exercise Price per Share
$ 0.38 to $ 4.00	643	5.42	$	2.13	499	$	2.07
$ 4.01 to $ 8.00	546	8.87		6.97	46		6.35
$ 8.01 to $12.00	728	7.50		9.10	410		9.18
$ 12.01 to $16.00	286	6.81		13.74	160		13.81
$ 16.01 to $20.00	47	6.99		18.80	25		18.74
$ 20.01 to $22.00	103	7.80		20.67	43		20.68
	2,353	6.85	$	7.97	1,183	$	7.31

79

Restricted Stock Units

A summary of our restricted stock unit activity is presented below (in thousands):

	Shares		Weighted- Average Grant Date Fair Value Per Share
Restricted stock units outstanding at January 1, 2007	569		$	15.18
Granted	1,633			7.38
Vested	(580	)		10.63
Forfeited	(318	)		10.94
Restricted stock units outstanding at December 30, 2007	1,304			8.47

The weighted average grant date fair value per restricted stock units granted was $7.38, $15.37 and $14.31 during the year ended December 30, 2007, December 31, 2006 and January 1 2006, respectively. The total fair values of restricted stock units that vested were $6.2 million, $0.6 million and zero during the years ended December 31, 2007, December 31, 2006 and January 1, 2006, respectively. The restricted stock units have one to four years vesting terms and are scheduled to vest through 2011.

Restricted Stock

A summary of restricted stock activity is presented below (in thousands):

	Shares		Weighted- Average Grant Date Fair Value Per Share
Restricted stock outstanding at January 1, 2007	151		$	12.81
Granted	—			—
Vested	(63	)		12.81
Restricted stock outstanding at December 30, 2007	88			12.81

The weighted average grant date fair value per restricted stock granted was $12.93 and $15.35 during the years ended, December 31, 2006 and January 1, 2006, respectively. The total fair values of restricted stock that vested were $0.8 million, $0.6 million and $0.1 million during the year ended December 30, 2007, December 31, 2006 and January 1, 2006, respectively. The restricted stock has four years vesting terms and are scheduled to vest through 2010.

Significant Options and Awards Modifications

During the first quarter of 2005, the Company completed an employee stock option exchange program. The voluntary program allowed eligible employees, consultants and directors, to return to the Company existing options with an exercise price greater than $3.84 per share and exchange them for new options that were granted on March 1, 2005. Participants in the exchange program exchanged options to purchase 633,002 shares of common stock with average exercise price of $7.53 per share for options to purchase 633,002 shares of common stock with an exercise price of $3.84 per share. The new option grants have a vesting period identical to the exchanged options and carry an exercise price of $3.84.

Prior to the adoption of SFAS 123(R), the Company used the intrinsic value method for reporting purposes. As a result, the modification of these options was treated as an exchange of the original award for a new award and the resulting expense was recorded as stock-based compensation expense. As a result of the modification to

80

the exercise price of the stock options, the replacement options were accounted for as variable from the date of modification and were required to be revalued at the end of each accounting period based upon the then current market price of the underlying common stock. Such re-valuation was performed until the option was either exercised, forfeited, canceled or expired. The Company recorded $5.6 million of additional deferred stock-based compensation expense and net stock compensation expense of $3.4 million during the year ended January 1, 2006 in connection with the exchange program. Upon the adoption of SFAS 123(R) on January 2, 2006, the unearned stock-based compensation balance was reclassified to additional-paid-in-capital. The unamortized portion, as of January 2, 2006, of the modification date fair value of the modification of these options, estimated in accordance with the original provisions of SFAS 123, is being amortized using the accelerated amortization method.

Pro Forma Disclosure

Pro forma information regarding net income and net income per share is required by SFAS 148, Accounting for Stock-Based Compensation—Transition and Disclosure. The fair value of the Company’s stock-based awards to employees was estimated using the multiple option approach of the Black-Scholes option-pricing model. The related expense was amortized using an accelerated method over the vesting terms of the option. Had compensation cost for the Company’s stock-based compensation plans and the ESPP been determined using the fair value at the grant dates for awards under those plans calculated using the Black-Scholes method of SFAS 123, the Company’s net income and basic and diluted net income per share would have been changed to the pro forma amounts for the periods indicated below (in thousands, except per share amounts):

	2005
Net income, as reported	$	2,742
Stock-based employee compensation included in net income as reported, net of related tax effects(1)		7,766
Stock-based employee compensation using the fair value method, net of related tax effects(1)		(7,767	)
Net income, pro forma	$	2,741
Basic and diluted net income per common share:
As reported	$	0.14
Pro forma	$	0.13

(1) The tax effects of stock-based compensation are zero as a result of a full valuation allowance on the deferred tax assets.

Disclosures Pertaining to All Stock-Based Award Plans

Cash received from option exercises and ESPP contributions under all share-based payment arrangements was $2.4 million, $3.9 million and $0.1 million for the years ended December 30, 2007, December 31, 2006 and January 1, 2006. The Company has maintained a full valuation allowance since inception and has not been recognizing excess tax benefits from share-based awards. The Company does not anticipate recognizing excess tax benefits from stock-based payments for the foreseeable future, and the Company believes it would be reasonable to exclude such benefits from deferred tax assets and net loss per common share calculations. Accordingly, the Company did not realize any tax benefits from tax deductions related to share-based payment awards during the years ended December 30, 2007, December 31, 2006 and January, 1 2006.

Warrants

Upon the closing of the initial public offering, all warrants to purchase shares of redeemable convertible preferred stock outstanding became exercisable for common stock. In 2000 and 2001, the Company issued warrants to purchase 6,390 shares of Series B convertible preferred stock at prices of $23.67 to $47.40 which were still outstanding at December 31, 2006. These warrants expired in 2007.

81

Note 12. Employee Benefit Plans

The Company has a retirement savings plan (Savings Plan) which qualifies as a deferred savings plan under section 401(k) of the Internal Revenue Code. All U.S employees are eligible to participate in the Savings Plan and allowed to contribute up to 60% of their total compensation, not to exceed the maximum amount allowed by the applicable statutory prescribed limit. The Company is not required to contribute, nor has it contributed, to the Savings Plan for any of the periods presented.

Note 13. Commitments and Contingencies

Lease Obligations

The Company leases office facilities, equipment and software under non-cancelable operating leases with various expiration dates through 2011. Rent expense for the years ended December 30, 2007, December 31, 2006 and January 1, 2006 was $1.3 million, $1.2 million and $1.0 million, respectively. The terms of the facility leases provide for rental payments on a graduated scale. The Company recognizes rent expense on a straight-line basis over the lease period, and has accrued for rent expense incurred but not paid.

Future minimum lease payments as of December 30, 2007 under non-cancelable leases with original terms in excess of one year are $1.9 million in 2008, $1.2 million in 2009, $0.7 million in 2010 and $0.2 million in 2011.

Purchase Commitments

In February 2006, the Company assumed a royalty agreement in connection with the NPA acquisition, under which the Company agreed to pay a minimum royalty fee of $0.7 million in 2008. In June 2007, the Company entered into a software development agreement and agreed to pay $0.5 million in 2008. In July 2007, the Company entered into a technology access agreement and agreed to pay $1.9 million in 2008 and $0.5 million in 2009. As of December 30, 2007, the Company had $3.1 million of inventory purchase obligations with various suppliers.

Indemnities, Commitments and Guarantees

During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include intellectual property indemnities to the Company’s customers in connection with the sales of its products, indemnities for liabilities associated with the infringement of other parties’ technology based upon the Company’s products, and indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease. The duration of these indemnities, commitments and guarantees varies, and in certain cases, is indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments that the Company could be obligated to make. The Company believes its internal development processes and other policies and practices limit its exposure related to the indemnification provisions of the various agreements that include indemnity provisions. In addition, the Company requires its employees to sign a proprietary information and inventions agreement, which assigns the rights to its employees’ development work to the Company. The Company has not recorded any liability for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets. The Company does, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable and the amount of the loss can be reasonably estimated, in accordance with SFAS 5, Accounting for Contingencies.

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

82

Litigation

In November 2006, three putative class action lawsuits were filed in the United States District Court for the Southern District of New York against the Company, its directors and two former executive officers, as well as the lead underwriters for its initial and secondary public offerings. The lawsuits were consolidated and an amended complaint was filed on April 24, 2007. The amended complaint alleges certain material misrepresentations and omissions by the Company in connection with its initial public offering in September 2005 and the follow-on offering in March 2006 concerning its business and prospects, and seek unspecified damages. On June 25, 2007, the Company filed motions to dismiss the amended complaint; plaintiffs opposed its motions, and a hearing on its motions were heard on January 16, 2008. As of the time of this filing, the matter was pending a decision by the Court. The Company cannot predict the likely outcome of this litigation, and an adverse result could have a material effect on its financial statements.

Additionally, from time to time, the Company is a party to various legal proceedings and claims arising from the normal course of business activities. Based on current available information, the Company does not expect that the ultimate outcome of any currently pending unresolved matters, individually or in the aggregate, will have a material adverse effect on its results of operations, cash flows or financial position.

Note 14. Related Party Transactions

The Company had a consulting agreement with Texan Ventures, LLC. Pursuant to the consulting agreement, G. Venkatesh, who is both the Managing Member of Texan Ventures, LLC and a member of the Company’s Board of Directors provides consulting services with respect to, among other things, general business advice relating to the operation of a public company, guidance and strategic advice in analyzing acquisition opportunities, assisting in negotiations of acquisition agreements and providing assistance and guidance in the integration of acquired companies. Under the consulting agreement, Texan Ventures, LLC was entitled to $3,000 per month and reimbursement for reasonable expenses. In October 2006, the agreement was amended whereby Mr. Venkatesh served as Executive Chairman of the Company’s Board of Directors, expanding his advisory services to assist in tactical and operational decisions of the Company, while the Company searched for a permanent Chief Executive Officer. As a result of the amendment, the consulting fees paid to Texan Ventures, LLC increased to $18,000 per month, and Mr. Venkatesh received an option to purchase 125,000 shares of the Company’s common stock. In June 2007, the Company hired its permanent Chief Executive Officer. At that time, Mr. Venkatesh was appointed as Chairman of the Company, and Texan Ventures, LLC continued to receive $18,000 per month through July 2007, and $3,000 each month for August and September 2007. After September 2007, the consulting relationship ended with no further payments. The Company paid Texan Ventures, LLC $132,000 in 2007, $67,500 in 2006 and $39,000 in 2005.

Note 15. Recent Accounting Pronouncements

In September 2006, FASB issued SFAS 157, Fair Value Measurements, which defines fair value, provides a framework for measuring fair value, and expands the disclosures required for fair value measurements. SFAS 157 applies to other accounting pronouncements that require fair value measurements; it does not require any new fair value measurements. The Company is required to apply the provisions of SFAS 157 beginning in 2008. The adoption of SFAS 157 is not expected to have a material effect on the Company’s consolidated statements of financial position, operations or cash flows.

In February 2007, the FASB issued SFAS 159, the Fair Value Option for Financial Assets and Financial Liabilities, which expands the standards under SFAS 157 to provide the one-time election (Fair Value Option) to measure financial instruments and certain other items at fair value and also includes an amendment of SFAS 115, Accounting for Certain Investments in Debt and Equity Securities. SFAS 159 will be effective for the Company beginning in 2008. The adoption of SFAS 159 is not expected to have a material effect on the Company’s consolidated statements of financial position, operations or cash flows.

83

In June 2007, the FASB ratified EITF 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities. This issue provides that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. Such amounts should be recognized as an expense as the related goods are delivered or the related services are performed. EITF 07-3 will be effective for the Company beginning in 2008. The adoption of this EITF is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations, which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree in a business combination. SFAS 141R also establishes principles around how goodwill acquired in a business combination or a gain from a bargain purchase should be recognized and measured, as well as provides guidelines on the disclosure requirements on the nature and financial impact of the business combination. SFAS 141R will be effective for the Company beginning in 2009. The adoption of SFAS 141R is not expected to have a material effect on the Company’s consolidated statements of financial position, operations or cash flows.

In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51. This statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. It requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. This statement establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation. SFAS 160 will be effective for the Company beginning in 2009. The adoption of SFAS 160 is not expected to have a material effect on the Company’s consolidated statements of financial position, operations or cash flows.

Note 16. Income Taxes

The provision for income taxes consists of state minimum taxes and foreign taxes as follows (in thousands):

	Year Ended
	December 30, 2007		December 31, 2006		January 1, 2006
Current :
Federal	$	—	$	130	$	237
State and local		2		13		58
Foreign		292		137	$	—
	$	294	$	280	$	295

The Company has not recorded any deferred tax expenses as deferred tax assets are fully offset by a valuation allowance as of December 30, 2007, December 31, 2006 and January 1, 2006.

84

A reconciliation between the provision for (benefit of) income taxes computed by applying the US federal tax rate to income (loss) before income taxes and the actual provision for income taxes is as follows (in thousands):

	Year Ended
	December 30, 2007		December 31, 2006		January 1, 2006
Provision at statutory rate	35	%	35	%	34	%
Difference between statutory rate and foreign effective rate	—		1		—
Change in valuation allowance	(35	)	(32	)	(82	)
Stock-based compensation	(4	)	(5	)	74
Tax credits	3		4		(17	)
Others	—		(4	)	1
	(1	)%	(1	)%	10	%

The temporary differences that give rise to significant components of the net deferred tax assets are as follows (in thousands):

	2007			2006
Deferred tax assets :
Net operating loss carryforwards	$	35,058		$	21,309
Depreciation and amortization		(830	)		(34	)
Research and development and other credits		9,517			8,996
Accruals and other		7,365			9,314
Acquired intangibles		3,060			2,038
		54,170			41,623
Valuation allowance		(54,170	)		(41,623	)
	$	—		$	—

The Company has elected to track the portion of its federal and state net operating loss carryforwards attributable to stock option benefits, in a separate memo account pursuant to SFAS 123(R). Therefore, these amounts are no longer included in the Company gross or net deferred tax assets. Pursuant to SFAS 123(R), the benefit of these net operating loss carryforwards will only be recorded to equity when they reduce cash taxes payable. The cumulative amounts recorded in the memo account as of December 30, 2007 are $2.8 million for federal tax purposes and $0.2 million for state tax purposes, tax effected.

While the Company does not expect any impact to the effective tax rate for US non-qualified stock option or restricted stock expense due to the adoption of SFAS 123(R), the effective tax rate may be negatively impacted by foreign stock option expense that may not be deductible in the foreign jurisdictions. Also, SFAS 123(R) requires that the tax benefit of stock option deductions relating to Incentive Stock Options (ISOs) be recorded in the period of disqualifying disposition. This could result in fluctuations in the Company effective tax rate between accounting periods. In November 2005, the FASB issued Staff Position No. FAS 123(R)-3, Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards. The Company has elected to adopt the alternative transition method provided in the FASB Staff Position for calculating the tax effects of stock-based compensation pursuant to SFAS 123(R). The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee stock-based compensation and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123(R).

85

As of December 30, 2007, the Company had approximately $92.5 million and $45.0 million of federal and state net operating loss carry forwards, respectively, available to reduce future taxable income, which will begin to expire in 2021 for federal and 2010 for state tax purposes, respectively. The Tax Reform Act of 1986 limits the use of net operating loss and tax credit carry forwards in the case of an “ownership change” of a corporation. An ownership change, as defined, may restrict utilization of tax attribute carry forwards. As a result of ownership changes, net operating loss carry-forwards for $21.1 million at the federal level and $26.3 million for California were limited to an annual utilization of approximately $0.9 million for each of the 18 and 10 years following July 2001, respectively. Due to ownership changes, approximately $6.7 million of California net operating losses carry-forwards will expire unutilized.

At December 30, 2007, the Company has research and development tax credits of approximately $5.2 million and $3.7 million for federal and state income tax purposes, respectively. If not utilized, the federal carry forward will expire in various amounts beginning 2019. The California credit can be carried forward indefinitely. The Company also has federal and state alternative minimum tax credits of approximately $0.4 million which do not expire, and other state tax credits of $0.3 million which will begin to expire in 2008.

Federal income taxes have not been provided for on a portion of the unremitted earnings of foreign subsidiaries because such earnings are intended to be permanently reinvested. The amount of unremitted earnings as of December 30, 2007 is approximately $2.0 million.

The Company’s Indian subsidiary operates in two locations, one in Bangalore and the other in Hyderabad. The Bangalore unit enjoys a special tax holiday under provisions of Section 10A of the Indian Income Tax Act, 1961; and this tax exemption is available until March 31, 2009 under the existing provisions of the Act. The Hyderabad unit which came into existence as a result of the NPA acquisition, does not enjoy this tax exemption and its net income will be taxed at the current rate of 33.66%

Given the history of net operating losses that the Company has incurred, management believes it is more likely than not that the net deferred tax asset will not be realized and, accordingly, has recorded a valuation allowance for the entire balance. The amount of the deferred tax asset considered realizable, however, may change if actual future taxable income differs from estimated amounts.

Adoption of FIN 48

In July 2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty in income taxes recognized in any entity’s financial statements in accordance with SFAS 109, Accounting for Income Taxes and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, FIN 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006.

The Company has adopted the provisions of FIN 48 as of January 1, 2007. The total amount of unrecognized tax benefits as of the date of adoption was $3.1 million. As a result of the implementation of FIN 48, the Company recognized no change in its liability for unrecognized tax benefits.

86

Included in the balance of unrecognized tax benefits as of December 30, 2007 are tax benefits of $0.1 million that, if recognized, would affect the effective tax rate and $3.7 million of benefits that would affect deferred tax assets. Future realization of such benefits is uncertain as of the date of adoption of FIN 48, because the Company’s deferred tax assets have a full valuation allowance. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

Balance at January 1, 2007	$	3,100
Additions for tax positions of prior years		700
Balance at December 30, 2007	$	3,800

The Company has adopted the accounting policy that interest expense and penalties relating to income tax position are classified within the provision for income taxes. The total amount of interest and penalty recorded as of December 30, 2007 was not material. The Company does not anticipate any significant changes within twelve months of this reporting date of its unrecognized tax benefits.

The Company’s operations are subject to income and transaction taxes in the United States and in multiple foreign jurisdictions. Significant estimates and judgments are required in determining the Company’s worldwide provision for income taxes. Some of these estimates are based on interpretations of existing tax laws or regulations. The ultimate amount of tax liability may be uncertain as a result.

The Company is subject to taxation in the US and various states and foreign jurisdictions. There are no ongoing examinations by taxing authorities at this time. The Company’s tax years starting from 1999 to 2007 remain open in various tax jurisdictions.

Note 17. Significant Customer Information and Segment Reporting

SFAS 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for the manner in which public companies report information about operating segments in annual and interim financial statements. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The method for determining the information to report is based on the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance.

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

The following table summarizes revenue by geographic region, based on the country in which the customer headquarters office is located (in thousands):

	Year Ended
	December 30, 2007		December 31, 2006		January 1, 2006
Japan	$	51,586	$	57,030	$	61,246
France		24,612		32,620		1,362
Korea		11,733		29,654		20,297
Other		19,536		15,381		2,166
	$	107,467	$	134,685	$	85,071

87

The Company divides its products into two product families: Access and Gateway. Access includes products that the Company sells on the carrier infrastructure side of the phone line while Gateway includes products that the Company sells into the residence. Revenue by product family is as follows (in thousands):

	Year Ended
	December 30, 2007		December 31, 2006		January 1, 2006
Access	$	61,893	$	71,007	$	70,063
Gateway		45,574		63,678		15,008
	$	107,467	$	134,685	$	85,071

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

	2007		2006
United States	$	8,708	$	10,776
India		2,187		2,639
Singapore		2,411		—
Taiwan		—		2,125
Other		610		2,533
	$	13,916	$	18,073

Note 18. Subsequent Events

In February 2008, the Company purchased the DSL technology and related assets from Centillium Communications, Inc., for approximately $12 million in cash.

88

SUPPLEMENTARY FINANCIAL DATA

Quarterly Financial Information (Unaudited)

(In thousands)

	Three Months Ended
	Apr. 2, 2006			Jul. 2, 2006			Oct. 1, 2006			Dec. 31, 2006			Apr. 1, 2007			Jul. 1, 2007			Sept. 30, 2007			Dec. 30, 2007
Revenue	$	35,825		$	41,192		$	36,670		$	20,998		$	24,668		$	25,658		$	27,275		$	29,866
Cost of revenue		18,560			25,076			23,051			14,665			15,256			14,614			17,190			16,204
Gross profit		17,265			16,116			13,619			6,333			9,412			11,044			10,085			13,662
Operating expenses:
Research and development		13,670			13,429			12,912			13,722			12,611			12,421			13,908			12,116
Selling, general and administrative		5,564			6,131			5,825			7,562			7,114			7,027			6,832			6,425
Restructuring charges		—			—			—			1,691			—			—			3,468			193
Common stock offering expenses		954			—			—			—			—			—			—			—
Total operating expenses		20,188			19,560			18,737			22,975			19,725			19,448			24,208			18,734
Loss from operations		(2,923	)		(3,444	)		(5,118	)		(16,642	)		(10,313	)		(8,404	)		(14,123	)		(5,072	)
Interest income, net		959			1,345			1,484			1,182			1,281			1,344			1,226			1091
Loss before income taxes		(1,964	)		(2,099	)		(3,634	)		(15,460	)		(9,032	)		(7,060	)		(12,897	)		(3,981	)
Provision for (benefit from) income taxes		113			110			(70	)		127			52			102			70			70
Loss before cumulative effect of change in accounting principle		(2,077	)		(2,209	)		(3,564	)		(15,587	)		(9,084	)		(7,162	)		(12,967	)		(4,051	)
Cumulative effect of change in accounting principle, net of tax		(638	)		—			—			—			—			—			—			—
Net loss	$	(1,439	)	$	(2,209	)	$	(3,564	)	$	(15,587	)	$	(9,084	)	$	(7,162	)	$	(12,967	)	$	(4,051	)
Basic and diluted net loss per share:
Prior to cumulative effect of change in accounting principle, net of tax	$	(0.09	)	$	(0.08	)	$	(0.13	)	$	(0.56	)	$	(0.32	)	$	(0.25	)	$	(0.45	)	$	(0.14	)
Cumulative effect of change in accounting principle, net of tax		0.03			—			—			—			—			—			—			—
Net income (loss) per share	$	(0.06	)	$	(0.08	)	$	(0.13	)	$	(0.56	)	$	(0.32	)	$	(0.25	)	$	(0.45	)	$	(0.14	)
Weighted average number of shares		24,481			27,083			27,368			27,601			28,014			28,404			28,711			29,311

89

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this annual report on Form 10-K. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded these disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for Ikanos. Ikanos’ internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the fair presentation of published financial statements for external purposes in accordance with GAAP. There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurances with respect to financial statement preparation. Further, because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate, the effectiveness of internal controls may vary over time.

Our management assessed the effectiveness of our internal control over financial reporting as of December 30, 2007. In making this assessment we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on our assessment using those criteria, we concluded that, as of December 30, 2007, our internal control over financial reporting is effective.

The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, has issued an attestation report on the Company’s internal control over financial reporting. The report on the audit of internal control over financial reporting appears in part II, Item 8 of this Form 10-K.

Changes in Internal Control over Financial Reporting

There was no change in our system of internal control over financial reporting during the fourth quarter ended December 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

90

PART III

Certain information required by Part III is omitted from this annual report on Form 10-K but will be included in the definitive proxy statement that we will file within 120 days after the end of our fiscal year pursuant to Regulation 14A (the “Proxy Statement”) for our 2008 Annual Meeting of Stockholders, and certain of the information to be included therein is incorporated by reference herein.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information regarding our executive officers required by this Item is incorporated by reference from the section entitled “Executive Officers of Registrant” in Part I of this annual report on Form 10-K.

The information regarding our directors, the identification of audit committee members and the audit committee financial expert is incorporated by reference from “Proposal One—Election of Directors” in our Proxy Statement.

The information concerning Section 16(a) reporting is incorporated by reference from “Other Information—Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement.

Information regarding material changes, if any, to the procedures by which security holders may recommend nominees to our board of directors is incorporated by reference from “Consideration of Stockholder Recommendations and Nominations” in our Proxy Statement.

We have adopted a Code of Business Conduct and Ethics applicable to all our employees. Our Code of Business Conduct and Ethics is available at our investor relations website at http://ir.ikanos.com/governance.cfm. Any waiver or amendment to our Code of Business Conduct and Ethics that applies to our Chief Executive Officer, President or Chief Financial Officer and other officers providing financial information, will be disclosed on our website at www.Ikanos.com or in a report on Form 8-K filed with the SEC.

ITEM 11. EXECUTIVE COMPENSATION

The information included under the following captions in our Proxy Statement is incorporated herein by reference: “Compensation Discussion and Analysis,” “Summary Compensation Table,” “Grants of Plan-Based Awards in 2007,” “Outstanding Equity Awards at 2007 Year End,” “Option Exercises and Stock Vested in 2007,” “Nonqualified Deferred Compensation,” “Potential Payments upon Termination or Change in Control,” “Director Compensation” and “Compensation Committee Interlocks and Insider Participation.” The information included under the heading “Compensation Committee Report” in our Proxy Statement is incorporated herein by reference; however, this information shall not be deemed to be “soliciting material” or to be “filed” with the Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information regarding stock ownership by principal stockholders and management required by this Item is incorporated by reference from “Share Ownership by Principal Stockholders and Management” in our Proxy Statement.

Equity Compensation Plan Information

The following table provides information as of December 30, 2007 with respect to common stock that may be issued upon the exercise of equity awards under our Amended and Restated 1999 Stock Option Plan (1999 Plan), Amended and Restated 2004 Equity Incentive Plan (2004 Plan), 2004 Employee Stock Purchase Plan

91

(2004 ESPP), the Doradus Technologies, Inc. 2004 Amended and Restated Stock Option Plan (Doradus Plan), and the stand-alone stock option agreement for Michael A. Ricci (Ricci Plan).

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted- average exercise price per share of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders (1)(2)(3)	3,212,478	$	5.02	2,448,926	(4)
Equity compensation plans not approved by security holders (5)	444,472		5.96	65,002	(6)
Total	3,656,950	$	5.13	2,513,928

(1) Includes: (i) shares of common stock issuable upon the exercise of outstanding options grants (subject to vesting) for 1,908,855 shares, and (ii) shares of common stock issuable upon the vesting of restricted stock units for 1,303,623 shares.

(2) No further equity awards may be granted under the 1999 Plan, which terminated at the time our initial public offering in September 2005.

(3) The 2004 Plan provides for an annual increase to the shares authorized under the plan on the first day of our fiscal year beginning in 2006, equal to the least of (i) 4.4% of our outstanding shares common stock on such date, (ii) 3.0 million shares, or (iii) an amount determined by the Board of the Directors.

The 2004 ESPP provides for an annual increase of the shares authorized under the plan on the first day of our fiscal year starting in 2005 and ending in 2014, the number of authorized shares under the ESPP will be increased by the lesser of (i) 2.5 % of our outstanding shares of common stock on such date, (ii) 1.5 million shares, or (iii) an amount determined by the Board of the Directors.

(4) Includes 643,381 shares available for future issuance under the 2004 Plan and 1,805,545 shares available for future issuance under the 2004 ESPP.

(5) Includes shares of common stock issuable upon the exercise of outstanding options grants (subject to vesting) for an aggregate of 444,472 shares, comprised of 144,472 shares under the Doradus Plan and 300,000 shares under the Ricci Plan.

(6) Shares available for future issuance under the Doradus Plan.

Doradus 2004 Amended and Restated Stock Option Plan

Options granted under the Doradus Plan may be incentive stock options or non statutory stock options. Options generally vest at a rate of 25% on the first anniversary of the grant date and 1/12th per quarter thereafter and terminate ten years after the date of grant. The Doradus Plan will have a term of ten years from the date of adoption, which was in 2004.

Stand-alone Stock Option Agreement for Michael A. Ricci

In July 2007, the Company adopted the Stand-alone Stock Option Agreement for Michael A. Ricci, under which 300,000 shares of the Company’s common stock have been reserved for issuance to CEO, Michael A. Ricci, in connection with his employment with the Company in June 2007.

On June 4, 2007, the Board of Directors of the Company granted an option to purchase 300,000 shares of the Company’s common stock (Inducement Grant) to Mr. Ricci pursuant to his offer letter dated May 1, 2007, a copy of which was filed on May 8, 2007 as Exhibit 10.1 to the Company’s Current Report on Form 8-K announcing his appointment. The Inducement Grant was granted outside of the Ikanos Amended and Restated 2004 Equity Incentive Plan and without stockholder approval pursuant to NASDAQ Marketplace Rule

92

4350(i)(1)(A). The inducement grant has the following terms: the option has been classified as a non-statutory stock option, has an exercise price equal to the fair market value on the grant date, has a 10-year term and will vest over four years with 25 percent of the shares subject to such option vesting one year after June 4, 2007 and 1/48 ^th of the shares subject to the option vesting monthly thereafter, subject to Mr. Ricci’s continued employment with the Company through each date. Pursuant to the terms of the offer letter with Mr. Ricci, the Inducement Grant will have accelerated vesting if Mr. Ricci is terminated without cause or resigns for good reason in connection with a change of control.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this Item is incorporated by reference to “Certain Relationships and Related Transactions” in our Proxy Statement. The information regarding director independence is incorporated herein by reference from the subsection entitled “Board Independence” in the section entitled “Proposal 1—Election of Directors” in our Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information regarding principal accounting fees and services is incorporated herein by reference from the section entitled “Proposal 2—Ratification of Appointment of Independent Registered Public Accounting Firm” in our Proxy Statement.

93

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

1. Financial Statements: The financial statements are set forth under Part II, Item 8 of this annual report on Form 10-K.

2. Financial statement schedules have been omitted since they are either not required, not applicable, or the information is otherwise included.

The following documents are filed as part of this Report:

3. Exhibits:

Exhibit Number	Description
2.1	Form of Agreement and Plan of Merger between Ikanos Communications and Ikanos Communications, Inc., a Delaware corporation. Incorporated by reference to Exhibit 2.1 to Amendment No. 1 of the Registrant’s registration statement on Form S-1 dated August 6, 2004 (Registration No. 333-116880).
2.2	Asset Purchase Agreement, dated January 12, 2006, between the Registrant, Analog Devices, Inc. and Analog Devices Canada Ltd. Incorporated by reference to Exhibit 2.2 of the Registrant’s annual report on Form 10-K filed with the SEC on February 27, 2006 (File No. 000-51532).
2.3	Amended and Restated Asset Purchase Agreement, dated February 17, 2006, between the Registrant, Analog Devices, Inc., Analog Devices Canada Ltd., and Analog Devices B.V. Incorporated by reference to Exhibit 2.3 of the Registrant’s annual report on Form 10-K filed with the SEC on February 27, 2006 (File No. 000-51532).
3.1	Form of Bylaws. Incorporated by reference to Exhibit 3.3 to Amendment No. 1 of the Registrant’s registration statement on Form S-1 dated August 6, 2004 (Registration No. 333-116880).
3.2	Form of Certificate of Incorporation. Incorporated by reference to Exhibit 3.6 to Amendment No. 6 of the Registrant’s registration statement on Form S-1 dated September 1, 2005 (Registration No. 333-116880).
4.1	Form of Registrant’s Common Stock Certificate. Incorporated by reference to Exhibit 4.1 to Amendment No. 1 of the Registrant’s registration statement on Form S-1 dated August 6, 2004 (Registration No. 333-116880).
4.2	Fourth Amended and Restated Investor Rights Agreement, dated as of March 5, 2004, between the Registrant and the parties named therein. Incorporated by reference to Exhibit 3.6 of the Registrant’s registration statement on Form S-1 dated June 25, 2004 (Registration No. 333-116880).
4.3	Amendment No. 2 to Fourth Amended and Restated Investor Rights Agreement, dated March 3, 2006, between the Registrant and the parties named therein. Incorporated by reference to Exhibit 4.3 of the Registrant’s registration statement on Form S-1 filed with the SEC on March 8, 2006 (Registration No. 333-132067).
10.1*	Form of Indemnification Agreement entered into by Registrant with each of its directors and executive officers. Incorporated by reference to Exhibit 10.1 of the Registrant’s registration statement on Form S-1 dated June 25, 2004 (Registration No. 333-116880).
10.2*	Amended and Restated 1999 Stock Option Plan and related form agreements there under. Incorporated by reference to Exhibit 10.1 of the Registrant’s quarterly report on Form 10-Q filed with the SEC on August 16, 2006 (File No. 000-51532).

94

Exhibit Number	Description
10.3 *	Amended and Restated 2004 Equity Incentive Plan. Incorporated by reference to Exhibit 10.3 to Amendment No. 6 of the Registrant’s registration statement on Form S-1 dated September 1, 2005 (Registration No. 333-116880).
10.3.1	Form of Restricted Stock Unit Agreement. Incorporated by reference to Exhibit 10.1 of the Registrant’s current report on Form 8-K filed with the SEC on July 11, 2006 (File No. 000-51532).
10.3.2	Form of Amended and Restated Stock Option Agreement. Incorporated by reference to Exhibit 10.2 of the Registrant’s current report on Form 8-K filed with the SEC on July 11, 2006 (File No. 000-51532).
10.3.3	French Sub-Plan for the Grant of Restricted Stock Units. Incorporated by reference to Exhibit 10.3 of the Registrant’s current report on Form 8-K filed with the SEC on July 11, 2006 (File No. 000-51532).
10.3.4	Form of Restricted Stock Unit Agreement for Employees in France. Incorporated by reference to Exhibit 10.3.1 of the Registrant’s current report on Form 8-K filed with the SEC on July 11, 2006 (File No. 000-51532).
10.3.5	French Sub-Plan for the Grant of Stock Options. Incorporated by reference to Exhibit 10.4 of the Registrant’s current report on Form 8-K filed with the SEC on July 11, 2006 (File No. 000-51532).
10.3.6	Form of Stock Option Agreement for Employees in France. Incorporated by reference to Exhibit 10.4.1 of the Registrant’s current report on Form 8-K filed with the SEC on July 11, 2006 (File No. 000-51532).
10.3.7	India Sub-Plan. Incorporated by reference to Exhibit 10.5 of the Registrant’s current report on Form 8-K filed with the SEC on July 11, 2006 (File No. 000-51532).
10.3.8	Form of Restricted Stock Unit Agreement For Employees in India. Incorporated by reference to Exhibit 10.5.1 of the Registrant’s current report on Form 8-K filed with the SEC on July 11, 2006 (File No. 000-51532).
10.3.9	Form of Stock Option Agreement for Employees in India. Incorporated by reference to Exhibit 10.5.2 of the Registrant’s current report on Form 8-K filed with the SEC on July 11, 2006 (File No. 000-51532).
10.4 *	Amended and Restated 2004 Employee Stock Purchase Plan. Incorporated by reference to Exhibit 10.4 to Amendment No. 6 of the Registrant’s registration statement on Form S-1 dated September 1, 2005 (Registration No. 333-116880).
10.5	Lease Agreement, dated as of February 7, 2006, between Registrant and ProLogis, and addendums thereto. Incorporated by reference to Exhibit 10.5 of the Registrant’s annual report on Form 10-K filed with the SEC on February 27, 2006 (File No. 000-51532).
10.6†	Product Development Agreement, dated October 30, 2003, between Registrant and Sasken Communication Technologies Ltd. Incorporated by reference to Exhibit 10.15 to Amendment No. 2 of the Registrant’s registration statement on Form S-1 dated September 3, 2004 (Registration No. 333-116880).
10.7	Patent and Technology License Agreement, effective as of February 17, 2006, by and among the Registrant and Analog Devices, Inc. Incorporated by reference to Exhibit 10.27 of the Registrant’s annual report on Form 10-K filed on February 27, 2006 (File No. 000-51532).
10.8	Consulting Agreement, effective as of March 30, 2006, between Ikanos and Texan Ventures. Incorporated by reference to Exhibit 10.28 of the Registrant’s current report on Form 8-K filed with the SEC on April 5, 2006 (File No. 000-51532).

95

Exhibit Number	Description
10.9	Doradus Technologies, Inc. 2004 Amended and Restated Stock Option Plan and form of stock option agreement. Incorporated by reference to Exhibit 4.1 of the Registrant’s registration statement on Form S-8 filed with the SEC on August 16, 2006 (Registration No. 333-136675).
10.10*	Offer letter, dated August 16, 2006, between the Registrant and Cory J. Sindelar. Incorporated by reference to exhibit 10.27 of the Registrant’s annual report on Form 10-K filed with the SEC on March 7, 2007 (File No. 000-51532).
10.11*	Offer letter, dated April 6, 2006, between the Registrant Dean J. Westman. Incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 11, 2007 (file No. 000-51532).
10.12*	Offer letter, dated September 8, 2006, between the Registrant and Nick Shamlou. Incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 11, 2007 (file No. 000-51532).
10.13*	Letter Agreement regarding Offer Letter, dated November 28, 2006, between the Registrant and Nick Shamlou. Incorporated by reference to Exhibit 10.2.1 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 11, 2007 (file No. 000-51532).
10.14*	2007 Sales Compensation Plan for the Vice President of Worldwide Sales. Incorporated by reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 11, 2007 (file No. 000-51532).
10.15*	Summary of Registrant’s 2007 Executive Bonus Program. Incorporated by reference to Exhibit 10.4 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 11, 2007 (file No. 000-51532).
10.16*	Letter Agreement with Michael A. Ricci dated as of May 1, 2007. Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on May 8, 2007 (File No. 000-51532).
10.17*	Stand-Alone Stock Option Agreement with Michael A. Ricci dated as of June 4, 2007. Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on June 7, 2007 (File No. 000-51532).
10.18*	Restricted Stock Unit Agreement with Michael A. Ricci dated as of June 4, 2007. Incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on June 7, 2007 (File No. 000-51532).
10.19*	Offer letter, dated July 24, 2001, between the Registrant and Yehoshua Rom. Incorporated by reference to Exhibit 10.13 of the Registrant’s registration statement on Form S-1 dated June 25, 2004 (Registration No. 333-116880).
10.20*	Separation and Release Agreement with Yehoshua Rom dated September 28, 2007. Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on October 1, 2007 (File No. 000-51532).
10.21*	Offer letter, dated August 29, 2003, between the Registrant and Daniel K. Atler. Incorporated by reference to Exhibit 10.7 of the Registrant’s registration statement on Form S-1 dated June 25, 2004 (Registration No. 333-116880).
10.22*	Separation and Release Agreement and Consulting Agreement with Daniel K. Alter dated October 1, 2007. Incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on October 1, 2007 (File No. 000-51532).
10.23*	Offer letter, dated June 14, 2007, between the Registrant and Noah D. Mesel.

96

Exhibit Number	Description
10.24 *	Offer letter, dated July 12, 2007, between the Registrant and Shekhar Khandekar.
21.1	Subsidiaries of the Registrant.
22.1	Certificate and Report of Inspection of Election. Incorporated by reference to Exhibit 22.1 of the Registrants Quarterly report on Form 10-Q filed with the SEC on August 3, 2007. (File No. 000-51532).
23.1	Consent of PricewaterhouseCoopers, LLP, Independent Registered Public Accounting Firm.
24.1	Power of Attorney is herein referenced to the signature page of this annual report on Form 10-K.
31.1	Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
32.1	Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Indicates a management contract or compensatory plan or arrangement.

† Confidential treatment has been granted as to certain portions of this Exhibit.

TRADEMARKS

The Ikanos Communications logo design, SmartLeap, Eagle, Fusiv, CleverConnect, Ikanos Programmable Operating System, Fx, FxS, VLR, FasTrack, RRA and Fiber Fast are among the trademarks or registered trademarks of Ikanos.

97

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	IKANOS COMMUNICATIONS, INC.
February 22, 2008	/s/    MICHAEL A. RICCI
	Michael A. Ricci President and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael A. Ricci and Cory J. Sindelar, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, to sign any and all amendments (including post-effective amendments) to this annual report on Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each of said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-facts and agents, or his substitute or substitutes, or any of them, shall do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

Signature	Title	Date
/s/    MICHAEL A. RICCI         Michael A. Ricci	President and Chief Executive Officer (Principal Executive Officer)	February 22, 2008
/s/    CORY J. SINDELAR         Cory J. Sindelar	Chief Financial Officer (Principal Financial and Accounting Officer)	February 22, 2008
/s/    G. VENKATESH         G. Venkatesh	Chairman of the Board and Director	February 22, 2008
/s/    DANIAL FAIZULLABHOY         Danial Faizullabhoy	Director	February 22, 2008
/s/    MICHAEL GULETT         Michael Gulett	Director	February 22, 2008
/s/    PAUL G. HANSEN         Paul G. Hansen	Director	February 22, 2008
/s/    FREDERICK M. LAX         Frederick M. Lax	Director	February 22, 2008

98