Net Revenue. Our net revenue is generated principally by sales of our semiconductor products. We derive the remainder of our net revenue predominantly from royalty revenue received pursuant to a patent license agreement and, to a much lesser extent, other royalties, software licenses, support and maintenance agreements, data services and cancellation fees. The majority of our sales occur through the efforts of our direct sales force. The remaining balance of our sales occurs through distributors.
We sell our products to leading manufacturers of wired and wireless communications equipment in each of our target markets. Because we leverage our technologies across different markets, certain of our integrated circuits may be incorporated into equipment used in multiple markets. We utilize independent foundries and third-party subcontractors to manufacture, assemble and test all of our semiconductor products.
The following table presents details of our net revenue:

                                                    Three Months Ended
                                                        March 31,
                                                     2009         2008
               Sales of semiconductor products        96.3 %       95.5 %
               Royalty and other (1)                   3.7          4.5

                                                     100.0 %      100.0 %

(1) Includes royalties of $19.0 million and $35.6 million in the three months ended March 31, 2009 and 2008 respectively, received pursuant to a patent license agreement entered into in July 2007.

                                                       Three Months Ended
                                                           March 31,
                                                        2009         2008
            Sales made through direct sales force        83.0 %       86.9 %
            Sales made through distributors              17.0         13.1

                                                        100.0 %      100.0 %

Sales made through distributors as a percentage of revenue increased in the three months ended March 31, 2009 due to increased sales of our mobile and wireless products, principally in Asia.
The demand for our products has been affected in the past, and may continue to be affected in the future, by various factors, including, but not limited to, the following:
• general economic and political conditions and specific conditions in the markets we address, including the continuing volatility in the technology sector and semiconductor industry, the current global economic recession, trends in the broadband communications markets in various geographic regions, including seasonality in sales of consumer products into which our products are incorporated;

• the inability of certain of our customers who depend on credit to have access to their traditional sources of credit to finance the purchase of products from us or purchases of capital equipment from others, particularly in the current global economic environment, which may lead them to reduce their level of purchases or to seek credit or other accommodations from us;

• the timing, rescheduling or cancellation of significant customer orders and our ability, as well as the ability of our customers, to manage inventory;

• our ability to specify, develop or acquire, complete, introduce, market and transition to volume production new products and technologies in a cost effective and timely manner;

• the rate at which our present and future customers and end-users adopt our products and technologies in our target markets; and

• the qualification, availability and pricing of competing products and technologies and the resulting effects on sales and pricing of our products.

For these and other reasons, our net revenue and results of operations for the three months ended March 31, 2009 and prior periods may not necessarily be indicative of future net revenue and results of operations.
From time to time, our key customers place large orders causing our quarterly net revenue to fluctuate significantly. We expect that these fluctuations will continue and that they may be exaggerated by the increasing volume of our products that are incorporated into consumer electronic products, sales of which are typically subject to greater volume fluctuations than non-consumer OEM products. We also maintain inventory, or hubbing, arrangements with certain of our customers. Pursuant to these arrangements we deliver products to a customer or a designated third party warehouse based upon the customer's projected needs, but do not recognize product revenue unless and until the customer reports that it has removed our product from the warehouse to incorporate into its end products. Historically, we have had good visibility into customer requirements and shipments within a quarter. However, if a customer does not take our products under a hubbing arrangement in accordance with the schedule it originally provided to us, our predicted future revenue stream could vary substantially from our forecasts and our results of operations could be materially and adversely affected. Additionally, since we own inventory that is physically located in a third party's warehouse, our ability to effectively manage inventory levels may be impaired, causing our total inventory turns to decrease, which could increase expenses associated with excess and obsolete product and negatively impact our cash flow.
Sales to our five largest customers, including sales to their manufacturing subcontractors, as a percentage of net revenue were as follows:

Three Months Ended March 31, 2009 2008 Five largest customers as a group 33.6 % 36.6 %

As we have broadened our customer base, net revenue derived from these top customers as a percentage of net revenue has decreased, even though the absolute dollars of net revenue have increased in some cases. However, we expect that our largest customers will continue to account for a substantial portion of our net revenue in 2009 and for the foreseeable future. The identities of our largest customers and their respective contributions to our net revenue have varied and will likely continue to vary from period to period. The decrease in net revenue from our top customers as a percentage of net revenue was primarily related to reduced sales, a change in the identity of our five largest customers and a related change in product mix.
Net revenue derived from all independent customers located outside the United States, excluding foreign subsidiaries or manufacturing subcontractors of customers that are headquartered in the United States even though such subsidiaries or manufacturing subcontractors are located outside of the United States, as a percentage of total net revenue was as follows:

                                                                  Three Months Ended
                                                                      March 31,
                                                                   2009          2008
Asia (primarily in Japan, Korea, China and Taiwan)                  35.4 %       27.2 %
Europe (primarily in Finland, France and the United Kingdom)        13.0          9.6
Other                                                                0.6          0.6

                                                                    49.0 %       37.4 %

Net revenue derived from shipments to international destinations, as a percentage of total net revenue was as follows:

                                                                            Three Months Ended
                                                                                March 31,
                                                                           2009             2008
Asia (primarily in China, Hong Kong, Singapore, Taiwan and Japan)           84.8 %          78.2 %
Europe (primarily in France, Germany and Hungary)                            4.0             3.2
Other                                                                        1.5             3.4

                                                                            90.3 %          84.8 %

All of our revenue to date has been denominated in U.S. dollars. Gross Margin. Our gross margin, or gross profit as a percentage of net revenue, has been affected in the past, and may continue to be affected in the future, by various factors, including, but not limited to, the following:
• our product mix and volume of product sales (including sales to high volume customers);

• the positions of our products in their respective life cycles;

• licensing and royalty revenue;

• the effects of competition;

• the effects of competitive pricing programs and rebates;

• provisions for excess and obsolete inventories and their relationship to demand volatility;

• manufacturing cost efficiencies and inefficiencies;

• fluctuations in direct product costs such as wafer pricing and assembly, packaging and testing costs, and other fixed costs;

• our ability to create cost advantages through successful integration and convergence;

• product warranty costs;

• amortization of purchased intangible assets;

• stock-based compensation expense; and

• reversals of unclaimed rebates and warranty reserves.

Net Income (Loss). Our net income (loss) has been affected in the past, and may continue to be affected in the future, by various factors, including, but not limited to, the following:
• stock-based compensation expense;

• required levels of research and development and other operating costs;

• licensing and royalty revenue;

• in-process research and development, or IPR&D;

• litigation costs and insurance recoveries;

• settlement costs;

• income tax benefits from adjustments to tax reserves of foreign subsidiaries;

• the loss of interest income resulting from lower average interest rates and investment balance reductions resulting from expenditures on repurchases of our Class A common stock;

• amortization of purchased intangible assets;

• impairment of goodwill and other long-lived assets;

• deferral of revenue under multiple-element arrangements;

• other-than-temporary impairment of marketable securities and strategic investments;

• gain (loss) on strategic investments; and

• restructuring costs or reversals thereof.

In the three months ended March 31, 2009 our net loss was $91.9 million as compared to net income of $74.3 million in the three months ended March 31, 2008, a difference of $166.3 million. This decrease in profitability was the direct result of decreased net revenue resulting in reduced gross profit of $143.9 million , a $15.7 million increase in operating expenses and a decrease in interest income of $15.7 million.
Net revenue in the three months ended March 31, 2009 decreased across each of our three target markets: (i) broadband communications, (ii) mobile and wireless and (iii) enterprise networking. The decrease in net revenue from our broadband communications target market resulted primarily from a decrease in demand for broadband modem, digital set-top box, and digital TV products offset in part by an increase in demand for our high definition DVD products. The decrease in net revenue from our mobile and wireless target market resulted primarily from a decrease in demand for our Bluetooth and VoIP product offerings, as well as a $16.6 million decrease in royalty revenue received pursuant to a patent license agreement entered into in July 2007, offset in part by an increase in demand for our wireless LAN and touch controller product offerings. The decrease in net revenue from our enterprise networking target market resulted primarily from a decrease in demand for our Ethernet switch, controller, server and security processor products.
Operating expenses increased principally due to an increase in the number of employees, and increased legal fees offset in part by decreases in both in-process research and development and settlement costs. Operating expenses also increased due to (i) an increase in cash compensation levels since March 31, 2008 as a result of our annual merit increase program, and
(ii) restructuring costs of $7.1 million. While we expect research and development costs to remain relatively flat over the short term, they will continue to increase over the long term as a result of growth in, and the diversification of, the markets we serve, new product opportunities, the number of design wins that go into production, changes in our compensation policies, and any expansion into new markets and technologies. As a result of the decline in global demand due to the continued economic downturn from the time we announced our acquisition of the DTV Business of AMD, Inc. in late 2008, we do not currently believe this acquisition will achieve earnings neutrality by the end of 2009. Product Cycles. The cycle for test, evaluation and adoption of our products by customers can range from three to more than nine months, with an additional three to more than twelve months before a customer commences volume production of equipment incorporating our products. Due to this lengthy sales cycle, we may experience significant delays from the time we incur expenses for research and development, selling, general and administrative efforts, and investments in inventory, to the time we generate corresponding revenue, if any. The rate of new orders may vary significantly from month to month and quarter to quarter. If anticipated sales or shipments in any quarter do not

occur when expected, expenses and inventory levels could be disproportionately high, and our results of operations for that quarter, and potentially for future quarters, would be materially and adversely affected.
Mobile Platforms Business. The development and introduction of new products often requires substantial research and development resources. During the last five years we have incurred substantial expenditures on the development of new products for the cellular handset market. Approximately 25% of our research and development expense is attributable to our mobile platforms business. However, this market is characterized by very long product development and sales cycles due to the significant qualification requirements of cellular handset makers and wireless network operators, and accordingly, it is common to experience significant delays from the time research and development efforts commence to the time corresponding revenues are generated. Due to these lengthy product development and sales cycles, our mobile platforms business had a material negative impact on our earnings in 2008, including impairment charges of $169.4 million recorded in the three months ended December 31, 2008 relating to this business and may continue to do so until we realize significant cellular revenues.
Most of the revenue that we derived from our mobile platforms business in the quarter ended March 31, 2009 related to the $19.0 million in royalties we received pursuant to a patent license agreement entered into in July 2007. In the event our royalty revenue decreases after March 31, 2009, our mobile platforms business could have a greater dilutive impact on our results of operations. Although we currently expect to begin deriving additional revenue from our cellular handset products later in 2009, it is possible that our customers may delay their product development plans or that their products will not be commercially successful, which would continue to materially and adversely affect our results of operations.
Acquisition Strategy. An element of our business strategy involves the acquisition of businesses, assets, products or technologies that allow us to reduce the time required to develop new technologies and products and bring them to market, incorporate enhanced functionality into and complement our existing product offerings, augment our engineering workforce, and enhance our technological capabilities. We plan to continue to evaluate strategic opportunities as they arise, including acquisitions and other business combination transactions, strategic relationships, capital infusions and the purchase or sale of assets.
Business Enterprise Segments. We operate in one reportable operating segment, wired and wireless broadband communications. SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, or SFAS 131, establishes standards for the way public business enterprises report information about operating segments in annual consolidated financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. Our Chief Executive Officer, who is considered to be our chief operating decision maker, reviews financial information presented on an operating segment basis for purposes of making operating decisions and assessing financial performance.
Although we have four operating segments, under the aggregation criteria set forth in SFAS 131 we operate in only one reportable operating segment, wired and wireless broadband communications.
Critical Accounting Policies and Estimates The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses in the reporting period. We regularly evaluate our estimates and assumptions related to revenue recognition, rebates, allowances for doubtful accounts, sales returns and allowances, warranty reserves, inventory reserves, stock-based compensation expense, goodwill and purchased intangible asset valuations, strategic investments, deferred income tax asset valuation allowances, uncertain tax positions, self-insurance, restructuring costs, litigation and other loss contingencies. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected.

We believe the following are either (i) critical accounting policies that require us to make significant estimates or assumptions in the preparation of our unaudited condensed consolidated financial statements or (ii) other key accounting policies that generally do not require us to make estimates or assumptions but may require us to make difficult or subjective judgments:
• Net Revenue. We recognize product revenue when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) our price to the customer is fixed or determinable and
(iv) collection of the resulting accounts receivable is reasonably assured. These criteria are usually met at the time of product shipment. However, we do not recognize revenue when any significant obligations remain. Customer purchase orders and/or contracts are generally used to determine the existence of an arrangement. Shipping documents are used to verify product delivery. We assess whether a price is fixed or determinable based upon the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess the collectibility of our accounts receivable based primarily upon the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer's payment history.

In arrangements in which our semiconductor products and software are delivered concurrently and post-contract customer support is not provided, we recognize revenue upon shipment of the semiconductor product, assuming all other basic revenue recognition criteria are met, as both the semiconductor products and software are considered delivered elements and no undelivered elements exist. In limited instances in which there are undelivered elements, we allocate revenue based on the relative fair value of the individual elements. If there is no established fair value for an undelivered element, the entire arrangement is accounted for as a single unit of accounting, resulting in a deferral of revenue and costs for the delivered element until the undelivered element has been fulfilled. In the case that the undelivered element is data or a support service, the revenue and costs applicable to both the delivered and undelivered elements are recorded ratably over the respective service period or estimated product life. If the undelivered element is essential to the functionality of the delivered element, no revenue or costs are recognized until the undelivered element is delivered. If we enter into future multiple element arrangements in which the fair value of each deliverable is not known, the portion of revenue we recognize on a deferred basis may vary significantly in any given quarter, which could cause even greater fluctuations in our quarterly operating results.

A portion of our sales is made through distributors under agreements allowing for pricing credits and/or rights of return. These pricing credits and/or rights of return provisions prevent us from being able to reasonably estimate the final price of the inventory to be sold and the amount of . . .