The manufacturing problems that impacted sales for Ikanos Communications in the third quarter still persist and will continue to plague the company in the fourth quarter, the chip maker said during an earnings call today. In fact, those problems are now worse than the company knew when it lowered its third-quarter revenue expectations only three weeks ago.

“We have more orders than we believe we have the ability to ship for in the fourth quarter,” said Dan Atler, who became Ikanos’ interim chief executive officer after former CEO Rajesh Vashist stepped down this week. “It’s regretful.”

Ikanos had problems with the “back-end testing constraints” of its fourth- and fifth-generation VDSL chip sets and was unable to fulfill customer demand in the third quarter. Atler attributed the problem to “a phenomenon that occurred in late August.”

“We’re working on the issue,” Atler said. “We think we have a solution to this, but we don’t have it in place exactly right now. If that solution comes out, we’ll be in much better shape.”

In addition, the company saw a drop in sales to Japan, where carriers are working through excess equipment inventories.

After reporting nearly $37 million in third-quarter revenue (the highest quarterly revenue in the company’s history, though down 7% to 14% from what the company expected last month), Ikanos predicted fourth-quarter revenue would drop by more than a third to somewhere between $21 million and $24 million.

Ikanos expects revenue to grow in the first quarter and in 2007 but won’t say how much yet. On today’s call, the company pointed out that of the 18 carriers that are deploying or have deployed VDSL, 16 of them used Ikanos products (two are in North America). And of the 17 that are trialing VDSL, 14 are trialing Ikanos products (three in North America).

When one analyst on today’s call asked why the company was increasing its operations expenditures in the fourth quarter despite the drop in revenue, Atler said, “We have commitments made to our customers that we’re going to honor and make good on.”

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