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# **UNITEDSTATES SECURITIES AND EXCHANGECOMMISSION**

## **Washington,D.C. 20549**

 

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### ** **

### **FORM 10-Q**

 

| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES********EXCHANGE ACT OF 1934** |
|------------|------------|---------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                    |
| ** ** | ** ** | **For the  quarterly period ended June 27, 2008**                                                        |
| ** ** | ** ** | ** **                                                                                                    |
| **OR**     |
| ** ** | ** ** | ** **                                                                                                    |
| o          | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES****EXCHANGE  ACT OF 1934**   |

 

**Commission file number: 000-50499**

 

**MINDSPEED TECHNOLOGIES, INC.**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                             | ** ** | **01-0616769**      |
|------------------------------------------|------------|---------------------|
| (State of incorporation)                 |       | (I.R.S. Employer    |
|                                     |       | Identification No.) |
| ** **                               | ** ** | ** **          |
| **4000 MacArthur Boulevard, East Tower** |       |                |
| **Newport Beach, California**            | ** ** | **92660-3095**      |
| (Address of principal executive offices) |       | (Zip code)          |

 

Registrant’s telephone number, including area code:

**(949) 579-3000**

 

Indicate by checkmark whether the Registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes xNo o

 

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

 

| Large accelerated filer o                                             |   | Accelerated filer x         |
|-----------------------------------------------------------------------|--------|----------------------------------|
| Non-accelerated filer o(Do not check if a smaller reporting  company) |   | Smaller reporting company o |

 

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes oNo x

 

The number of outstandingshares of the Registrant’s Common Stock as of July 25, 2008 was23,813,151.

 

 

 

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**FORWARD-LOOKING STATEMENTS**

 

This Quarterly Report on Form 10-Qcontains statements relating to Mindspeed Technologies, Inc. (includingcertain projections and business trends) that are “forward-looking statements”within the meaning of Section 27A of the Securities Act of 1933, asamended (the Securities Act), and Section 21E of the Securities ExchangeAct of 1934, as amended (the Exchange Act), and are subject to the “safe harbor”created by those sections. All statements included in this Quarterly Report on Form 10-Q,other than those that are purely historical, are forward-looking statements.Words such as “expect,” “believe,” “anticipate,” “outlook,” “could,” “target,” “project,”“intend,” “plan,” “seek,” “estimate,” “should,” “may,” “assume” and “continue,”as well as variations of such words and similar expressions, also identifyforward-looking statements. Forward-looking statements in this Quarterly Reporton Form 10-Q include, without limitation, statements regarding:

 

·           the ability of ourrelationships with network infrastructure original equipment manufacturers tofacilitate early adoption of our products, enhance our ability to obtain designwins and encourage adoption of our technology in the industry;

 

·           the growth prospectsfor the network infrastructure equipment and communications semiconductorsmarkets, including increased demand for network capacity, the upgrade andexpansion of legacy networks, and the build-out of networks in developingcountries;

 

·           our plans to makesubstantial investments in research and development and participate in theformulation of industry standards;

 

·           our ability to achievedesign wins and convert wins into revenue;

 

·           the continuation ofintense price and product competition, and the resulting declining averageselling prices for our products;

 

·           the value of ourintellectual property and our strategy regarding sales and licensing ofnon-core intellectual property;

 

·           the impact of changesin customer purchasing activities, inventory levels and inventory managementpractices;

 

·           the importance ofattracting and retaining highly skilled, dedicated personnel;

 

·           the challenges ofshifting any operations or labor offshore, including the likelihood ofcompetition in offshore markets for qualified personnel;

 

·           our ability to achieverevenue growth and profitability, or to sustain positive cash flows fromoperations, and the expected period through which we will continue to incurlosses;

 

·           our plans to reduceoperating expenses, the amount and timing of any such expense reductions, andits effects on cash flow;

 

·           our anticipation thatwe will not pay a dividend in the foreseeable future;

 

·           the dependence of ouroperating results on our ability to develop and introduce new products and enhancementsto existing products on a timely basis;

 

·           the continuation of atrend toward industry consolidation and the effect it could have on ouroperating results;

 

·           our belief that we arebenefiting from the increased deployment of internet protocol-based networksboth in new network buildouts worldwide and the replacement of circuit-switchednetworks;

 

·           the sufficiency of ourexisting sources of liquidity and expected sources of cash to fund ouroperations, research and development efforts, anticipated capital expenditures,working capital and other financing requirements for the next 12 months;

 

·           the circumstances underwhich we may need to seek additional financing, our ability to obtain any suchfinancing and any consideration of acquisition opportunities;

 

·           our expectation thatour provision for income taxes for fiscal 2008 will principally consist ofincome taxes related to our foreign operations;

 

·           our expectations withrespect to our recognition of income tax benefits in the future;

 

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·           our restructuringplans, including expected workforce reductions and facilities closures, theexpected cost savings under our restructuring plans and the uses of thosesavings, the timing and amount of payments to complete the actions, the sourceof funds for such payments, the impact on our liquidity and the resultingdecreases in our research and development and selling, general andadministrative expenses, and the amounts of future charges to complete ourrestructuring plans;

 

·           our beliefs regardingthe effect of the disposition of pending or asserted legal matters;

 

·           our acquisitionstrategy, the means of financing such a strategy, and the impact of any past orfuture acquisitions, including the impact on revenue, margin and profitability;

 

·           our intentions tomarket, sell and support acquired Ethernet aggregation products and to developand further extend the Ethernet MAC product line;

 

·           our plans relating toour use of stock-based compensation, the effectiveness of our incentivecompensation programs and the expected amounts of stock-based compensationexpense in future periods;

 

·           our belief that thefinancial stability of suppliers is an important consideration in our customers’purchasing decisions;

 

·           the amount and timingof future payments under contractual obligations; and

 

·           the impactof recent accounting pronouncements and the adoption of new accountingstandards.

 

Ourexpectations, beliefs, anticipations, objectives, intentions, plans andstrategies regarding the future are not guarantees of future performance andare subject to risks and uncertainties that could cause actual results, andactual events that occur, to differ materially from results contemplated by theforward-looking statement. These risks and uncertainties include, but are notlimited to:

 

·            future operating losses;

 

·            cash requirements and terms and availability offinancing;

 

·            worldwide political and economic uncertainties andspecific conditions in the markets we address; 

 

·            loss of or diminished demand from one or more keycustomers or distributors; 

 

·            fluctuations in the price of our common stock andour operating results;

 

·            our ability to attract and retain qualifiedpersonnel;

 

·            constraints in the supply of wafers and otherproduct components from our third-party manufacturers; 

 

·            doing business internationally;

 

·            pricing pressures and other competitive factors; 

 

·            successful development and introduction of newproducts;

 

·            our ability to successfully and cost effectivelyestablish and manage operations in foreign jurisdictions; 

 

·            industry consolidation;

 

·            order and shipment uncertainty;

 

·            our ability to obtain design wins and developrevenues from them;

 

·            lengthy sales cycles;

 

·            the expense of and our ability to defend ourintellectual property against infringement claims by others;

 

·            product defects and bugs; and

 

·            business acquisitions and investments.

 

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The forward-lookingstatements in this report are subject to additional risks and uncertainties,including those set forth in Part II, Item 1A under the heading “RiskFactors” and those detailed from time to time in our other filings with theSEC. These forward-looking statements are made only as of the date hereof and,except as required by law, we undertake no obligation to update or revise anyof them, whether as a result of new information, future events or otherwise.

 

Mindspeed®and Mindspeed Technologies® are registered trademarks of MindspeedTechnologies, Inc. Other brands, names and trademarks contained in thisreport are the property of their respective owners.

 

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**MINDSPEED TECHNOLOGIES, INC.**

 

**INDEX**

 
| ** **                              | ** **                                                                                                                            | ** ** | **PAGE**   |
|-----------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
|                                    |                                                                                                                                  |       |       |
| **PART I.  FINANCIAL INFORMATION** |                                                                                                                                  |       |
| ** **                              | ** **                                                                                                                            | ** ** | ** ** |
| Item 1.                                 | Financial Statements (unaudited):                                                                                                     |       |       |
|                                    |                                                                                                                                  |       |       |
|                                    | Consolidated  Condensed Balance Sheets — June 27, 2008 and September 28, 2007                                          | 6          |
|                                    |                                                                                                                                  |       |       |
|                                    | Consolidated  Condensed Statements of Operations — Three Months and Nine Months Ended  June 27, 2008 and June 29, 2007 | 7          |
|                                    |                                                                                                                                  |       |       |
|                                    | Consolidated  Condensed Statements of Cash Flows — Three Months and Nine Months Ended  June 27, 2008 and June 29, 2007 | 8          |
|                                    |                                                                                                                                  |       |       |
|                                    | Notes to Consolidated Condensed Financial Statements                                                                                  | 9          |
|                                    |                                                                                                                                  |       |       |
| Item  2.                                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                           |       | 17         |
|                                    |                                                                                                                                  |       |       |
| Item  3.                                | Quantitative  and Qualitative Disclosures About Market Risk                                                                           |       | 27         |
|                                    |                                                                                                                                  |       |       |
| Item  4.                                | Controls and  Procedures                                                                                                              |       | 28         |
|                                    |                                                                                                                                  |       |       |
| **PART II.  OTHER INFORMATION**    |                                                                                                                                  |       |
|                                    |                                                                                                                                  |       |       |
| Item 1A.                                | Risk Factors                                                                                                                          |       | 29         |
|                                    |                                                                                                                                  |       |       |
| Item  4.                                | Submission  of Matters to a Vote of Security Holders                                                                                  |       | 40         |
|                                    |                                                                                                                                  |       |       |
| Item 6.                                 | Exhibits                                                                                                                              |       | 41         |
|                                    |                                                                                                                                  |       |       |
|                                    | Signature                                                                                                                             |       | 43         |
|                                         |                                                                                                                                       |            |            |  |

 

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**PART I.FINANCIAL INFORMATION**

 

**ITEM 1.FINANCIAL STATEMENTS**

 

**MINDSPEED TECHNOLOGIES, INC.**

**Consolidated Condensed Balance Sheets**

**(unaudited, in thousands, except per share amounts)**

 
| ** **                                                                                                                                                      | ** ** | **June 27,  2008** | ** ** | **September 28,  2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------------|------------|
| **ASSETS**                                                                                                                                                      |       |                    |       |                         |       |
| **Current Assets**                                                                                                                                              |       |                    |       |                         |       |
| Cash and cash equivalents                                                                                                                                       |       | $                       | 29,898     |                         | $          | 25,796 |   |
| Receivables, net of allowance for doubtful  accounts of $348 and $353 at June 27, 2008 and September 28, 2007,  respectively                          |       | 17,155                  |       | 13,584                       |       |
| Inventories                                                                                                                                                     |       | 10,551                  |       | 15,023                       |       |
| Other current assets                                                                                                                                            |       | 2,375                   |       | 3,763                        |       |
| Total current assets                                                                                                                                            |       | 59,979                  |       | 58,166                       |       |
| Property, plant and equipment, net                                                                                                                              |       | 13,314                  |       | 13,147                       |       |
| Intangible assets, net                                                                                                                                          |       | 2,635                   |       | 3,200                        |       |
| Goodwill                                                                                                                                                        |       | 2,429                   |       | 2,324                        |       |
| License agreements, net                                                                                                                                         |       | 3,239                   |       | 1,798                        |       |
| Other assets                                                                                                                                                    |       | 2,763                   |       | 3,444                        |       |
| Total assets                                                                                                                                                    |       | $                       | 84,359     |                         | $          | 82,079 |   |
| ** **                                                                                                                                                      | ** ** | ** **              | ** ** | ** **                   | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                  | ** ** | ** **              | ** ** | ** **                   | ** ** |
| **Current Liabilities**                                                                                                                                         |       |                    |       |                         |       |
| Accounts payable                                                                                                                                                |       | $                       | 8,521      |                         | $          | 7,117 |   |
| Deferred income on sales to distributors                                                                                                                        |       | 3,739                   |       | 4,226                        |       |
| Accrued compensation and benefits                                                                                                                               |       | 6,950                   |       | 5,286                        |       |
| Accrued income tax                                                                                                                                              |       | 92                      |       | 752                          |       |
| Restructuring                                                                                                                                                   |       | 163                     |       | 1,478                        |       |
| Other current liabilities                                                                                                                                       |       | 2,839                   |       | 3,493                        |       |
| Total current liabilities                                                                                                                                       |       | 22,304                  |       | 22,352                       |       |
| Convertible senior notes                                                                                                                                        |       | 45,365                  |       | 45,037                       |       |
| Other liabilities                                                                                                                                               |       | 598                     |       | 444                          |       |
| Total liabilities                                                                                                                                               |       | 68,267                  |       | 67,833                       |       |
| Commitments and contingencies (Note 4)                                                                                                                          |       | —                  |       | —                       |       |
| **Stockholders’ Equity**                                                                                                                                   |       |                    |       |                         |       |
| Preferred stock, $0.01 par value: 25,000  shares authorized; no shares issued or outstanding                                                                    |       | —                  |       | —                       |       |
| Common stock, $0.01 par value: 100,000  shares authorized; 23,817 and 23,152 shares issued at June 27, 2008 and  September 28, 2007, respectively (1) |       | 238                     |       | 232                          |       |
| Additional paid-in capital (1)                                                                                                                                  |       | 268,106                 |       | 263,427                      |       |
| Accumulated deficit                                                                                                                                             |       | (238,027                | )          | (234,480                     | )          |
| Accumulated other comprehensive loss                                                                                                                            |       | (14,225                 | )          | (14,933                      | )          |
| Total stockholders’ equity                                                                                                                                 |       | 16,092                  |       | 14,246                       |       |
| Total liabilities and stockholders’ equity                                                                                                                 |       | $                       | 84,359     |                         | $          | 82,079 |   |

 

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(1) Common stock andadditional paid in capital amounts have been retroactively adjusted to reflectthe effect of the Company’s June 30, 2008 one-for-five reverse stocksplit.  See Note 1.

 

Seeaccompanying notes to consolidated condensed financial statements.

 

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**MINDSPEED TECHNOLOGIES, INC.**

**Consolidated Condensed Statements of Operations**

**(unaudited, in thousands, except per share amounts)**

** **
| ** **                                                             | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                             | ** ** | **June 27,**                | ** ** | **June 29,**               | ** ** | **June 27,** | ** ** | **June 29,** | ** ** |
| ** **                                                             | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                   |       |                             |       |                            |       |   |   |   |   |   |   |   |   |
| Net revenues                                                           |       | $                                | 38,049     |                            | $          | 33,207 |   | $ | 109,598 |   | $ | 94,122 |   |
| Cost of goods sold                                                     |       | 12,510                           |       | 10,522                          |       | 34,651 |   | 32,016 |   |
| Gross margin                                                           |       | 25,539                           |       | 22,685                          |       | 74,947 |   | 62,106 |   |
|                                                                   |       |                             |       |                            |       |   |   |   |   |
| Operating expenses:                                                    |       |                             |       |                            |       |   |   |   |   |
| Research and development                                               |       | 14,771                           |       | 13,871                          |       | 42,193 |   | 44,181 |   |
| Selling, general and  administrative                                   |       | 11,196                           |       | 10,835                          |       | 34,376 |   | 32,907 |   |
| Special charges                                                        |       | 110                              |       | (104                            | )          | 284 |   | 4,728 |   |
|                                                                   |       |                             |       |                            |       |   |   |   |   |
| Total operating expenses                                               |       | 26,077                           |       | 24,602                          |       | 76,853 |   | 81,816 |   |
|                                                                   |       |                             |       |                            |       |   |   |   |   |
| Operating loss                                                         |       | (538                             | )          | (1,917                          | )          | (1,906 | ) | (19,710 | ) |
|                                                                   |       |                             |       |                            |       |   |   |   |   |
| Interest expense                                                       |       | (563                             | )          | (560                            | )          | (1,689 | ) | (1,678 | ) |
| Other income, net                                                      |       | 150                              |       | 121                             |       | 125 |   | 388 |   |
|                                                                   |       |                             |       |                            |       |   |   |   |   |
| Loss before income taxes                                               |       | (951                             | )          | (2,356                          | )          | (3,470 | ) | (21,000 | ) |
|                                                                   |       |                             |       |                            |       |   |   |   |   |
| Provision for income taxes                                             |       | 132                              |       | 163                             |       | 279 |   | 455 |   |
|                                                                   |       |                             |       |                            |       |   |   |   |   |
| Net loss                                                               |       | $                                | (1,083     | )                               | $          | (2,519 | ) | $ | (3,749 | ) | $ | (21,455 | ) |
|                                                                   |       |                             |       |                            |       |   |   |   |   |
| Net loss per share, basic and  diluted (1)                             |       | $                                | (0.05      | )                               | $          | (0.11 | ) | $ | (0.16 | ) | $ | (0.97 | ) |
|                                                                   |       |                             |       |                            |       |   |   |   |   |
| Weighted-average number of  shares used in  per share  computation (1) |       | 23,144                           |       | 22,365                          |       | 22,981 |   | 22,042 |   |

 

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(1) Earnings per shareamounts have been retroactively adjusted to reflect the effect of the Company’sJune 30, 2008 one-for-five reverse stock split.  See Note 1.

 

Seeaccompanying notes to consolidated condensed financial statements.

 

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**MINDSPEED TECHNOLOGIES, INC.**

**Consolidated Condensed Statements of Cash Flows**

**(unaudited, in thousands)**

** **
| ** **                                                                                   | ** ** | **Nine months ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                   | ** ** | **June 27,  2008**         | ** ** | **June 29,  2007** | ** ** |
| Cash Flows From Operating Activities                                     | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Net loss                                                                                     |       | $                               | (3,749     | ) | $ | (21,455 | ) |
|                                                                                         |       |                            |       |   |   |
| Adjustments to reconcile net  loss to net cash  Provided  by (used in) operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                                                |       | 4,640                           |       | 3,893 |   |
| Stock-based compensation                                                                     |       | 4,123                           |       | 5,870 |   |
| Inventory provisions                                                                         |       | (1,188                          | )          | (384 | ) |
| Other non-cash items, net                                                                    |       | 387                             |       | 444 |   |
| Changes in assets and  liabilities, net of effects of acquisitions:                          |       |                            |       |   |   |
| Receivables                                                                                  |       | (3,490                          | )          | (568 | ) |
| Inventories                                                                                  |       | 5,660                           |       | 3,139 |   |
| Accounts payable                                                                             |       | 2,680                           |       | (2,459 | ) |
| Deferred income on sales to  distributors                                                    |       | (487                            | )          | (1,135 | ) |
| Accrued expenses and other  current liabilities                                              |       | 616                             |       | 1,662 |   |
| Other                                                                                        |       | 2,445                           |       | 1,558 |   |
| Net cash provided by (used in)  operating activities                                         |       | 11,637                          |       | (9,435 | ) |
|                                                                                         |       |                            |       |   |   |
| Cash Flows From Investing  Activities                                                        |       |                            |       |   |   |
| Capital expenditures                                                                         |       | (6,426                          | )          | (3,436 | ) |
| Acquisition of assets, net of cash acquired                                                  |       | (1,172                          | )          | — |   |
| Purchases of available-for-sale  marketable securities                                       |       | —                          |       | (13,832 | ) |
| Sales of available-for-sale marketable  securities                                           |       | —                          |       | 18,000 |   |
| Maturities of held-to-maturity  marketable securities                                        |       | —                          |       | 863 |   |
| Net cash (used in) provided by  investing activities                                         |       | (7,598                          | )          | 1,595 |   |
|                                                                                         |       |                            |       |   |   |
| Cash Flows From Financing  Activities                                                        |       |                            |       |   |   |
| Exercise of stock options and  warrants                                                      |       | 111                             |       | 3,320 |   |
| Net cash provided by financing  activities                                                   |       | 111                             |       | 3,320 |   |
|                                                                                         |       |                            |       |   |   |
| Effect of foreign currency exchange rates  on cash                                           |       | (48                             | )          | — |   |
|                                                                                         |       |                            |       |   |   |
| Net increase (decrease) in cash  and cash equivalents                                        |       | 4,102                           |       | (4,520 | ) |
| Cash and cash equivalents at  beginning of period                                            |       | 25,796                          |       | 29,976 |   |
| Cash and cash equivalents at  end of period                                                  |       | $                               | 29,898     |   | $ | 25,456 |   |

 

Seeaccompanying notes to consolidated condensed financial statements.

 

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**MINDSPEED TECHNOLOGIES, INC.**

**NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS**

(unaudited)

 

**1. Basis ofPresentation and Significant Accounting Policies**

 

Mindspeed Technologies, Inc.(Mindspeed or the Company) designs, develops and sells semiconductor networkingsolutions for communications applications in enterprise, broadband access,metropolitan and wide-area networks. On June 27, 2003, Conexant Systems, Inc.(Conexant) completed the distribution (the Distribution) to Conexantstockholders of all 18,066,689 (90,333,445 on a pre June 30, 2008 one-for-fivereverse stock split basis) outstanding shares of common stock of its whollyowned subsidiary, Mindspeed. In the Distribution, each Conexant stockholderreceived one fifth of a share (one share on a pre June 30, 2008one-for-five reverse stock split basis) of Mindspeed common stock (including anassociated preferred share purchase right) for every three shares of Conexantcommon stock held and cash for any fractional share of Mindspeed common stock.Following the Distribution, Mindspeed began operations as an independent,publicly held company.

 

Prior to the Distribution,Conexant transferred to Mindspeed the assets and liabilities of the Mindspeedbusiness, including the stock of certain subsidiaries, and certain other assetsand liabilities which were allocated to Mindspeed under the DistributionAgreement entered into between Conexant and Mindspeed. Also prior to theDistribution, Conexant contributed to Mindspeed cash in an amount such that atthe time of the Distribution Mindspeed’s cash balance was $100 million.Mindspeed issued to Conexant a warrant to purchase six million shares (adjustedto reflect our June 30, 2008 one-for-five reverse stock split) ofMindspeed common stock at a price of $17.04 per share (adjusted to reflect our June 30,2008 one-for-five reverse stock split), exercisable for a period beginning oneyear and ending ten years after the Distribution. In connection with theDistribution, Mindspeed and Conexant also entered into a Credit Agreement(terminated December 2004), an Employee Matters Agreement, a TaxAllocation Agreement, a Transition Services Agreement and a Sublease.

 

*Basis ofPresentation –* Theconsolidated condensed financial statements, prepared in accordance withgenerally accepted accounting principles in the United States of America.,include the accounts of Mindspeed and each of its subsidiaries. All accountsand transactions among Mindspeed and its subsidiaries have been eliminated inconsolidation. In the opinion of management, the accompanying consolidatedcondensed financial statements contain all adjustments, consisting ofadjustments of a normal recurring nature and the special charges (Note 5),necessary to present fairly the Company’s financial position, results ofoperations and cash flows in accordance with generally accepted accountingprinciples in the United States of America. The results of operations forinterim periods are not necessarily indicative of the results that may beexpected for a full year. These financial statements should be read inconjunction with the consolidated financial statements and notes theretoincluded in the Company’s Annual Report on Form 10-K for the fiscal yearended September 28, 2007.

 

*Reverse Stock Split* – In May 2008, the Company’s Board ofDirectors approved a one-for-five reverse stock split following approval by theCompany’s stockholders on April 7, 2008. The reverse stock split was effected June 30, 2008.  All share and per share amounts have beenretroactively adjusted to reflect the reverse stock split.  There was no net effect on total stockholdersequity as a result of the reverse stock split.

 

*Liquidity –*In order to become profitable, or to generate and sustain positive cash flowsfrom operations, the Company must further reduce operating expenses and/orincrease revenues. During the first nine months of fiscal 2008, the Companybenefited from the completion of a series of cost reduction actions which haveimproved its operating cost structure. These expense reductions alone may not make the Company profitable orallow it to sustain profitability if it is achieved. The Company’s ability toachieve the necessary revenue growth will depend on increased demand fornetwork infrastructure equipment that incorporates its products, which in turndepends primarily on the level of capital spending by communications serviceproviders and enterprises. The Company may not be successful in achieving thenecessary revenue growth or may be unable to sustain past and future expensereductions in subsequent periods. The Company may not achieve profitability orsustain such profitability, if achieved.

 

The Companybelieves that its existing sources of liquidity, along with cash expected to begenerated from product sales and sales or licensing of non-core intellectualproperty, will be sufficient to fund its operations, research and developmentefforts, anticipated capital expenditures, working capital and other financingrequirements for at least the next 12 months. The Company is currentlyevaluating a number of available refinancing alternatives regarding itsconvertible debt due November 2009, including alternatives to provide cashnecessary to repay its convertible debt when the instrument reaches maturity in2009, assuming that it has not been converted into equity prior to maturity(Note 7).   From time to time, theCompany may acquire its debt securities through privately negotiated transactions,tender offers, exchange offers (for new debt or other securities), 

 

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**MINDSPEED TECHNOLOGIES, INC.**

**NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(continued)**

(unaudited)

 

redemptions orotherwise, upon such terms and at such prices as the Company may determineappropriate.  The Company will need tocontinue a focused program of capital expenditures to meet its research anddevelopment and corporate requirements. The Company may also consideracquisition opportunities to extend its technology portfolio and designexpertise and to expand its product offerings. In order to fund capitalexpenditures, increase its working capital or complete any acquisitions, theCompany may seek to obtain additional debt or equity financing. The Company mayalso need to seek to obtain additional debt or equity financing if itexperiences downturns or cyclical fluctuations in its business that are moresevere or longer than anticipated or if it fails to achieve anticipated revenueand expense levels. However, the Company cannot assure you that such financingwill be available to it on favorable terms, or at all.

 

*Reclassifications–* Certain reclassifications have been made to2007 financial statements to conform to the 2008 presentation.

 

*FiscalPeriods –* Our interimfiscal quarters end on the thirteenth Friday of each quarter. The third quarterof fiscal 2008 and 2007 ended on June 27, 2008 and June 29, 2007,respectively.

 

*Recent Accounting Standards*– On September 29, 2007, the Company adopted Financial AccountingStandards Board (FASB) Interpretation No. 48, “Accounting for Uncertaintyin Income Taxes – An Interpretation of FASB Statement No. 109” (FIN48).  FIN 48 clarifies the accounting foruncertainty in income taxes recognized in the financial statements inaccordance with FASB Statement No. 109, “Accounting for Income Taxes” andrecommends a recognition threshold and measurement process for recording in thefinancial statements uncertain tax positions taken or expected to be taken inthe Company’s tax return. FIN 48 also provides guidance on de-recognition,classification, interest and penalties, accounting in interim periods anddisclosure requirements for uncertain tax positions.  See Note 3 for further information on theadoption of FIN 48.

 

InDecember 2007, the FASB issued Financial Accounting Standards (SFAS) No. 141R,“Business Combinations,” and SFAS No. 160, “Accounting and Reporting ofNoncontrolling Interest in Consolidated Financial Statements, an Amendment ofARB No. 51.” These new standards will significantly change the financialaccounting and reporting of business combination transactions and noncontrolling(or minority) interests in consolidated financial statements. TheseStatements are effective for fiscal years beginning after December 15,2008.  The Company will be required toadopt SFAS No. 141R and SFAS No. 160 in the first quarter of fiscal2010. Accordingly, to the extentthe Company engages in any business combination transactions, such transactionswill be recorded and disclosed following existing accounting principles until October 2,2009.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities—an Amendment of FASBStatement No. 133.” This Statement requires enhanced disclosures about anentity’s derivative and hedging activities and is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008. The Company will be required to adopt SFAS 161 in the first quarter offiscal 2010 and does not expect that the adoption will have a material impacton its financial condition or results of operations.

 

In May 2008, the FASBissued FASB Staff Position FSP APB 14-1, “Accounting for Convertible DebtInstruments That May be Settled in Cash upon Conversion (Including PartialCash Settlement).”  This FSP specifiesthat issuers of such instruments should separately account for theliability and equity components in a manner that will reflect the entity’snonconvertible debt borrowing rate when interest cost is recognized insubsequent periods. This FSP is effective for financial statements issued forfiscal years beginning after December 15, 2008, and interim periods withinthose fiscal years.  The Company will berequired to adopt this FSP in the first quarter of fiscal 2010.  Early adoption is not permitted. The Companybelieves this change in methodology will negatively affect its earnings andearnings per share as interest expense will be required to reflect the marketrate of interest for nonconvertible debt. The Company is currently evaluating the magnitude of this impact on itsfinancial condition and results of operations.

 

*IncomeTaxes –* The provisionfor income taxes for the nine months ended June 27, 2008 and June 29,2007, respectively, principally consists of income taxes incurred by theCompany’s foreign subsidiaries.

 

*SupplementalCash Flow Information –*Interest paid for each of the nine month periods ended June 27, 2008 and June 29,2007 was $1.7 million.  Income taxespaid, net of refunds received, for the nine months ended June 27, 2008 andJune 29, 2007 were $56,000 and $752,000, respectively.  Non-cash investing activities in the firstnine months fiscal 2008 consisted of the purchase of $754,000 of property andequipment from suppliers on account. Assets acquired consist of amounts paid and received during the firstnine months of fiscal 2008 on cash, accounts receivable, accounts payable andaccrued liabilities created through the acquisition of certain assets of AmpleCommunications, Inc., which occurred in the fourth quarter of fiscal 2007.

 

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**MINDSPEED TECHNOLOGIES, INC.**

**NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(continued)**

(unaudited)

 

**2.Supplemental Financial Statement Data**

 

***Inventories***

 

Inventories consist of thefollowing (in thousands):

 
| ** **      | ** ** | **June 27,  2008** | ** ** | **September 28,  2007** | ** ** |
|-----------------|------------|-------------------------|------------|------------------------------|------------|
| Work-in-process |       | $                       | 6,770      |                         | $          | 7,497 |   |
| Finished goods  |       | 3,781                   |       | 7,526                        |       |
|            |       | $                       | 10,551     |                         | $          | 15,023 |   |

 

During the nine months endedJune 27, 2008 and June 29, 2007, the Company sold inventories with anoriginal cost of approximately $1.1 million and $3.1 million, respectively,that had been written down to a zero cost basis during fiscal 2001.

 

***Intangible Assets and Goodwill***

 

In conjunctionwith the acquisition of certain assets of Ample Communications, Inc. on September 25,2007, the Company acquired certain intangible assets.   These intangible assets consist of backlog(approximately $0.1 million), developed technology (approximately $3.1 million)and goodwill (approximately $2.3 million). In the first nine months of fiscal2008, the Company recorded purchase accounting adjustments related toadditional transaction costs, additional cash and accounts receivable receivedas well as a decrease in the value of fixed assets received.  Accordingly, the balance of goodwill haschanged as follows (in thousands):

 
| ** ** | ** ** | **September 28,  2007** | ** ** | **Purchase Price  Adjustments** | ** ** | **June 27,  2008** | ** ** |
|------------|------------|------------------------------|------------|--------------------------------------|------------|-------------------------|------------|
| Goodwill   |       | $                            | 2,324      |                                 | $          | 105                     |       | $ | 2,429 |   |
|            |            |                              |            |                                      |            |                         |            |  |  |  |

 

***Deferred Income onShipments to Distributors***

 

Deferred income on shipmentsto distributors is as follows (in thousands):

 
| ** **                                               | ** ** | **June 27,  2008** | ** ** | **September 28,  2007** | ** ** |
|----------------------------------------------------------|------------|-------------------------|------------|------------------------------|------------|
| Deferred revenue on shipments to  distributors           |       | $                       | 4,165      |                         | $          | 4,953 |   |
| Deferred cost of inventory on shipments to  distributors |       | (473                    | )          | (808                         | )          |
| Reserves                                                 |       | 47                      |       | 81                           |       |
| Deferred income on sales to distributors                 |       | $                       | 3,739      |                         | $          | 4,226 |   |

 

***Comprehensive Loss***

 

Comprehensive loss is asfollows (in thousands):

 
| ** **                               | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **June 27,****2008**        | ** ** | **June 29,****2007**       | ** ** | **June 27,****2008** | ** ** | **June 29,****2007** | ** ** |
|                                     |       |                             |       |                            |       |   |   |   |   |
| Net loss                                 |       | $                                | (1,083     | )                               | $          | (2,519 | ) | $ | (3,749 | ) | $ | (21,455 | ) |
| Foreign currency translation adjustments |       | 22                               |       | 67                              |       | 708 |   | 487 |   |
| Comprehensive loss                       |       | $                                | (1,061     | )                               | $          | (2,452 | ) | $ | (3,041 | ) | $ | (20.968 | ) |

 

The balance of accumulatedother comprehensive loss at June 27, 2008 and September 28, 2007consists of accumulated foreign currency translation adjustments.

 

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**MINDSPEED TECHNOLOGIES, INC.**

**NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(continued)**

(unaudited)

 

***Revenues by Product Line***

 

Revenues by product line areas follows (in thousands):

 
| ** **                       | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **June 27,****2008**        | ** ** | **June 29,****2007**       | ** ** | **June 27,****2008** | ** ** | **June 29,**

**2007** | ** ** |
|                             |       |                             |       |                            |       |   |   |   |   |
| Multiservice access products     |       | $                                | 13,748     |                            | $          | 9,241 |   | $ | 35,555 |   | $ | 27,545 |   |
| High-performance analog products |       | 10,921                           |       | 9,408                           |       | 31,649 |   | 27,360 |   |
| WAN communications products      |       | 13,380                           |       | 14,558                          |       | 42,394 |   | 39,217 |   |
|                             |       | $                                | 38,049     |                            | $          | 33,207 |   | $ | 109,598 |   | $ | 94,122 |   |

 

***Revenues by Geographic Area***

 

Revenues by geographic area,based on product shipment destination, are as follows (in thousands):

 
| ** **                     | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | **June 27,****2008**        | ** ** | **June 29,**

**2007**     | ** ** | **June 27,****2008** | ** ** | **June 29,****2007** | ** ** |
|                           |       |                             |       |                            |       |   |   |   |   |
| Americas                       |       | $                                | 8,795      |                            | $          | 12,538 |   | $ | 34,883 |   | $ | 33,916 |   |
| Asia-Pacific                   |       | 24,891                           |       | 16,729                          |       | 60,728 |   | 49,329 |   |
| Europe, Middle East and Africa |       | 4,363                            |       | 3,940                           |       | 13,987 |   | 10,877 |   |
|                           |       | $                                | 38,049     |                            | $          | 33,207 |   | $ | 109,598 |   | $ | 94,122 |   |

 

The Company believes asubstantial portion of the products sold to original equipment manufacturers(OEMs) and third-party manufacturing service providers in the Asia-Pacificregion are ultimately shipped to end-markets in the Americas and Europe.

 

Direct sales to thefollowing customers accounted for 10% or more of net revenues in the periodspresented:

 
| ** ** | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** ** | ** ** | **June 27,  2008**          | ** ** | **June 29,****2007**       | ** ** | **June 27,****2008** | ** ** | **June 29,****2007** | ** ** |
|       |       |                             |       |                            |       |   |   |   |   |
| Customer A |       | 20                               | %          | 13                              | %          | 17 | % | 14 | % |
| Customer B |       | 11                               | %          | 16                              | %          | 12 | % | 17 | % |
| Customer C |       | 10                               | %          | 7                               | %          | 7 | % | 5 | % |

 

**3. Income Taxes**

 

In July 2006, the FASB issued FIN 48, which clarifies theaccounting for uncertainty in income taxes recognized in an entity’s financialstatements in accordance with FASB Statement No. 109, “Accounting forIncome Taxes” and prescribes a recognition threshold and measurement attributesfor financial statement disclosure of tax positions taken or expected to betaken on a tax return. Under FIN 48, the impact of an uncertain income taxposition on the income tax return must be recognized at the largest amount thatis more-likely-than-not to be sustained upon audit by the relevant taxingauthority. An uncertain income tax position will not be recognized if it hasless than a 50% likelihood of being sustained. Additionally, FIN 48 providesguidance on de-recognition, classification, interest and penalties, accountingin interim periods, disclosure and transition.

 

TheCompany adopted the provisions of FIN 48 on September 29, 2007.  As a result of the adoption of FIN 48 andrecognition of the cumulative effect of adoption of a new accounting principle,the Company recorded a $202,000 decrease in the liability for unrecognizedincome tax benefits, with an offsetting decrease in accumulated deficit.  As of September 29, 2007 the Company hadapproximately $28.9 million of total unrecognized tax benefits.  Of this total, $474,000 represents the amountof unrecognized tax benefits that, if recognized, would favorably affect theeffective tax rate.  The remaining $28.4million of unrecognized tax benefits, if recognized, would have no impact onthe effective tax rate and be recorded as an increase to the Company’s netoperating loss carry-forwards with a related increase in the valuation allowance.  However, to the extent that any portion ofsuch benefit is recognized at the time a valuation allowance no longer exists,such benefit would favorably affect the effective tax rate. In the first ninemonths of fiscal 2008, there has been no change in the balance of unrecognizedtax benefits. The Company does not expect that the unrecognized tax benefitwill change significantly within the next 12 months. The Company recognizesinterest and penalties related to unrecognized tax benefits in the tax provision.As of September 29, 2007, the Company had no liability for the payment ofinterest and penalties. The liability for the payment of interest and penaltiesdid not change as of June 27, 2008.

 

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**MINDSPEED TECHNOLOGIES, INC.**

**NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(continued)**

(unaudited)

 

TheCompany’s tax years ended October 1, 2004 to September 28, 2007remain open to examination by certain foreign taxing jurisdictions.  The Company has incurred U.S. federal andstate net operating losses in all tax periods since inception.  The statute of limitations on these taxperiods with net operating losses does not begin until these losses areutilized.  Accordingly, all federal andall significant states’ tax years since inception remain open for examination.

 

**4.Stock-Based Compensation**

 

Effective October 1,2005, the Company adopted Statement of Financial Accounting Standards No. 123(revised 2004), “Share-Based Payment” (SFAS 123R). SFAS 123R requires that theCompany account for all stock-based compensation using a fair-value method andrecognize the fair value of each award as an expense over the service period.The Company elected to adopt SFAS 123R using “modified prospective application.”

 

Stock-based compensationawards generally vest over time and require continued service to the Companyand, in some cases, require the achievement of specified performanceconditions. The amount of compensation expense recognized is based upon thenumber of awards that are ultimately expected to vest. The Company estimatesforfeiture rates of 10% to 12.5% depending on the characteristics of the award.

 

As a result of the Company’soperating losses and its expectation of future operating results, no income taxbenefits have been recognized for any U.S. federal and state operatinglosses—including those related to stock-based compensation expense. The Companydoes not expect to recognize any income tax benefits relating to futureoperating losses until it determines that such tax benefits are more likelythan not to be realized.

 

The fair value of stockoptions awarded during the nine months ended June 27, 2008 and June 29,2007 was estimated at the date of grant using the Black-Scholes option-pricingmodel. The following table summarizes the weighted-average assumptions used andthe resulting fair value of options granted:

 
| ** **                                      | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **June 27, 2008**     | ** ** | **June 29, 2007** | ** ** |
| Weighted-average fair value of options  granted |       | $                               | 2.15       |   | $ | 5.85 |   |
|                                            |       |                            |       |   |   |
| Weighted-average assumptions:                   |       |                            |       |   |   |
| Expected option life                            |       | 3.3 years                       |       | 3.3 years |   |
| Risk-free interest rate                         |       | 2.6                             | %          | 4.7 | % |
| Expected volatility                             |       | 65                              | %          | 75 | % |
| Dividend yield                                  |       | —                          |       | — |   |
|                                                 |            |                                 |            |  |  |  |  |

 

The expected option term wasestimated based upon historical experience and management’s expectation ofexercise behavior. The expected volatility of the Company’s stock price isbased upon the historical daily changes in the price of the Company’s commonstock. The risk-free interest rate is based upon the current yield on U.S.Treasury securities having a term similar to the expected option term. Dividendyield is estimated at zero because the Company does not anticipate payingdividends in the foreseeable future.

 

Stock-based compensationexpense related to employee stock options and restricted stock under SFAS 123Rwas allocated as follows (in thousands):

 
| ** **                             | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **June 27,****2008**        | ** ** | **June 29,****2007**       | ** ** | **June 27,****2008** | ** ** | **June 29,****2007** | ** ** |
|                                   |       |                             |       |                            |       |   |   |   |   |
| Cost of goods sold                     |       | $                                | 43         |                            | $          | 118 |   | $ | 121 |   | $ | 307 |   |
| Research and development               |       | 450                              |       | 816                             |       | 1,762 |   | 1,910 |   |
| Selling, general and administrative    |       | 603                              |       | 1,351                           |       | 2,240 |   | 3,584 |   |
| Special charges                        |       | —                           |       | —                          |       | — |   | 69 |   |
| Total stock-based compensation expense |       | $                                | 1,096      |                            | $          | 2,285 |   | $ | 4,123 |   | $ | 5,870 |   |

 

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**MINDSPEED TECHNOLOGIES, INC.**

**NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(continued)**

(unaudited)

 

*Stock Compensation Plans*

 

The Companyhas two principal stock incentive plans: the 2003 Long-Term Incentives Plan andthe Directors Stock Plan. The 2003 Long-Term Incentives Plan provides for the grantof stock options, restricted stock, restricted stock units and otherstock-based awards to officers and employees of the Company. The DirectorsStock Plan provides for the grant of stock options, restricted stock units andother stock-based awards to the Company’s non-employee directors. On March 5,2007 the stockholders of the Company approved plan amendments which, amongother things, (1) increased the authorized number of shares reserved forissuance under the 2003 Long-Term Incentives Plan to 3.9 million shares (19.3million shares on a pre June 30, 2008 one- for-five reverse stock splitbasis), (2) removed the “evergreen” provision from the Directors StockPlan that automatically increased the number of shares available under theDirectors Stock Plan each year and (3) fixed the total number of sharesauthorized for issuance under the Directors Stock Plan at 288,000 shares(1,440,000 shares on a pre June 30, 2008 one-for-five reverse stock splitbasis). As of June 27, 2008, an aggregate of 358,000 shares (adjusted forthe June 30, 2008 one-for-five reverse stock split) of the Company’scommon stock were available for issuance under these plans.

 

The Companyalso has a 2003 Stock Option Plan, under which stock options were issued inconnection with the Distribution. In the Distribution, each holder of aConexant stock option (other than options held by persons in certain foreignlocations) received an option to purchase a number of shares of Mindspeedcommon stock. The number of shares subject to, and the exercise prices of, theoutstanding Conexant options and the Mindspeed options were adjusted so thatthe aggregate intrinsic value of the options was equal to the intrinsic valueof the Conexant option immediately prior to the Distribution and the ratio ofthe exercise price per share to the market value per share of each option wasthe same immediately before and after the Distribution. As a result of suchoption adjustments, Mindspeed issued options to purchase an aggregate ofapproximately 6.0 million shares (29.9 million shares on a pre June 30,2008 one- for-five reverse stock split basis) of its common stock to holders ofConexant stock options (including Mindspeed employees) under the 2003 StockOption Plan. There are no shares available for new stock option awards underthe 2003 Stock Option Plan. However, any shares subject to the unexercisedportion of any terminated, forfeited or cancelled option are available forfuture option grants only in connection with an offer to exchange outstandingoptions for new options.

 

Prior to February 2007,the Company maintained employee stock purchase plans for its domestic andforeign employees. Under SFAS 123R, the plans were non-compensatory and theCompany has recorded no compensation expense in connection therewith.  The employee stock purchase plans wereterminated by the Company’s board of directors effective February 28,2007.

 

*StockOption Awards*

 

Prior tofiscal 2006, stock-based compensation consisted principally of stock options.Eligible employees received grants of stock options at the time of hire; theCompany also made broad-based stock option grants covering substantially allemployees annually. Stock option awards have exercise prices not less than themarket price of the common stock at the grant date and a contractual term ofeight or ten years, and are subject to time-based vesting (generally over fouryears). The following table summarizes stock option activity under allplans (adjusted for the June 30, 2008 one- for-five reverse stock split) (sharesin thousands):

 
| ** **                                            | ** ** | **Number  of Shares** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Weighted-Average  Remaining  Contractual Term** | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|-------------------------------------------|------------|--------------------------------------------------------|------------|
| Outstanding at September 28, 2007 |       | 3,982                      |       | $                                         | 11.65      |                                                   |       |   |
|                                                  |       |                       |       |                                      |       |                                                   |       |
| Granted                                               |       | 84                         |       | $                                         | 5.85       |                                                   |       |   |
| Exercised                                             |       | (18                        | )          | $                                         | 5.95       |                                                   |       |   |
| Forfeited or expired                                  |       | (533                       | )          | $                                         | 11.50      |                                                   |       |   |
|                                                  |       |                       |       |                                      |       |                                                   |       |
| Outstanding at June 27, 2008                     |       | 3,515                      |       | $                                         | 11.55      |                                                   | 3.3 years  |   |
|                                                  |       |                       |       |                                      |       |                                                   |       |
| Exercisable at end of period                          |       | 3,001                      |       | $                                         | 11.80      |                                                   | 2.7 years  |   |

 

As of June 27, 2008,there was unrecognized compensation expense of $1.6 million related to unvestedstock options, which the Company expects to recognize over a weighted-averageperiod of 2.0 years. The aggregate intrinsic value of options exercised duringthe nine months ended June 27, 2008 was $33,000. The aggregate intrinsicvalue of options outstanding and options exercisable as of June 27, 2008was $20,000.

 

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**MINDSPEED TECHNOLOGIES, INC.**

**NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(continued)**

(unaudited)

 

*Restricted Stock Awards*

 

The Company’sstock incentive plans also provide for awards of shares of restricted stock andother stock-based incentive awards. Restricted stock awards have time-basedvesting and/or performance conditions and are generally subject to forfeitureif employment terminates prior to the end of the service period or if theprescribed performance criteria are not met. Restricted stock awards are valuedat the grant date based upon the market price of the Company’s common stock andthe fair value of each award is charged to expense over the service period.

 

In fiscal 2007and the first nine months of fiscal 2008, new awards of stock-basedcompensation have principally consisted of restricted stock awards. Themajority of the restricted stock awards are intended to provide performanceemphasis and incentive compensation through vesting tied to each employee’sperformance against individual goals, as well as to improvements in the Company’soperating performance. The actual amounts of expense will depend on the numberof awards that ultimately vest upon the satisfaction of the related performanceand service conditions.  The fair valueof each award is charged to expense over the service period.

 

The followingtable summarizes restricted stock award activity (adjusted for the June 30,2008 one-for-five reverse stock split), (shares in thousands):

 
| ** **                                  | ** ** | **Number  of  Shares** | ** ** | **Weighted-  Average  Grant Date  Fair Value** | ** ** |
|---------------------------------------------|------------|------------------------|------------|----------------------------------------------------------|------------|
| Nonvested shares at September 28, 2007 |       | 638                    |       | $                                                        | 10.85      |   |
|                                        |       |                   |       |                                                     |       |
| Granted                                     |       | 731                    |       | $                                                        | 4.50       |   |
| Vested                                      |       | (499                   | )          | $                                                        | 7.70       |   |
| Forfeited                                   |       | (118                   | )          | $                                                        | 8.95       |   |
|                                        |       |                   |       |                                                     |       |
| Nonvested shares at June 27, 2008      |       | 752                    |       | $                                                        | 7.30       |   |

 

The total fair value ofshares vested during the nine months ended June 27, 2008 was $3.0million.  As of June 27, 2008, therewas unrecognized compensation expense of $2.8 million related to unvestedrestricted stock awards, which the Company expects to recognize over aweighted-average period of approximately 1.4 years.

 

**4.Commitments and Contingencies**

 

Various lawsuits, claims andproceedings have been or may be instituted or asserted against Conexant orMindspeed, including those pertaining to product liability, intellectualproperty, environmental, safety and health and employment matters. Inconnection with the Distribution, Mindspeed assumed responsibility for allcontingent liabilities and current and future litigation against Conexant orits subsidiaries to the extent such matters relate to Mindspeed.

 

The outcome of litigationcannot be predicted with certainty and some lawsuits, claims or proceedings maybe disposed of unfavorably to the Company. Many intellectual property disputeshave a risk of injunctive relief and there can be no assurance that the Companywill be able to license a third party’s intellectual property. Injunctiverelief could have a material adverse effect on the financial condition orresults of operations of the Company. Based on its evaluation of matters whichare pending or asserted, management of the Company believes the disposition ofsuch matters will not have a material adverse effect on the financial conditionor results of operations of the Company.

 

**5. SpecialCharges**

 

Special charges consist ofthe following (in thousands):

 
| ** **            | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-----------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **            | ** ** | **June 27,****2008**        | ** ** | **June 29,****2007**       | ** ** | **June 27,****2008** | ** ** | **June 29,****2007** | ** ** |
|                  |       |                             |       |                            |       |   |   |   |   |
| Restructuring charges |       | $                                | 110        |                            | $          | (104 | ) | $ | 284 |   | $ | 4,728 |   |
|                       |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

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**MINDSPEED TECHNOLOGIES, INC.**

**NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(continued)**

(unaudited)

 

*Mindspeed Restructuring Plans —* In fiscal 2006and 2007, the Company implemented a number of cost reduction initiatives toimprove its operating cost structure. The cost reduction initiatives includedworkforce reductions, significant reductions in capital spending, theconsolidation of certain facilities and salary reductions for the seniormanagement team.

 

Activity andliability balances related to the Mindspeed restructuring plans through June 27,2008 are as follows (in thousands):

 
| ** **                                      | ** ** | **Workforce  Reductions** | ** ** | **Facility  and Other** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|---------------------------|------------|------------------------------|------------|-----------|------------|
| Restructuring balance, September 28,  2007 |       | $                         | 232        |                         | $          | 1,252     |       | $ | 1,484 |   |
| Charged to costs and expenses                   |       | —                    |       | 284                          |       | 284       |       |
| Cash payments                                   |       | (171                      | )          | (1,428                       | )          | (1,599    | )          |
| Restructuring balance, June 27, 2008       |       | $                         | 61         |                         | $          | 108       |       | $ | 169 |   |

 

The remainingaccrued restructuring balance principally represents obligations undernon-cancelable leases, employee severance benefits and other contractualcommitments. The Company expects to pay these obligations over their respectiveterms, which expire at various dates through fiscal 2009. The payments will befunded from available cash balances and funds from product sales and are notexpected to significantly impact liquidity.

 

**6. RelatedParty Transactions**

 

TheCompany leases its headquarters and principal design center in Newport Beach,California from Conexant. For the nine months ended June 27, 2008 and June 29,2007, rent and operating expenses payable to Conexant were $5.1 million and$4.0 million, respectively.

 

**7.Subsequent Events**

 

InJuly 2008, the Company completed the sale of certain non-core patents for$10 million, which will be reported in the Company’s fiscal 2008 fourth quarterrevenues.

 

Inaddition, in August 2008, the Company issued $15 million aggregateprincipal amount of its 6.50% Convertible Senior Notes due 2013 in exchange forthe surrender and cancellation of $15 million aggregate principal amount of itsoutstanding 3.75% Convertible Senior Notes due 2009.

 

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**ITEM 2.****                ****MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND****RESULTS OF OPERATIONS**

 

This information should beread in conjunction with our unaudited consolidated condensed financialstatements and the notes thereto included in this Quarterly Report and ouraudited consolidated financial statements and notes thereto and Management’sDiscussion and Analysis of Financial Condition and Results of Operationscontained in our Annual Report on Form 10-K for our fiscal year ended September 28,2007.

 

**Overview**

 

We design, develop and sellsemiconductor networking solutions for communications applications inenterprise, broadband access, metropolitan and wide-area networks. Ourproducts, ranging from optical network transceiver solutions to voice andInternet protocol (IP) processors, are classified into three focused productfamilies: high-performance analog products, multiservice access products andwide area networking (WAN) communications products. Our products are sold tooriginal equipment manufacturers (OEMs) for use in a variety of networkinfrastructure equipment, including mixed media gateways, high-speed routers,switches, access multiplexers, cross-connect systems, add-drop multiplexers, IPprivate branch exchanges (PBXs),optical modules and broadcast video systems.Service providers use this equipment for the processing, transmission andswitching of high-speed voice, data and video traffic, including advancedservices such as voice-over-IP (VoIP), within different segments of thecommunications network. Our customers include Alcatel-Lucent, CiscoSystems, Inc., Huawei Technologies Co., LM Ericsson Telephone Company,Neophotonics Corporation, Nokia Siemens Networks, Nortel Networks, Inc.and Zhongxing Telecom Equipment Corp. (ZTE).

 

**Trends andFactors Affecting Our Business**

 

Our products are componentsof network infrastructure equipment. As a result, we rely on network infrastructureOEMs to select our products from among alternative offerings to be designedinto their equipment. These “design wins” are an integral part of the longsales cycle for our products. Our customers may need six months or longer totest and evaluate our products and an additional six months or more to beginvolume production of equipment that incorporates our products. We believe ourclose relationships with leading network infrastructure OEMs facilitate earlyadoption of our products during development of their products, enhance ourability to obtain design wins and encourage adoption of our technology by theindustry.

 

We market and sell oursemiconductor products directly to network infrastructure OEMs. We alsosell our products indirectly through electronic component distributors andthird-party electronic manufacturing service providers, who manufactureproducts incorporating our semiconductor networking solutions for OEMs. Salesto distributors accounted for approximately 54% of our revenues for fiscal 2007and 55% for the first nine months of fiscal 2008. Sales to customers locatedoutside the United States, primarily in the Asia-Pacific region and Europe,were approximately 69% of our net revenues for fiscal 2007 and 73% for thefirst nine months of fiscal 2008. We believe a substantial portion of theproducts we sell to OEMs and third-party manufacturing service providers in theAsia-Pacific region is ultimately shipped to end markets in the Americas andEurope.

 

Wehave significant research, development, engineering and product designcapabilities. Our success depends to a substantial degree upon our ability todevelop and introduce in a timely fashion new products and enhancements to ourexisting products that meet changing customer requirements and emergingindustry standards. We have made, and plan to make, substantial investments inresearch and development and to participate in the formulation of industrystandards. We spent approximately $57.4 million and $42.2 million on researchand development for fiscal 2007 and the first nine months of fiscal 2008,respectively. We seek to maximize our return on our research and developmentspending by focusing our research and development investment in what we believeare key high-growth markets, including VoIP and high-performance analogapplications.  We have developed andmaintain a broad intellectual property portfolio, and we intend to periodicallyenter into strategic arrangements to leverage our portfolio by licensing orselling our patents which are no longer core to our business.  We recognized our first revenues from thesale of patents during the fourth quarter of fiscal 2007 and additionalrevenues in the first and second quarters of fiscal 2008.  We anticipate continuing this intellectualproperty strategy in future periods.

 

We are dependent upon thirdparties for the manufacture, assembly and testing of our products. Our abilityto bring new products to market, to fulfill orders and to achieve long-termrevenue growth is dependent on our ability to obtain sufficient externalmanufacturing capacity, including wafer fabrication capacity. Periods of upturnin the semiconductor industry may be characterized by rapid increases in demandand a shortage of capacity for wafer fabrication and assembly and testservices. 

 

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In such periods, we mayexperience longer lead times or indeterminate delivery schedules, which mayadversely affect our ability to fulfill orders for our products. During periodsof capacity shortages for manufacturing, assembly and testing services, ourprimary foundries and other suppliers may devote their limited capacity tofulfill the requirements of other clients that are larger than we are, or whohave superior contractual rights to enforce manufacture of their products,including to the exclusion of producing our products. We may also incurincreased manufacturing costs, including costs of finding acceptablealternative foundries or assembly and test service providers.

 

In order to becomeprofitable, or to generate and sustain positive cash flows from operations, wemust further reduce operating expenses and/or increase our revenues. Throughthe first nine months of fiscal 2008, we have completed a series of costreduction actions which have improved our operating cost structure.

 

Our ability toachieve revenue growth will depend on increased demand for networkinfrastructure equipment that incorporates our products, which in turn dependsprimarily on the level of capital spending by communications service providers.We believe the market for network infrastructure equipment in general, and forcommunications semiconductors in particular, offers attractive long-term growthprospects due to increasing demand for network capacity, the continuedupgrading and expansion of existing networks and the build-out oftelecommunication networks in developing countries. However, the semiconductorindustry is highly cyclical and is characterized by constant and rapidtechnological change, rapid product obsolescence and price erosion, evolvingtechnical standards, short product life cycles and wide fluctuations in productsupply and demand. In addition, there has been an increasing trend towardindustry consolidation, particularly among major network equipment andtelecommunications companies. Consolidation in the industry may lead to pricing pressure and loss ofmarket share.  These factors have causedsubstantial fluctuations in our revenues and our results of operations in thepast, and we may experience cyclical fluctuations in our business in thefuture.

 

OnSeptember 25, 2007, we acquired the product portfolio and intellectualproperty assets of Ample Communications, Inc., an innovative developer ofEthernet media access controller (MAC) products for carrier Ethernetaggregation applications.  We purchasedthese assets in a private foreclosure sale from Ample’s senior creditor.

 

The products we acquired fromAmple ship to major OEM equipment customers for installation in Ethernetmetropolitan, access, and enterprise networks, including wireless/cellularbackhaul and Ethernet-over-SONET applications. We market, sell and support these Ethernet aggregation products withdensities ranging from two to 24 ports and Ethernet transmission speeds from 10Mbps to 10 Gbps. We also expect to develop and further extend the Ethernet MACproduct line.

 

On February 29,2008, we received a letter from The NASDAQ Stock Market notifying us that forthe 30 consecutive business days preceding the date of the letter the bid priceof our common stock had closed below the $1.00 per share minimum bid pricerequired for continued inclusion on The NASDAQ Global Market pursuant to NASDAQMarketplace Rule 4450(a)(5). In order to regain compliance with theminimum bid price rule, we effected a one-for-five reverse stock split on June 30,2008.

 

On July 23,2008, we received a letter from NASDAQ informing us that the closing bid price ofour common stock met or exceeded $1.00 per share for a minimum of 10consecutive business days.  Accordingly,we have regained compliance with Marketplace Rule 4450(a)(5).

 

**CriticalAccounting Policies and Estimates**

 

Thepreparation of financial statements in accordance with generally acceptedaccounting principles in the United States requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Among the significant estimates affecting our consolidatedfinancial statements are those relating to inventories, revenue recognition,allowances for doubtful accounts, stock-based compensation, income taxes andimpairment of long-lived assets. We regularly evaluate our estimates andassumptions based upon historical experience and various other factors that webelieve to be reasonable under the circumstances, the results of which form thebasis for making judgments about the carrying values of assets and liabilitiesthat are not readily apparent from other sources. To the extent actual resultsdiffer from those estimates, our future results of operations may be affected.

 

*Inventories* — We write down our inventoryfor estimated obsolete or unmarketable inventory in an amount equal to thedifference between the cost of inventory and the estimated market value basedupon assumptions about future demand and market conditions. If actual marketconditions are less favorable than our estimates, additional inventorywrite-downs may be required. In the event we experience unanticipated demandand are able to sell a portion of the inventories we have previously writtendown, our gross margins will be favorably affected.

 

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*Stock-Based Compensation* — We account forstock-based compensation in accordance with SFAS No. 123R, “Share-BasedPayment.” SFAS 123R requires that we account for all stock-basedcompensation transactions using a fair-value method and recognize the fairvalue of each award as an expense over the service period. The fair value ofrestricted stock awards is based upon the market price of our common stock atthe grant date. We estimate the fair value of stock option awards, as of thegrant date, using the Black-Scholes option-pricing model. The use of the Black-Scholesmodel requires that we make a number of estimates, including the expectedoption term, the expected volatility in the price of our common stock, therisk-free rate of interest and the dividend yield on our common stock. If ourexpected option term and stock-price volatility assumptions were different, theresulting determination of the fair value of stock option awards could bematerially different. In addition, judgment is also required in estimating thenumber of share-based awards that we expect will ultimately vest upon thefulfillment of service conditions (such as time-based vesting) or theachievement of specific performance conditions. If the actual number of awardsthat ultimately vest differs significantly from these estimates, stock-based compensationexpense and our results of operations could be materially impacted.

 

*Revenue Recognition* —  We recognize revenues when the followingfundamental criteria are met: (i) persuasive evidence of an arrangementexists; (ii) delivery has occurred; (iii) our price to the customeris fixed or determinable; and (iv) collection of the sales price isreasonably assured. We generate revenues from direct product sales, sales todistributors, development agreements and the sale and license of intellectualproperty.

 

We recognize revenues on products shipped directly to customers at thetime the products are shipped and title and risk of loss transfer to thecustomer, in accordance with the terms specified in the arrangement, and thefour above mentioned revenue recognition criteria are met.

 

We recognize revenues on sales to distributors based on the rightsgranted to these distributors in our distribution agreements.  We have certain distributors who have beengranted return rights and receive credits for changes in selling prices to endcustomers, the magnitude of which is not known at the time products are shippedto the distributor.  The return rightsgranted to these distributors consist of limited stock rotation rights,which allow them to rotate up to 10% of the products in their inventory twice ayear, as well as certain product return rights if the applicable distributionagreement is terminated.  Thesedistributors also receive price concessions because they resell our products toend customers at various negotiated price points which vary by end customer,product, quantity, geography and competitive pricing environments. When adistributor’s resale is priced at a discount from the distributors invoiceprice, we credit back to the distributor a portion of the distributor’soriginal purchase price after the resale transaction is complete. Thus, aportion of the “Deferred income on sales to distributors” balance will becredited back to the distributor in the future. Under these agreements,we defer recognition of revenue until the products are resold by the distributor, at which time our final netsales price is fixed and the distributor’s right to return the productsexpires.  At the time of shipment tothese distributors, (i) we record a trade receivable at the invoicedselling price because there is a legally enforceable obligation from thedistributor to pay us currently for product delivered, (ii) we relieveinventory for the carrying value of products shipped because legal title haspassed to the distributor, and (iii) we record deferred revenue anddeferred cost of inventory under the “Deferred income on sales to distributors”caption in the liability section of our consolidated balance sheets.  We evaluate the deferred cost of inventorycomponent of this account for possible impairment by considering potentialobsolescence of products that might be returned to us and by considering thepotential of resale prices of these products being below our cost. Byreviewing deferred inventory costs in the manners discussed above, we ensurethat any portion of deferred inventory costs that are not recoverable fromfuture contractual revenue are charged to cost of sales as an expense. “Deferred income on sales to distributors”effectively represents the gross margin on sales to distributors, however, theamount of gross margin we recognize in future periods may be less than theoriginally recorded deferred income as a result of negotiated priceconcessions.  In recent years, suchconcessions have exceeded 30% of list price on average.  For detail of this account balance, see “Note2 - Supplemental Financial Statement Data” to our consolidated financialstatements.

 

Werecognize revenues from other distributors at the time of shipment andwhen title and risk of loss transfer to the distributor, in accordance with theterms specified in the arrangement, and when the four above mentioned revenuerecognition criteria are met.These distributors may also be given business terms to return a portion ofinventory, however they do not receive credits for changes in selling prices toend customers. At the time of shipment, product prices are fixed anddeterminable and the amount of future returns can be reasonably estimated andaccrued.

 

Revenue fromthe sale and license of intellectual property is recognized when the abovementioned four revenue recognition criteria are met. Development revenue isrecognized when services are performed and customer acceptance has beenreceived and was not significant for any of the periods presented.

 

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*Deferred Income Taxes* — We have provideda full valuation allowance against our U.S federal and state deferred taxassets. If sufficient evidence of our ability to generate future U.S federaland/or state taxable income becomes apparent, we may be required to reduce ourvaluation allowance, resulting in income tax benefits in our statement ofoperations. We evaluate the realizability of our deferred tax assets and assessthe need for a valuation allowance quarterly.

 

*Impairment of Long-Lived Assets* — Weregularly monitor and review long-lived assets, including fixed assets,goodwill and intangible assets, for impairment including whenever events orchanges in circumstances indicate that the carrying amount of any such assetmay not be recoverable. The determination of recoverability is based on anestimate of the undiscounted cash flows expected to result from the use of anasset and its eventual disposition. The estimate of cash flows is based upon,among other things, certain assumptions about expected future operatingperformance, growth rates and other factors. Our estimates of undiscounted cashflows may differ from actual cash flows due to, among other things,technological changes, economic conditions, changes to our business model orchanges in our operating performance. If the sum of the undiscounted cash flows(excluding interest) is less than the carrying value, we recognize animpairment loss, measured as the amount by which the carrying value exceeds thefair value of the asset.

 

**RecentAccounting Pronouncements**

 

On September 29, 2007, we adopted Financial Accounting StandardsBoard (FASB) Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes — An Interpretation of FASB Statement No. 109” (FIN 48).  FIN 48 clarifies the accounting foruncertainty in income taxes recognized in the financial statements inaccordance with FASB Statement No. 109, “Accounting for Income Taxes” andrecommends a recognition threshold and measurement process for recording in thefinancial statements uncertain tax positions taken or expected to be taken inour tax return. FIN 48 also provides guidance on de-recognition,classification, interest and penalties, accounting in interim periods anddisclosure requirements for uncertain tax positions.  See Note 3 to the financial statements forfurther information on our adoption of FIN 48.

 

InDecember 2007, the FASB issued Financial Accounting Standards (SFAS) No. 141R,“Business Combinations”, and SFAS No. 160, “Accounting and Reporting ofNoncontrolling Interest in Consolidated Financial Statements, an Amendment ofARB No. 51” (SFAS No. 160). These new standards will significantlychange the financial accounting and reporting of business combinationtransactions and noncontrolling (or minority) interests in consolidatedfinancial statements. These Statements are effective for fiscal yearsbeginning after December 15, 2008. We will be required to adopt SFAS No. 141R and SFAS No. 160 inthe first quarter of fiscal 2010.Accordingly, to the extent we engage in any business combination transactions,such transaction will be recorded and disclosed following existing accountingprinciples until October 2, 2009.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities—an Amendment of FASBStatement No. 133.” This Statement requires enhanced disclosures about anentity’s derivative and hedging activities and is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008. We will be required to adopt SFAS 161 in the first quarter of fiscal 2010and do not expect that the adoption will have a material impact on ourfinancial condition or results of operations.

 

In May 2008, the FASBissued FASB Staff Position FSP APB 14-1, “Accounting for Convertible DebtInstruments That May be Settled in Cash upon Conversion (Including PartialCash Settlement).”  This FSP specifiesthat issuers of such instruments should separately account for theliability and equity components in a manner that will reflect the entity’snonconvertible debt borrowing rate when interest cost is recognized in subsequentperiods. This FSP is effective for financial statements issued for fiscal yearsbeginning after December 15, 2008, and interim periods within those fiscalyears.  We will be required to adopt thisFSP in the first quarter of fiscal 2010. Early adoption is not permitted. We believe this change in methodologywill negatively affect our earnings and earnings per share as interest expensewill be required to reflect the market rate of interest for nonconvertibledebt.  We are currently evaluating the magnitudeof this impact on our financial condition and results of operations.

 

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**Results of Operations**

 

**Net Revenues**

 

The following table summarizes our net revenues:

 
| ** **                       | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **June 27,**                | ** ** | ** **                      | ** ** | **June 29,** | ** ** | **June 27,** | ** ** | ** ** | ** ** | **June 29,** | ** ** |
| **($ in millions)**    | ** ** | **2008**                         | ** ** | **Change**                      | ** ** | **2007** | ** ** | **2008** | ** ** | **Change** | ** ** | **2007** | ** ** |
| Multiservice access products     |       | $                                | 13.7       |                            | 49         | % | $ | 9.2 |   | $ | 35.6 |   | 29 | % | $ | 27.5 |   |
| High-performance analog products |       | 10.9                             |       | 16                              | %          | 9.4 |   | 31.6 |   | 16 | % | 27.4 |   |
| WAN communications products      |       | 13.4                             |       | (8                              | )%         | 14.6 |   | 42.4 |   | 8 | % | 39.2 |   |
| Net revenues                     |       | $                                | 38.0       |                            | 15         | % | $ | 33.2 |   | $ | 109.6 |   | 16 | % | $ | 94.1 |   |

 

Forthe fiscal 2008 third quarter, the 15% increase in our revenues compared to thethird quarter of fiscal 2007 reflects higher sales of our multiservice accessproducts and our high-performance analog products, partially offset by lowersales of our WAN communications products. Revenues from our multiservice access processors increased by $4.5million, or 49%, principally reflecting increased sales volumes across ournewer VoIP products as telecommunication service providers deploy IP-basedaccess and enterprise networks partially offset by decreased shipments in ourlegacy products.  In addition, weexperienced an increase in shipments in our multiservice access enterpriseproducts.  Revenues from ourhigh-performance analog products increased by $1.5 million, or 16%, primarilyas a result of increased shipments of our switching and signal conditioningproducts.  Sales of our WANcommunications products decreased by $1.2 million, or 8%, when compared to thethird quarter of fiscal 2007, resulting from lower shipments of DSL transceivers, SONETapplications and T/E carrier transmission products.  This decrease was partially offset byrevenues from the sale of Ethernet products added to the WAN portfolio as aresult of the acquisition of certain assets of Ample Communications in thefourth quarter of fiscal 2007 and increased shipments of our high-level datalink controller (HDLC) devices.

 

For the first nine months offiscal 2008, the 16% increase in our revenues compared to the similar fiscal2007 period reflects higher sales volumes across each of our product families including approximately $4.35 million inrevenues from leveraging our intellectual property portfolio by sellingnon-core patents. Net revenues from our multiservice access productsincreased $8.1 million, or 29%, reflecting a combination of increased salesvolumes across our newer VoIP product families, as well as revenues recorded onthe sale of intellectual property, and increased shipments in our multiserviceaccess enterprise products.   Theseincreases were partially offset by a decrease in sales in our legacy products.We believe we are benefiting from the increasing deployment of IP-based networksboth in new network buildouts worldwide and the replacement of circuit-switchednetworks. Netrevenues from our high-performance analog products increased $4.2 million, or16%, reflecting a benefit from increased demand for our switching and signalconditioning products.Net revenues from our WAN communications products increased $3.2 million, or 8% reflecting acombination of salesof Ethernet products added to the WAN portfolio as a result of the acquisitionof certain assets of Ample Communications in the fourth quarter of fiscal 2007,revenue recorded on the sale of intellectual property and increased shipmentsof our high-level data link controller (HDLC) devices.  These benefits were partially offset by a decrease indemand for ourproducts in access and metropolitan area network applications such as T/Ecarrier transmission products and DSL transceivers.

 

**Gross Margin**

 
| ** **                    | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                    | ** ** | **June 27,**                | ** ** | ** **                      | ** ** | **June 29,** | ** ** | **June 27,** | ** ** | ** ** | ** ** | **June 29,** | ** ** |
| **($ in millions)** | ** ** | **2008**                         | ** ** | **Change**                      | ** ** | **2007** | ** ** | **2008** | ** ** | **Change** | ** ** | **2007** | ** ** |
| Gross margin                  |       | $                                | 25.5       |                            | 13         | % | $ | 22.7 |   | $ | 74.9 |   | 21 | % | $ | 62.1 |   |
| Percent of net revenues       |       | 67                               | %          |                            |       | 68 | % | 68 | % |   |   | 66 | % |
|                               |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Gross margin represents revenues less cost of goodssold. As a fabless semiconductor company, we use third parties (including TaiwanSemiconductor Manufacturing Co., Ltd. (TSMC), Jazz Semiconductor, Inc. andAmkor Technology, Inc.) for wafer fabrication and assembly and testservices. Our cost of goods sold consists predominantly of: purchased finishedwafers; assembly and test services; royalty and other intellectual propertycosts; labor and overhead costs associated with product procurement; the costof mask sets purchased; and sustaining engineering expenses pertaining toproducts sold.

 

Our gross margin for thefiscal 2008 third quarter increased $2.8 million over the comparable fiscal2007 period, principally reflecting an increase in product sales.  The provision for excess and obsoleteinventories was a net credit of $0.1 million for the fiscal 2008 third quarter,compared to a net credit of $0.2 million for the comparable fiscal 2007period.  We experienced a decrease in sales in the third quarter offiscal 2008 of inventory previously written down to a zero cost basis in fiscal2001 to $0.2 million from $1.1 million in the third quarter of fiscal 2007.

 

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Our gross margin for thefirst nine months of fiscal 2008 increased $12.8 million over the comparablefiscal 2007 period, principally reflecting an increase in product sales and thesale of intellectual property with a zero cost basis. The improvement of ourgross margin for the first nine months of fiscal 2008 includes $4.35 millionfrom the sale of certain patents that are no longer core to our business. In addition, the provision for excess andobsolete inventories was a $1.2 million net credit for the first nine months offiscal 2008, compared to $0.4 million net credit for the comparable fiscal 2007period.  Our gross margin improvement was partially offset by adecrease in sales in the first nine months of fiscal 2008 of inventorypreviously written down to a zero cost basis in fiscal 2001 to $1.1 millionfrom $3.1 million in the first nine months of fiscal 2007.

 

We assess the recoverability of our inventories atleast quarterly through a review of inventory levels in relation to foreseeabledemand (generally over 12 months). Foreseeable demand is based upon allavailable information, including sales backlog and forecasts, product marketingplans and product life cycles. When the inventory on hand exceeds theforeseeable demand, we write down the value of those inventories which, at thetime of our review, we expect to be unable to sell. The amount of the inventorywrite-down is the excess of historical cost over estimated realizable value.Once established, these write-downs are considered permanent adjustments to thecost basis of the excess inventory.

 

Our products are used by OEMs that have designed ourproducts into network infrastructure equipment. For many of our products, wegain these “design wins” through a lengthy sales cycle, which often includesproviding technical support to the OEM customer. In the event of the loss ofbusiness from existing OEM customers, we may be unable to secure new customersfor our existing products without first achieving new design wins. When thequantities of inventory on hand exceed foreseeable demand from existing OEMcustomers into whose products our products have been designed, we generallywill be unable to sell our excess inventories to others, and the estimatedrealizable value of such inventories to us is generally zero.

 

We base our assessment ofthe recoverability of our inventories, and the amounts of any write-downs, oncurrently available information and assumptions about future demand and marketconditions. Demand for our products may fluctuate significantly over time, andactual demand and market conditions may be more or less favorable than thoseprojected by management. In the event that actual demand is lower thanoriginally projected, additional inventory write-downs may be required.

 

**Research and Development**

 
| ** **                    | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                    | ** ** | **June 27,**                | ** ** | ** **                      | ** ** | **June 29,** | ** ** | **June 27,** | ** ** | ** ** | ** ** | **June 29,** | ** ** |
| **($ in millions)** | ** ** | **2008**                         | ** ** | **Change**                      | ** ** | **2007** | ** ** | **2008** | ** ** | **Change** | ** ** | **2007** | ** ** |
| Research and development      |       | $                                | 14.8       |                            | 6          | % | $ | 13.9 |   | $ | 42.2 |   | (4 | )% | $ | 44.2 |   |
| Percent of net revenues       |       | 39                               | %          |                            |       | 42 | % | 38 | % |   |   | 47 | % |
|                               |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Our research and development (R&D) expenses consistprincipally of direct personnel costs, photomasks, electronic design automationtools and pre-production evaluation and test costs. The $0.9 million increase inR&D expenses for the third quarter of fiscal 2008 compared to the thirdquarter of fiscal 2007 is mainly driven by $0.7 million in employee separationcosts which consist of severance benefits payable to certain former employeesas a result of organizational changes. In addition, we experienced an increase in expenses related toelectronic design automation tools. These increases were partially offset by a $0.3 million decrease indepreciation expense, principally resulting from certain assets reaching theend of their depreciable lives.

 

The $2.0 million decrease inR&D expenses for the first nine months of fiscal 2008 compared to the firstnine months of fiscal 2007 reflects a $0.7 million decrease in compensation andpersonnel-related costs and a $0.6 million decrease in the cost of ourfacilities resulting from our expense reduction actions. The decrease inR&D expenses also reflects a $0.9 million decrease in depreciationexpense, principally resulting from certain assets reaching the end of theirdepreciable lives.

 

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**Selling, General and Administrative**

 
| ** **                          | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **June 27,**                | ** ** | ** **                      | ** ** | **June 29,** | ** ** | **June 27,** | ** ** | ** ** | ** ** | **June 29,** | ** ** |
| **($ in millions)**       | ** ** | **2008**                         | ** ** | **Change**                      | ** ** | **2007** | ** ** | **2008** | ** ** | **Change** | ** ** | **2007** | ** ** |
| Selling, general and administrative |       | $                                | 11.2       |                            | 3          | % | $ | 10.8 |   | $ | 34.4 |   | 4 | % | $ | 32.9 |   |
| Percent of net revenues             |       | 29                               | %          |                            |       | 33 | % | 31 | % |   |   | 35 | % |
|                                     |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Our selling, general andadministrative (SG&A) expenses include sales and marketing costs, includingthe cost of personnel, independent sales representative commissions and productmarketing, applications engineering and other marketing costs. Our SG&Aexpenses also include costs of corporate functions including accounting,finance, legal, human resources, information systems and communications. The$0.4 million increase in our SG&A expenses for the third quarter of fiscal2008 compared to the third quarter of fiscal 2007 reflects a $0.5 millionincrease in legal and consulting fees incurred in conjunction with businessdevelopment activities.

 

The $1.5 million increase inour SG&A expenses for the first nine months of fiscal 2008 compared to thecomparable fiscal 2007 period reflects an increase of approximately $0.7million in labor and benefits due to an increase in the cost of benefitsoffered to our employees, as well as $0.3 million in severance benefits payable to a formerofficer of the company.  Additionally, weexperienced a $0.7 million increase in professional fees.  The increase in professional fees isprimarily due to expenses incurred in connection with the printing anddistribution of our proxy statement and the addition of submitting a proposalfor stockholder approval to amend our certificate of incorporation to effect areverse stock split and reduce our authorized shares of common stock.

 

**Special Charges**

 

Special charges consist of the following (inthousands):

 
| ** **            | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-----------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **            | ** ** | **June 27,  2008**          | ** ** | **June 29,  2007**         | ** ** | **June 27,  2008** | ** ** | **June 29,**** 2007** | ** ** |
|                  |       |                             |       |                            |       |   |   |   |   |
| Restructuring charges |       | $                                | 110        |                            | $          | (104 | ) | $ | 284 |   | $ | 4,728 |   |
|                       |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

*MindspeedRestructuring Plans*— In fiscal 2006 and 2007, we implemented a numberof cost reduction initiatives to improve our operating cost structure. The costreduction initiatives included workforce reductions, significant reductions incapital spending, the consolidation of certain facilities and salary reductionsfor the senior management team.

 

Activity and liabilitybalances related to the Mindspeed restructuring plans through June 27,2008 are as follows (in thousands):

 
| ** **                                     | ** ** | **Workforce  Reductions** | ** ** | **Facility  and Other** | ** ** | **Total** | ** ** |
|------------------------------------------------|------------|---------------------------|------------|------------------------------|------------|-----------|------------|
| Restructuring balance, September 28, 2007 |       | $                         | 232        |                         | $          | 1,252     |       | $ | 1,484 |   |
| Charged to costs and expenses                  |       | —                    |       | 284                          |       | 284       |       |
| Cash payments                                  |       | (171                      | )          | (1,428                       | )          | (1,599    | )          |
| Restructuring balance, June 27, 2008      |       | $                         | 61         |                         | $          | 108       |       | $ | 169 |   |

 

The remaining accruedrestructuring balance principally represents obligations under non-cancelableleases, employee severance benefits and other contractual commitments. Weexpect to pay these obligations over their respective terms, which expire atvarious dates through fiscal 2009. The payments will be funded from availablecash balances and funds from product sales and are not expected tosignificantly impact liquidity.

 

**Interest Expense**

** **
| ** **                    | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                    | ** ** | **June 27,**                | ** ** | **June 29,**               | ** ** | **June 27,** | ** ** | **June 29,** | ** ** |
| **($ in millions)** | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Interest expense              |       | $                                | 0.6        |                            | $          | 0.6 |   | $ | 1.7 |   | $ | 1.7 |   |
|                               |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

Interest expense represents interest on the $46million aggregate principal amount of convertible senior notes we issued in December 2004.

 

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**Other Income, Net**

 
| ** **                    | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                    | ** ** | **June 27,**                | ** ** | **June 29,**               | ** ** | **June 27,** | ** ** | **June 29,** | ** ** |
| **($ in millions)** | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Other income, net             |       | $                                | 0.2        |                            | $          | 0.1 |   | $ | 0.1 |   | $ | 0.4 |   |
|                               |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

Other income, netprincipally consists of interest income, foreign exchange gains and losses andother non-operating gains and losses. The increase in other income for thethird quarter of fiscal 2008 compared to the third quarter of fiscal 2007principally reflects lower foreign exchange losses incurred in the thirdquarter of fiscal 2008 than in the third quarter of fiscal 2007. This waspartially offset by a decrease in interest income for the third quarter of 2008compared to the third quarter of 2007 resulting from lower invested cashbalances and lower interest rates.  Thedecrease in other income for the first nine months of fiscal 2008 compared to thefirst nine months of fiscal 2007 principally reflects lower interest income inthe nine months of 2008 than in the same period in the prior year resultingfrom lower invested cash balances and lower interest rates.

 

**Provision for Income Taxes**

 

Our provision for income taxes for the first ninemonths of fiscal 2008 and 2007 principally consisted of income taxes incurredby our foreign subsidiaries. As a result of our recent operating losses and ourexpectation of future operating results, we determined that it is more likelythan not that the U.S. federal and state income tax benefits (principally netoperating losses we can carry forward to future years) which arose during thefirst nine months of fiscal 2008 and 2007 will not be realized. Accordingly, wehave not recognized any income tax benefits relating to our U.S. federal andstate operating losses for those periods and we do not expect to recognize anyincome tax benefits relating to future operating losses until we believe thatsuch tax benefits are more likely than not to be realized. We expect that ourprovision for income taxes for fiscal 2008 will principally consist of incometaxes related to our foreign operations.

 

**Liquidity and Capital Resources**

 

Cash provided by operating activities was $11.6million for the first nine months of fiscal 2008 compared to cash used inoperating activities of $9.4 million for the first nine months of fiscal2007.  Operating cash flows for the firstnine months of fiscal 2008 reflect our net loss of $3.7 million, offset bynon-cash charges (depreciation and amortization, stock-based compensationexpense, inventory provisions and other) of $8.0 million, and net workingcapital decreases of approximately $7.4 million.

 

The net working capital decreases for the first ninemonths of fiscal 2008 consisted principally of a $5.7 million decrease in netinventories resulting from our efforts to reduce inventory on hand and a$2.7 million increase in payables mainly due to the timing ofpayments.  In addition, other assets andother current assets decreased by $2.2 million mainly due to decreases inprepaid insurance and prepaid software licenses.  These working capital decreases were partially offsetby a $3.5 million increase in accounts receivable.

 

Cash used in operatingactivities was $9.4 million for the first nine months of fiscal 2007. Operatingcash flows for the first nine months of fiscal 2007 reflect our net loss of$21.5 million, partially offset by non-cash charges (depreciation, stock-basedcompensation expense and other) of $9.8 million, and net working capitaldecreases of approximately $2.2 million.

 

The net working capitaldecreases for the first nine months of fiscal 2007 consisted principally of a$3.1 million decrease in inventory primarily due to continued focus ondecreasing inventory on hand.  Theworking capital decreases also include a $1.9 million increase in accruedexpenses and other current liabilities mainly consisting of an increase inaccrued compensation expense due to the timing of payment. These amounts werepartially offset by a $2.5 million decrease in accounts payable principallyrelated to the timing of vendor payments.

 

Cash used in investing activities of $7.6 million forthe first nine months of fiscal 2008 principally consisted of $6.4 million ofcapital expenditures and payments associated with our acquisition ofcertain assets of Ample Communications of $1.2 million. For the first nine months of fiscal2007, cash provided by investing activities of $1.6 million principallyconsisted of sales of marketable securities (net of purchases) of $5.0 millionand capital expenditures of $3.4 million.

 

Cash provided by financing activities of $0.1 millionand $3.3 million for the first nine months of fiscal 2008 and 2007,respectively, consisted of proceeds from the exercise of stock options.

 

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*Senior Notes Offerings*

 

*3.75%Convertible Senior Notes due 2009*

 

In December 2004, we sold an aggregate principalamount of $46.0 million in convertible senior notes due 2009 for net proceeds(after discounts and commissions) of approximately $43.9 million. The notes aresenior unsecured obligations, ranking equal in right of payment with all futureunsecured indebtedness. The notes bear interest at a rate of 3.75%, payablesemiannually in arrears each May 18 and November 18. The notes aredue November 18, 2009. We used approximately $3.3 million of the proceedsto purchase U.S. government securities that were pledged to the trustee for thepayment of the first four scheduled interest payments on the notes when due.

 

The notes are convertible, at the option of theholder, at any time prior to maturity into shares of our common stock. Uponconversion, we may, at our option, elect to deliver cash in lieu of shares of ourcommon stock or a combination of cash and shares of common stock. Effective May 13,2005, the conversion price of the notes was adjusted to $11.55 per share ($2.31per share on a pre June 30, 2008 one-for-five reverse stock split basis)of common stock, which is equal to a conversion rate of approximately 86.58shares (432.9004 shares on a pre June 30, 2008 one-for-five reverse stocksplit basis) of common stock per $1,000 principal amount of notes. Prior tothis adjustment, the conversion price applicable to the notes was $14.05 pershare ($2.81 per share on a pre June 30, 2008 one-for-five reverse stocksplit basis) of common stock, which was equal to approximately 71.17 shares(355.8719 shares on a pre June 30, 2008 one-for-five reverse stock splitbasis) of common stock per $1,000 principal amount of notes. The adjustment wasmade pursuant to the terms of the indenture governing the notes. The conversionprice is subject to further adjustment under the terms of the indenture toreflect stock dividends, stock splits, issuances of rights to purchase sharesof common stock and certain other events.

 

If we undergo certainfundamental changes (as defined in the indenture), holders of notes may requireus to repurchase some or all of their notes at 100% of the principal amountplus accrued and unpaid interest. If, upon notice of certain eventsconstituting a fundamental change, holders of the notes elect to convert thenotes, we may be required to make additional cash payment per $1,000 principalamount of notes in connection with the conversion. The amount of the additionalcash payment, if any, will be determined by reference to a table set forth inthe indenture governing the notes and our average stock price (as determined inaccordance with the indenture) for the 20 trading days following the conversiondate. If an applicable fundamental change were to occur between November 18,2007 and November 18, 2008, the amount of the additional cash paymentwould be equal to such average stock price times a multiplier of up to 12.24(61.19 on a pre June 30, 2008 one-for-five reverse stock split basis). Ourobligation to make the additional cash payment will not apply to fundamentalchanges that occur on or after November 18, 2009, and the applicablemultiplier will decrease on a daily basis through that date. Notwithstandingthe foregoing, no additional cash payment will be required if the applicableaverage stock price is less than $11.50 per share ($2.30 per share on a pre June 30,2008 one-for-five reverse stock split basis) (subject to adjustment as setforth in the indenture). In the event of a non-stock change of controlconstituting a “public acquirer change of control” (as defined in theindenture), we may, in lieu of making an additional cash payment upon conversionas required by the indenture, elect to adjust the conversion price and therelated conversion obligation such that the noteholders will be entitled toconvert their notes into a number of shares of public acquirer common stock.

 

For financial accounting purposes, our contingentobligation to issue additional shares or make additional cash payment uponconversion following a fundamental change is an “embedded derivative.” As of June 27,2008, the liability under the fundamental change adjustment has been recordedat its estimated fair value and is not significant.

 

*6.50%Convertible Senior Notes due 2013*

* *

OnJuly 30, 2008, we entered into separate exchange agreements with certainholders of our existing 3.75% Convertible Senior Notes due 2009, pursuant towhich holders of an aggregate of $15 million of the existing notes agreed toexchange their notes for $15 million in aggregate principal amount of a newseries of 6.50% Convertible Senior Notes due 2013. The exchanges closed on August 1,2008. We paid at the closing an aggregate of approximately $116,000 in accruedand unpaid interest on the existing notes that were exchanged for the newnotes, as well as a $750,000 fee to our financial advisor.

 

Weissued the new notes pursuant to an indenture, dated as of August 1, 2008,between us and Wells Fargo Bank, N.A., as trustee. Following the completion ofthe exchange, $31 million in aggregate principal amount of the existing notesremain outstanding.

 

Thenew notes are unsecured senior indebtedness and bear interest at a rate of6.50% per annum. Interest is payable on February 1 and August 1 ofeach year, commencing on February 1, 2009. The new notes mature on August 1,2013. At maturity, we will be required to repay the outstanding principal ofthe new notes.

 

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Thenew notes are convertible at the option of the holders, at any time on or priorto maturity, into shares of our common stock at a conversion rate initiallyequal to approximately $4.74 per share of common stock, which is subject toadjustment in certain circumstances. Upon conversion of the new notes, wegenerally have the right to deliver to the holders thereof, at our option, (i) cash,(ii) shares of our common stock, or (iii) a combination thereof. Theinitial conversion price of the new notes will be adjusted to reflect stockdividends, stock splits, issuances of rights to purchase shares of our commonstock, and upon other events. If we undergo certain fundamental changes priorto maturity of the new notes, the holders thereof will have the right, at theiroption, to require us to repurchase for cash some or all of their new notes ata repurchase price equal to 100% of the principal amount of the new notes beingrepurchased, plus accrued and unpaid interest (including additional interest,if any) to, but not including, the repurchase date, or convert the new notesinto shares of our common stock and, under certain circumstances, receive additional shares of our commonstock in the amount provided in the indenture.

 

Ifthere is an event of default on the new notes, the principal of and premium, ifany, on all the new notes and the interest accrued thereon may be declaredimmediately due and payable, subject to certain conditions set forth in the indenture.An event of default under the indenture will occur if we: (i) aredelinquent in making certain payments due under the new notes; (ii) failto deliver shares of common stock or cash upon conversion of the new notes; (iii) failto deliver certain required notices under the new notes; (iv) fail,following notice, to cure a breach of a covenant under the new notes or the indenture;(v) incur certain events of default with respect to other indebtedness; or(vi) is subject to certain bankruptcy proceedings or orders. If we fail todeliver certain SEC reports to the trustee in a timely manner as required bythe indenture, (x) the interest rate applicable to the new notes duringthe delinquency will be increased by 0.25% or 0.50%, as applicable (dependingon the duration of the delinquency), and (y) if the required reports arenot delivered to the trustee within 180 days after their due date under the indenture,a holder of the new notes will generally have the right, subject to certainlimitations, to require us to repurchase all or any portion of the new notesthen held by such holder.

 

*Conexant Warrant*

 

On June 27, 2003, Conexant Systems, Inc.(Conexant) completed the distribution (the Distribution) to Conexantstockholders of all 18,066,689 (90,333,445 on a pre June 30, 2008 one-for-fivereverse stock split basis) outstanding shares of common stock of its whollyowned subsidiary, Mindspeed. In the Distribution, each Conexant stockholderreceived one fifth of one share (one share on a pre June 30, 2008one-for-five reverse stock split basis) of Mindspeed common stock (including anassociated preferred share purchase right) for every three shares of Conexantcommon stock held and cash for any fractional share of Mindspeed common stock.Following the Distribution, Mindspeed began operations as an independent,publicly held company.

 

In the Distribution, we issued to Conexant a warrantto purchase six million shares (adjusted to reflect our June 30, 2008one-for-five reverse stock split) of our common stock at a price of $17.04 pershare (adjusted to reflect our June 30, 2008 one-for-five reverse stocksplit), exercisable for a period of ten years after the Distribution. Thewarrant may be transferred or sold in whole or part at any time. The warrantcontains antidilution provisions that provide for adjustment of the exerciseprice, and the number of shares issuable under the warrant, upon the occurrenceof certain events. If we issue, or are deemed to have issued, shares of ourcommon stock, or securities convertible into our common stock, at prices belowthe current market price of our common stock (as defined in the warrants) atthe time of the issuance of such securities, the warrant’s exercise price willbe reduced and the number of shares issuable under the warrant will beincreased. The amount of such adjustment if any, will be determined pursuant toa formula specified in the warrant and will depend on the number of sharesissued, the offering price and the current market price of our common stock atthe time of the issuance of such securities. Adjustments to the warrantpursuant to these antidilution provisions may result in significant dilution tothe interests of our existing stockholders and may adversely affect the marketprice of our common stock. The antidilution provisions may also limit ourability to obtain additional financing on terms favorable to us.

 

Moreover, we may not realize any cash proceeds from theexercise of the warrant held by Conexant. A holder of the warrant may opt for acashless exercise of all or part of the warrant. In a cashless exercise, theholder of the warrant would make no cash payment to us and would receive anumber of shares of our common stock having an aggregate value equal to theexcess of the then-current market price of the shares of our common stockissuable upon exercise of the warrant over the exercise price of the warrant.Such an issuance of common stock would be immediately dilutive to the interestsof other stockholders.

 

*Liquidity*

 

Our principal sources ofliquidity are our existing cash balances and cash generated from product sales.During the first nine months of fiscal 2008, we also received approximately$4.35 million in cash from sales of our non-core intellectual property. As of June 27,2008, our cash and cash equivalents totaled $29.9 million. Our workingcapital at June 27, 2008 was $37.7 million. In July 2008, wereceived $10.0 million from the sale of non-core patents which will be includedin revenues in the fourth quarter of fiscal 2008.

 

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In order to become profitable,or to sustain positive cash flows from operations, we must further reduceoperating expenses and/or increase revenues. Through the first nine months offiscal 2008, we have completed a series of cost reduction actions which haveimproved our operating cost structure. These expense reductions alone may notmake us profitable or allow us to sustain profitability if it is achieved. Ourability to achieve the necessary revenue growth will depend on increased demandfor network infrastructure equipment that incorporates our products, which inturn depends primarily on the level of capital spending by communicationsservice providers and enterprises. We may not be successful in achieving thenecessary revenue growth or we may be unable to sustain past and future expensereductions in subsequent periods. We may not achieve profitability or sustainsuch profitability, if achieved.

 

We believe that our existingsources of liquidity, along with cash expected to be generated from productsales and sales or licensing of non-core intellectual property, will besufficient to fund our operations, research and development efforts,anticipated capital expenditures, working capital and other financingrequirements for at least the next 12 months. We are currently evaluating anumber of available refinancing alternatives regarding our convertible debt,including alternatives to provide cash necessary to repay our convertible debtdue November 2009, when the instrument reaches maturity in 2009, assumingthat it has not been converted into equity prior to maturity. From time totime, we may acquire our debt securities through open market purchases,privately negotiated transactions, tender offers, exchange offers (for new debtor other securities), redemptions or otherwise, upon such terms and at suchprices as we may determine. We will need to continue a focused program ofcapital expenditures to meet our research and development and corporaterequirements. We may also consider acquisition opportunities to extend ourtechnology portfolio and design expertise and to expand our product offerings.In order to fund capital expenditures, increase its working capital or completeany acquisitions, we may seek to obtain additional debt or equity financing. Wemay also need to seek to obtain additional debt or equity financing if weexperience downturns or cyclical fluctuations in our business that are moresevere or longer than anticipated or if we fail to achieve anticipated revenueand expense levels. However, we cannot assure you that such financing will beavailable to us on favorable terms, or at all.

 

**Off-Balance Sheet Arrangements**

 

We have made guarantees and indemnities, under whichwe may be required to make payments to a guaranteed or indemnified party, inrelation to certain transactions. In connection with the Distribution, wegenerally assumed responsibility for all contingent liabilities andthen-current and future litigation against Conexant or its subsidiaries relatedto the Mindspeed business. We may also be responsible for certain federalincome tax liabilities under the tax allocation agreement between us andConexant, which provides that we will be responsible for certain taxes imposedon us, Conexant or Conexant stockholders. In connection with certain facilityleases, we have indemnified our lessors for certain claims arising from thefacility or the lease. We indemnify our directors, officers, employees andagents to the maximum extent permitted under the laws of the State of Delaware.The duration of the guarantees and indemnities varies, and in many cases isindefinite. The majority of our guarantees and indemnities do not provide forany limitation of the maximum potential future payments we could be obligatedto make. We have not recorded any liability for these guarantees andindemnities in the accompanying consolidated balance sheets.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

** **

Our cash and cash equivalents consist of demanddeposits, highly-liquid money market funds and commercial paper. Our maininvestment objectives are the preservation of investment capital and themaximization of after-tax returns on our investment portfolio. Consequently, weinvest in securities that meet high credit quality standards and we limit theamount of our credit exposure to any one issuer. We do not use derivativeinstruments for speculative or investment purposes.

 

*Interest Rate Risk*

 

Our cash and cash equivalents are not subject tosignificant interest rate risk due to the short maturities or variable interestrate characteristics of these instruments. As of June 27, 2008, thecarrying value of our cash and cash equivalents approximates fair value.

 

Our long-term debt consists of convertible seniornotes which bear interest at a fixed rate of 3.75%. Consequently, our resultsof operations and cash flows are not subject to any significant interest raterisk relating to our long-term debt.

 

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*Foreign Currency Exchange Rate Risk*

 

We transact business in various foreign currencies andwe face foreign currency exchange rate risk on assets and liabilities that aredenominated in foreign currencies. The majority of our foreign exchange risksare not hedged; however, from time to time, we may utilize foreign currencyforward exchange contracts to hedge a portion of our exposure to foreigncurrency exchange rate risk. These hedging transactions are intended to offsetthe gains and losses we experience on foreign currency transactions with gainsand losses on the forward contracts, so as to mitigate our overall risk offoreign exchange gains and losses. We do not enter into forward contracts forspeculative or trading purposes. At June 27, 2008, we held no foreigncurrency forward exchange contracts. Based on our overall currency rateexposure at June 27, 2008, a 10% change in currency rates would not have amaterial effect on our consolidated financial position, results of operationsor cash flows.

 

**ITEM 4.CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls andProcedures**

 

Under the supervision and with the participation ofour management, including our Chief Executive Officer and our Chief FinancialOfficer, we have evaluated the effectiveness of the design and operation of ourdisclosure controls and procedures as of June 27, 2008. Disclosurecontrols and procedures are defined under SEC rules as controls and otherprocedures that are designed to ensure that information required to bedisclosed by us in the reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within required time periods.Based upon that evaluation, our Chief Executive Officer and our Chief FinancialOfficer have concluded that, as of June 27, 2008, these disclosurecontrols and procedures were effective.

 

**Changes in Internal Control overFinancial Reporting**

 

There were no changes in our internal control overfinancial reporting during the fiscal quarter ended June 27, 2008 thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PART II.OTHER INFORMATION**

 

**ITEM 1A.RISK FACTORS**

 

We have revised the risk factors that relate to ourbusiness, as set forth below. These risks include any material changes to andsupersede the risks previously disclosed in Part I, Item 1A of our AnnualReport on Form 10-K for the fiscal year ended September 28, 2007. Weencourage investors to review these risk factors, as well as those containedunder “Forward-Looking Statements” preceding Part I of this Report.

 

Our business, financialcondition and operating results can be affected by a number of factors,including those listed below, any one of which could cause our actual resultsto vary materially from recent results or from our anticipated future results.Any of these risks could also materially and adversely affect our business,financial condition or the price of our common stock or other securities.

 

***We are incurring operating losses and we may continue to incur lossesin future*****periods*****.***

 

We incurred a net loss of$3.7 million in the first nine months of fiscal 2008 and incurred net losses of$21.9 million in fiscal 2007 and $24.5 million in fiscal 2006. We maycontinue to incur losses and negative cash flows in future periods.

 

In order to becomeprofitable, or to sustain positive cash flows from operations, we must furtherreduce operating expenses and/or increase our revenues. Through the first ninemonths of fiscal 2008, we have completed a series of cost reduction actionswhich have improved our operating cost structure. These expense reductionsalone may not make us profitable or allow us to sustain profitability if it isachieved. Our ability to achieve the necessary revenue growth will depend onincreased demand for network infrastructure equipment that incorporates ourproducts, which in turn depends primarily on the level of capital spending bycommunications service providers and enterprises. We may not be successful inachieving the necessary revenue growth or the expected expense reductions.Moreover, we may be unable to sustain past or expected future expensereductions in subsequent periods. We may not achieve profitability or sustainsuch profitability, if achieved.

 

***We have substantial cash requirements to fund our operations, researchand******developmentefforts and capital expenditures. Our capital resources are limited and******capital needed for ourbusiness may not be available when we need it.***

 

For the first nine months offiscal 2008, we generated $11.6 million in cash from operating activitiescompared to net cash used of $9.4 million in the first nine months of fiscal2007. Our net cash used in operating activities was $10.0 million in fiscal2007 and $15.9 million for fiscal 2006. Our principal sources of liquidity areour existing cash balances and cash generated from product sales and sales ofintellectual property. As of June 27, 2008, our cash and cash equivalentstotaled $29.9 million. We believe that our existing sources of liquidity willbe sufficient to fund our operations, research and development efforts,anticipated capital expenditures, working capital and other financingrequirements for at least the next 12 months. However, this may not be thecase, and if we continue to incur operating losses and negative cash flows inthe future, we may need to reduce further our operating costs or obtainalternate sources of financing, or both. We are currently evaluating, and mayevaluate in the future, transactions that may involve the issuance orincurrence of indebtedness, including credit facilities, however we may nothave access to additional sources of capital on favorable terms or at all. Ifwe raise additional funds through the issuance of equity, equity-based or debtsecurities, such securities may have rights, preferences or privileges seniorto those of our common stock and our stockholders may experience dilution oftheir ownership interests.

 

***Our operating results may beadversely impacted by worldwide political and economic uncertainties andspecific conditions in the markets we address, including the cyclical nature ofand volatility in the semiconductor industry. As a result, the market price ofour common stock may decline.***

 

Weoperate primarily in the semiconductor industry, which is cyclical and subjectto rapid change and evolving industry standards. From time to time, thesemiconductor industry has experienced significant downturns. These downturnsare characterized by decreases in product demand, excess customer inventoriesand accelerated erosion of prices. These factors could cause substantialfluctuations in our revenue and in our results of operations. Any downturns inthe semiconductor industry may be severe and prolonged, and any failure of theindustry or wired and wireless communications markets to fully recover fromdownturns could seriously impact our revenue and harm our business, financialcondition and results of operations. The semiconductor industry alsoperiodically experiences increased demand and production capacity constraints,which may affect our ability to ship products. Accordingly, our operatingresults may vary significantly as a result of the general conditions in thesemiconductor industry, which could cause large fluctuations in our stockprice.

 

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Additionally,in the recent past, general worldwide economic conditions have experienced adownturn due to slower economic activity, concerns about inflation anddeflation, increased energy costs, decreased consumer confidence, reducedcorporate profits and capital spending, adverse business conditions andliquidity concerns in the wired and wireless communications markets, the effecton the market in China due to the Olympic games, recent international conflictsand terrorist and military activity, and the impact of natural disasters andpublic health emergencies. These conditions make it extremely difficult for ourcustomers, our vendors and us to accurately forecast and plan future businessactivities, and they could cause U.S. and foreign businesses to slowspending on our products and services, which would delay and lengthen salescycles. We cannot predict the timing, strength or duration of any worldwideeconomic slowdown or subsequent economic recovery, or in the semiconductorindustry or the wired and wireless communications markets. If the economy ormarkets in which we operate do not continue at their present levels, ourbusiness, financial condition and results of operations will likely bematerially and adversely affected. Additionally, the combination of our lengthysales cycle coupled with challenging macroeconomic conditions could have asynergistic negative impact on the results of our operations.

 

***The loss of one or more key customers ordistributors, or the diminished demand for our products from a key customercould significantly reduce our revenues and profits.***

 

Arelatively small number of end customers and distributors have accounted for asignificant portion of our revenues in any particular period. We have nolong-term volume purchase commitments from our key customers. One or more ofour key customers or distributors may discontinue operations as a result ofconsolidation, liquidation or otherwise. Reductions, delays and cancellation oforders from our key customers or the loss of one or more key customers couldsignificantly reduce our revenues and profits. We cannot assure you that ourcurrent customers will continue to place orders with us, that orders byexisting customers will continue at current or historical levels or that wewill be able to obtain orders from new customers.

 

***The price of our common stock may fluctuate significantly.***

 

The price of our commonstock is volatile and may fluctuate significantly. There can be no assurance asto the prices at which our common stock will trade or that an active tradingmarket in our common stock will be sustained in the future. The market price atwhich our common stock trades may be influenced by many factors, including:

 

**·****   **our operating and financialperformance and prospects, including our ability to achieve or sustainprofitability, if achieved, within the forecasted time period;

 

·**   **the depth and liquidity ofthe market for our common stock;

 

·**   **investor perception of usand the industry in which we operate;

 

**·****   **the level of researchcoverage of our common stock;

 

·**   **changes in earningsestimates or buy/sell recommendations by analysts;

 

·**   **general financial and othermarket conditions; and

 

·**   **domestic and internationaleconomic conditions.

 

In addition, public stockmarkets have experienced, and may in the future experience, extreme price andtrading volume volatility, particularly in the technology sectors of themarket. This volatility has significantly affected the market prices ofsecurities of many technology companies for reasons frequently unrelated to ordisproportionately impacted by the operating performance of these companies.These broad market fluctuations may adversely affect the market price of ourcommon stock. If ourcommon stock trades below $1.00 for 30 consecutive trading days, or if weotherwise do not meet the requirements for continued quotation on the NasdaqGlobal Market, our common stock could be delisted which would adversely affectthe ability of investors to sell shares of our common stock and could otherwiseadversely affect our business. During fiscal 2008, our common stock tradedbelow $1.00 for 30 consecutive trading days. In order to regain compliancewith the minimum bid price rule, we effected a one-for-five reverse stock spliton June 30, 2008.

 

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***Our operating results are subject to substantial quarterly and annualfluctuations.***

 

Our revenues and operatingresults have fluctuated in the past and may fluctuate in the future. Thesefluctuations are due to a number of factors, many of which are beyond ourcontrol. These factors include, among others:

 

·changes inend-user demand for the products manufactured and sold by our customers;

 

·the effects ofcompetitive pricing pressures, including decreases in average selling prices ofour products;

 

·the gain orloss of significant customers;

 

·market acceptanceof our products and our customers’ products;

 

·our ability todevelop, introduce, market and support new products and technologies on atimely basis;

 

·the timing ofreceipt, reduction or cancellation of significant orders by customers;

 

·fluctuations inthe levels of component inventories held by our customers and changes in ourcustomers’ inventory management practices;

 

·shifts in ourproduct mix and the effect of maturing products;

 

·availabilityand cost of products from our suppliers;

 

·the timing andextent of product development costs;

 

·new product andtechnology introductions by us or our competitors;

 

·fluctuations inmanufacturing yields;

 

·significantwarranty claims, including those not covered by our suppliers; and

 

·intellectualproperty disputes.

 

The foregoing factors aredifficult to forecast, and these, as well as other factors, could materiallyand adversely affect our quarterly or annual operating results.

 

***We may not be able to attract and retain qualified personnel necessaryfor the******design, development, sale and support of our products. Our successcould be******negativelyaffected if key personnel leave.***

 

Our future success dependson our ability to attract, retain and motivate qualified personnel, includingexecutive officers and other key management, technical and support personnel.As the source of our technological and product innovations, our key technicalpersonnel represent a significant asset. The competition for such personnel canbe intense in the semiconductor industry. We may not be able to attract andretain qualified management and other personnel necessary for the design,development, sale and support of our products.

 

In periods of poor operatingperformance, we have experienced, and may experience in the future, particulardifficulty attracting and retaining key personnel. If we are not successful inassuring our employees of our financial stability and our prospects forsuccess, our employees may seek other employment, which may materially andadversely affect our business. Moreover, our recent expense reduction andrestructuring initiatives, including a series of worldwide workforcereductions, have significantly reduced the number of our technical employees.We intend to continue to expand our international business activities includingexpansion of design and operational centers abroad and may have difficultyattracting and maintaining international employees. The loss of the services ofone or more of our key employees, including Raouf Y. Halim, our chief executiveofficer, or certain key design and technical personnel, or our inability toattract, retain and motivate qualified personnel could have a material adverseeffect on our ability to operate our business.

 

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Many of our engineers areforeign nationals working in the United States under visas. The visas held bymany of our employees permit qualified foreign nationals working in specialtyoccupations, such as certain categories of engineers, to reside in the UnitedStates during their employment. The number of new visas approved each year maybe limited and may restrict our ability to hire additional qualified technicalemployees. In addition, immigration policies are subject to change, and thesepolicies have generally become more stringent since the events of September 11,2001. Any additional significant changes in immigration laws, rules orregulations may further restrict our ability to retain or hire technicalpersonnel.

 

***We are entirely dependent upon third parties for the manufacture of ourproducts and******are vulnerable to their capacity constraints during times of increasingdemand for******semiconductorproducts.***

 

We are entirely dependentupon outside wafer fabrication facilities, known as foundries, for waferfabrication services. Our principal suppliers of wafer fabrication services areTSMC and Jazz. We are also dependent upon third parties, including Amkor, forthe assembly and testing of all of our products. Under our fabless businessmodel, our long-term revenue growth is dependent on our ability to obtainsufficient external manufacturing capacity, including wafer productioncapacity. Periods of upturns in the semiconductor industry may be characterizedby rapid increases in demand and a shortage of capacity for wafer fabricationand assembly and test services.

 

The risks associated withour reliance on third parties for manufacturing services include:

 

**·****   **the lack of assured supply,potential shortages and higher prices;

 

·**   **increased lead times;

 

·**   **limited control overdelivery schedules, manufacturing yields, production costs and product quality;and

 

·**   **the unavailability of, ordelays in obtaining, products or access to key process technologies.

 

Our standard lead time, orthe time required to manufacture our products (including wafer fabrication,assembly and testing) is typically 12 to 16 weeks. During periods ofmanufacturing capacity shortages, the foundries and other suppliers on whom werely may devote their limited capacity to fulfill the production requirementsof other clients that are larger or better financed than we are, or who havesuperior contractual rights to enforce manufacture of their products, includingto the exclusion of producing our products.

 

Additionally, if we arerequired to seek alternative foundries or assembly and test service providers,we would be subject to longer lead times, indeterminate delivery schedules andincreased manufacturing costs, including costs to find and qualify acceptablesuppliers. For example, if we choose to use a new foundry, the qualificationprocess may take as long as six months over the standard lead time before wecan begin shipping products from the new foundry.

 

Waferfabrication processes are subject to obsolescence, and foundries maydiscontinue a wafer fabrication process used for certain of our products. Insuch event, we generally offer our customers a “last-time buy” program tosatisfy their anticipated requirements for our products. The unanticipateddiscontinuation of a wafer fabrication process on which we rely may adverselyaffect our revenues and our customer relationships.

 

The foundries and othersuppliers on whom we rely may experience financial difficulties or sufferdisruptions in their operations due to causes beyond our control, includinglabor strikes, work stoppages, electrical power outages, fire, earthquake,flooding or other natural disasters. Certain of our suppliers’ manufacturingfacilities are located near major earthquake fault lines in the Asia-Pacificregion and in California. In the event of a disruption of the operations of oneor more of our suppliers, we may not have an alternate source immediatelyavailable. Such an event could cause significant delays in shipments until weare able to shift the products from an affected facility or supplier to anotherfacility or supplier. The manufacturing processes we rely on are specializedand are available from a limited number of suppliers. Alternate sources ofmanufacturing capacity, particularly wafer production capacity, may not beavailable to us on a timely basis. Even if alternate manufacturing capacity isavailable, we may not be able to obtain it on favorable terms, or at all.Difficulties or delays in securing an adequate supply of our products onfavorable terms, or at all, could impair our ability to meet our customers’requirements and have a material adverse effect on our operating results.

 

In addition, the highly complexand technologically demanding nature of semiconductor manufacturing has causedfoundries to experience, from time to time, lower than anticipatedmanufacturing yields, particularly in connection with the introduction of newproducts and the installation and start-up of new process technologies. Lowerthan anticipated manufacturing yields may affect our ability to fulfill ourcustomers’ demands for our products on a timely basis. Moreover, lower thananticipated manufacturing yields may adversely affect our cost of goods soldand our results of operations.

 

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***We are subject to the risks of doing business internationally.***

 

A significant part of ourstrategy involves our continued pursuit of growth opportunities in a number ofinternational markets. We market, sell, design and service our productsinternationally. Salesto customers located outside the United States, primarily in the Asia-Pacificregion and Europe, were approximately 69% of our net revenues for fiscal 2007and 73% for the first nine months of fiscal 2008. In addition, we have designcenters, customer support centers, and rely on suppliers, located outside theUnited States, including foundries and assembly and test service providerslocated in the Asia-Pacific region. Our international sales and operations aresubject to a number of risks inherent in selling and operating abroad whichcould adversely affect our ability to increase or maintain our foreign sales.These include, but are not limited to, risks regarding:

 
| **·** |   | currency exchange rate  fluctuations;                                                                                                                                                                                                            |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                             |
| ·     |   | local economic and  political conditions;                                                                                                                                                                                                        |
|       |   |                                                                                                                                                                                                                                             |
| ·     |   | disruptions of capital and  trading markets;                                                                                                                                                                                                     |
|       |   |                                                                                                                                                                                                                                             |
| ·     |   | accounts receivable  collection and longer payment cycles;                                                                                                                                                                                       |
|       |   |                                                                                                                                                                                                                                             |
| ·     |   | difficulties in staffing  and managing foreign operations;                                                                                                                                                                                       |
|       |   |                                                                                                                                                                                                                                             |
| ·     |   | potential hostilities and  changes in diplomatic and trade relationships;                                                                                                                                                                        |
|       |   |                                                                                                                                                                                                                                             |
| ·     |   | restrictive governmental  actions (such as restrictions on the transfer or repatriation of funds and  trade protection measures, including export duties and quotas and customs  duties and tariffs);                                            |
|       |   |                                                                                                                                                                                                                                             |
| ·     |   | changes in legal or  regulatory requirements;                                                                                                                                                                                                    |
|       |   |                                                                                                                                                                                                                                             |
| ·     |   | difficulty in obtaining  distribution and support;                                                                                                                                                                                               |
|       |   |                                                                                                                                                                                                                                             |
| ·     |   | the laws and policies of  the United States and other countries affecting trade, foreign investment and  loans and import or export licensing requirements;                                                                                      |
|       |   |                                                                                                                                                                                                                                             |
| ·     |   | environmental laws and  regulations governing, among other things, air emissions, wastewater  discharges, the use, handling and disposal of hazardous substances and  wastes, soil and groundwater contamination and employee health and safety; |
|       |   |                                                                                                                                                                                                                                             |
| ·     |   | tax laws;                                                                                                                                                                                                                                        |
|       |   |                                                                                                                                                                                                                                             |
| ·     |   | limitations on our ability  under local laws to protect our intellectual property;                                                                                                                                                               |
|       |   |                                                                                                                                                                                                                                             |
| ·     |   | cultural differences in  the conduct of business; and                                                                                                                                                                                            |
|       |   |                                                                                                                                                                                                                                             |
| ·     |   | natural disasters, acts of  terrorism and war.                                                                                                                                                                                                   |

 

Because most of ourinternational sales are currently denominated in U.S. dollars, our productscould become less competitive in international markets if the value of the U.S.dollar increases relative to foreign currencies. As we continue to shift aportion of our operations offshore, more of our expenses are incurred incurrencies other than those in which we bill for the related services. Anincrease in the value of certain currencies, such as the Euro, Ukrainianhryvnia and Indian rupee, against the U.S. dollar could increase costs of ouroffshore operations by increasing labor and other costs that are denominated inlocal currencies.

 

From time to time we mayenter into foreign currency forward exchange contracts to mitigate the risk ofloss from currency exchange rate fluctuations for foreign currency commitmentsentered into in the ordinary course of business. We have not entered intoforeign currency forward exchange contracts for other purposes. Our financialcondition and results of operations could be adversely affected by currencyfluctuations.

 

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***We are subject to intensecompetition.***

 

The communicationssemiconductor industry in general, and the markets in which we compete inparticular, are intensely competitive. We compete worldwide with a number ofU.S. and international semiconductor manufacturers that are both larger andsmaller than we are in terms of resources and market share. We currently facesignificant competition in our markets and expect that intense price andproduct competition will continue. This competition has resulted, and isexpected to continue to result, in declining average selling prices for ourproducts.

 

Many of our current andpotential competitors have certain advantages over us, including:

 

**·****   **stronger financial positionand liquidity;

 

·**   **longer presence in keymarkets;

 

·**   **greater name recognition;

 

·**   **more secure supply chain;

 

·**   **access to larger customerbases; and

 

·**   **significantly greater salesand marketing, manufacturing, distribution, technical and other resources.

 

As a result, thesecompetitors may be able to adapt more quickly to new or emerging technologiesand changes in customer requirements or may be able to devote greater resourcesto the development, promotion and sale of their products than we can. Moreover,we have incurred substantial operating losses and we may continue to incurlosses in future periods. We believe that financial stability of suppliers isan important consideration in our customers’ purchasing decisions. If our OEMcustomers perceive that we lack adequate financial stability, they may choosesemiconductor suppliers that they believe have a stronger financial position orliquidity.

 

Current and potentialcompetitors also have established or may establish financial or strategicrelationships among themselves or with our existing or potential customers,resellers or other third parties. These relationships may affect customers’purchasing decisions. Accordingly, it is possible that new competitors oralliances among competitors could emerge and rapidly acquire significant marketshare. We may not be able to compete successfully against current and potentialcompetitors.

 

***Our success depends on our ability to develop competitive new productsin a timely******manner and keep abreast of the rapid technological changes in ourmarket.***

 

Our operating results willdepend largely on our ability to continue to introduce new and enhancedsemiconductor products on a timely basis as well as our ability to keep abreastof rapid technological changes in our markets. Our products could becomeobsolete sooner than we expect because of faster than anticipated, orunanticipated, changes in one or more of the technologies related to ourproducts. The introduction of new technology representing a substantial advanceover current technology could adversely affect demand for our existingproducts. Currently accepted industry standards are also subject to change,which may also contribute to the obsolescence of our products. If we are unableto develop and introduce new or enhanced products in a timely manner, ourbusiness may be adversely affected.

 

Successful productdevelopment and introduction depends on numerous factors, including, amongothers:

 

**·****   **our ability to anticipatecustomer and market requirements and changes in technology and industrystandards;

 

·**   **our ability to accuratelydefine new products;

 

·**   **our ability to completedevelopment of new products, and bring our products to market, on a timelybasis;

 

·**   **our ability to differentiateour products from offerings of our competitors; and

 

·**   **overall market acceptance ofour products.

 

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We may nothave sufficient resources to make the substantial investment in research anddevelopment in order to develop and bring to market new and enhanced products,particularly if we are required to take further cost reduction actions.Furthermore, we are required to evaluate expenditures for planned productdevelopment continually and to choose among alternative technologies based onour expectations of future market growth. We may be unable to develop andintroduce new or enhanced products in a timely manner, our products may notsatisfy customer requirements or achieve market acceptance, or we may be unableto anticipate new industry standards and technological changes. We also may notbe able to respond successfully to new product announcements and introductionsby competitors.

 

Research anddevelopment projects may experience unanticipated delays related to ourinternal design efforts. New product development also requires the productionof photomask sets and the production and testing of sample devices. In theevent we experience delays in obtaining these services from the waferfabrication and assembly and test vendors on whom we rely, our product introductionsmay be delayed and our revenues and results of operations may be adverselyaffected.

 

***The increasing significance of our foreignoperations exposes us to risks that are******beyond our control and could affectour ability to operate successfully.***

 

In order toenhance the cost-effectiveness of our operations, we have increasingly soughtto shift portions of our research and development and customer supportoperations to jurisdictions with lower cost structures than that available inthe United States. The transition of even a portion of our business operationsto new facilities in a foreign country involves a number of logistical andtechnical challenges that could result in product development delays andoperational interruptions, which could reduce our revenues and adversely affectour business. We may encounter complications associated with the set-up,migration and operation of business systems and equipment in a new facility.This could result in delays in our research and development efforts and otherwisedisrupt our operations. If such delays or disruptions occur, they could damageour reputation and otherwise adversely affect our business and results ofoperations.

 

To the extentthat we shift any operations or labor offshore to jurisdictions with lower coststructures, we may experience challenges in effectively managing thoseoperations as a result of several factors, including time zone differences andregulatory, legal, cultural and logistical issues. Additionally, the relocationof labor resources may have a negative impact on our existing employees, whichcould negatively impact our operations. If we are unable to effectively manageour offshore research and development staff and any other offshore operations,our business and results of operations could be adversely affected.

 

We cannot becertain that any shifts in our operations to offshore jurisdictions willultimately produce the expected cost savings. We cannot predict the extent ofgovernment support, availability of qualified workers, future labor rates ormonetary and economic conditions in any offshore locations where we mayoperate. Although some of these factors may influence our decision to establishor increase our offshore operations, there are inherent risks beyond ourcontrol, including:

 

·**            **politicaluncertainties;

 

·**            **wage inflation;

 

·**            **exposure toforeign currency fluctuations;

 

·**            **tariffs and othertrade barriers; and

 

·**            **foreignregulatory restrictions and unexpected changes in regulatory environments.

 

We will likelybe faced with competition in these offshore markets for qualified personnel,including skilled design and technical personnel, and we expect thiscompetition to increase as companies expand their operations offshore. If thesupply of such qualified personnel becomes limited due to increased competitionor otherwise, it could increase our costs and employee turnover rates. One ormore of these factors or other factors relating to foreign operations couldresult in increased operating expenses and make it more difficult for us tomanage our costs and operations, which could cause our operating results todecline and result in reduced revenues.

 

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***Industry consolidation may harm our operatingresults.***

 

There has beenan increasing trend toward industry consolidation in our markets in recentyears, particularly among major network equipment and telecommunicationscompanies. We expect this trend to continue as companies attempt to strengthenor hold their market positions in an evolving industry and as companies areacquired or are unable to continue operations. While we cannot predict howconsolidation in our industry will affect our customers or competitors, rapidconsolidation will lead to fewer customers, with the effect that loss of amajor customer could have a material impact on results not anticipated in acustomer marketplace composed of more numerous participants.  Increased consolidation and competition forfewer customers may result in pricing pressures or a loss in market share, eachof which could materially impact our business.

 

***Uncertainties involving the ordering andshipment of our products could adversely******affect our business.***

 

Our sales aretypically made pursuant to individual purchase orders and we generally do nothave long-term supply arrangements with our customers. Generally, our customersmay cancel orders until 30 days prior to shipment. In addition, we sell a substantialportion of our products through distributors, some of whom have a right toreturn unsold products to us. Sales to distributors accounted forapproximately 54% of our revenues for fiscal 2007 and 55% for the first ninemonths of fiscal 2008.

 

Because of thesignificant lead times for wafer fabrication and assembly and test services, weroutinely purchase inventory based on estimates of end-market demand for ourcustomers’ products.  End-market demandmay be subject to dramatic changes and is difficult to predict.  End-market demand is highly influenced by thetiming and extent of carrier capital expenditures. The difficulty in predictingdemand may be compounded when we sell to OEMs indirectly through distributorsor contract manufacturers, or both, as our forecasts of demand are then basedon estimates provided by multiple parties. In addition, our customers maychange their inventory practices on short notice for any reason. Thecancellation or deferral of product orders, the return of previously soldproducts or overproduction due to the failure of anticipated orders tomaterialize could result in our holding excess or obsolete inventory, whichcould result in write-downs of inventory. Conversely, if we fail to anticipateinventory needs we may be unable to fulfill demand for our products, resultingin a loss of potential revenue.

 

***If network infrastructure OEMs do not designour products into their equipment, we******will be unable to sell thoseproducts. Moreover, a design win from a customer does******not guarantee future sales to thatcustomer.***

 

Our productsare not sold directly to the end-user but are components of other products. Asa result, we rely on network infrastructure OEMs to select our products fromamong alternative offerings to be designed into their equipment. We may beunable to achieve these “design wins.” Without design wins from OEMs, we wouldbe unable to sell our products. Once an OEM designs another supplier’ssemiconductors into one of its product platforms, it is more difficult for usto achieve future design wins with that OEM’s product platform because changingsuppliers involves significant cost, time, effort and risk. Achieving a designwin with a customer does not ensure that we will receive significant revenuesfrom that customer and we may be unable to convert design wins into actualsales. Even after a design win, the customer is not obligated to purchase ourproducts and can choose at any time to stop using our products if, for example,its own products are not commercially successful.

 

***Because of the lengthy sales cycles of manyof our products, we may incur significant******expenses before we generate anyrevenues related to those products.***

 

Our customersgenerally need six months or longer to test and evaluate our products and an additionalsix months or more to begin volume production of equipment that incorporatesour products. These lengthy periods also increase the possibility that acustomer may decide to cancel or change product plans, which could reduce oreliminate sales to that customer. As a result of this lengthy sales cycle, wemay incur significant research and development and selling, general andadministrative expenses before we generate any revenues from new products. Wemay never generate the anticipated revenues if our customers cancel or changetheir product plans.

 

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***We may be subject to claims, or we may berequired to defend and indemnify customers******against claims, of infringement ofthird-party intellectual property rights or******demands that we, or our customers,license third-party technology, which could result******in significant expense.***

 

Thesemiconductor industry is characterized by vigorous protection and pursuit ofintellectual property rights. From time to time, third parties have assertedand may in the future assert patent, copyright, trademark and otherintellectual property rights against technologies that are important to ourbusiness. The resolution or compromise of any litigation or other legal processto enforce such alleged third party rights, including claims arising throughour contractual indemnification of our customers, or claims challenging thevalidity of our patents, regardless of its merit or resolution, could be costlyand divert the efforts and attention of our management and technical personnel.

 

We may notprevail in any such litigation or other legal process or we may compromise orsettle such claims because of the complex technical issues and inherentuncertainties in intellectual property disputes and the significant expense indefending such claims. If litigation or other legal process results in adverserulings, we may be required to:

 

·**            **pay substantialdamages for past, present and future use of the infringing technology;

 

·**            **cease themanufacture, use or sale of infringing products;

 

·**            **discontinue theuse of infringing technology;

 

·**            **expendsignificant resources to develop non-infringing technology;

 

·**            **pay substantialdamages to our customers or end users to discontinue use or replace infringingtechnology with non-infringing technology;

 

·**            **licensetechnology from the third party claiming infringement, which license may not beavailable on commercially reasonable terms, or at all; or

 

·**            **relinquishintellectual property rights associated with one or more of our patent claims,if such claims are held invalid or otherwise unenforceable.

 

In connectionwith the distribution, we generally assumed responsibility for all contingentliabilities and litigation against Conexant or its subsidiaries related to ourbusiness.

 

***If we are not successful in protecting ourintellectual property rights, it may harm******our ability to compete.***

 

We relyprimarily on patent, copyright, trademark and trade secret laws, as well asemployee and third-party nondisclosure and confidentiality agreements and othermethods, to protect our proprietary technologies and processes. We may berequired to engage in litigation to enforce or protect our intellectualproperty rights, which may require us to expend significant resources and todivert the efforts and attention of our management from our businessoperations. In particular:

 

·**            **the steps we taketo prevent misappropriation or infringement of our intellectual property maynot be successful;

 

·**            **any existing orfuture patents may be challenged, invalidated or circumvented; or

 

·**            **the measuresdescribed above may not provide meaningful protection.

 

Despite thepreventive measures and precautions that we take, a third party could copy orotherwise obtain and use our technology without authorization, develop similartechnology independently or design around our patents. We generally enter intoconfidentiality agreements with our employees, consultants and strategicpartners. We also try to control access to and distribution of ourtechnologies, documentation and other proprietary information. Despite theseefforts, internal or external parties may attempt to copy, disclose, obtain oruse our products, services or technology without our authorization. Also,former employees may seek employment with our business partners, customers orcompetitors, and the confidential nature of our proprietary information may notbe maintained in the course of such future employment. Further, in somecountries outside the United States, patent protection is not available or notreliably enforced. Some countries that do allow registration of patents do notprovide meaningful redress for patent violations. As a result, protectingintellectual property in those countries is difficult and competitors may sellproducts in those countries that have functions and features that infringe onour intellectual property.

 

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***The complexity of our products may lead toerrors, defects and bugs, which could******subject us to significant costs ordamages and adversely affect market acceptance of******our products.***

 

Although we,our customers and our suppliers rigorously test our products, our products arecomplex and may contain errors, defects or bugs when first introduced or as newversions are released. We have in the past experienced, and may in the futureexperience, errors, defects and bugs. If any of our products contain productiondefects or reliability, safety, quality or compatibility problems that aresignificant to our customers, our reputation may be damaged and customers maybe reluctant to buy our products, which could adversely affect our ability toretain existing customers and attract new customers. In addition, these defectsor bugs could interrupt or delay sales of affected products to our customers,which could adversely affect our results of operations.

 

If defects orbugs are discovered after commencement of commercial production of a newproduct, we may be required to make significant expenditures of capital andother resources to resolve the problems. This could result in significantadditional development costs and the diversion of technical and other resourcesfrom our other development efforts. We could also incur significant costs torepair or replace defective products and we could be subject to claims fordamages by our customers or others against us. We could also be exposed toproduct liability claims or indemnification claims by our customers.  These costs or damages could have a materialadverse effect on our financial condition and results of operations.

 

***We may make business acquisitions orinvestments, which involve significant risk.***

 

We may fromtime to time make acquisitions, enter into alliances or make investments inother businesses to complement our existing product offerings, augment ourmarket coverage or enhance our technological capabilities. However, any suchtransactions could result in:

 

·**            **issuances ofequity securities dilutive to our existing stockholders;

 

·**            **substantial cashpayments;

 

·**            **the incurrence ofsubstantial debt and assumption of unknown liabilities;

 

·**            **large one-timewrite-offs;

 

·**            **amortizationexpenses related to intangible assets;

 

·**            **the diversion ofmanagement’s attention from other business concerns; and

 

·**            **the potentialloss of key employees, customers and suppliers of the acquired business.

 

Integratingacquired organizations and their products and services may be expensive,time-consuming and a strain on our resources and our relationships withemployees, customers and suppliers, and ultimately may not be successful. Thebenefits or synergies we may expect from the acquisition of complementary orsupplementary businesses may not be realized to the extent or in the time framewe initially anticipate.

 

Additionally,in periods subsequent to an acquisition, we must evaluate goodwill andacquisition-related intangible assets for impairment. If such assets are foundto be impaired, they will be written down to estimated fair value, with acharge against earnings.

 

***Our results of operations could vary as aresult of the methods, estimates and******judgments we use in applying ouraccounting policies.***

 

The methods,estimates and judgments we use in applying our accounting policies have asignificant impact on our results of operations (see “Critical AccountingPolicies and Estimates” in Part I, Item 2 of this Form 10-Q). Suchmethods, estimates and judgments are, by their nature, subject to substantialrisks, uncertainties and assumptions, and changes in rule making by theregulatory bodies.  Factors may ariseover time that lead us to change our methods, estimates and judgments. Changesin those methods, estimates and judgments could significantly affect ourresults of operations.

 

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***Substantial sales of the shares of our commonstock issuable upon conversion of our******convertible senior notes or exerciseof the warrant issued to Conexant could******adversely affect our stock price orour ability to raise additional financing in the******public capital markets.***

 

Conexant holdsa warrant to acquire six million shares (adjusted to reflect our June 30,2008 one-for-five reverse stock split) of our common stock at a price of $17.04per share (adjusted to reflect our June 30, 2008 one-for-five reversestock split), exercisable through June 27, 2013, representing approximately16% of our outstanding common stock on a fully diluted basis. The warrant maybe transferred or sold in whole or part at any time. If Conexant sells thewarrant or if Conexant or a transferee of the warrant exercises the warrant andsells a substantial number of shares of our common stock in the future, or ifinvestors perceive that these sales may occur, the market price of our commonstock could decline or market demand for our common stock could be sharplyreduced. As of June 27, 2008, we have $46.0 million aggregate principalamount of convertible senior notes outstanding. These notes are convertible atany time, at the option of the holder, into approximately 86.5801shares (adjusted to reflect our June 30, 2008one-for-five reverse stock split) of common stock per $1,000 principalamount of notes or an aggregate of approximately 3,983,000 shares (adjusted to reflect our June 30, 2008one-for-five reverse stock split) of our common stock. The conversion ofthe notes and subsequent sale of a substantial number of shares of our commonstock could also adversely affect demand for, and the market price of, ourcommon stock. Each of these transactions could adversely affect our ability toraise additional financing by issuing equity or equity-based securities in thepublic capital markets.

 

***Antidilution and other provisions in thewarrant issued to Conexant may also******adversely affect our stock price orour ability to raise additional financing.***

 

The warrantissued to Conexant contains antidilution provisions that provide for adjustmentof the warrant’s exercise price, and the number of shares issuable under thewarrant, upon the occurrence of certain events. If we issue, or are deemed tohave issued, shares of our common stock, or securities convertible into ourcommon stock, at prices below the current market price of our common stock (asdefined in the warrant) at the time of the issuance of such securities, thewarrant’s exercise price will be reduced and the number of shares issuableunder the warrant will be increased. The amount of such adjustment if any, willbe determined pursuant to a formula specified in the warrant and will depend onthe number of shares issued, the offering price and the current market price ofour common stock at the time of the issuance of such securities. Adjustments tothe warrant pursuant to these antidilution provisions may result in significantdilution to the interests of our existing stockholders and may adversely affectthe market price of our common stock. The antidilution provisions may alsolimit our ability to obtain additional financing on terms favorable to us.

 

Moreover, wemay not realize any cash proceeds from the exercise of the warrant held byConexant. A holder of the warrant may opt for a cashless exercise of all orpart of the warrant. In a cashless exercise, the holder of the warrant wouldmake no cash payment to us, and would receive a number of shares of our commonstock having an aggregate value equal to the excess of the then-current marketprice of the shares of our common stock issuable upon exercise of the warrantover the exercise price of the warrant. Such an issuance of common stock wouldbe immediately dilutive to the interests of other stockholders.

 

***Some of our directors and executive officersmay have potential conflicts of interest******because of their positions withConexant or their ownership of Conexant common******stock.***

 

Some of ourdirectors are Conexant directors, and our non-executive chairman of the boardis chairman of the board of Conexant. Several of our directors and executiveofficers own Conexant common stock and hold options to purchase Conexant commonstock. Service on our board of directors and as a director or officer ofConexant, or ownership of Conexant common stock by our directors and executiveofficers, could create, or appear to create, potential conflicts of interestwhen directors and officers are faced with decisions that could have differentimplications for us and Conexant. For example, potential conflicts could arisein connection with decisions involving the warrant to purchase our common stockissued to Conexant, or other agreements entered into between us and Conexant inconnection with the distribution.

 

Our restatedcertificate of incorporation includes provisions relating to the allocation ofbusiness opportunities that may be suitable for both us and Conexant based onthe relationship to the companies of the individual to whom the opportunity ispresented and the method by which it was presented and also includes provisionslimiting challenges to the enforceability of contracts between us and Conexant.

 

We may havedifficulty resolving any potential conflicts of interest with Conexant, andeven if we do, the resolution may be less favorable than if we were dealingwith an entirely unrelated third party.

 

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***Provisions in our organizational documentsand rights plan and Delaware law will make******it more difficult for someone toacquire control of us.***

 

Our restatedcertificate of incorporation, our amended and restated bylaws, our amendedrights agreement and the Delaware General Corporation Law contain severalprovisions that would make more difficult an acquisition of control of us in atransaction not approved by our board of directors. Our restated certificate ofincorporation and amended and restated bylaws include provisions such as:

 

·**            **the division ofour board of directors into three classes to be elected on a staggered basis,one class each year;

 

·**            **the ability ofour board of directors to issue shares of our preferred stock in one or moreseries without further authorization of our stockholders;

 

·**            **a prohibition onstockholder action by written consent;

 

·**            **a requirementthat stockholders provide advance notice of any stockholder nominations ofdirectors or any proposal of new business to be considered at any meeting ofstockholders;

 

·**            **a requirementthat a supermajority vote be obtained to remove a director for cause or toamend or repeal certain provisions of our restated certificate of incorporationor amended and restated bylaws;

 

·**            **elimination ofthe right of stockholders to call a special meeting of stockholders; and

 

·**            **a fair priceprovision.

 

Our rightsagreement gives our stockholders certain rights that would substantiallyincrease the cost of acquiring us in a transaction not approved by our board ofdirectors.

 

In addition tothe rights agreement and the provisions in our restated certificate ofincorporation and amended and restated bylaws, Section 203 of the DelawareGeneral Corporation Law generally provides that a corporation shall not engagein any business combination with any interested stockholder during thethree-year period following the time that such stockholder becomes aninterested stockholder, unless a majority of the directors then in officeapproves either the business combination or the transaction that results in thestockholder becoming an interested stockholder or specified stockholderapproval requirements are met.

 

**ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

Our annualmeeting of stockholders was held on April 7, 2008 in Costa Mesa, California.At the meeting, the following matters were voted on by our stockholders andapproved by the following votes:

 
| ** **                                                                         | ** ** | **Number of shares** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **Voted For**                  | ** ** | **Withheld** | ** ** |
| Election of three Class II directors  for a three-year term expiring in 2011: |       |                           |       |   |   |
| Michael T. Hayashi                                                                 |       | 85,742,789                     |       | 11,226,312 |   |
| Ming Louie                                                                         |       | 92,413,463                     |       | 4,555,638 |   |
| Thomas A. Madden                                                                   |       | 85,740,691                     |       | 11,228,410 |   |

 
| ** **                                                                                                                                                                                                                                                                | ** ** | **Number of shares** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                | ** ** | **Voted  For**                 | ** ** | **Voted Against** | ** ** | **Abstentions** | ** ** | **Broker  Non-Votes** | ** ** |
| Proposal to ratify the appointment of  Deloitte & Touche LLP as our independent registered public  accounting firm                                                                                                                                               |       | 95,352,232                     |       | 1,068,185 |   | 548,684 |   | — |   |
| Proposal for approval of an amendment to  Certificate of Incorporation to effect a reverse stock split by a ratio of  between 1-for-3 and 1-for-8 shares, at the discretion of the Board of  Directors, and to reduce authorized shares of common stock by the same ratio |       | 91,801,400                     |       | 4,543,513 |   | 624,188 |   | — |   |

 

Messrs. Raouf Y. Halim, Donald H. Gips, Jerre L. Stead and DwightW. Decker continue to serve as directors.

 

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**ITEM 6. EXHIBITS**

** **
| 3.1    |   | Restated  Certificate of Incorporation of the Registrant, filed as Exhibit 4.1 to  the Registrant’s Registration Statement on Form S-3 (Registration  Statement No. 333-106146), is incorporated herein by reference.                                                                      |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                           |
| 3.2    |   | Certificate of Amendment  to the Restated Certificate of Incorporation of the Registrant, filed as  Exhibit 3.1 to the Registrant’s Current Report on Form 8-K dated  July 1, 2008, is incorporated herein by reference.                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                           |
| 3.3    |   | Amended and Restated  Bylaws of the Registrant, filed as Exhibit 3.2 to the Registrant’s  Annual Report on Form 10-K for the year ended September 30, 2005,  is incorporated herein by reference.                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                           |
| 4.1    |   | Specimen certificate for  the Registrant’s Common Stock, par value $.01 per share.                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                           |
| 4.2    |   | Rights Agreement dated as  of June 26, 2003, by and between the Registrant and Mellon Investor  Services LLC, as Rights Agent, filed as Exhibit 4.1 to the Registrant’s  Current Report on Form 8-K dated July 1, 2003, is incorporated  herein by reference.                         |
|   |   |                                                                                                                                                                                                                                                                                                           |
| 4.3    |   | First Amendment to Rights  Agreement, dated as of December 6, 2004, by and between the Registrant  and Mellon Investor Services LLC, filed as Exhibit 4.4 to the  Registrant’s Current Report on Form 8-K dated December 2, 2004, is  incorporated herein by reference.               |
|   |   |                                                                                                                                                                                                                                                                                                           |
| 4.4    |   | Second  Amendment to Rights Agreement, dated as of June 16, 2008, by and between  the Registrant and Mellon Investor Services LLC, filed as  Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated  June 16, 2008, is incorporated herein by reference.                   |
|   |   |                                                                                                                                                                                                                                                                                                           |
| 4.5    |   | Common Stock Purchase  Warrant dated June 27, 2003, filed as Exhibit 4.5 to the Registrant’s  Registration Statement on Form S-3 (Registration Statement  No. 333-109523), is incorporated herein by reference.                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                           |
| 4.6    |   | Registration Rights  Agreement dated as of June 27, 2003, by and between the Registrant and  Conexant Systems, Inc., filed as Exhibit 4.6 to the Registrant’s  Registration Statement on Form S-3 (Registration Statement  No. 333-109523), is incorporated herein by reference. |
|   |   |                                                                                                                                                                                                                                                                                                           |
| 4.7    |   | Credit Agreement Warrant  dated June 27, 2003, issued by the Registrant to Conexant  Systems, Inc., filed as Exhibit 4.5 to the Registrant’s  Registration Statement on Form S-3 (Registration Statement  No. 333-109525), is incorporated herein by reference.                  |
|   |   |                                                                                                                                                                                                                                                                                                           |
| 4.8    |   | Registration Rights  Agreement dated as of June 27, 2003 by and between the Registrant and  Conexant Systems, Inc., filed as Exhibit 4.6 to the Registrant’s  Registration Statement on Form S-3 (Registration Statement  No. 333-109525), is incorporated herein by reference.  |
|   |   |                                                                                                                                                                                                                                                                                                           |
| 4.9    |   | Indenture, dated as of  December 8, 2004, between the Registrant and Wells Fargo Bank, N.A.,  filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K  dated December 2, 2004, is incorporated herein by reference.                                                       |
|   |   |                                                                                                                                                                                                                                                                                                           |
| 4.10   |   | Form of 3.75%  Convertible Senior Notes due 2009, attached as Exhibit A to the  Indenture (Exhibit 4.8 hereto), is incorporated herein by reference.                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                           |
| 4.11   |   | Registration Rights  Agreement, dated as of December 8, 2004, by and between the Registrant  and Lehman Brothers Inc., filed as Exhibit 4.3 to the Registrant’s  Current Report on Form 8-K dated December 2, 2004, is incorporated  herein by reference.                             |
|   |   |                                                                                                                                                                                                                                                                                                           |
| *10.1  |   | Form of Employment  Agreement, filed as Exhibit 10.1 to the Registrant’s Current Report on  Form 8-K dated May 15, 2008, is incorporated herein by reference.                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                           |
| 10.2   |   | Schedule identifying  parties to and terms of agreements with the Registrant substantially  identical to the form of Employment Agreement filed as Exhibit 10.1 to  the Registrant’s Current Report on Form 8-K dated May 15, 2008.                                                        |

 

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| 10.3   |   | Schedule identifying  parties to and terms of agreements with the Registrant substantially  identical to the form of Indemnification Agreement filed as  Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for  the quarter ended March 31, 2005. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                               |
| *10.4  |   | Letter Agreement, dated as  of April 15, 2008, by and between the Registrant and Simon Biddiscombe,  filed as Exhibit 10.2 to the Registrant’s Quarterly Report on  Form 10-Q for the quarter ended March 28, 2008, is incorporated  herein by reference. |
|   |   |                                                                                                                                                                                                                                                                               |
| *10.5  |   | Non-Qualified Stock Option  Award and Award Agreement, dated July 25, 2008, by and between the  Registrant and Bret W. Johnsen.                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                               |
| *10.6  |   | Mindspeed Technologies, Inc.  2003 Long-Term Incentives Plan, as Amended and Restated, as of July 1,  2008.                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                               |
| *10.7  |   | Mindspeed  Technologies, Inc. 2003 Stock Option Plan, as Amended and Restated, as  of July 1, 2008.                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                               |
| *10.8  |   | Mindspeed  Technologies, Inc. Directors Stock Plan, as Amended and Restated, as of  July 1, 2008.                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                               |
| *10.9  |   | Form of Restricted  Stock Unit Award under the Mindspeed Technologies, Inc. Directors Stock  Plan, filed as Exhibit 10.2 to the Registrant’s Current Report on  Form 8-K dated April 11, 2008, is incorporated herein by reference.                  |
|   |   |                                                                                                                                                                                                                                                                               |
| *10.10 |   | Restricted Stock Unit  Terms and Conditions under the Mindspeed Technologies, Inc. Directors  Stock Plan, filed as Exhibit 10.1 to the Registrant’s Current Report on  Form 8-K dated April 11, 2008, is incorporated herein by reference.                |
|   |   |                                                                                                                                                                                                                                                                               |
| *10.11 |   | Summary of Cash Bonus  Arrangement                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                               |
| 31.1   |   | Certification of Chief  Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                               |
| 31.2   |   | Certification of Chief  Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                               |
| 32.1   |   | Certification of Chief  Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                               |
| 32.2   |   | Certification of Chief  Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                         |

 

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*                           Management contract or compensatory plan orarrangement.

 

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**SIGNATURE**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|                      | MINDSPEED TECHNOLOGIES,  INC. |
|---------------------------|-------------------------------|
|                      | (Registrant)                  |
|                      |                          |   |
| Date: August 5, 2008 | By                            | /s/ BRET W. JOHNSEN |
|                      |                          |   |
|                      |                          | Bret W. Johnsen |
|                      |                          | Senior Vice President,  Chief Financial |
|                      |                          | Officer and Treasurer |
|                      |                          | (principal financial and  accounting officer) |

 

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#### **Table of Contents**

 

#### **EXHIBIT INDEX**

#### ** **

| 4.1    |   | Specimen certificate for  the Registrant’s Common Stock, par value $.01 per share.                                                                                                                                                                                            |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                               |
| 10.2   |   | Schedule identifying  parties to and terms of agreements with the Registrant substantially  identical to the form of Employment Agreement filed as Exhibit 10.1 to  the Registrant’s Current Report on Form 8-K dated May 15, 2008.                            |
|   |   |                                                                                                                                                                                                                                                                               |
| 10.3   |   | Schedule identifying  parties to and terms of agreements with the Registrant substantially  identical to the form of Indemnification Agreement filed as  Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for  the quarter ended March 31, 2005. |
|   |   |                                                                                                                                                                                                                                                                               |
| 10.5   |   | Non-Qualified Stock Option  Award and Award Agreement, dated July 25, 2008, by and between the Registrant  and Bret W. Johnsen.                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                               |
| 10.6   |   | Mindspeed  Technologies, Inc. 2003 Long-Term Incentives Plan, as Amended and  Restated, as of July 1, 2008.                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                               |
| 10.7   |   | Mindspeed  Technologies, Inc. 2003 Stock Option Plan, as Amended and Restated, as  of July 1, 2008.                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                               |
| 10.8   |   | Mindspeed  Technologies, Inc. Directors Stock Plan, as Amended and Restated, as of  July 1, 2008.                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                               |
| 10.11  |   | Summary of Cash Bonus  Arrangement                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                               |
| 31.1   |   | Certification of Chief  Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                               |
| 31.2   |   | Certification of Chief  Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                               |
| 32.1   |   | Certification of Chief  Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                               |
| 32.2   |   | Certification of Chief  Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                         |

 

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