# ** **

# **UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

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

 

## ****

### ** **

### **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 December 31, 2007**                                                    |
|   | ** **                                                                                                    |
| **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 x No o

 

In December 2007,the FASB issued a revised Statement No. 141, “Business Combinations”, whichestablishes principles and requirements for how the acquirer recognizes and measuresin its financial statements the identifiable assets acquired, the liabilitiesassumed, and any noncontrolling interest in the acquiree. The Statement alsoestablishes principles and requirements for how the acquirer recognizes andmeasures the goodwill acquired in the business combination or a gain from abargain purchase and determines what information to disclose to enable users ofthe financial statements to evaluate the nature and financial effects of thebusiness combination. The Statement is effective for fiscal years beginningafter December 15, 2008  The Company willbe required to adopt FAS 141R in the first quarter of fiscal 2010 and does notexpect that the adoption will have a material impact on its financial conditionor results of operations.

 

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

Large Accelerated Filer o           Accelerated Filer x          Non-acceleratedFiler o

 

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o No x

 

The number of outstandingshares of the Registrant’s Common Stock as of January 25, 2008 was117,478,422.

 

 

----

 

**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 investment inresearch and development and participation in the formulation of industrystandards;

 

·           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 of non-core intellectualproperty;

 

·           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 and negative cash flows;

 

·           our plans to reduceoperating expenses, and the amount and timing of any such expense reductions;

 

·           the importance ofproviding comprehensive product service and support;

 

·           the dependence of ouroperating results on our ability to introduce 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 increasing deployment of Internet protocol-based networksboth in new network buildouts (particularly in Asia) and the replacement ofcircuit-switched networks;

 

·           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;

 

2

----

 

·           our expectation ofpaying our obligations relating to our restructuring plans and otherobligations over their respective terms, our intention to fund those paymentsfrom available cash balances and funds from product sales, and the impact ofsuch payments on our liquidity;

 

·           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;

 

·           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 intentions withrespect to inventories that were previously written down;

 

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

 

·           our acquisitionstrategy and the impact of any past or future acquisitions, including theimpact 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 impact of recentaccounting pronouncements and the adoption of new accounting standards.

 

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:

 

·           market demand for ournew and existing products and our ability to increase our revenues;

 

·           our ability to maintainoperating expenses within anticipated levels;

 

·           our ability to furthergenerate cash;

 

·           availability and termsof capital needed for our business;

 

·           constraints in thesupply of wafers and other product components from our third-partymanufacturers;

 

·           our ability tosuccessfully and cost effectively establish and manage operations in foreignjurisdictions;

 

·           the ability to attractand retain qualified personnel;

 

3

----

 

·           successful developmentand introduction of new products;

 

·           our ability to successfully integrate acquired businesses and realize theanticipated benefits from such acquisitions;

 

·           our ability to obtaindesign wins and develop revenues from them;

 

·           pricing pressures andother competitive factors;

 

·           industry consolidation;

 

·           order and shipmentuncertainty;

 

·           changes in ourcustomers’ inventory levels and inventory management practices;

 

·           fluctuations inmanufacturing yields;

 

·           product defects; and

 

·           intellectual propertyinfringement claims by others and the ability to protect our intellectualproperty.

 

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.

 

For presentation purposes ofthis Quarterly Report on Form 10-Q, references made to the periods ended December 31,2007 and 2006 relate to the actual fiscal 2008 first quarter ended December 28,2007 and the actual fiscal 2007 first quarter ended December 29, 2006,respectively.  References made tothe year ended September 30, 2007 relate to the actual fiscal year ended September 28,2007.

 

4

----

 

**MINDSPEED TECHNOLOGIES, INC.**

** **

**INDEX**

 
| ** **                              | ** ** | ** **                                                                                                  | **PAGE**   |
|-----------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|
|                                    |       |                                                                                                        |       |
| **PART I.  FINANCIAL INFORMATION** |       |
| ** **                              | ** ** | ** **                                                                                                  | ** ** |
| Item 1.                                 |       | Financial Statements (unaudited):                                                                           |       |
|                                    |       |                                                                                                        |       |
|                                    |       | Consolidated  Condensed Balance Sheets — December 31, 2007 and September 30, 2007            | 6          |
|                                    |       |                                                                                                        |       |
|                                    |       | Consolidated Condensed  Statements of Operations — Three Months Ended December 31, 2007 and 2006  | 7          |
|                                    |       |                                                                                                        |       |
|                                    |       | Consolidated  Condensed Statements of Cash Flows — Three Months Ended December 31,  2007 and 2006 | 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                                                                                    | 27         |
|                                    |       |                                                                                                        |       |
| **PART II. OTHER  INFORMATION**    |       |
| ** **                              |       |
| Item 1A.                                |       | Risk Factors                                                                                                | 28         |
|                                    |       |                                                                                                        |       |
| Item 2.                                 |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                | 40         |
|                                    |       |                                                                                                        |       |
| Item 5.                                 |       | Other Information                                                                                           | 40         |
|                                    |       |                                                                                                        |       |
| Item 6.                                 |       | Exhibits                                                                                                    | 41         |
|                                    |       |                                                                                                        |       |
|                                    |       | Signature                                                                                                   | 43         |

 

5

----

** **

**PART I.FINANCIAL INFORMATION**

** **

**ITEM 1.FINANCIAL STATEMENTS**

 

**MINDSPEED TECHNOLOGIES, INC.**

**Consolidated Condensed Balance Sheets**

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

 
| ** **                                                                                                                                                        | ** ** | **December 31,  2007** | ** ** | **September 30,  2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| **ASSETS**                                                                                                                                                        |       |                        |       |                         |       |
| **Current Assets**                                                                                                                                                |       |                        |       |                         |       |
| Cash and cash equivalents                                                                                                                                         |       | $                           | 27,514     |                         | $          | 25,796 |   |
| Receivables, net of allowance for doubtful  accounts of $351 and $353 at December 31, 2007 and September 30,  2007, respectively                        |       | 12,508                      |       | 13,584                       |       |
| Inventories                                                                                                                                                       |       | 12,794                      |       | 15,023                       |       |
| Other current assets                                                                                                                                              |       | 4,296                       |       | 3,763                        |       |
| Total current assets                                                                                                                                              |       | 57,112                      |       | 58,166                       |       |
| Property, plant and equipment, net                                                                                                                                |       | 13,322                      |       | 13,147                       |       |
| Intangible assets, net                                                                                                                                            |       | 2,945                       |       | 3,200                        |       |
| Goodwill                                                                                                                                                          |       | 2,348                       |       | 2,324                        |       |
| License agreements, net                                                                                                                                           |       | 1,774                       |       | 1,798                        |       |
| Other assets                                                                                                                                                      |       | 2,788                       |       | 3,444                        |       |
| Total assets                                                                                                                                                      |       | $                           | 80,289     |                         | $          | 82,079 |   |
| ** **                                                                                                                                                        | ** ** | ** **                  | ** ** | ** **                   | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                    | ** ** | ** **                  | ** ** | ** **                   | ** ** |
| **Current Liabilities**                                                                                                                                           |       |                        |       |                         |       |
| Accounts payable                                                                                                                                                  |       | $                           | 5,394      |                         | $          | 7,117 |   |
| Deferred revenue                                                                                                                                                  |       | 4,577                       |       | 4,852                        |       |
| Accrued compensation and benefits                                                                                                                                 |       | 6,085                       |       | 5,286                        |       |
| Accrued income tax                                                                                                                                                |       | 124                         |       | 752                          |       |
| Restructuring                                                                                                                                                     |       | 952                         |       | 1,478                        |       |
| Other current liabilities                                                                                                                                         |       | 1,707                       |       | 2,867                        |       |
| Total current liabilities                                                                                                                                         |       | 18,839                      |       | 22,352                       |       |
| Convertible senior notes                                                                                                                                          |       | 45,145                      |       | 45,037                       |       |
| Other liabilities                                                                                                                                                 |       | 473                         |       | 444                          |       |
| Total liabilities                                                                                                                                                 |       | 64,457                      |       | 67,833                       |       |
| Commitments and contingencies                                                                                                                                     |       | —                      |       | —                       |       |
| **Stockholders’ Equity**                                                                                                                                     |       |                        |       |                         |       |
| Preferred stock, $0.01 par value: 25,000  shares authorized; no shares issued or outstanding                                                                      |       | —                      |       | —                       |       |
| Common stock, $0.01 par value: 500,000  shares authorized; 117,421 and 115,759 shares issued at December 31,  2007 and September 30, 2007, respectively |       | 1,174                       |       | 1,158                        |       |
| Additional paid-in capital                                                                                                                                        |       | 264,589                     |       | 262,501                      |       |
| Accumulated deficit                                                                                                                                               |       | (235,107                    | )          | (234,480                     | )          |
| Accumulated other comprehensive loss                                                                                                                              |       | (14,824                     | )          | (14,933                      | )          |
| Total stockholders’ equity                                                                                                                                   |       | 15,832                      |       | 14,246                       |       |
| Total liabilities and stockholders’ equity                                                                                                                   |       | $                           | 80,289     |                         | $          | 82,079 |   |

 

Seeaccompanying notes to consolidated condensed financial statements.

 

6

----

** **

**MINDSPEED TECHNOLOGIES, INC.**

**Consolidated Condensed Statements of Operations**

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

 
| ** **                                                       | ** ** | **Three months ended  December 31,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                       | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Net revenues                                                     |       | $                                                   | 35,301     |   | $ | 30,157 |   |
| Cost of goods sold                                               |       | 10,342                                              |       | 10,677 |   |
| Gross margin                                                     |       | 24,959                                              |       | 19,480 |   |
|                                                             |       |                                                |       |   |   |
| Operating expenses:                                              |       |                                                |       |   |   |
| Research and development                                         |       | 13,718                                              |       | 15,600 |   |
| Selling, general and administrative                              |       | 11,506                                              |       | 10,793 |   |
| Special charges                                                  |       | 81                                                  |       | 3,595 |   |
|                                                             |       |                                                |       |   |   |
| Total operating expenses                                         |       | 25,305                                              |       | 29,988 |   |
|                                                             |       |                                                |       |   |   |
| Operating loss                                                   |       | (346                                                | )          | (10,508 | ) |
|                                                             |       |                                                |       |   |   |
| Interest expense                                                 |       | (562                                                | )          | (559 | ) |
| Other (expense) income, net                                      |       | 161                                                 |       | (53 | ) |
|                                                             |       |                                                |       |   |   |
| Loss before income taxes                                         |       | (747                                                | )          | (11,120 | ) |
|                                                             |       |                                                |       |   |   |
| Provision for income taxes                                       |       | 82                                                  |       | 197 |   |
|                                                             |       |                                                |       |   |   |
| Net loss                                                         |       | $                                                   | (829       | ) | $ | (11,317 | ) |
|                                                             |       |                                                |       |   |   |
| Net loss per share, basic and diluted                            |       | $                                                   | (0.01      | ) | $ | (0.10 | ) |
|                                                             |       |                                                |       |   |   |
| Weighted-average number of shares used in  per share computation |       | 113,776                                             |       | 108,380 |   |

 

Seeaccompanying notes to consolidated condensed financial statements.

 

7

----

** **

**MINDSPEED TECHNOLOGIES, INC.**

**Consolidated Condensed Statements of Cash Flows**

**(unaudited, in thousands)**

 
| ** **                                                                                                                  | ** ** | **Three months ended  December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                  | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| **Cash Flows From Operating Activities**                                                                                    | ** ** |                                                |       |   |   |
| Net loss                                                                                                                    |       | $                                                   | (829       | ) | $ | (11,317 | ) |
|                                                                                                                        |       |                                                |       |   |   |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities, net of effects of  acquisitions: |       |                                                |       |   |   |
| Depreciation and amortization                                                                                               |       | 1,610                                               |       | 1,267 |   |
| Stock-based compensation                                                                                                    |       | 1,654                                               |       | 1,476 |   |
| Inventory provisions                                                                                                        |       | (347                                                | )          | (323 | ) |
| Other non-cash items, net                                                                                                   |       | 128                                                 |       | 92 |   |
| Changes in assets and liabilities:                                                                                          |       |                                                |       |   |   |
| Receivables                                                                                                                 |       | 1,087                                               |       | 1,743 |   |
| Inventories                                                                                                                 |       | 2,576                                               |       | (533 | ) |
| Accounts payable                                                                                                            |       | (627                                                | )          | 1,025 |   |
| Deferred revenue                                                                                                            |       | (275                                                | )          | (818 | ) |
| Accrued expenses and other current  liabilities                                                                             |       | 56                                                  |       | 3,332 |   |
| Other                                                                                                                       |       | (245                                                | )          | 1,304 |   |
| Net cash provided by (used in) operating  activities                                                                        |       | 4,788                                               |       | (2,752 | ) |
|                                                                                                                        |       |                                                |       |   |   |
| **Cash Flows From Investing Activities**                                                                                    | ** ** |                                                |       |   |   |
| Capital expenditures                                                                                                        |       | (2,013                                              | )          | (1,066 | ) |
| Acquisition of assets, net of cash acquired                                                                                 |       | (1,155                                              | )          | — |   |
| Purchases of available-for-sale marketable  securities                                                                      |       | —                                              |       | (6,050 | ) |
| Sales of available-for-sale marketable  securities                                                                          |       | —                                              |       | 3,800 |   |
| Maturities of held-to-maturity marketable  securities                                                                       |       | —                                              |       | 863 |   |
| Net cash used in investing activities                                                                                       |       | (3,168                                              | )          | (2,453 | ) |
|                                                                                                                        |       |                                                |       |   |   |
| **Cash Flows From Financing Activities**                                                                                    | ** ** |                                                |       |   |   |
| Exercise of stock options and warrants                                                                                      |       | 101                                                 |       | 359 |   |
| Net cash provided by financing activities                                                                                   |       | 101                                                 |       | 359 |   |
|                                                                                                                        |       |                                                |       |   |   |
| Effect of foreign currency exchange rates  on cash                                                                          |       | (3                                                  | )          | — |   |
|                                                                                                                        |       |                                                |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                                                                       |       | 1,718                                               |       | (4,846 | ) |
| Cash and cash equivalents at beginning of  period                                                                           |       | 25,796                                              |       | 29,976 |   |
| Cash and cash equivalents at end of period                                                                                  |       | $                                                   | 27,514     |   | $ | 25,130 |   |

 

Seeaccompanying notes to consolidated condensed financial statements.

 

8

----

 

**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, access, metropolitanand wide-area networks. On June 27, 2003, Conexant Systems, Inc.(Conexant) completed the distribution (the Distribution) to Conexantstockholders of all 90,333,445 outstanding shares of common stock of its whollyowned subsidiary, Mindspeed. In the Distribution, each Conexant stockholderreceived one share of Mindspeed common stock (including an associated preferredshare purchase right) for every three shares of Conexant common stock held andcash for any fractional share of Mindspeed common stock. Following theDistribution, Mindspeed began operations as an independent, publicly heldcompany.

 

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 30 million shares ofMindspeed common stock at a price of $3.408 per share, exercisable for a periodbeginning one year and ending ten years after the Distribution. In connectionwith the Distribution, Mindspeed and Conexant also entered into a CreditAgreement (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 withaccounting principles generally accepted in the United States of America,include the accounts of Mindspeed and each of its subsidiaries. All accounts andtransactions 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 30, 2007.

 

*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 quarter 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, will be sufficient to fund its operations,research and development efforts, anticipated capital expenditures, workingcapital and other financing requirements for at least the next 12 months. TheCompany will need to continue a focused program of capital expenditures to meetits research and development and corporate requirements. The Company may alsoconsider acquisition opportunities to extend its technology portfolio anddesign expertise 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.

 

9

----

** **

**MINDSPEED TECHNOLOGIES, INC.**

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

(unaudited)

 

*FiscalPeriods*– Forpresentation purposes, references made to the periods ended December 31,2007 and 2006 relate to the actual fiscal 2008 first quarter ended December 28,2007 and the actual fiscal 2007 first quarter ended December 29, 2006,respectively.  References made tothe year ended September 30, 2007 relate to the actual fiscal year ended September 28,2007.

 

*Recent Accounting Standards*– On October 1, 2007, the Company 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 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.

 

In December2007, the FASB issued a revised Statement No. 141, “Business Combinations” (SFAS 141R), which establishesprinciples and requirements for how the acquirer recognizes and measures in itsfinancial statements the identifiable assets acquired, the liabilities assumed,and any noncontrolling interest in the acquiree. The Statement also establishesprinciples and requirements for how the acquirer recognizes and measures thegoodwill acquired in the business combination or a gain from a bargain purchaseand determines what information to disclose to enable users of the financialstatements to evaluate the nature and financial effects of the businesscombination. The Statement is effective for fiscal years beginning afterDecember 15, 2008  The Company will berequired to adopt SFAS 141R in the first quarter of fiscal 2010 and does notexpect that the adoption will have a material impact on its financial conditionor results of operations.

 

*IncomeTaxes*– The provisionfor income taxes for the three months ended December 31, 2007 and 2006principally consists of income taxes incurred by the Company’s foreignsubsidiaries.

 

*SupplementalCash Flow Information*–Interest paid for the three months ended December 31, 2007 and 2006 was$862,500 and $862,500, respectively. Income taxes paid, net of refunds received, for the three months ended December 31,2007 and 2006 were $(42,000) and $(17,000), respectively.  Non-cash investing activities in the firstquarter of fiscal 2008 consisted of the purchase of $425,000 of property andequipment from suppliers on account.  Assets acquired consists of amounts paidduring the first quarter of fiscal 2008 on accounts payable and accruedliabilities created through the acquisition of certain assets of AmpleCommunications, Inc., which occurred in the fourth quarter of fiscal 2007.

 

**2.Supplemental Financial Statement Data**

 

***Inventories***

 

Inventories consist of thefollowing (in thousands):

 
| ** **      | ** ** | **December 31,  2007** | ** ** | **September 30,  2007** | ** ** |
|-----------------|------------|-----------------------------|------------|------------------------------|------------|
| Work-in-process |       | $                           | 6,768      |                         | $          | 7,497 |   |
| Finished goods  |       | 6,026                       |       | 7,526                        |       |
|            |       | $                           | 12,794     |                         | $          | 15,023 |   |

 

During the three monthsended December 31, 2007 and 2006, the Company sold inventories with anoriginal cost of approximately $0.5 million and $1.2 million, respectively,that had been written down to a zero cost basis during fiscal 2001.

 

***Comprehensive Loss***

*** ***

Comprehensive loss is asfollows (in thousands):

 
| ** **                               | ** ** | **Three months ended  December 31,** | ** ** |
|------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                               | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Net loss                                 |       | $                                                   | (829       | ) | $ | (11,317 | ) |
| Foreign currency translation adjustments |       | 109                                                 |       | 334 |   |
| Comprehensive loss                       |       | $                                                   | (720       | ) | $ | (10,983 | ) |

 

10

----

** **

**MINDSPEED TECHNOLOGIES, INC.**

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

(unaudited)

 

The balance of accumulatedother comprehensive loss at December 31, 2007 and September 30, 2007consists of accumulated foreign currency translation adjustments.

 

***Revenues by Product Line***

 

Revenues by product line areas follows (in thousands):

 
| ** **                       | ** ** | **Three months ended  December 31,** | ** ** |
|----------------------------------|------------|-----------------------------------------------------|------------|
| ** **                       | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Multiservice access DSP products |       | $                                                   | 9,942      |   | $ | 8,986 |   |
| High-performance analog products |       | 10,574                                              |       | 9,794 |   |
| WAN communications products      |       | 14,785                                              |       | 11,377 |   |
|                             |       | $                                                   | 35,301     |   | $ | 30,157 |   |

 

***Revenues by Geographic Area***

 

Revenues by geographic area,based upon country of destination, are as follows (in thousands):

 
| ** **                     | ** ** | **Three months ended  December 31,** | ** ** |
|--------------------------------|------------|-----------------------------------------------------|------------|
| ** **                     | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Americas                       |       | $                                                   | 13,626     |   | $ | 10,019 |   |
| Asia-Pacific                   |       | 17,671                                              |       | 17,183 |   |
| Europe, Middle East and Africa |       | 4,004                                               |       | 2,955 |   |
|                           |       | $                                                   | 35,301     |   | $ | 30,157 |   |

 

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.

 

The following direct customersaccounted for 10% or more of net revenues in the periods presented:

 
| ** ** | ** ** | **Three months ended  December 31,** | ** ** |
|------------|------------|-----------------------------------------------------|------------|
| ** ** | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Customer A |       | 17                                                  | %          | 12 | % |
| Customer B |       | 16                                                  | %          | 20 | % |
| Customer C |       | 6                                                   | %          | 10 | % |

 

**3. Income Taxes**

 

##### **In July 2006, the FASB issued FIN 48, which clarifiesthe accounting for uncertainty in income taxes recognized in an entity’sfinancial statements in accordance with FASB Statement No. 109, “Accountingfor Income Taxes” and prescribes a recognition threshold and measurementattributes for financial statement disclosure of tax positions taken orexpected to be taken on a tax return. Under FIN 48, the impact of an uncertainincome tax position on the income tax return must be recognized at the largestamount that is more-likely-than-not to be sustained upon audit by the relevanttaxing authority. An uncertain income tax position will not be recognized if ithas less than a 50% likelihood of being sustained. Additionally, FIN 48provides guidance on de-recognition, classification, interest and penalties,accounting in interim periods, disclosure and transition.**

##### ** **

TheCompany adopted the provisions of FIN 48 on October 1, 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 October 1, 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 valuationallowance.  However, to the extent thatany portion of such benefit is recognized at the time a valuation allowance nolonger exists, such benefit would favorably affect the effective tax rate. Inthe first quarter of fiscal 2008, there has been no change in the balance ofunrecognized tax benefits. The Company does not expect that the unrecognizedtax benefit will change significantly within the next 12 months.

 

11

----

** **

**MINDSPEED TECHNOLOGIES, INC.**

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

(unaudited)

 

TheCompany recognizes interest and penalties related to unrecognized tax benefitsin the tax provision. As of October 1, 2007, the Company had no liabilityfor the payment of interest and penalties. The liability for the payment ofinterest and penalties did not change as of December 31, 2007.

 

Theimpact of the Company’s adoption of FIN 48 on accumulated deficit is as follows(in thousands):

 
| ** **                                     | ** ** | **Three months ended  December 31, 2007** | ** ** |
|------------------------------------------------|------------|---------------------------------------------------------------|------------|
| Balance, beginning of the period               |       | $                                                             | (234,480   | ) |
| Net loss                                       |       | (829                                                          | )          |
| Adjustments related to the adoption of FIN  48 |       | 202                                                           |       |
| Balance, end of the period                     |       | $                                                             | (235,107   | ) |

 

TheCompany’s tax years ended September 30, 2004 to September 30, 2007remain open to examination by certain foreign taxing jurisdictions.  The Company has incurred US federal and statenet 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 three months ended December 31, 2007 and 2006was 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:

 
| ** **                                      | ** ** | **Three months ended  December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Weighted-average fair value of options  granted |       | $                                                   | 0.74       |   | $ | 0.99 |   |
|                                            |       |                                                |       |   |   |
| Weighted-average assumptions:                   |       |                                                |       |   |   |
| Expected option life                            |       | 3.5 years                                           |       | 3.5 years |   |
| Risk-free interest rate                         |       | 3.2                                                 | %          | 4.6 | % |
| Expected volatility                             |       | 68                                                  | %          | 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 is basedupon the historical daily changes in the price of the Company’s common stock.The risk-free interest rate is based upon the current yield on U.S. Treasury securitieshaving a term similar to the expected option term. Dividend yield is estimatedat zero because the Company does not anticipate paying dividends in theforeseeable future.

 

12

----

** **

**MINDSPEED TECHNOLOGIES, INC.**

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

(unaudited)

 

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

 
| ** **                             | ** ** | **Three months ended  December 31,** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Cost of goods sold                     |       | $                                                   | 80         |   | $ | 92 |   |
| Research and development               |       | 801                                                 |       | 579 |   |
| Selling, general and administrative    |       | 773                                                 |       | 773 |   |
| Special charges                        |       | —                                              |       | 32 |   |
|                                   |       |                                                |       |   |   |
| Total stock-based compensation expense |       | $                                                   | 1,654      |   | $ | 1,476 |   |

 

*StockCompensation 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 thegrant of 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. As of December 31,2007, an aggregate of 2.8 million shares of the Company’s common stock wereavailable for issuance under these plans. On March 5, 2007 thestockholders of the Company approved plan amendments which, among other things,(1) increased the authorized number of shares reserved for issuance underthe 2003 Long-Term Incentives Plan to 19.3 million shares, (2) removed the“evergreen” provision from the Directors Stock Plan that automaticallyincreased the number of shares available under the Directors Stock Plan eachyear and (3) fixed the total number of shares authorized for issuanceunder the Directors Stock Plan at 1,440,000.

 

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 29.9 million shares 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 (shares in thousands):

 

13

----

** **

**MINDSPEED TECHNOLOGIES, INC.**

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

(unaudited)

 
| ** **                                            | ** ** | **Number  of Shares** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Weighted-Average  Remaining  Contractual Term** | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|-------------------------------------------|------------|--------------------------------------------------------|------------|
| Outstanding at September 30, 2007 |       | 19,909                     |       | $                                         |  2.33 |                                                   |       |   |
|                                                  |       |                       |       |                                      |       |                                                   |       |
| Granted                                               |       | 121                        |       | $                                         | 1.46       |                                                   |       |   |
| Exercised                                             |       | (82                        | )          | $                                         | 1.22       |                                                   |       |   |
| Forfeited or expired                                  |       | (594                       | )          | $                                         | 2.11       |                                                   |       |   |
|                                                  |       |                       |       |                                      |       |                                                   |       |
| Outstanding at December 31, 2007                 |       | 19,354                     |       | $                                         | 2.34       |                                                   | 3.8 years  |   |
|                                                  |       |                       |       |                                      |       |                                                   |       |
| Exercisable at end of period                          |       | 16,065                     |       | $                                         | 2.33       |                                                   | 3.1 years  |   |

 

As of December 31,2007, there was unrecognized compensation expense of $2.2 million related tounvested stock options, which the Company expects to recognize over aweighted-average period of 2.3 years. The aggregate intrinsic value of optionsexercised during the three months ended December 31, 2007 was $32,000. Theaggregate intrinsic value of options outstanding and options exercisable as of December 31,2007 was $0.3 million and $0.3 million, respectively.

 

*RestrictedStock 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 quarter of fiscal 2008, new awards of stock-based compensationhave principally consisted of restricted stock awards. The majority of therestricted stock awards are intended to provide performance emphasis andincentive compensation through vesting tied to each employee’s performanceagainst individual goals, as well as to improvements in the Company’s operatingperformance. The actual amounts of expense will depend on the number of awardsthat ultimately vest upon the satisfaction of the related performance andservice conditions.  The fair value of eachaward is charged to expense over the service period.

 

The followingtable summarizes restricted stock award activity (shares in thousands):

 
| ** **                                  | ** ** | **Number  of  Shares** | ** ** | **Weighted-  Average  Grant Date  Fair Value** | ** ** |
|---------------------------------------------|------------|------------------------|------------|----------------------------------------------------------|------------|
| Nonvested shares at September 30, 2007 |       | 3,189                  |       | $                                                        | 2.17       |   |
|                                        |       |                   |       |                                                     |       |
| Granted                                     |       | 1,497                  |       | $                                                        | 1.30       |   |
| Vested                                      |       | (1,674                 | )          | $                                                        | 1.72       |   |
| Forfeited                                   |       | (216                   | )          | $                                                        | 2.01       |   |
|                                        |       |                   |       |                                                     |       |
| Nonvested shares at December 31, 2007  |       | 2,796                  |       | $                                                        | 1.97       |   |

 

The total fair value ofshares vested during the three months ended December 31, 2007 was $2.4million.  As of December 31, 2007there was unrecognized compensation expense of $4.0 million related to unvestedrestricted stock awards, which the Company expects to recognize over aweighted-average period of approximately 1.6 years.

 

14

----

** **

**MINDSPEED TECHNOLOGIES, INC.**

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

(unaudited)

 

**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 ofrestructuring charges totaling $81,000 in the first quarter of fiscal 2008 and$3.6 million in the first quarter of fiscal 2007.

 

*RestructuringCharges*

 

*Mindspeed 2007 Restructuring Plan*— During thefirst and second quarters of fiscal 2007, the Company implemented arestructuring plan under which it reduced its workforce by approximately 49employees. The affected employees included approximately 38 persons in researchand development, 8 in sales and marketing and 3 in general and administrativefunctions. In connection with this reduction in workforce, the Company recordeda charge of $2.4 million for severance benefits payable to the affected employeesand $75,000 for the value of stock-based compensation awards that will vestwithout future service to the Company. On December 1, 2006, the Companyvacated approximately 50,000 square feet of excess space at its Newport Beachheadquarters and recorded a charge related to contractual obligations on thisspace of approximately $1.9 million. This charge was increased by $0.6 millionduring the second fiscal quarter and an additional $0.2 million in the fourthfiscal quarter as a result of a change in sub-lease income estimates. TheCompany expects to incur a total of $0.2 million of additional restructuringcosts in future periods related to this plan.

 

Activity andliability balances related to the Mindspeed 2007 restructuring plan through December 31,2007 are as follows (in thousands):

 
| ** **                                      | ** ** | **Workforce  Reductions** | ** ** | **Facility  and Other** | ** ** | **Total**  | ** ** |
|-------------------------------------------------|------------|---------------------------|------------|------------------------------|------------|------------|------------|
| ** **                                      | ** ** | ** **                | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Charged to costs and expenses                   |       | $                         | 2,418      |                         | $          | 2,834      |       | $ | 5,252 |   |
| Cash payments                                   |       | (2,119                    | )          | (1,582                       | )          | (3,701     | )          |
| Reversal of non-cash charges                    |       | (75                       | )          | —                       |       | (75        | )          |
| Restructuring balance, September 30,  2007 |       | 224                       |       | 1,252                        |       | 1,476      |       |
| Charged to costs and expenses                   |       | —                    |       | 81                           |       | 81         |       |
| Cash payments                                   |       | (106                      | )          | (494                         | )          | (600       | )          |
| Restructuring balance, December 31,  2007  |       | $                         | 118        |                         | $          | 839        |       | $ | 957 |   |

 

*Other Restructuring Plans*— In fiscal 2002,2003, 2005 and 2006, the Company implemented a number of cost reductioninitiatives to improve its operating cost structure. The cost reductioninitiatives included workforce reductions, significant reductions in capitalspending, the consolidation of certain facilities and salary reductions for thesenior management team. During the three months ended December 31, 2007,the Company made cash payments of $7,000 under these restructuring plans. As ofDecember 31, 2007, there were $1,000 in remaining liabilities under theserestructuring plans.

 

15

----

** **

**MINDSPEED TECHNOLOGIES, INC.**

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

(unaudited)

 

Asof December 31, 2007, the Company has a remaining accrued restructuringbalance for all restructuring plans totaling $958,000 and principally representingobligations under non-cancelable leases, employee severance benefits and othercontractual commitments. The Company expects to pay these obligations overtheir respective terms, which expire at various dates through fiscal 2009. Thepayments will be funded from available cash balances and funds from productsales and are not expected to significantly impact liquidity.

 

**6. Related Party Transactions**

 

The Company leasesits headquarters and principal design center in Newport Beach, California fromConexant. For the three months ended December 31, 2007 and 2006, rent andoperating expenses payable to Conexant were $1.7 million and $1.6 million,respectively. 

 

16

----

 
| **ITEM  2.** | **MANAGEMENT’S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND****RESULTS OF  OPERATIONS** |
|--------------|-----------------------------------------------------------------------------------------------------|

 

This informationshould be read in conjunction with our unaudited consolidated condensedfinancial statements and the notes thereto included in this Quarterly Reportand our audited consolidated financial statements and notes thereto andManagement’s Discussion and Analysis of Financial Condition and Results ofOperations contained in our Annual Report on Form 10-K for our fiscal yearended September 30, 2007.

 

**Overview**

 

We design, develop and sell semiconductor networkingsolutions for communications applications in enterprise, access, metropolitanand wide-area networks. Our products, ranging from optical network transceiversolutions to voice and Internet protocol (IP) processors, are classified intothree focused product families: high-performance analog products, multiserviceaccess digital signal processor (DSP) products and wide area networking (WAN)communications products. Our products are sold to original equipmentmanufacturers (OEMs) for use in a variety of network infrastructure equipment,including mixed media gateways, high-speed routers, switches, accessmultiplexers, cross-connect systems, add-drop multiplexers, digital loopcarrier equipment, IP private branch exchanges (PBXs) and optical modules.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, Cisco Systems, Inc.,Huawei Technologies Co., LM Ericsson Telephone Company, NeophotonicsCorporation, Nokia Siemens Networks, Nortel Networks, Inc. and ZhongxingTelecom Equipment Corp. (ZTE).

 

**Trends and Factors Affecting OurBusiness**

 

Our products are components of network infrastructureequipment. As a result, we rely on network infrastructure OEMs to select ourproducts from among alternative offerings to be designed into their equipment.These “design wins” are an integral part of the long sales cycle for ourproducts. Our customers may need six months or longer to test and evaluate ourproducts and an additional six months or more to begin volume production ofequipment that incorporates our products. We believe our close relationshipswith leading network infrastructure OEMs facilitate early adoption of ourproducts during development of their products, enhance our ability to obtaindesign wins and encourage adoption of our technology by the industry.

 

We market and sell our semiconductor products directlyto network infrastructure OEMs. We also sell our products indirectlythrough electronic component distributors and third-party electronicmanufacturing service providers, who manufacture products incorporating oursemiconductor networking solutions for OEMs. Sales to distributorsaccounted for approximately 54% and 57% of our revenues for fiscal 2007 and thefirst quarter of fiscal 2008, respectively. Sales to customers located outsidethe United States, primarily in the Asia-Pacific region and Europe, wereapproximately 69% and 66%, respectively, of our net revenues for fiscal 2007and the first quarter 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.

 

We have significantresearch, development, engineering and product design capabilities. Our successdepends to a substantial degree upon our ability to develop and introduce in atimely fashion new products and enhancements to our existing products that meetchanging customer requirements and emerging industry standards. We have made,and plan to make, substantial investments in research and development and toparticipate in the formulation of industry standards. We spent approximately$57.4 million and $13.7 million on research and development for fiscal 2007 andthe first quarter of fiscal 2008, respectively. We seek to maximize our returnon our research and development spending by focusing our research anddevelopment investment in what we believe are key high-growth markets,including VoIP and high-performance analog applications.  We have developed and maintain a broadintellectual property portfolio, and we intend to periodically enter intostrategic arrangements to leverage our portfolio by licensing or selling ourintellectual property that 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 quarter of fiscal 2008. We anticipate continuing this intellectual property strategy in futureperiods.

 

17

----

 

We are dependent upon third parties for themanufacture, assembly and testing of our products. Our ability to bring newproducts to market, to fulfill orders and to achieve long-term revenue growthis dependent on our ability to obtain sufficient external manufacturingcapacity, including wafer fabrication capacity. Periods of upturn in thesemiconductor industry may be characterized by rapid increases in demand and ashortage of capacity for wafer fabrication and assembly and test services. Insuch periods, we may experience longer lead times or indeterminate deliveryschedules, which may adversely affect our ability to fulfill orders for ourproducts. During periods of capacity shortages for manufacturing, assembly andtesting services, our primary foundries and other suppliers may devote theirlimited capacity to fulfill the requirements of other clients that are largerthan we are, or who have superior contractual rights to enforce manufacture oftheir products, including to the exclusion of producing our products. We mayalso incur increased manufacturing costs, including costs of finding acceptablealternative foundries or assembly and test service providers.

 

In order to become profitable, or to generate andsustain positive cash flows from operations, we must further reduce operatingexpenses and/or increase our revenues. Through the first quarter of fiscal2008, we have completed a series of cost reduction actions which have improvedour operating cost structure.

 

Our ability to achieve thenecessary 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.

 

Ample’s products ship tomajor OEM equipment customers for installation in Ethernet metropolitan,access, and enterprise networks, including wireless/cellular backhaul andEthernet-over-SONET applications.  Weintend to 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.

 

**Critical Accounting Policies andEstimates**

 

The preparation of financialstatements in accordance with accounting principles generally accepted in theUnited States requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Among thesignificant estimates affecting our consolidated financial statements are thoserelating to inventories, revenue recognition, allowances for doubtful accounts,stock-based compensation, income taxes and impairment of long-lived assets. Weregularly evaluate our estimates and assumptions based upon historicalexperience and various other factors that we believe to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. To the extent actual results differ from those estimates,our future results of operations may be affected.

 

18

----

 

*Inventories* — Wewrite down our inventory for estimated obsolete or unmarketable inventory in anamount equal to the difference between the cost of inventory and the estimatedmarket value based upon assumptions about future demand and market conditions.If actual market conditions are less favorable than our estimates, additionalinventory write-downs may be required. In the event we experience unanticipateddemand and are able to sell a portion of the inventories we have previouslywritten down, our gross margins will be favorably affected.

 

*Stock-BasedCompensation* — We account for stock-based compensation inaccordance with SFAS No. 123R, “Share-Based Payment.” SFAS 123Rrequires that we account for all stock-based compensation transactions using afair-value method and recognize the fair value of each award as an expense overthe service period. The fair value of restricted stock awards is based upon themarket price of our common stock at the grant date. We estimate the fair valueof stock option awards, as of the grant date, using the Black-Scholesoption-pricing model. The use of the Black-Scholes model requires that we makea number of estimates, including the expected option term, the expectedvolatility in the price of our common stock, the risk-free rate of interest andthe dividend yield on our common stock. If our expected option term andstock-price volatility assumptions were different, the resulting determinationof the fair value of stock option awards could be materially different. Inaddition, judgment is also required in estimating the number of share-basedawards that we expect will ultimately vest upon the fulfillment of serviceconditions (such as time-based vesting) or the achievement of specificperformance conditions. If the actual number of awards that ultimately vestdiffers significantly from these estimates, stock-based compensation expenseand our results of operations could be materially impacted.

 

*RevenueRecognition* — 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. Delivery occurs when goods are shipped and title and riskof loss transfer to the customer, in accordance with the terms specified in thearrangement with the customer. Revenue recognition is deferred in all instanceswhere the earnings process is incomplete. We make certain product sales toelectronic component distributors under agreements allowing for a right toreturn unsold products. We defer the recognition of revenue on all sales tothese distributors until the products are sold by the distributors to a thirdparty. We record a reserve for estimated sales returns and allowances in thesame period as the related revenues are recognized. We base these estimates onour historical experience or the specific identification of an eventnecessitating a reserve. To the extent actual sales returns differ from ourestimates, our future results of operations may be affected. Developmentrevenue is recognized when services are performed and was not significant forany of the periods presented.  Revenuefrom the sale of intellectual property is recognized when the above mentionedfour criteria are met.

 

*DeferredIncome Taxes* — We have provided a full valuation allowanceagainst our U.S federal and state deferred tax assets. If sufficient evidenceof our ability to generate future U.S federal and/or state taxable incomebecomes apparent, we may be required to reduce our valuation allowance,resulting in income tax benefits in our statement of operations. We evaluatethe realizability of our deferred tax assets and assess the need for avaluation allowance quarterly.

 

*Impairmentof Long-Lived Assets* — We regularly monitor and review long-livedassets, including fixed assets, goodwill and intangible assets, for impairmentincluding whenever events or changes in circumstances indicate that thecarrying amount of any such asset may not be recoverable. The determination ofrecoverability is based on an estimate of the undiscounted cash flows expectedto result from the use of an asset and its eventual disposition. The estimateof cash flows is based upon, among other things, certain assumptions aboutexpected future operating performance, growth rates and other factors. Ourestimates of undiscounted cash flows may differ from actual cash flows due to,among other things, technological changes, economic conditions, changes to ourbusiness model or changes in our operating performance. If the sum of theundiscounted cash flows (excluding interest) is less than the carrying value,we recognize an impairment loss, measured as the amount by which the carryingvalue exceeds the fair value of the asset.

 

**Recent Accounting Pronouncements**

 

OnOctober 1, 2007, we adopted Financial Accounting Standards Board (FASB)Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – AnInterpretation 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 a revised Statement No. 141, “BusinessCombinations” (SFAS 141R), which establishes principles and requirements forhow the acquirer recognizes and measures in its financial statements theidentifiable assets acquired, the liabilities assumed, and any noncontrollinginterest in the acquiree. The Statement also establishes principles andrequirements for how the acquirer recognizes and measures the goodwill acquiredin the business combination or a gain from a bargain purchase and determineswhat information to disclose to enable users of the financial statements toevaluate the nature and financial effects of the business combination. TheStatement is effective for fiscal years beginning after December 15, 2008.  We will be required to adopt SFAS 141R in thefirst quarter of fiscal 2010 and do not expect that the adoption will have amaterial impact on our financial condition or results of operations.

 

19

----

 

**Results of Operations**

 

**Net Revenues**

 

The following table summarizes our net revenues:

 
| ** **                       | ** ** | **Three months ended December 31,** | ** ** |
|----------------------------------|------------|---------------------------------------------------------|------------|
| **($ in millions)**    | ** ** | **2007**                                                | ** ** | **Change** | ** ** | **2006** | ** ** |
| Multiservice access DSP products |       | $                                                       | 9.9        |   | 11 | % | $ | 9.0 |   |
| High-performance analog products |       | 10.6                                                    |       | 8 | % | 9.8 |   |
| WAN communications products      |       | 14.8                                                    |       | 30 | % | 11.4 |   |
| Net revenues                     |       | $                                                       | 35.3       |   | 17 | % | $ | 30.2 |   |

 

The 17% increase in our revenues for the fiscal 2008first quarter compared to the comparable fiscal 2007 period reflects highersales volume across all of our product families including approximately $2.65million in revenues from our strategic arrangements to leverage our portfolioby licensing or selling our patents and other intellectual property.   Net revenues from ourmultiservice access DSP products increased $0.9 million, or 11%, reflecting adecrease in sales in our legacy products more than offset by a combination ofincreased sales volumes across our newer VoIP product families, as well asrevenues recorded on the sale of intellectual property.  We areexperiencing increased sales volumes of our newer VoIP product families astelecommunication service providers install equipment to transmit their voicetraffic over IP data networks. We believe we are benefiting from the increasingdeployment of IP-based networks both in new network buildouts (particularly inAsia) and the replacement of circuit-switched networks.   Net revenues from our high-performance analogproducts increased $0.8 million, or 8%, reflecting a benefit from increaseddemand for our switching products and signal conditioning used intelecommunications and enterprise applications somewhat offset by lower demandfor our physical media dependent devices for use in infrastructure equipmentfor fiber-to-the-premise deployments and metropolitan area networks. Net revenuesfrom our WAN communications products increased $3.4 million, or 30%, reflectingincreased shipments of our ATM/MPLS network processor products, increasedshipments of T/E carrier transmission products, our first sales of Ethernet products added to theWAN portfolio as a result of the acquisition of certain assets of AmpleCommunications in the fourth quarter of fiscal 2007, as well as revenuerecorded on the sale of intellectual property.  Additionally, revenuesin the fiscal 2007 first quarter were lower compared to the first quarter offiscal 2008 primarily as a result of quarter-end product shipment delaysassociated with an earthquake-related communications disruption at a keyassembly supplier’s Philippines facility.

 

**Gross Margin**

 
| ** **                    | ** ** | **Three months ended December 31,** | ** ** |
|-------------------------------|------------|---------------------------------------------------------|------------|
| **($ in millions)** | ** ** | **2007**                                                | ** ** | **Change** | ** ** | **2006** | ** ** |
| Gross margin                  |       | $                                                       | 25.0       |   | 28 | % | $ | 19.5 |   |
| Percent of net revenues       |       | 71                                                      | %          |   |   | 65 | % |
|                               |            |                                                         |            |  |  |  |  |  |  |

 

Gross margin represents revenues less cost of goodssold. As a fabless semiconductor company, we use third parties (includingTaiwan Semiconductor Manufacturing Co., Ltd. (TSMC), Jazz Semiconductor, Inc.and Amkor 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 the first quarter of fiscal 2008increased $5.5 million over our gross margin for the first quarter of fiscal2007 principally reflecting an increase in product sales and the sale ofintellectual property with a zero cost basis. The improvement of our gross margin as a percent of net revenues for thefirst quarter of fiscal 2008 includes a 2.4 percent benefit from the sale ofcertain patents that are no longer core to our business.  Our gross margin improvement was partially offsetby a decrease in sales in the first quarter of fiscal 2008 of inventorypreviously written down to a zero cost basis in fiscal 2001 from $1.2 millionin the first quarter of fiscal 2007 to $0.5 million in the first quarter offiscal 2008.

 

20

----

 

In fiscal 2001, we recorded an aggregate of $83.5million of inventory write-downs, reducing the cost basis of the affectedinventories to zero. The fiscal 2001 inventory write-downs resulted from thesharply reduced end-customer demand for network infrastructure equipment duringthat period. As a result of these market conditions, we experienced asignificant number of order cancellations and a decline in the volume of neworders beginning in the fiscal 2001 first quarter. The inventories written downin fiscal 2001 principally consisted of multiservice access processors and DSLtransceivers.

 

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.

 

From the time of the fiscal 2001 inventory write-downsthrough December 31, 2007, we scrapped a portion of these inventorieshaving an original cost of $39.9 million and sold a portion of theseinventories with an original cost of $36.4 million. The sales resulted fromincreased demand beginning in the first quarter of fiscal 2002 which was notanticipated at the time of the write-downs. As of December 31, 2007, wecontinued to hold inventories with an original cost of $7.2 million which werepreviously written down to a zero cost basis. We currently intend to hold theseremaining inventories and will sell these inventories if we continue toexperience renewed demand for these products. While there can be no assurancethat we will be able to do so, if we are able to sell a portion of theinventories which are carried at zero cost basis, our gross margins will befavorably affected by an amount equal to the original cost of the zero-costbasis inventory sold. To the extent that we do not experience renewed demandfor the remaining inventories, they will be scrapped as they become obsolete.

 

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 market conditions.Demand for our products may fluctuate significantly over time, and actualdemand and market conditions may be more or less favorable than those projectedby management. In the event that actual demand is lower than originallyprojected, additional inventory write-downs may be required.

 

**Research and Development**

 
| ** **                    | ** ** | **Three months ended December 31,** | ** ** |
|-------------------------------|------------|---------------------------------------------------------|------------|
| **($ in millions)** | ** ** | **2007**                                                | ** ** | **Change** | ** ** | **2006** | ** ** |
| Research and development      |       | $                                                       | 13.7       |   | (12 | )% | $ | 15.6 |   |
| Percent of net revenues       |       | 39                                                      | %          |   |   | 52 | % |
|                               |            |                                                         |            |  |  |  |  |  |  |

 

Our research and development (R&D) expensesconsist principally of direct personnel costs, photomasks, electronic designautomation tools and pre-production evaluation and test costs. The $1.9 milliondecrease in R&D expenses for the first quarter of fiscal 2008 compared tothe first quarter of fiscal 2007 reflects a $0.7 million decrease incompensation and personnel-related costs and a $0.2 million decrease inthe cost of our facilities resulting from our expense reduction actions. Thedecrease in R&D expenses also reflects a $0.3 million decrease indepreciation expense, principally resulting from certain assets reaching theend of their depreciable lives, and a $0.2 million decrease in the cost ofmaterials, photomasks and preproduction devices.

 

21

----

 

**Selling, General and Administrative**

 
| ** **                          | ** ** | **Three months ended December 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------------------------|------------|
| **($ in millions)**       | ** ** | **2007**                                                | ** ** | **Change** | ** ** | **2006** | ** ** |
| Selling, general and administrative |       | $                                                       | 11.5       |   | 7 | % | $ | 10.8 |   |
| Percent of net revenues             |       | 33                                                      | %          |   |   | 36 | % |
|                                     |            |                                                         |            |  |  |  |  |  |  |

 

Our selling, general and administrative (SG&A)expenses include personnel costs, independent sales representative commissionsand product marketing, applications engineering and other marketing costs. OurSG&A expenses also include costs of corporate functions, including accounting,finance, legal, human resources, information systems and communications. The$0.7 million increase in our SG&A expenses for the first quarter of fiscal2008 compared to the first quarter of fiscal 2007 reflects $0.2 million inseverance benefits payable to a former officer of the company as well as a $0.3million increase in professional fees.

 

**Special Charges**

 

Special charges consist of restructuring chargestotaling $81,000 in the first quarter of fiscal 2008 and $3.6 million in thefirst quarter of fiscal 2007.

 

*Restructuring Charges*

 

*Mindspeed2007 Restructuring Plan*— During the first and second quarters offiscal 2007, we implemented a restructuring plan under which we reduced ourworkforce by approximately 49 employees. The affected employees includedapproximately 38 persons in research and development, 8 in sales and marketingand 3 in general and administrative functions. In connection with thisreduction in workforce, we recorded a charge of $2.4 million for severancebenefits payable to the affected employees and $75,000 for the value ofstock-based compensation awards that will vest without future service to us. OnDecember 1, 2006, we vacated approximately 50,000 square feet of excessspace at our Newport Beach headquarters and recorded a charge related tocontractual obligations on this space of approximately $1.9 million. Thischarge was increased by $0.6 million during the second fiscal quarter and anadditional $0.2 million in the fourth fiscal quarter as a result of a change insub-lease income estimates. We expect to incur a total of $0.2 million ofadditional restructuring costs in future periods related to this plan.

 

Activity and liabilitybalances related to the Mindspeed 2007 restructuring plan through December 31,2007 are as follows (in thousands):

 
| ** **                                     | ** ** | **Workforce  Reductions** | ** ** | **Facility  and Other** | ** ** | **Total**  | ** ** |
|------------------------------------------------|------------|---------------------------|------------|------------------------------|------------|------------|------------|
| ** **                                     | ** ** | ** **                | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Charged to costs and expenses                  |       | $                         | 2,418      |                         | $          | 2,834      |       | $ | 5,252 |   |
| Cash payments                                  |       | (2,119                    | )          | (1,582                       | )          | (3,701     | )          |
| Reversal of non-cash charges                   |       | (75                       | )          | —                       |       | (75        | )          |
| Restructuring balance, September 30, 2007 |       | 224                       |       | 1,252                        |       | 1,476      |       |
| Charged to costs and expenses                  |       | —                    |       | 81                           |       | 81         |       |
| Cash payments                                  |       | (106                      | )          | (494                         | )          | (600       | )          |
| Restructuring balance, December 31, 2007  |       | $                         | 118        |                         | $          | 839        |       | $ | 957 |   |

 

*OtherRestructuring Plans*— In fiscal 2002, 2003, 2005 and 2006, weimplemented a number of cost reduction initiatives to improve our operatingcost structure. The cost reduction initiatives included workforce reductions,significant reductions in capital spending, the consolidation of certainfacilities and salary reductions for the senior management team. During thethree months ended December 31, 2007, we made cash payments of $7,000under these restructuring plans. As of December 31, 2007, there were$1,000 in remaining liabilities under these restructuring plans.

 

As of December 31,2007, we have a remaining accrued restructuring balance for all restructuringplans totaling $958,000, principally representing obligations undernon-cancelable leases, employee severance benefits and other contractualcommitments. We expect to pay these obligations over their respective terms,which expire at various dates through fiscal 2009. The payments will be fundedfrom available cash balances and funds from product sales and are not expectedto significantly impact liquidity.

 

22

----

 

**Interest Expense**

 
| ** **                    | ** ** | **Three months ended December 31,** | ** ** |
|-------------------------------|------------|---------------------------------------------------------|------------|
| **($ in millions)** | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| Interest expense              |       | $                                                       | (0.6       | ) | $ | (0.6 | ) |
|                               |            |                                                         |            |  |  |  |  |

 

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

 

**Other Income (Expense), Net**

 
| ** **                    | ** ** | **Three months ended December 31,** | ** ** |
|-------------------------------|------------|---------------------------------------------------------|------------|
| **($ in millions)** | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| Other income (expense), net   |       | $                                                       | 0.2        |   | $ | (0.1 | ) |
|                               |            |                                                         |            |  |  |  |  |

 

Other income (expense)principally consists of interest income, foreign exchange gains and losses andother non-operating gains and losses. The increase in other income for thefirst quarter of fiscal 2008 compared to the first quarter of fiscal 2007principally reflects higher foreign exchange losses incurred in the firstquarter of fiscal 2007 than in the first quarter of fiscal 2008.  This was partially offset by a decrease ininterest income in the first quarter of fiscal 2008 resulting from lowerinvested cash balances.

 

**Provision for Income Taxes**

 

Our provision for income taxes for the first quartersof fiscal 2008 and 2007 principally consisted of income taxes incurred by ourforeign 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 quarters of fiscal 2008 and 2007 will not be realized. Accordingly, we havenot recognized any income tax benefits relating to our U.S. federal and stateoperating losses for those periods and we do not expect to recognize any incometax benefits relating to future operating losses until we believe that such taxbenefits are more likely than not to be realized. We expect that our provisionfor income taxes for fiscal 2008 will principally consist of income taxesrelated to our foreign operations.

 

**Liquidity and Capital Resources**

 

Cash provided by operating activities was $4.8 millionfor the first quarter of fiscal 2008 compared to cash used in operatingactivities of $2.8 million for the first quarter of fiscal 2007.  Operating cash flows for the first quarter offiscal 2008 reflect our net loss of $0.8 million, offset by non-cash charges(depreciation and amortization, stock-based compensation expense, inventoryprovisions and other) of $3.0 million, and net working capital decreases ofapproximately $2.6 million.

 

The net working capital decreases for the firstquarter of fiscal 2008 consisted principally of a $2.6 million decrease in netinventories resulting from our efforts to reduce inventory on hand and a$1.1 million decrease in accounts receivable resulting from a decrease inour average collection period.  These working capital decreases werepartially offset by a decrease in accounts payable principally related to thetiming of payments.

 

Cash used in investing activities of $3.2 million forthe first quarter of fiscal 2008 principally consisted of  $2.0 million of capital expenditures and paymentsassociated with our acquisition of certain assets of Ample Communications of$1.2 million. For thefirst quarter of fiscal 2007, cash used in investing activities of $2.5 millionprincipally consisted of purchases of marketable securities (net of sales) of$1.4 million and capital expenditures of $1.1 million.

 

Cash provided by financing activities of $101,000 and$359,000 for the first quarters of fiscal 2008 and 2007, respectively,consisted of proceeds from the exercise of stock options.

 

23

----

 

*Convertible Senior Notes Offering*

 

In December 2004, we sold $46.0 million aggregateprincipal amount of convertible senior notes due 2009 for net proceeds (afterdiscounts and commissions) of approximately $43.9 million. The notes are seniorunsecured 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 usedapproximately $3.3 million of the proceeds to purchase U.S. governmentsecurities that were pledged to the trustee for the payment of the first fourscheduled 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 ofour common stock or a combination of cash and shares of common stock. EffectiveMay 13, 2005, the conversion price of the notes was adjusted to $2.31 pershare of common stock, which is equal to a conversion rate of approximately432.9004 shares of common stock per $1,000 principal amount of notes. Prior tothis adjustment, the conversion price applicable to the notes was $2.81 pershare of common stock, which was equal to approximately 355.8719 shares ofcommon stock per $1,000 principal amount of notes. The adjustment was madepursuant 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 certain fundamentalchanges (as defined in the indenture), holders of notes may require us torepurchase some or all of their notes at 100% of the principal amount plusaccrued and unpaid interest. If, upon notice of certain events constituting afundamental change, holders of the notes elect to convert the notes, we may berequired to make an additional cash payment per $1,000 principal amount ofnotes in connection with the conversion. The amount of the additional cashpayment, if any, will be determined by reference to a table set forth in theindenture 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 fundamentalchange were to occur between November 18, 2007 and November 18, 2008,the amount of the additional cash payment would be equal to such average stockprice times a multiplier of up to 61.19. Our obligation to make the additional cash payment will not apply tofundamental changes that occur on or after November 18, 2009, and theapplicable multiplier will decrease on a daily basis through that date.  Notwithstanding the foregoing, no additionalcash payment will be required if the applicable average stock price is lessthan $2.30 per share (subject to adjustment as set forth in theindenture).  In the event of a non-stockchange of control constituting a “public acquirer change of control” (asdefined in the indenture), we may, in lieu of making an additional cash paymentupon conversion as required by the indenture, elect to adjust the conversionprice and the related conversion obligation such that the noteholders will beentitled to convert their notes into a number of shares of public acquirercommon stock.

 

For financial accounting purposes, our contingentobligation to issue additional shares or make an additional cash payment uponconversion following a fundamental change is an “embedded derivative.” As of December 31,2007, the estimated fair value of our liability under the fundamental changeadjustment was not significant.

 

*Conexant Warrant*

 

On June 27, 2003, Conexant Systems, Inc.(Conexant) completed the distribution (the Distribution) to Conexantstockholders of all 90,333,445 outstanding shares of common stock of its whollyowned subsidiary, Mindspeed. In the Distribution, each Conexant stockholderreceived one share of Mindspeed common stock (including an associated preferredshare purchase right) for every three shares of Conexant common stock held andcash for any fractional share of Mindspeed common stock. Following theDistribution, Mindspeed began operations as an independent, publicly heldcompany.

 

In the Distribution, we issued to Conexant a warrantto purchase 30 million shares of our common stock at a price of $3.408 per share,exercisable for a period of ten years after the Distribution. The warrant maybe transferred or sold in whole or part at any time. The warrant containsantidilution provisions that provide for adjustment of the exercise price, andthe number of shares issuable under the warrant, upon the occurrence of certainevents. If we issue, or are deemed to have issued, shares of our common stock,or securities convertible into our common stock, at prices below the currentmarket price of our common stock (as defined in the warrants) at the time ofthe issuance of such 

 

24

----

 

securities, the warrant’s exercise price will bereduced and the number of shares issuable under the warrant will be increased.The amount of such adjustment, if any, will be determined pursuant to a formulaspecified in the warrant and will depend on the number of shares issued, theoffering price and the current market price of our common stock at the time ofthe issuance of such securities. Adjustments to the warrant pursuant to theseantidilution provisions may result in significant dilution to the interests ofour existing stockholders and may adversely affect the market price of ourcommon stock. The antidilution provisions may also limit our ability to obtainadditional financing on terms favorable to us.

 

Moreover, we may not realize any cash proceeds fromthe exercise of the warrant held by Conexant. A holder of the warrant may optfor a cashless exercise of all or part of the warrant. In a cashless exercise,the holder 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 stock issuableupon exercise of the warrant over the exercise price of the warrant. Such anissuance of common stock would be immediately dilutive to the interests ofother stockholders.

 

*Liquidity*

 

Our principal sources ofliquidity are our existing cash balances and cash generated from product sales.As of December 31, 2007, our cash and cash equivalents totaled$27.5 million. Our working capital at December 31, 2007 was$38.3 million.

 

In order to becomeprofitable, or to generate and sustain positive cash flows from operations, wemust further reduce operating expenses and/or increase revenues. Through thefirst quarter of fiscal 2008, we have completed a series of cost reductionactions which have improved our operating cost structure.  These expense reductions alone may not makeus 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, will be sufficient to fund our operations, research and developmentefforts, anticipated capital expenditures, working capital and other financingrequirements for at least the next 12 months. We will need to continue afocused program of capital expenditures to meet our research and developmentand corporate requirements. We may also consider acquisition opportunities toextend our technology portfolio and design expertise and to expand our productofferings. In order to fund capital expenditures, increase our working capitalor complete any acquisitions, we may seek to obtain additional debt or equityfinancing. We may also need to seek to obtain additional debt or equityfinancing if we experience downturns or cyclical fluctuations in our businessthat are more severe or longer than anticipated or if we fail to achieveanticipated revenue and expense levels. However, we cannot assure you that suchfinancing will be available to us on favorable terms, or at all.

 

**Contractual Obligations**

 

The following table summarizes the future payments weare required to make under contractual obligations as of December 31,2007:

 
| ** **                         | ** ** | **Payments due by period** | ** ** |
|------------------------------------|------------|-------------------------------------------|------------|
| ** **                         | ** ** | **Total**                                 | ** ** | **<1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **>5 years** | ** ** |
| ** **                         | ** ** | **(in millions)**                    | ** ** |
| Long-term debt                     |       | $                                         | 46.0       |   | $ | — |   | $ | 46.0 |   | $ | — |   | $ | — |   |
| Interest expense on long-term debt |       | 3.5                                       |       | 1.8 |   | 1.7 |   | — |   | — |   |
| Operating leases                   |       | 18.7                                      |       | 8.1 |   | 9.7 |   | 0.6 |   | 0.3 |   |
| Purchase obligations               |       | 6.4                                       |       | 1.7 |   | 4.3 |   | 0.4 |   | — |   |
| Total                              |       | $                                         | 74.6       |   | $ | 11.6 |   | $ | 61.7 |   | $ | 1.0 |   | $ | 0.3 |   |

 

25

----

 

Long-term debt consists of $46.0 million aggregateprincipal amount of our convertible senior notes issued in December 2004.The notes bear interest at a rate of 3.75%, payable semiannually in arrearseach May 18 and November 18, and mature on November 18, 2009.

 

In June 2007, weextended our Sublease with Conexant pursuant to which we lease our headquartersin Newport Beach, California. The Sublease, which had been amended and restatedin March 2005, had an initial term through June 2008. The Subleasewas extended for an additional two year term (through June 2010) for areduced amount of space beginning June 2008.  Rent payable under the Sublease for the next12 months is approximately $3.6 million and will be reduced to approximately$3.1 million annually thereafter resulting from the space reduction. Rentpayable is subject to annual increases of 3%, plus a prorated portion ofoperating expenses associated with the leased property. We estimate our minimumfuture obligation under the Sublease at approximately $14.0 million over theremainder of the lease term, but actual costs under the Sublease will varybased upon Conexant’s actual costs. In addition, each year we may elect topurchase certain services from Conexant based on a prorated portion of Conexant’sactual costs.

 

We lease our otherfacilities and certain equipment under non-cancelable operating leases. Theleases expire at various dates through 2014 and contain various provisions forrental adjustments, including, in certain cases, adjustments based on increasesin the Consumer Price Index. The leases generally contain renewal provisionsfor varying periods of time. Although we have entered into non-cancelablesubleases with anticipated rental income totaling $1.1 million and extending tovarious dates through fiscal 2010, we have not reduced the amount of ourcontractual obligations under the related operating leases to take into accountthe anticipated rental income.

 

**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 obligated tomake. We have not recorded any liability for these guarantees and indemnitiesin the accompanying consolidated balance sheets.

 

26

----

** **

**ITEM3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

** **

Our cash and cash equivalents consist of demanddeposits and highly-liquid money market funds. Our marketable securitiesconsist of auction rate securities whose interest rates reset periodically(generally every seven or twenty-eight days) and U.S. Treasury securitieshaving maturities of less than 12 months. Our main investment objectives arethe preservation of investment capital and the maximization of after-taxreturns on our investment portfolio. Consequently, we invest in securities thatmeet high credit quality standards and we limit the amount of our creditexposure to any one issuer. We do not use derivative instruments forspeculative 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 December 31, 2007, 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.

 

*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 December 31, 2007, we held no foreigncurrency forward exchange contracts. Based on our overall currency rateexposure at December 31, 2007, a 10% change in currency rates would nothave a material effect on our consolidated financial position, results ofoperations or 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 December 31, 2007. 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 December 31, 2007, 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 December 31, 2007 thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

27

----

 

**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 30, 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 substantial operating losses, and we anticipateadditional future******losses.***

 

We incurred a net loss of$829,000 in the first three months of fiscal 2008 and incurred net losses of$21.9 million in fiscal 2007 and $24.5 million in fiscal 2006. Weexpect that we will continue to incur losses at least through the first half offiscal 2008, and we may incur additional losses and negative cash flows insubsequent periods.

 

In order to becomeprofitable, or to generate and sustain positive cash flows from operations, wemust further reduce operating expenses and/or increase our revenues.  Through the first three months of fiscal2008, we have completed a series of cost reduction actions which have improvedour operating cost structure. These expense reductions alone may not make usprofitable or allow us to sustain profitability if it is achieved. Our abilityto achieve the necessary revenue growth will depend on increased demand fornetwork infrastructure equipment that incorporates our products, which in turndepends primarily on the level of capital spending by communications serviceproviders and enterprises. We may not be successful in achieving the necessaryrevenue growth or the expected expense reductions. Moreover, we may be unableto sustain past or expected future expense reductions in subsequent periods. Wemay not achieve profitability or sustain such 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 three monthsof fiscal 2008, we generated $4.8 million in cash from operating activitiescompared to net cash used of $2.8 million in the first three months of fiscal2007.  Our net cash used in operatingactivities was $10.0 million in fiscal 2007 and $15.9 million for fiscal2006.  Our principal sources of liquidityare our existing cash balances, marketable securities and cash generated fromproduct sales. As of December 31, 2007, our cash and cash equivalentstotaled $27.5 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 obtain alternatesources of financing, or both. We may not have access to additional sources ofcapital on favorable terms or at all. If we raise additional funds through theissuance of equity, equity-based or debt securities, such securities may haverights, preferences or privileges senior to those of our common stock and ourstockholders may experience dilution of their ownership interests.

 

***We operate in the highly cyclical semiconductor industry, which issubject to******significant downturns.***

 

The semiconductor industryis highly cyclical and is characterized by constant and rapid technologicalchange, rapid product obsolescence and price erosion, evolving technicalstandards, short product life cycles and wide fluctuations in product supplyand demand. From time to time, these and other factors, together with changesin general economic conditions, cause significant upturns and downturns in theindustry in general, and in our business in particular. Periods of industrydownturns have been characterized by diminished product demand, productionovercapacity, high inventory levels and accelerated erosion of average sellingprices. These factors have caused substantial fluctuations in our revenues andour results of operations in the past and we may experience similar fluctuationsin our business in the future.

 

28

----

 

***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 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 gain orloss of significant customers;

 

·    marketacceptance of our products and our customers’ products;

 

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

 

·    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;

 

·    intellectualproperty disputes; and

 

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

 

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

 

***The increasing significance of our foreign operations exposes us torisks that are******beyond our control and could affect our ability to operatesuccessfully.***

 

In order to enhance thecost-effectiveness of our operations, we have increasingly sought to shiftportions of our research and development and customer support operations tojurisdictions with lower cost structures than that available in the UnitedStates. The transition of even a portion of our business operations to newfacilities in a foreign country involves a number of logistical and technicalchallenges that could result in product development delays and operationalinterruptions, which could reduce our revenues and adversely affect ourbusiness. We may encounter complications associated with the set-up, migrationand operation of business systems and equipment in a new facility. This couldresult in delays in our research and development efforts and otherwise disruptour operations. If such delays or disruptions occur, they could damage ourreputation and otherwise adversely affect our business and results ofoperations.

 

To the extent that we shiftany operations or labor offshore to jurisdictions with lower cost structures,we may experience challenges in effectively managing those operations as aresult of several factors, including time zone differences and regulatory,legal, cultural and logistical issues. Additionally, the relocation of laborresources may have a negative impact on our existing employees, which couldnegatively impact our operations. If we are unable to effectively manage ouroffshore research and development staff and any other offshore operations, ourbusiness and results of operations could be adversely affected.

 

29

----

 

We cannot be certain thatany shifts in our operations to offshore jurisdictions will ultimately producethe expected cost savings. We cannot predict the extent of government support,availability of qualified workers, future labor rates or monetary and economicconditions in any offshore locations where we may operate. Although some ofthese factors may influence our decision to establish or increase our offshoreoperations, there are inherent risks beyond our control, including:

 

·**            **political uncertainties;

 

·**            **wage inflation;

 

·**            **exposure to foreign currencyfluctuations;

 

·**            **tariffs and other tradebarriers; and

 

·**            **foreign regulatoryrestrictions and unexpected changes in regulatory environments.

 

We will likely be faced withcompetition in these offshore markets for qualified personnel, includingskilled design and technical personnel, and we expect this competition toincrease as companies expand their operations offshore. If the supply of suchqualified personnel becomes limited due to increased competition or otherwise,it could increase our costs and employee turnover rates. One or more of thesefactors or other factors relating to foreign operations could result inincreased operating expenses and make it more difficult for us to manage ourcosts and operations, which could cause our operating results to decline andresult in reduced revenues.

 

***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.

 

30

----

 

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 highlycomplex and technologically demanding nature of semiconductor manufacturing hascaused foundries 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.

 

***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 anticipate future losses.We believe that financial stability of suppliers is an important considerationin our customers’ purchasing decisions. If our OEM customers perceive that welack adequate financial stability, they may choose semiconductor suppliers thatthey believe have a stronger financial position or liquidity.

 

31

----

 

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.

 

***Industry consolidation may harm our operating results.***

 

There has been an increasingtrend toward industry consolidation in our markets in recent years,particularly among major network equipment and telecommunications companies. Weexpect this trend to continue as companies attempt to strengthen or hold theirmarket positions in an evolving industry and as companies are acquired or areunable to continue operations. While we cannot predict how consolidation in ourindustry will affect our customers or competitors, rapid consolidation willlead to fewer customers, with the effect that loss of a major customer couldhave a material impact on results not anticipated in a customer marketplacecomposed of more numerous participants. Increased consolidation and competition for fewer customers may resultin pricing pressures or a loss in market share, each of which could materiallyimpact our business.

 

***Our success depends on our ability to develop competitive new productsin a timely******manner.***

 

Our operating results willdepend largely on our ability to continue to introduce new and enhancedsemiconductor products on a timely basis. Successful product development andintroduction depends on numerous factors, including, among others:

 

·**            **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.

 

We may not have sufficientresources to make the substantial investment in research and development inorder to develop and bring to market new and enhanced products, particularly ifwe are required to take further cost reduction actions. Furthermore, we arerequired to evaluate expenditures for planned product development continuallyand to choose among alternative technologies based on our expectations offuture market growth. We may be unable to develop and introduce new or enhancedproducts in a timely manner, our products may not satisfy customer requirementsor achieve market acceptance, or we may be unable to anticipate new industrystandards and technological changes. We also may not be able to respondsuccessfully to new product announcements and introductions by competitors.

 

Research and developmentprojects may experience unanticipated delays related to our internal designefforts. New product development also requires the production of photomask setsand the production and testing of sample devices. In the event we experiencedelays in obtaining these services from the wafer fabrication and assembly andtest vendors on whom we rely, our product introductions may be delayed and ourrevenues and results of operations may be adversely affected.

 

***If we are not able to keep abreast of the rapid technological changesin our markets,******our products could become obsolete.***

 

The demand for our productscan change quickly and in ways we may not anticipate because our marketsgenerally exhibit the following characteristics:

 

·**            **rapid technologicaldevelopments;

 

32

----

 

·**            **rapid changes in customerrequirements;

 

·**            **frequent new productintroductions and enhancements;

 

·**            **declining prices over thelife cycle of products; and

 

·**            **evolving industry standards.

 

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.

 

***Uncertainties involving the ordering and shipment of our products couldadversely******affect our business.***

 

Our sales are typically madepursuant to individual purchase orders and we generally do not have long-termsupply arrangements with our customers. Generally, our customers may cancelorders 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 for approximately57% and 54%, respectively, of our net revenues for the first three months offiscal 2008 and fiscal 2007.

 

Because of the significantlead times for wafer fabrication and assembly and test services, we routinelypurchase inventory based on estimates of end-market demand for our customers’products, which may be subject to dramatic changes and is difficult to predict.This difficulty may be compounded when we sell to OEMs indirectly throughdistributors or contract manufacturers, or both, as our forecasts of demand arethen based on estimates provided by multiple parties. In addition, ourcustomers may change their inventory practices on short notice for any reason.The cancellation 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 design our products into theirequipment, we******will be unable to sell those products. Moreover, a design win from acustomer does******not guarantee future sales to that customer.***

 

Our products are not solddirectly to the end-user but are components of other products. As a result, werely on network infrastructure OEMs to select our products from amongalternative offerings to be designed into their equipment. We may be unable toachieve these “design wins.” Without design wins from OEMs, we would be unableto sell our products. Once an OEM designs another supplier’s semiconductorsinto one of its product platforms, it is more difficult for us to achievefuture design wins with that OEM’s product platform because changing suppliersinvolves significant cost, time, effort and risk. Achieving a design win with acustomer does not ensure that we will receive significant revenues from thatcustomer and we may be unable to convert design wins into actual sales. Evenafter a design win, the customer is not obligated to purchase our products andcan choose at any time to stop using our products if, for example, its ownproducts are not commercially successful.

 

***Because of the lengthy sales cycles of many of our products, we mayincur significant******expenses before we generate any revenues related to thoseproducts.***

 

Our customers generally needsix months or longer to test and evaluate our products and an additional sixmonths or more to begin volume production of equipment that incorporates ourproducts. These lengthy periods also increase the possibility that a customermay decide to cancel or change product plans, which could reduce or eliminatesales to that customer. As a result of this lengthy sales cycle, we may incursignificant research and development and selling, general and administrativeexpenses before we generate any revenues from new products. We may nevergenerate the anticipated revenues if our customers cancel or change theirproduct plans.

 

33

----

 

***We may be subject to claims, or we may be required to defend and indemnifycustomers******against claims, of infringement of third-party intellectual propertyrights or******demandsthat we, or our customers, license third-party technology, which could result******in significant expense.***

 

The semiconductor industryis characterized by vigorous protection and pursuit of intellectual propertyrights. From time to time, third parties have asserted and may in the futureassert patent, copyright, trademark and other intellectual property rightsagainst technologies that are important to our business. The resolution orcompromise of any litigation or other legal process to enforce such allegedthird party rights, including claims arising through our contractualindemnification of our customers, or claims challenging the validity of ourpatents, regardless of its merit or resolution, could be costly and divert theefforts and attention of our management and technical personnel.

 

We may not prevail in anysuch litigation or other legal process or we may compromise or settle suchclaims because of the complex technical issues and inherent uncertainties inintellectual property disputes and the significant expense in defending suchclaims. If litigation or other legal process results in adverse rulings, we maybe required to:

 

·**            **pay substantial damages forpast, present and future use of the infringing technology;

 

·**            **cease the manufacture, useor sale of infringing products;

 

·**            **discontinue the use ofinfringing technology;

 

·**            **expend significant resourcesto develop non-infringing technology;

 

·**            **pay substantial damages toour customers or end users to discontinue use or replace infringing technologywith non-infringing technology;

 

·**            **license technology from thethird party claiming infringement, which license may not be available oncommercially reasonable terms, or at all; or

 

·**            **relinquish intellectualproperty rights associated with one or more of our patent claims, if suchclaims are held invalid or otherwise unenforceable.

 

In connection with thedistribution, we generally assumed responsibility for all contingentliabilities and litigation against Conexant or its subsidiaries related to ourbusiness.

 

***If we are not successful in protecting our intellectual propertyrights, it may harm******our ability to compete.***

 

We rely primarily on patent,copyright, trademark and trade secret laws, as well as employee and third-partynondisclosure and confidentiality agreements and other methods, to protect ourproprietary technologies and processes. We may be required to engage inlitigation to enforce or protect our intellectual property rights, which mayrequire us to expend significant resources and to divert the efforts andattention of our management from our business operations. In particular:

 

·**            **the steps we take to preventmisappropriation or infringement of our intellectual property may not besuccessful;

 

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

 

·**            **the measures described abovemay not provide meaningful protection.

 

Despite the preventivemeasures and precautions that we take, a third party could copy or otherwiseobtain and use our technology without authorization, develop similar technologyindependently 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 

 

34

----

 

these efforts, internal or externalparties may attempt to copy, disclose, obtain or use our products, services ortechnology without our authorization. Also, former employees may seekemployment with our business partners, customers or competitors, and theconfidential nature of our proprietary information may not be maintained in thecourse of such future employment. Further, in some countries outside the UnitedStates, patent protection is not available or not reliably enforced. Somecountries that do allow registration of patents do not provide meaningfulredress for patent violations. As a result, protecting intellectual property inthose countries is difficult and competitors may sell products in thosecountries that have functions and features that infringe on our intellectual property.

 

***The complexity of our products may lead to errors, defects and bugs,which could******subject us to significant costs or damages and adversely affect marketacceptance of******our products.***

 

Although we, our customersand our suppliers rigorously test our products, our products are complex andmay contain errors, defects or bugs when first introduced or as new versionsare 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 or bugs arediscovered after commencement of commercial production of a new product, we maybe required to make significant expenditures of capital and other resources toresolve the problems. This could result in significant additional developmentcosts and the diversion of technical and other resources from our otherdevelopment efforts. We could also incur significant costs to repair or replacedefective products and we could be subject to claims for damages by ourcustomers or others against us. We could also be exposed to product liabilityclaims of indemnification claims by our customers.  These costs or damages could have a materialadverse effect on our financial condition and results of operations.

 

***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 operating performance, wehave experienced, and may experience in the future, particular difficulty attractingand retaining key personnel. If we are not successful in assuring our employeesof our financial stability and our prospects for success, our employees mayseek other employment, which may materially and adversely affect our business.Moreover, our recent expense reduction and restructuring initiatives, includinga series of worldwide workforce reductions, have significantly reduced thenumber of our technical employees. We intend to continue to expand ourinternational business activities including expansion of design and operationalcenters abroad and may have difficulty attracting and maintaining internationalemployees. The loss of the services of one or more of our key employees,including Raouf Y. Halim, our chief executive officer, or certain key designand technical personnel, or our inability to attract, retain and motivatequalified personnel could have a material adverse effect on our ability tooperate our business.

 

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.

 

35

----

 

***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. Sales to customers located outside the United States, primarilyin the Asia-Pacific region and Europe, were approximately 66% and 69%,respectively, of our net revenues for the first three months of fiscal 2008 andfiscal 2007. In addition, we have design centers, customer support centers, andrely on suppliers, located outside the United States, including foundries andassembly and test service providers located in the Asia-Pacific region. Ourinternational sales and operations are subject to a number of risks inherent inselling and operating abroad which could adversely affect our ability toincrease or maintain our foreign sales. These include, but are not limited to,risks regarding:

 

·**            **currency exchange ratefluctuations;

 

·**            **local economic and politicalconditions;

 

·**            **disruptions of capital andtrading markets;

 

·**            **accounts receivablecollection and longer payment cycles;

 

·**            **difficulties in staffing andmanaging foreign operations;

 

·**            **potential hostilities andchanges in diplomatic and trade relationships;

 

·**            **restrictive governmentalactions (such as restrictions on the transfer or repatriation of funds andtrade protection measures, including export duties and quotas and customsduties and tariffs);

 

·**            **changes in legal orregulatory requirements;

 

·**            **difficulty in obtainingdistribution and support;

 

·**            **the laws and policies of theUnited States and other countries affecting trade, foreign investment and loansand import or export licensing requirements;

 

·**            **tax laws;

 

·**            **limitations on our abilityunder local laws to protect our intellectual property;

 

·**            **cultural differences in theconduct of business; and

 

·**            **natural disasters, acts ofterrorism 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 currency fluctuations.

 

36

----

 

***We may make business acquisitions or investments, which involvesignificant risk.***

 

We may from time to timemake acquisitions, enter into alliances or make investments in other businessesto complement our existing product offerings, augment our market coverage orenhance our technological capabilities. However, any such transactions couldresult in:

 

·**            **issuances of equitysecurities dilutive to our existing stockholders;

 

·**            **substantial cash payments;

 

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

 

·**            **large one-time write-offs;

 

·**            **amortization expensesrelated to intangible assets;

 

·**            **the diversion of management’sattention from other business concerns; and

 

·**            **the potential loss of keyemployees, customers and suppliers of the acquired business.

 

Integrating acquiredorganizations and their products and services may be expensive, time-consumingand a strain on our resources and our relationships with employees, customersand suppliers, and ultimately may not be successful. The benefits or synergieswe may expect from the acquisition of complementary or supplementary businessesmay not be realized to the extent or in the time frame we initially anticipate.

 

Additionally, in periodssubsequent to an acquisition, we must evaluate goodwill and acquisition-relatedintangible assets for impairment. When such assets are found to be impaired,they will be written down to estimated fair value, with a charge againstearnings.

 

***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 us andthe 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 our common stock closes below $1.00 for 30 consecutive tradingdays, or if we otherwise do not meet the requirements for continued quotationon the Nasdaq Global Market, our common stock could be delisted.  If Nasdaq delists our common stock, we could facematerial adverse consequences, including:

 

37

----

 

·**            **limitedavailability of market quotations for our common stock;

 

·**            **more limited news andanalyst coverage;

 

·**            **decreased liquidity in ourtrading markets;

 

·**            **decreased availability toissue additional common stock, other securities or obtain additional financingin the future; and

 

·**            **decreased ability of ourstockholders to sell their common stock in certain states.

 

***Our results of operations could vary as a result of the methods,estimates and******judgments we use in applying our accounting policies.***

 

The methods, estimates andjudgments we use in applying our accounting policies have a significant impacton our results of operations (see “Critical Accounting Policies and Estimates”in Part I, Item 2 of this Form 10-Q). Such methods, estimates andjudgments are, by their nature, subject to substantial risks, uncertainties andassumptions, and changes in rule making by the regulatory bodies.  Factors may arise over time that lead us tochange our methods, estimates and judgments. Changes in those methods, estimatesand judgments could significantly affect our results of operations.

 

***Substantial sales of the shares of our common stock issuable uponconversion of our******convertible senior notes or exercise of the warrant issuedto Conexant could******adversely affect our stock price or our ability to raiseadditional financing in the******public capital markets.***

 

Conexant holds a warrant toacquire 30 million shares of our common stock at a price of $3.408 per share,exercisable through June 27, 2013, representing approximately 16% of ouroutstanding common stock on a fully diluted basis. The warrant may betransferred or sold in whole or part at any time. If Conexant sells the warrantor if Conexant or a transferee of the warrant exercises the warrant and sells asubstantial number of shares of our common stock in the future, or if investorsperceive that these sales may occur, the market price of our common stock coulddecline or market demand for our common stock could be sharply reduced. As of December 31,2007, we have $46.0 million aggregate principal amount of convertible seniornotes outstanding. These notes are convertible at any time, at the option ofthe holder, into approximately 432.9004 shares of common stock per $1,000principal amount of notes or an aggregate of approximately 19.9 million sharesof our common stock. The conversion of the notes and subsequent sale of asubstantial number of shares of our common stock could also adversely affectdemand for, and the market price of, our common stock. Each of these transactionscould adversely affect our ability to raise additional financing by issuingequity or equity-based securities in the public capital markets.

 

***Antidilution and other provisions in the warrant issued to Conexant mayalso******adversely affect our stock price or our ability to raise additionalfinancing.***

 

The warrant issued toConexant contains antidilution provisions that provide for adjustment of thewarrant’s exercise price, and the number of shares issuable under the warrant,upon the occurrence of certain events. If we issue, or are deemed to haveissued, shares of our common stock, or securities convertible into our commonstock, at prices below the current market price of our common stock (as definedin the warrant) at the time of the issuance of such securities, the warrant’sexercise price will be reduced and the number of shares issuable under thewarrant will be increased. The amount of such adjustment if any, will bedetermined 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.

 

38

----

 

Moreover, we may not realizeany cash proceeds from the exercise of the warrant held by Conexant. A holderof the warrant may opt for a cashless exercise of all or part of the warrant.In a cashless exercise, the holder of the warrant would make no cash payment tous, and would receive a number of shares of our common stock having anaggregate value equal to the excess of the then-current market price of theshares of our common stock issuable upon exercise of the warrant over theexercise price of the warrant. Such an issuance of common stock would beimmediately dilutive to the interests of other stockholders.

 

***Some of our directors and executive officers may have potentialconflicts of interest******because of their positions with Conexant or their ownershipof Conexant common******stock.***

 

Some of our directors areConexant directors, and our non-executive chairman of the board is chairman ofthe board of Conexant. Several of our directors and executive officers ownConexant common stock and hold options to purchase Conexant common stock.Service on our board of directors and as a director or officer of Conexant, orownership of Conexant common stock by our directors and executive officers,could create, or appear to create, potential conflicts of interest whendirectors 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 restated certificate ofincorporation includes provisions relating to the allocation of businessopportunities that may be suitable for both us and Conexant based on therelationship 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 have difficultyresolving any potential conflicts of interest with Conexant, and even if we do,the resolution may be less favorable than if we were dealing with an entirelyunrelated third party.

 

***Provisions in our organizational documents and rights plan and Delawarelaw will make******it more difficult for someone to acquire control of us.***

 

Our restated certificate ofincorporation, our amended and restated bylaws, our amended rights agreementand the Delaware General Corporation Law contain several provisions that wouldmake more difficult an acquisition of control of us in a transaction notapproved by our board of directors. Our restated certificate of incorporationand amended and restated bylaws include provisions such as:

 

·**            **the division of our board ofdirectors into three classes to be elected on a staggered basis, one class eachyear;

 

·**            **the ability of our board ofdirectors to issue shares of our preferred stock in one or more series withoutfurther authorization of our stockholders;

 

·**            **a prohibition on stockholderaction by written consent;

 

·**            **a requirement thatstockholders provide advance notice of any stockholder nominations of directorsor any proposal of new business to be considered at any meeting ofstockholders;

 

·**            **a requirement that asupermajority vote be obtained to remove a director for cause or to amend orrepeal certain provisions of our restated certificate of incorporation oramended and restated bylaws;

 

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

 

·**            **a fair price provision.

 

39

----

 

Our rights agreement givesour stockholders certain rights that would substantially increase the cost ofacquiring us in a transaction not approved by our board of directors.

 

In addition to the rightsagreement and the provisions in our restated certificate of incorporation andamended and restated bylaws, Section 203 of the Delaware GeneralCorporation Law generally provides that a corporation shall not engage in anybusiness combination with any interested stockholder during the three-yearperiod following the time that such stockholder becomes an interestedstockholder, unless a majority of the directors then in office approves eitherthe business combination or the transaction that results in the stockholderbecoming an interested stockholder or specified stockholder approvalrequirements are met.

 

**ITEM 2. UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

**Issuer Purchases of Equity Securities**

 
| ****                                             | ** ** | **Total Number of  Shares (or Units)  Purchased** | ** ** | **Average Price  Paid per Share  (or Unit)** | ** ** | **Total Number of  Shares (or Units)  Purchased as Part of  Publicly Announced  Plans or Programs** | ** ** | **Maximum Number (or  Approximate Dollar  Value) of Shares (or  Units) that May Yet Be  Purchased Under the  Plans or Programs** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|
| September 29, 2007 to October 26, 2007 |       | 2,262                                             | (a)        | $                                            | 1.79       |                                                                                                     | —     |                                                                                                                                  | —     |   |
| October 27, 2007 to November 23, 2007  |       | —                                            |       | $                                            | —     |                                                                                                     | —     |                                                                                                                                  | —     |   |
| November 24, 2007 to December 28, 2007 |       | —                                            |       | $                                            | —     |                                                                                                     | —     |                                                                                                                                  | —     |   |
|                                             |       | 2,262                                             |       | $                                            | 1.79       |                                                                                                     | —     |                                                                                                                                  | —     |   |

 

----

(a)      Represents shares of ourcommon stock withheld from, or delivered by, employees in order to satisfyapplicable tax withholding obligations in connection with the vesting ofrestricted stock. These repurchases were not made pursuant to any publiclyannounced plan or program.

 

**ITEM 5. OTHER INFORMATION**

 

Weplan to hold our 2008 annual meeting of stockholders on Monday, April 7,2008.  Our board of directors has fixed February 7,2008 as the record date for the 2008 annual meeting, which means thatstockholders of record as of the close of business on that date will beentitled to notice of and to vote at the 2008 annual meeting.

 

The2008 annual meeting date is more than 30 days after the anniversary of our 2007annual meeting of stockholders, which was held on March 5, 2007.  As a result, in accordance with applicablelaw and our bylaws, and taking into account relevant timing and processconsiderations, we have established the close of business on February 20,2007 as the new deadline for the receipt of stockholder proposals submitted forinclusion in our proxy statement for the 2008 annual meeting.  Any such proposals should be submitted toMindspeed Technologies, Inc., 4000 MacArthur Boulevard, East Tower,Newport Beach, California 92660, Attention: Secretary.  Any such proposals must comply with allapplicable SEC requirements, and the submission of a stockholder proposal doesnot guarantee that it will be included in the proxy statement.  We expect to begin printing and sending ourproxy materials as promptly as practicable after the aforementioned deadlinefor submitting stockholder proposals.

 

40

----

** **

**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                    |   | 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, filed as Exhibit 4.1 to the  Registrant’s Registration Statement on Form 10 (File No. 1-31650),  is incorporated herein by reference.                                                                                                                                                            |
|   |                   |   |                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | 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                    |   | 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.                                                                                                                                                                     |
|   |                   |   |                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | 4.5                    |   | 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.                                                                                               |
|   |                   |   |                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | 4.6                    |   | 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.                                                                                                                |
|   |                   |   |                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | 4.7                    |   | 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.                                                                                                |
|   |                   |   |                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | 4.8                    |   | 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.                                                                                                                                                     |
|   |                   |   |                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | 4.9                    |   | 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.                                                                                                                                                                                                                                          |
|   |                   |   |                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | 4.10                   |   | 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                 |   | Bonus Agreement dated as of November 23, 2007,  by and between the Registrant and Raouf Y. Halim, filed as Exhibit 10.1  to the Registrant’s Current Report on Form 8-K dated November 29,  2007, is incorporated by reference.                                                                                                                                                     |
|   |                   |   |                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | * 10.2                 |   | Bonus Agreement dated as of November 23, 2007,  by and between the Registrant and Simon Biddiscombe, filed as  Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated  November 29, 2007, is incorporated by reference.                                                                                                                                                  |
|   |                   |   |                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |    10.3      |   | Schedule identifying parties to and terms of  agreements with the Registrant substantially identical to the Employment  Agreement filed as Exhibit 10.8.1 to the Registrant’s Registration  Statement on Form 10 (File No. 1-31650), filed as  Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K/A  dated January 25, 2008, is incorporated by reference. |
|   |                   |   |                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |    31.1 |   | Certification of Chief Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                    |

 

41

----

 
|   | 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. |

 

----

*                           Management contract or compensatory planor arrangement.

 

42

----

 

**SIGNATURE**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
|                        | MINDSPEED TECHNOLOGIES, INC. |
|-----------------------------|------------------------------|
|                        | (Registrant)                 |
|                        |                         |
| Date: February 6, 2008 | By                           | /s/ SIMON BIDDISCOMBE |   |
|                        |                         |
|                        |                         | Simon Biddiscombe |
|                        |                         | Senior Vice President, Chief Financial Officer, |
|                        |                         | Secretary and Treasurer |
|                        |                         | (principal financial officer) |

#### ** **

43

----

 

#### **EXHIBIT INDEX**

#### ** **

| 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. |

 

----