# ** **

# **UNITED STATES SECURITIESAND EXCHANGECOMMISSION**

## **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  March 28, 2008**                                                    |
| ** ** | ** ** | ** **                                                                                                 |
| **OR**     |
| ** ** | ** ** | ** **                                                                                                 |
| o          | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES****EXCHANGE ACT OF 1934** |

 

**Commissionfile number: 000-50499**

 

**MINDSPEEDTECHNOLOGIES, INC.**

(Exact name of registrantas 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’stelephone number, including area code:

**(949)579-3000**

 

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

 

Indicate by 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-accelerated Filer o (Do not  check if a smaller reporting company) |   | Smaller Reporting Company o |

 

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

 

The number of outstanding shares of the Registrant’sCommon Stock as of April 25, 2008 was 118,949,693.

 

 

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**FORWARD-LOOKINGSTATEMENTS**

 

This Quarterly Report on Form 10-Q containsstatements relating to Mindspeed Technologies, Inc. (including certainprojections and business trends) that are “forward-looking statements” withinthe meaning of Section 27A of the Securities Act of 1933, as amended (theSecurities Act), and Section 21E of the Securities Exchange Act of 1934,as amended (the Exchange Act), and are subject to the “safe harbor” created bythose 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 prospects for thenetwork infrastructure equipment and communications semiconductors markets,including increased demand for network capacity, the upgrade and expansion oflegacy networks, and the build-out of networks in developing countries;

 

·           our plans to makesubstantial investments in research and development and participate in the formulationof industry standards;

 

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

 

·           the continuation of intenseprice and product competition, and the resulting declining average sellingprices for our products;

 

·           the value of our intellectualproperty and our strategy regarding sales of non-core intellectual property;

 

·           the impact of changes incustomer purchasing activities, inventory levels and inventory managementpractices;

 

·           the importance of attractingand retaining highly skilled, dedicated personnel;

 

·           the challenges of shiftingany operations or labor offshore, including the likelihood of competition inoffshore 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, the amount and timing of any such expense reductions, andits effects on cash flow;

 

·           our anticipation that wewill continue our intellectual property strategy in future periods;

 

·           our anticipation that wewill not pay a dividend in the foreseeable future;

 

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

 

·           our belief that we mayimplement a reverse stock split and the possible effects of any reverse stocksplit;

 

·           the continuation of a trendtoward industry consolidation and the effect it could have on our operatingresults;

 

·           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;

 

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·           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;

 

·           our expectation of payingour obligations relating to our restructuring plans and other obligations overtheir respective terms, our intention to fund those payments from availablecash balances and funds from product sales, and the impact of such payments onour 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 that ourprovision for income taxes for fiscal 2008 will principally consist of incometaxes related to our foreign operations;

 

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

 

·           our restructuring plans,including expected workforce reductions and facilities closures, the expectedcost savings under our restructuring plans and the uses of those savings, thetiming and amount of payments to complete the actions, the source of funds forsuch payments, the impact on our liquidity and the resulting decreases in ourresearch and development and selling, general and administrative expenses, andthe amounts of future charges to complete our restructuring plans;

 

·           our beliefs regarding theeffect of the disposition of pending or asserted legal matters;

 

·           our acquisition strategy,the means of financing such a strategy, and the impact of any past or futureacquisitions, including the impact on revenue, margin and profitability;

 

·           our intentions to market,sell and support acquired Ethernet aggregation products and to develop andfurther extend the Ethernet MAC product line;

 

·           our plans relating to ouruse 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 timing offuture payments under contractual obligations; and

 

·           the impact of recentaccounting pronouncements and the adoption of new accounting standards.

 

Our expectations, beliefs,anticipations, objectives, intentions, plans and strategies regarding the futureare not guarantees of future performance and are subject to risks anduncertainties that could cause actual results, and actual events that occur, todiffer materially from results contemplated by the forward-looking statement.These risks and uncertainties include, but are not limited to:

 

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

 

·           downturnsin the semiconductor industry;

 

·           political and economicuncertainties affecting our foreign operations;

 

·           our ability to maintainoperating expenses within anticipated levels;

 

·           our ability to furthergenerate cash;

 

·           terms and availability offinancing;

 

·           supply constraints due toour dependence on third-party manufacturers;

 

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·           our ability to successfullyand cost effectively establish and manage operations in foreign jurisdictions;

 

·           the ability to attract andretain qualified personnel;

 

·           successful development andintroduction of new products;

 

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

 

·           our ability to obtain designwins and develop revenues from them;

 

·           pricing pressures and othercompetitive factors;

 

·           industryconsolidation;

 

·           order and shipmentuncertainty;

 

·           changes in our customers’inventory levels and inventory management practices;

 

·           investor, vendor andcustomer confidence in our company and products;

 

·           risks associated withbusiness acquisitions and investments;

 

·           fluctuations in manufacturing yields;

 

·           fluctuations in the price ofour common stock;

 

·           our ability to meet thelisting standards of  The NASDAQ StockMarket LLC;

 

·           product defects; and

 

·           the expense of and ourability to defend our intellectual property against infringement claims by others.

 

The forward-looking statements in this report aresubject to additional risks and uncertainties, including those set forth in Part II,Item 1A under the heading “Risk Factors” and those detailed from time to timein our other filings with the SEC. These forward-looking statements are madeonly as of the date hereof and, except as required by law, we undertake noobligation to update or revise any of them, whether as a result of newinformation, future events or otherwise.

 

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

 

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**MINDSPEEDTECHNOLOGIES, INC.**

 

**INDEX**

 
| ** **                             | ** **                                                                                                                              | ** ** | **PAGE**   |
|----------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
|                                   |                                                                                                                                    |       |       |
| **PART I. FINANCIAL INFORMATION** |                                                                                                                                    |       |
| ** **                             | ** **                                                                                                                              | ** ** | ** ** |
| Item 1.                                | Financial  Statements (unaudited):                                                                                                      |       |       |
|                                   |                                                                                                                                    |       |       |
|                                   | Consolidated  Condensed Balance Sheets — March 28, 2008 and September 28, 2007                                           |       | 6          |
|                                   |                                                                                                                                    |       |       |
|                                   | Consolidated  Condensed Statements of Operations — Three Months and Six Months Ended   March 28, 2008 and March 30, 2007 |       | 7          |
|                                   |                                                                                                                                    |       |       |
|                                   | Consolidated  Condensed Statements of Cash Flows — Six Months Ended   March 28, 2008 and March 30, 2007                  |       | 8          |
|                                   |                                                                                                                                    |       |       |
|                                   | Notes  to Consolidated Condensed Financial Statements                                                                                   |       | 9          |
|                                   |                                                                                                                                    |       |       |
| Item 2.                                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                             |       | 16         |
|                                   |                                                                                                                                    |       |       |
| Item 3.                                | Quantitative  and Qualitative Disclosures About Market Risk                                                                             |       | 26         |
|                                   |                                                                                                                                    |       |       |
| Item 4.                                | Controls and  Procedures                                                                                                                |       | 27         |
|                                   |                                                                                                                                    |       |       |
| **PART II. OTHER  INFORMATION**   |                                                                                                                                    |       |
|                                   |                                                                                                                                    |       |       |
| Item 1A.                               | Risk  Factors                                                                                                                           |       | 28         |
|                                   |                                                                                                                                    |       |       |
| Item 4.                                | Submission of  Matters to a Vote of Security Holders                                                                                    |       | 40         |
|                                   |                                                                                                                                    |       |       |
| Item 5.                                | Other Information                                                                                                                       |       | 40         |
|                                   |                                                                                                                                    |       |       |
| Item 6.                                | Exhibits                                                                                                                                |       | 41         |
|                                   |                                                                                                                                    |       |       |
|                                   | Signature                                                                                                                               |       | 42         |

 

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**MINDSPEEDTECHNOLOGIES, INC.**

**ConsolidatedCondensed Balance Sheets**

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

 
| ** **                                                                                                                                                     | ** ** | **March 28,  2008** | ** ** | **September 28,  2007** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|------------------------------|------------|
| **ASSETS**                                                                                                                                                     |       |                     |       |                         |       |
| **Current Assets**                                                                                                                                             |       |                     |       |                         |       |
| Cash and cash equivalents                                                                                                                                      |       | $                        | 28,690     |                         | $          | 25,796 |   |
| Receivables, net of allowance for doubtful accounts of $350 and $353  at March 28, 2008 and September 28, 2007, respectively                         |       | 17,681                   |       | 13,584                       |       |
| Inventories                                                                                                                                                    |       | 9,662                    |       | 15,023                       |       |
| Other current assets                                                                                                                                           |       | 2,479                    |       | 3,763                        |       |
| Total current assets                                                                                                                                           |       | 58,512                   |       | 58,166                       |       |
| Property, plant and equipment, net                                                                                                                             |       | 13,061                   |       | 13,147                       |       |
| Intangible assets, net                                                                                                                                         |       | 2,795                    |       | 3,200                        |       |
| Goodwill                                                                                                                                                       |       | 2,429                    |       | 2,324                        |       |
| License agreements, net                                                                                                                                        |       | 2,655                    |       | 1,798                        |       |
| Other assets                                                                                                                                                   |       | 2,832                    |       | 3,444                        |       |
| Total assets                                                                                                                                                   |       | $                        | 82,284     |                         | $          | 82,079 |   |
| ** **                                                                                                                                                     | ** ** | ** **               | ** ** | ** **                   | ** ** |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                 | ** ** | ** **               | ** ** | ** **                   | ** ** |
| **Current Liabilities**                                                                                                                                        |       |                     |       |                         |       |
| Accounts payable                                                                                                                                               |       | $                        | 7,216      |                         | $          | 7,117 |   |
| Deferred income on sales to distributors                                                                                                                       |       | 3,516                    |       | 4,226                        |       |
| Accrued compensation and benefits                                                                                                                              |       | 5,606                    |       | 5,286                        |       |
| Accrued income tax                                                                                                                                             |       | 111                      |       | 752                          |       |
| Restructuring                                                                                                                                                  |       | 540                      |       | 1,478                        |       |
| Other current liabilities                                                                                                                                      |       | 3,332                    |       | 3,493                        |       |
| Total current liabilities                                                                                                                                      |       | 20,321                   |       | 22,352                       |       |
| Convertible senior notes                                                                                                                                       |       | 45,255                   |       | 45,037                       |       |
| Other liabilities                                                                                                                                              |       | 651                      |       | 444                          |       |
| Total liabilities                                                                                                                                              |       | 66,227                   |       | 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; 119,135 and  115,759 shares issued at March 28, 2008 and September 28, 2007,  respectively |       | 1,191                    |       | 1,158                        |       |
| Additional paid-in capital                                                                                                                                     |       | 266,057                  |       | 262,501                      |       |
| Accumulated deficit                                                                                                                                            |       | (236,944                 | )          | (234,480                     | )          |
| Accumulated other comprehensive loss                                                                                                                           |       | (14,247                  | )          | (14,933                      | )          |
| Total stockholders’ equity                                                                                                                                |       | 16,057                   |       | 14,246                       |       |
| Total liabilities and stockholders’ equity                                                                                                                |       | $                        | 82,284     |                         | $          | 82,079 |   |

 

See accompanying notes toconsolidated condensed financial statements.

 

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**MINDSPEEDTECHNOLOGIES, INC.**

**ConsolidatedCondensed Statements of Operations**

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

** **
| ** **                                                       | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                       | ** ** | **March 28,****2008**       | ** ** | **March 30,  2007**       | ** ** | **March 28,****2008** | ** ** | **March 30,****2007** | ** ** |
|                                                             |       |                             |       |                           |       |   |   |   |   |
| Net revenues                                                     |       | $                                | 36,248     |                           | $          | 30,758 |   | $ | 71,549 |   | $ | 60,915 |   |
| Cost of goods sold                                               |       | 11,799                           |       | 10,817                         |       | 22,141 |   | 21,494 |   |
| Gross margin                                                     |       | 24,449                           |       | 19,941                         |       | 49,408 |   | 39,421 |   |
|                                                             |       |                             |       |                           |       |   |   |   |   |
| Operating expenses:                                              |       |                             |       |                           |       |   |   |   |   |
| Research and development                                         |       | 13,704                           |       | 14,710                         |       | 27,422 |   | 30,310 |   |
| Selling, general and administrative                              |       | 11,674                           |       | 11,279                         |       | 23,180 |   | 22,072 |   |
| Special charges                                                  |       | 93                               |       | 1,237                          |       | 174 |   | 4,832 |   |
|                                                             |       |                             |       |                           |       |   |   |   |   |
| Total operating expenses                                         |       | 25,471                           |       | 27,226                         |       | 50,776 |   | 57,214 |   |
|                                                             |       |                             |       |                           |       |   |   |   |   |
| Operating loss                                                   |       | (1,022                           | )          | (7,285                         | )          | (1,368 | ) | (17,793 | ) |
|                                                             |       |                             |       |                           |       |   |   |   |   |
| Interest expense                                                 |       | (564                             | )          | (559                           | )          | (1,126 | ) | (1,118 | ) |
| Other (expense) income, net                                      |       | (186                             | )          | 320                            |       | (25 | ) | 267 |   |
|                                                             |       |                             |       |                           |       |   |   |   |   |
| Loss before income taxes                                         |       | (1,772                           | )          | (7,524                         | )          | (2,519 | ) | (18,644 | ) |
|                                                             |       |                             |       |                           |       |   |   |   |   |
| Provision for income taxes                                       |       | 65                               |       | 95                             |       | 147 |   | 292 |   |
|                                                             |       |                             |       |                           |       |   |   |   |   |
| Net loss                                                         |       | $                                | (1,837     | )                              | $          | (7,619 | ) | $ | (2,666 | ) | $ | (18,936 | ) |
|                                                             |       |                             |       |                           |       |   |   |   |   |
| Net loss per share, basic and dilutedNet loss                    |       | $                                | (0.02      | )                              | $          | (0.07 | ) | $ | (0.02 | ) | $ | (0.17 | ) |
|                                                             |       |                             |       |                           |       |   |   |   |   |
| Weighted-average number of shares used in  per share computation |       | 115,225                          |       | 110,429                        |       | 114,501 |   | 109,405 |   |

 

See accompanying notes toconsolidated condensed financial statements.

 

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**MINDSPEEDTECHNOLOGIES, INC.**

**ConsolidatedCondensed Statements of Cash Flows**

**(unaudited,in thousands)**

 
| ** **                                                                                 | ** ** | **Six months ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                 | ** ** | **March 28,****2008**     | ** ** | **March 30,****2007** | ** ** |
| Cash Flows From Operating Activities                                                       |       |                           |       |   |   |
| Net loss                                                                                   |       | $                              | (2,666     | ) | $ | (18,936 | ) |
|                                                                                       |       |                           |       |   |   |
| Adjustments to reconcile net loss to net cash  Provided by (used in) operating activities: |       |                           |       |   |   |
| Depreciation and amortization                                                              |       | 3,115                          |       | 2,589 |   |
| Stock-based compensation                                                                   |       | 3,027                          |       | 3,585 |   |
| Inventory provisions                                                                       |       | (1,064                         | )          | (228 | ) |
| Other non-cash items, net                                                                  |       | 258                            |       | 254 |   |
| Changes in assets and liabilities, net of  effects of acquisitions:                        |       |                           |       |   |   |
| Receivables                                                                                |       | (3,917                         | )          | 4,103 |   |
| Inventories                                                                                |       | 6,425                          |       | 669 |   |
| Accounts payable                                                                           |       | 1,265                          |       | (1,958 | ) |
| Deferred income on sales to distributors                                                   |       | (716                           | )          | (1,198 | ) |
| Accrued expenses and other current liabilities                                             |       | 147                            |       | 2,569 |   |
| Other                                                                                      |       | 2,335                          |       | 1,141 |   |
| Net cash provided by (used in) operating  activities                                       |       | 8,209                          |       | (7,410 | ) |
|                                                                                       |       |                           |       |   |   |
| Cash Flows From Investing Activities                                                       |       |                           |       |   |   |
| Capital expenditures                                                                       |       | (4,127                         | )          | (1,822 | ) |
| Acquisition of assets, net of cash acquired                                                |       | (1,172                         | )          | — |   |
| Purchases of available-for-sale marketable  securities                                     |       | —                         |       | (12,832 | ) |
| Sales of available-for-sale marketable  securities                                         |       | —                         |       | 12,500 |   |
| Maturities of held-to-maturity marketable  securities                                      |       | —                         |       | 863 |   |
| Net cash (used in) investing activities                                                    |       | (5,299                         | )          | (1,291 | ) |
|                                                                                       |       |                           |       |   |   |
| Cash Flows From Financing Activities                                                       |       |                           |       |   |   |
| Exercise of stock options and warrants                                                     |       | 111                            |       | 2,422 |   |
| Net cash provided by financing activities                                                  |       | 111                            |       | 2,422 |   |
|                                                                                       |       |                           |       |   |   |
| Effect of foreign currency exchange rates on cash                                          |       | (127                           | )          | — |   |
|                                                                                       |       |                           |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                                      |       | 2,894                          |       | (6,279 | ) |
| Cash and cash equivalents at beginning of  period                                          |       | 25,796                         |       | 29,976 |   |
| Cash and cash equivalents at end of period                                                 |       | $                              | 28,690     |   | $ | 23,697 |   |

 

See accompanying notes toconsolidated condensed financial statements.

 

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**MINDSPEEDTECHNOLOGIES, INC.**

**NOTESTO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS**

(unaudited)

 

**1. Basis of Presentation andSignificant Accounting Policies**

 

Mindspeed Technologies, Inc. (Mindspeed or theCompany) designs, develops and sells semiconductor networking solutions forcommunications applications in enterprise, access, metropolitan and wide-areanetworks. On June 27, 2003, Conexant Systems, Inc. (Conexant)completed the distribution (the Distribution) to Conexant stockholders of all90,333,445 outstanding shares of common stock of its wholly owned subsidiary,Mindspeed. In the Distribution, each Conexant stockholder received one share ofMindspeed common stock (including an associated preferred share purchase right)for every three shares of Conexant common stock held and cash for anyfractional share of Mindspeed common stock. Following the Distribution,Mindspeed began operations as an independent, publicly held company.

 

Prior to the Distribution, Conexant transferred toMindspeed the assets and liabilities of the Mindspeed business, including thestock of certain subsidiaries, and certain other assets and liabilities whichwere allocated to Mindspeed under the Distribution Agreement entered intobetween Conexant and Mindspeed. Also prior to the Distribution, Conexantcontributed to Mindspeed cash in an amount such that at the time of theDistribution Mindspeed’s cash balance was $100 million. Mindspeed issued toConexant a warrant to purchase 30 million shares of Mindspeed common stock at aprice of $3.408 per share, exercisable for a period beginning one year andending ten years after the Distribution. In connection with the Distribution,Mindspeed and Conexant also entered into a Credit Agreement (terminated December 2004),an Employee Matters Agreement, a Tax Allocation Agreement, a TransitionServices Agreement and a Sublease.

 

*Basis of Presentation –* The consolidated condensed financialstatements, prepared in accordance with accounting principles generallyaccepted in the United States of America, include the accounts of Mindspeed andeach of its subsidiaries. All accounts and transactions among Mindspeed and itssubsidiaries have been eliminated in consolidation. In the opinion ofmanagement, the accompanying consolidated condensed financial statements containall adjustments, consisting of adjustments of a normal recurring nature and thespecial charges (Note 5), necessary to present fairly the Company’s financialposition, results of operations and cash flows in accordance with generallyaccepted accounting principles in the United States of America. The results ofoperations for interim periods are not necessarily indicative of the resultsthat may be expected for a full year. These financial statements should be readin conjunction with the consolidated financial statements and notes theretoincluded in the Company’s Annual Report on Form 10-K for the fiscal yearended September 28, 2007.

 

*Liquidity* - In order tobecome profitable, or to generate and sustain positive cash flows fromoperations, the Company must further reduce operating expenses and/or increaserevenues. During the first six months of fiscal 2008, the Company benefitedfrom the completion of a series of cost reduction actions which have improved itsoperating cost structure.  These expensereductions alone may not make the Company profitable or allow it to sustainprofitability if it is achieved. The Company’s ability to achieve the necessaryrevenue growth will depend on increased demand for network infrastructureequipment that incorporates its products, which in turn depends primarily onthe level of capital spending by communications service providers andenterprises. The Company may not be successful in achieving the necessaryrevenue growth or may be unable to sustain past and future expense reductionsin subsequent periods. The Company may not achieve profitability or sustainsuch profitability, if achieved.

 

The Company believes thatits existing sources of liquidity, along with cash expected to be generatedfrom product sales, will be sufficient to fund its operations, research anddevelopment efforts, anticipated capital expenditures, working capital andother financing requirements for at least the next 12 months. The Company willneed to continue a focused program of capital expenditures to meet its researchand development and corporate requirements. The Company may also consideracquisition opportunities to extend its technology portfolio and designexpertise and to expand its product offerings. In order to fund capitalexpenditures, increase its working capital or complete any acquisitions, theCompany may seek to obtain additional debt or equity financing. The Company mayalso need to seek to obtain additional debt or equity financing if itexperiences downturns or cyclical fluctuations in its business that are moresevere or longer than anticipated or if it fails to achieve anticipated revenueand expense levels. However, the Company cannot assure you that such financingwill be available to it on favorable terms, or at all.

 

*Reclassifications -* Certain reclassifications have been made to 2007financial statements to conform to the 2008 presentation.

 

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*Fiscal Periods –* Our interim fiscal quarters end on thethirteenth Friday of each quarter. The second quarter of fiscal 2008 and 2007ended on March 28, 2008 and March 30, 2007, respectively.

 

*Recent Accounting Standards* – On September 29, 2007,the Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48,“Accounting for Uncertainty in Income Taxes – An Interpretation of FASBStatement No. 109” (FIN 48).  FIN 48clarifies the accounting for uncertainty in income taxes recognized in thefinancial statements in accordance with FASB Statement No. 109, “Accountingfor Income Taxes” and recommends a recognition threshold and measurementprocess for recording in the financial statements uncertain tax positions takenor expected to be taken in the Company’s tax return. FIN 48 also providesguidance on de-recognition, classification, interest and penalties, accountingin interim periods and disclosure requirements for uncertain taxpositions.  See Note 3 for furtherinformation on the adoption of FIN 48.

 

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

 

InMarch 2008, the FASB issued SFAS No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities—an Amendment of FASB Statement No. 133.”This Statement requires enhanced disclosures about an entity’s derivative andhedging activities and is effective for financial statements issued for fiscalyears and interim periods beginning after November 15, 2008. The Companywill be required to adopt SFAS 161 in the first quarter of fiscal 2010 and doesnot expect that the adoption will have a material impact on its financialcondition or results of operations.

 

*Income Taxes –* The provision for income taxes for thesix months ended March 28, 2008 and March 30, 2007, respectively,principally consists of income taxes incurred by the Company’s foreignsubsidiaries.

 

*Supplemental Cash Flow Information –* Interest paid for the six months ended March 28,2008 and March 30, 2007 was $862,500 and $862,500, respectively.  Income taxes paid, net of refunds received,for the six months ended March 28, 2008 and March 30, 2007 were$11,000 and $186,000, respectively. Non-cash investing activities in the first six months fiscal 2008consisted of the purchase of $329,000 of property and equipment from supplierson account.  Assets acquired consists ofamounts paid and received during the first six months of fiscal 2008 on cash,accounts receivable, accounts payable and accrued liabilities created throughthe acquisition of certain assets of Ample Communications, Inc., whichoccurred in the fourth quarter of fiscal 2007.

 

**2. Supplemental Financial StatementData**

 

***Inventories***

 

Inventories consist of the following (in thousands):

 
| ** **      | ** ** | **March 28,  2008** | ** ** | **September 28,  2007** | ** ** |
|-----------------|------------|--------------------------|------------|-------------------------|------------|
| Work-in-process |       | $                        | 5,641      |                    | $          | 7,497 |   |
| Finished goods  |       | 4,021                    |       | 7,526                   |       |
|            |       | $                        | 9,662      |                    | $          | 15,023 |   |

 

During the six months ended March 28, 2008 and March 30,2007, the Company sold inventories with an original cost of approximately $0.9million and $2.0 million, respectively, that had been written down to a zerocost basis during fiscal 2001.

 

10

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***Intangible Assets and Goodwill***

 

In conjunction with theacquisition of certain assets of Ample Communications, Inc. on September 25,2007, the Company acquired certain intangible assets.   These intangible assets consist of backlog(approximately $100,000), developed technology (approximately $3,100,000) andgoodwill (approximately $2,324,000). In the first six months of fiscal 2008,the Company recorded purchase accounting adjustments related to additionaltransaction costs, additional cash and accounts receivable received as well asa decrease in the value of fixed assets received.  Accordingly, the balance of goodwill haschanged as follows (in thousands):

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

 

***Deferred Income on Sales toDistributors***

 

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

 
| ** **                                          | ** ** | **March 28,  2008** | ** ** | **September 28,  2007** | ** ** |
|-----------------------------------------------------|------------|--------------------------|------------|------------------------------|------------|
| Deferred revenue on sales to distributors           |       | $                        | 3,997      |                         | $          | 4,953 |   |
| Deferred cost of inventory on sales to distributors |       | (535                     | )          | (808                         | )          |
| Reserves                                            |       | 54                       |       | 81                           |       |
| Deferred income on sales to distributors            |       | $                        | 3,516      |                         | $          | 4,226 |   |

 

***Comprehensive Loss***

 

Comprehensive loss is as follows (in thousands):

 
| ** **                               | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                               | ** ** | **March 28,  2008**         | ** ** | **March 30,  2007**       | ** ** | **March 28,  2008** | ** ** | **March 30,  2007** | ** ** |
|                                     |       |                             |       |                           |       |   |   |   |   |
| Net loss                                 |       | $                                | (1,837     | )                              | $          | (7,619 | ) | $ | (2,666 | ) | $ | (18,936 | ) |
| Foreign currency translation adjustments |       | 577                              |       | 86                             |       | 686 |   | 420 |   |
| Comprehensive loss                       |       | $                                | (1,260     | )                              | $          | (7,533 | ) | $ | (1,980 | ) | $ | (18,516 | ) |

 

The balance of accumulated other comprehensive loss atMarch 28, 2008 and September 28, 2007 consists of accumulated foreigncurrency translation adjustments.

 

***Revenues by ProductLine***

 

Revenues by product line are as follows (inthousands):

 
| ** **                       | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|----------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                       | ** ** | **March 28,  2008**         | ** ** | **March 30,****2007**     | ** ** | **March 28,  2008** | ** ** | **March 30,  2007** | ** ** |
|                             |       |                             |       |                           |       |   |   |   |   |
| Multiservice access DSP products |       | $                                | 11,865     |                           | $          | 9,318 |   | $ | 21,807 |   | $ | 18,304 |   |
| High-performance analog products |       | 10,154                           |       | 8,158                          |       | 20,728 |   | 17,952 |   |
| WAN communications products      |       | 14,229                           |       | 13.282                         |       | 29,014 |   | 24,659 |   |
|                             |       | $                                | 36,248     |                           | $          | 30,758 |   | $ | 71,549 |   | $ | 60,915 |   |

 

***Revenues byGeographic Area***

 

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

 
| ** **                     | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|--------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                     | ** ** | **March 28,  2008**         | ** ** | **March 30,  2007**       | ** ** | **March 28,  2008** | ** ** | **March 30,  2007** | ** ** |
|                           |       |                             |       |                           |       |   |   |   |   |
| Americas                       |       | $                                | 12,462     |                           | $          | 11,359 |   | $ | 26,088 |   | $ | 21,378 |   |
| Asia-Pacific                   |       | 18,166                           |       | 15,417                         |       | 35,837 |   | 32,600 |   |
| Europe, Middle East and Africa |       | 5,620                            |       | 3,982                          |       | 9,624 |   | 6,937 |   |
|                           |       | $                                | 36,248     |                           | $          | 30,758 |   | $ | 71,549 |   | $ | 60,915 |   |

 

11

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The Company believes a substantial portion of theproducts sold to original equipment manufacturers (OEMs) and third-partymanufacturing service providers in the Asia-Pacific region are ultimatelyshipped to end-markets in the Americas and Europe.

 

The following direct customers accounted for 10% ormore of net revenues in the periods presented:

 
| ** ** | ** ** | **Six months ended** | ** ** |
|------------|------------|--------------------------------|------------|
| ** ** | ** ** | **March 28, 2008**   | ** ** | **March 30, 2007** | ** ** |
| Customer A |       | 16%                            |       | 14% |   |
| Customer B |       | 13%                            |       | 18% |   |

 

**3. IncomeTaxes**

 

InJuly 2006, the FASB issued FIN 48, which clarifies the accounting foruncertainty in income taxes recognized in an entity’s financial statements inaccordance with FASB Statement No. 109, “Accounting for Income Taxes” andprescribes a recognition threshold and measurement attributes for financialstatement disclosure of tax positions taken or expected to be taken on a taxreturn. Under FIN 48, the impact of an uncertain income tax position on theincome tax return must be recognized at the largest amount that ismore-likely-than-not to be sustained upon audit by the relevant taxingauthority. An uncertain income tax position will not be recognized if it hasless than a 50% likelihood of being sustained. Additionally, FIN 48 providesguidance on de-recognition, classification, interest and penalties, accountingin interim periods, disclosure and transition.

 

The Company adopted theprovisions of FIN 48 on September 29, 2007. As a result of the adoption of FIN 48 and recognition of the cumulativeeffect of adoption of a new accounting principle, the Company recorded a$202,000 decrease in the liability for unrecognized income tax benefits, withan offsetting decrease in accumulated deficit. As of September 29, 2007 the Company had approximately $28.9 million oftotal unrecognized tax benefits.  Of thistotal, $474,000 represents the amount of unrecognized tax benefits that, ifrecognized, would favorably affect the effective tax rate.  The remaining $28.4 million of unrecognizedtax benefits, if recognized, would have no impact on the effective tax rate andbe recorded as an increase to the Company’s net operating loss carry-forwardswith a related increase in the valuation allowance.  However, to the extent that any portion ofsuch benefit is recognized at the time a valuation allowance no longer exists,such benefit would favorably affect the effective tax rate. In the first sixmonths of fiscal 2008, there has been no change in the balance of unrecognizedtax benefits. The Company does not expect that the unrecognized tax benefitwill change significantly within the next 12 months. The Company recognizesinterest and penalties related to unrecognized tax benefits in the tax provision.As of September 29, 2007, the Company had no liability for the payment ofinterest and penalties. The liability for the payment of interest and penaltiesdid not change as of March 28, 2008.

 

The Company’s tax yearsended October 1, 2004 to September 28, 2007 remain open toexamination 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 adoptedStatement of Financial Accounting Standards No. 123 (revised 2004), “Share-BasedPayment” (SFAS 123R). SFAS 123R requires that the Company account for allstock-based compensation using a fair-value method and recognize the fair valueof each award as an expense over the service period. The Company elected toadopt SFAS 123R using “modified prospective application.”

 

Stock-based compensation awards generally vest overtime and require continued service to the Company and, in some cases, requirethe achievement of specified performance conditions. The amount of compensationexpense recognized is based upon the number of awards that are ultimatelyexpected to vest. The Company estimates forfeiture rates of 10% to 12.5%depending on the characteristics of the award.

 

As a result of the Company’s operating losses and itsexpectation of future operating results, no income tax benefits have beenrecognized for any U.S. federal and state operating losses—including thoserelated to stock-based compensation expense. The Company does not expect torecognize any income tax benefits relating to future operating losses until itdetermines that such tax benefits are more likely than not to be realized.

 

12

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The fair value of stock options awarded during the sixmonths ended March 28, 2008 and March 30, 2007 was estimated at thedate of grant using the Black-Scholes option-pricing model. The following tablesummarizes the weighted-average assumptions used and the resulting fair valueof options granted:

 
| ** **                                     | ** ** | **Six months ended** | ** ** |
|------------------------------------------------|------------|--------------------------------|------------|
| ** **                                     | ** ** | **March 28, 2008**   | ** ** | **March 30, 2007** | ** ** |
| Weighted-average fair value of options granted |       | $                              | 0.72       |   | $ | 1.17 |   |
|                                           |       |                           |       |   |   |
| Weighted-average assumptions:                  |       |                           |       |   |   |
| Expected option life                           |       | 3.5  years                     |       | 3.3  years |   |
| Risk-free interest rate                        |       | 3.1                            | %          | 4.7 | % |
| Expected volatility                            |       | 68                             | %          | 75 | % |
| Dividend yield                                 |       | —                         |       | — |   |
|                                                |            |                                |            |  |  |  |  |

 

The expected option term was estimated based uponhistorical experience and management’s expectation of exercise behavior. Theexpected volatility of the Company’s stock price is based upon the historicaldaily changes in the price of the Company’s common stock. The risk-freeinterest 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.

 

Stock-based compensation expense related to employeestock options and restricted stock under SFAS 123R was allocated as follows (inthousands):

 
| ** **                             | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                             | ** ** | **March 28,  2008**         | ** ** | **March 30,  2007**       | ** ** | **March 28,  2008** | ** ** | **March 30,****2007** | ** ** |
|                                   |       |                             |       |                           |       |   |   |   |   |
| Cost of goods sold                     |       | $                                | (2         | )                              | $          | 97 |   | $ | 78 |   | $ | 189 |   |
| Research and development               |       | 511                              |       | 515                            |       | 1,312 |   | 1,094 |   |
| Selling, general and administrative    |       | 864                              |       | 1,460                          |       | 1,637 |   | 2,233 |   |
| Special charges                        |       | —                           |       | 37                             |       | — |   | 69 |   |
| Total stock-based compensation expense |       | $                                | 1,373      |                           | $          | 2,109 |   | $ | 3,027 |   | $ | 3,585 |   |

 

*StockCompensation Plans*

 

The Company has twoprincipal stock incentive plans: the 2003 Long-Term Incentives Plan and theDirectors Stock Plan. The 2003 Long-Term Incentives Plan provides for the grantof stock options, restricted stock, restricted stock units and otherstock-based awards to officers and employees of the Company. The DirectorsStock Plan provides for the grant of stock options, restricted stock units andother stock-based awards to the Company’s non-employee directors. On March 5,2007 the stockholders of the Company approved plan amendments which, amongother things, (1) increased the authorized number of shares reserved forissuance under the 2003 Long-Term Incentives Plan to 19.3 million shares, (2) removedthe “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. As of March 28, 2008, anaggregate of 1.4 million shares of the Company’s common stock were availablefor issuance under these plans.

 

The Company also has a 2003Stock Option Plan, under which stock options were issued in connection with theDistribution. In the Distribution, each holder of a Conexant stock option(other than options held by persons in certain foreign locations) received anoption to purchase a number of shares of Mindspeed common stock. The number ofshares subject to, and the exercise prices of, the outstanding Conexant optionsand the Mindspeed options were adjusted so that the aggregate intrinsic valueof the options was equal to the intrinsic value of the Conexant optionimmediately prior to the Distribution and the ratio of the exercise price pershare to the market value per share of each option was the same immediatelybefore and after the Distribution. As a result of such option adjustments,Mindspeed issued options to purchase an aggregate of approximately29.9 million shares of its common stock to holders of Conexant stockoptions (including Mindspeed employees) under the 2003 Stock Option Plan. Thereare no shares available for new stock option awards under the 2003 Stock OptionPlan. However, any shares subject to the unexercised portion of any terminated,forfeited or cancelled option are available for future option grants only inconnection with an offer to exchange outstanding options for new options.

 

13

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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.

 

*Stock Option Awards*

 

Prior to fiscal 2006,stock-based compensation consisted principally of stock options. Eligibleemployees received grants of stock options at the time of hire; the Companyalso made broad-based stock option grants covering substantially all employeesannually. Stock option awards have exercise prices not less than the marketprice of the common stock at the grant date and a contractual term of eight orten years, and are subject to time-based vesting (generally over four years). The following table summarizes stockoption activity under all plans (shares in thousands):

 
| ** **                                            | ** ** | **Number  of Shares** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Weighted-Average  Remaining  Contractual Term** | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|-------------------------------------------|------------|--------------------------------------------------------|------------|
| Outstanding at September 28, 2007 |       | 19,909                     |       | $                                         | 2.33       |                                                   |       |   |
|                                                  |       |                       |       |                                      |       |                                                   |       |
| Granted                                               |       | 130                        |       | $                                         | 1.42       |                                                   |       |   |
| Exercised                                             |       | (91                        | )          | $                                         | 1.19       |                                                   |       |   |
| Forfeited or expired                                  |       | (1,450                     | )          | $                                         | 2.22       |                                                   |       |   |
|                                                  |       |                       |       |                                      |       |                                                   |       |
| Outstanding at March 28, 2008                    |       | 18,498                     |       | $                                         | 2.34       |                                                   | 3.5  years |   |
|                                                  |       |                       |       |                                      |       |                                                   |       |
| Exercisable at end of period                          |       | 15,641                     |       | $                                         | 2.36       |                                                   | 2.9  years |   |

 

As of March 28,2008, there was unrecognized compensation expense of $1.9 million related tounvested stock options, which the Company expects to recognize over aweighted-average period of 2.1 years. The aggregate intrinsic value of optionsexercised during the six months ended March 28, 2008 was $33,000. Theaggregate intrinsic value of options outstanding and options exercisable as of March 28,2008 was nil.

 

*Restricted Stock Awards*

 

The Company’s stockincentive plans also provide for awards of shares of restricted stock and otherstock-based incentive awards. Restricted stock awards have time-based vestingand/or performance conditions and are generally subject to forfeiture ifemployment 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 2007 and the firstsix months of fiscal 2008, new awards of stock-based compensation haveprincipally 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 ofeach award is charged to expense over the service period.

 

The following tablesummarizes restricted stock award activity (shares in thousands):

 
| ** **                                  | ** ** | **Number  of  Shares** | ** ** | **Weighted-  Average  Grant Date  Fair Value** | ** ** |
|---------------------------------------------|------------|------------------------|------------|----------------------------------------------------------|------------|
| Nonvested shares at September 28, 2007 |       | 3,189                  |       | $                                                        | 2.17       |   |
|                                        |       |                   |       |                                                     |       |
| Granted                                     |       | 3,364                  |       | $                                                        | 0.93       |   |
| Vested                                      |       | (2,220                 | )          | $                                                        | 1.57       |   |
| Forfeited                                   |       | (307                   | )          | $                                                        | 2.04       |   |
|                                        |       |                   |       |                                                     |       |
| Nonvested shares at March 28, 2008     |       | 4,026                  |       | $                                                        | 1.46       |   |

 

14

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The total fair value of shares vested during the sixmonths ended March 28, 2008 was $2.8 million.  As of March 28, 2008, there wasunrecognized compensation expense of $3.8 million related to unvestedrestricted stock awards, which the Company expects to recognize over aweighted-average period of approximately 1.5 years.

 

**4. Commitments and Contingencies**

 

Various lawsuits, claims and proceedings have been ormay be instituted or asserted against Conexant or Mindspeed, including thosepertaining to product liability, intellectual property, environmental, safetyand health and employment matters. In connection with the Distribution,Mindspeed assumed responsibility for all contingent liabilities and current andfuture litigation against Conexant or its subsidiaries to the extent suchmatters relate to Mindspeed.

 

The outcome of litigation cannot be predicted withcertainty and some lawsuits, claims or proceedings may be disposed ofunfavorably to the Company. Many intellectual property disputes have a risk ofinjunctive relief and there can be no assurance that the Company will be ableto license a third party’s intellectual property. Injunctive relief could havea material adverse effect on the financial condition or results of operationsof the Company. Based on its evaluation of matters which are pending orasserted, management of the Company believes the disposition of such matterswill not have a material adverse effect on the financial condition or resultsof operations of the Company.

 

**5. Special Charges**

 

Special charges consist of restructuring chargestotaling $174,000 in the first six months of fiscal 2008 and $4.8 million inthe first six months of fiscal 2007.

 

*Restructuring Charges*

 

*MindspeedRestructuring Plans*— In fiscal 2006 and 2007, the Company implemented anumber of cost reduction initiatives to improve its operating cost structure.The cost reduction initiatives included workforce reductions, significantreductions in capital spending, the consolidation of certain facilities andsalary reductions for the senior management team.  The Company expects to incur a total ofapproximately $0.1 million of additional restructuring costs in future periodsrelated to these plans.

 

Activity and liabilitybalances related to the Mindspeed restructuring plans through March 28,2008 are as follows (in thousands):

 
| ** **                                     | ** ** | **Workforce  Reductions** | ** ** | **Facility  and Other** | ** ** | **Total** | ** ** |
|------------------------------------------------|------------|---------------------------|------------|------------------------------|------------|-----------|------------|
| Restructuring balance, September 28, 2007 |       | $                         | 232        |                         | $          | 1,252     |       | $ | 1,484 |   |
| Charged to costs and expenses                  |       | —                    |       | 174                          |       | 174       |       |
| Cash payments                                  |       | (152                      | )          | (960                         | )          | (1,112    | )          |
| Restructuring balance, March 28, 2008     |       | $                         | 80         |                         | $          | 466       |       | $ | 546 |   |

 

The remaining accruedrestructuring balance principally represents obligations under non-cancelableleases, employee severance benefits and other contractual commitments. TheCompany expects to pay these obligations over their respective terms, whichexpire at various dates through fiscal 2009. The payments will be funded fromavailable cash balances and funds from product sales and are not expected tosignificantly impact liquidity.

 

**6. Related Party Transactions**

 

The Company leases itsheadquarters and principal design center in Newport Beach, California fromConexant. For the six months ended March 28, 2008 and March 30, 2007,rent and operating expenses payable to Conexant were $3.4 million and $3.3million, respectively.

 

**7. Subsequent Event**

 

At the Company’s 2008 Annual Meeting of Stockholderson April 7, 2008 its Stockholders approved a proposal to amend the Company’sRestated Certificate of Incorporation to permit a reverse stock split of ourcommon stock at a ratio of between one-for-three and one-for-eight shares, tobe determined at the discretion of the Company’s Board of Directors, and toreduce authorized shares of common stock by the same ratio.

 

15

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**ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND****RESULTSOF OPERATIONS**

 

This information should be read in conjunction withour unaudited consolidated condensed financial statements and the notes theretoincluded in this Quarterly Report and our audited consolidated financialstatements and notes thereto and Management’s Discussion and Analysis ofFinancial Condition and Results of Operations contained in our Annual Report onForm 10-K for our fiscal year ended September 28, 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 into threefocused product families: high-performance analog products, multiservice accessdigital 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 our semiconductornetworking solutions for OEMs. Sales to distributors accounted forapproximately 54% of our revenues for both fiscal 2007 and the first six monthsof fiscal 2008. Sales to customers located outside the United States, primarilyin the Asia-Pacific region and Europe, were approximately 69% of our netrevenues for both fiscal 2007 and the first six months of fiscal 2008. Webelieve a substantial portion of the products we sell to OEMs and third-partymanufacturing service providers in the Asia-Pacific region is ultimatelyshipped to end markets in the Americas and Europe.

 

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 $27.4 million on research and development for fiscal 2007 andthe first six months of fiscal 2008, respectively. We seek to maximize ourreturn on 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 ourpatents which are no longer core to our business.  We recognized our first revenues from thesale of patents during the fourth quarter of fiscal 2007 and additionalrevenues in the first and second quarters of fiscal 2008.  We anticipate continuing this intellectualproperty strategy in future periods.

 

We are dependent upon 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 

 

16

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ability to fulfill orders for our products. Duringperiods of capacity shortages for manufacturing, assembly and testing services,our primary foundries and other suppliers may devote their limited capacity tofulfill the requirements of other clients that are larger than we are, or whohave superior contractual rights to enforce manufacture of their products,including to the exclusion of producing our products. We may also incurincreased manufacturing costs, including costs of finding acceptablealternative foundries or assembly and test service providers.

 

In order to become profitable, or to generate andsustain positive cash flows from operations, we must further reduce operatingexpenses and/or increase our revenues. Through the first six months 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.  We willmarket, sell and support these Ethernet aggregation products with densitiesranging from two to 24 ports and Ethernet transmission speeds from 10 Mbps to10 Gbps. We also expect to develop and further extend the Ethernet MAC productline.

 

On February 29, 2008, wereceived a letter from The NASDAQ Stock Market notifying us that for the 30consecutive business days preceding the date of the letter the bid price of ourcommon stock had closed below the $1.00 per share minimum bid price requiredfor continued inclusion on The NASDAQ Global Market pursuant to NASDAQMarketplace Rule 4450(a)(5). This notification has no effect on thelisting of our common stock at this time.

 

In accordance with NASDAQMarketplace Rule 4450(e)(2), we have 180 calendar days from the date ofthe NASDAQ letter, or until August 27, 2008, to regain compliance with theminimum bid price rule. To regain compliance, the closing bid price of ourcommon stock must meet or exceed $1.00 per share for a minimum of 10consecutive business days. NASDAQ may, in its discretion, require us tomaintain a bid price of at least $1.00 per share for a period in excess of 10consecutive business days, but generally no more than 20 consecutive businessdays, before determining that we have demonstrated an ability to maintainlong-term compliance. If compliance is not regained, NASDAQ will notify us ofits determination to delist our common stock, which decision may be appealed tothe NASDAQ Listings Qualification Panel.

 

In order to regain compliancewith the minimum bid price rule, we may implement a reverse stock split. At our2008 Annual Meeting of Stockholders on April 7, 2008, our stockholdersapproved a proposal to amend our Restated Certificate of Incorporation topermit a reverse stock split of our common stock at a ratio of betweenone-for-three and one-for-eight shares, to be determined at the discretion ofour Board of Directors, and to reduce authorized shares of common stock by thesame ratio.** **Our Board of Directors has the authority, but not theobligation, in its sole discretion, and without further action on the part ofour stockholders, (i) to select one of the approved reverse stock splitratios, (ii) to set the effective time of any such reverse stock split,and (iii) to effect the approved reverse stock split by causing theamendment to our certificate of incorporation to be filed with the DelawareSecretary of State.  Our Board ofDirectors has reserved the right to elect not to proceed, and abandon, thereverse stock split if our Board of Directors determines that the reverse stocksplit is no longer in the best interests of our company and our stockholders.

 

We may alternatively apply totransfer our common stock to The NASDAQ Capital Market if we satisfy all of therequirements, other than the minimum bid price, for initial inclusion on thismarket. If we elect to apply for such a transfer and if such application isapproved, we will be afforded the remainder of a second 180 calendar day periodto regain compliance with the minimum bid price rule while listed on TheNASDAQ Capital Market.

 

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**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.

 

*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.

 

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

 

Werecognize revenues on products shipped directly to customers at the time theproducts are shipped and title and risk of loss transfer to the customer, inaccordance with the terms specified in the arrangement, and the four abovementioned revenue recognition criteria are met.

 

Werecognize revenues on sales to distributors based on the rights granted tothese distributors in our distribution agreements.  We have certain distributors who have beengranted return rights and receive credits for changes in selling prices to endcustomers, the magnitude of which is not known at the time products are shippedto the distributor.  The return rightsgranted to these distributors consist of limited stock rotation rights, which allow them torotate up to 10% of the products in their inventory twice a year, as well ascertain product return rights if the applicable distribution agreement isterminated.  These distributors alsoreceive price concessions because they resell our products to end customers atvarious negotiated price points which vary by end customer, product, quantity,geography and competitive pricing environments. When a distributor’s resale ispriced at a discount from the distributor’s invoice price, we credit back tothe distributor a portion of the distributor’s original purchase price afterthe resale transaction is complete. Thus, a portion of the “Deferred income onsales to distributors” balance will be credited back to the distributor in thefuture. Under these agreements, we defer recognition of revenue until theproducts are resold by the distributor, at which time our final net sales price is fixed anddistributor’s right to return the products expires.  At the time of shipment to these distributors:(i) we record a trade receivable at the invoiced selling price becausethere is a legally enforceable obligation from the distributor to pay uscurrently for product delivered; (ii) we relieve inventory for thecarrying value of products shipped because legal title has passed to the distributor;and (iii) we record deferred revenue and deferred cost of inventory underthe “Deferred income on sales to distributors” caption in the liability sectionof our consolidated balance sheets.  Weevaluate the deferred cost of inventory component of this account for possibleimpairment by considering potential obsolescence of products that might bereturned to us and by considering the 

 

18

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potential of resaleprices of these products being below our cost. By reviewing deferredinventory costs in the manners discussed above, we ensure that any portion ofdeferred inventory costs that are not recoverable from future contractualrevenue are charged to cost of sales as an expense. “Deferred income on sales to distributors”effectively represents the gross margin on sales to distributors, however, theamount of gross margin we recognize in future periods may be less than theoriginally recorded deferred income as a result of negotiated priceconcessions.  In recent years, suchconcessions have exceeded 30% of list price on average.  For detail of this account balance, see “Note2 - Supplemental Financial Statement Data” to our consolidated financialstatements.

 

We recognize revenuesfrom other distributors at the time of shipment and when title and risk ofloss transfer to the distributor, in accordance with the terms specified in thearrangement, and when the four above-mentioned revenue recognition criteria aremet. Thesedistributors may also be given business terms to return a portion of inventory,however they do not receive credits for changes in selling prices to endcustomers. At the time of shipment, product prices are fixed and determinableand the amount of future returns can be reasonably estimated and accrued.

 

Revenue from the sale andlicense of intellectual property is recognized when the above mentioned fourcriteria are met. Development revenue is recognized when services are performedand customer acceptance has been received and was not significant for any ofthe periods presented.

 

*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**

 

OnSeptember 29, 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.

 

In December 2007,the FASB issued Financial Accounting Standards (SFAS) No. 141R, “BusinessCombinations”, and SFAS No. 160, “Accounting and Reporting ofNoncontrolling Interest in Consolidated Financial Statements, an Amendment ofARB No. 51” (SFAS No. 160). These new standards will significantlychange the financial accounting and reporting of business combinationtransactions and noncontrolling (or minority) interests in consolidatedfinancial statements. These Statements are effective for fiscal yearsbeginning after December 15, 2008. We will be required to adopt SFAS No. 141R and SFAS No. 160 inthe first quarter of fiscal 2010. Accordingly, any business combinations we engage inwill be recorded and disclosed following existing accounting principles until October2, 2009.

 

InMarch 2008, the FASB issued SFAS No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities—an Amendment of FASB Statement No. 133.”This Statement requires enhanced disclosures about an entity’s derivative andhedging activities and is effective for financial statements issued for fiscalyears and interim periods beginning after November 15, 2008. We will berequired to adopt SFAS 161 in the first quarter of fiscal 2010 and do notexpect that the adoption will have a material impact on our financial conditionor results of operations.

 

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**Results of Operations**

 

**Net Revenues**

 

The following table summarizes our net revenues:

 
| ** **                       | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|----------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                       | ** ** | **March 28,**               | ** ** | ** **                     | ** ** | **March 30,** | ** ** | **March 28,** | ** ** | ** ** | ** ** | **March 30,** | ** ** |
| **($ in millions)**    | ** ** | **2008**                         | ** ** | **Change**                     | ** ** | **2007** | ** ** | **2008** | ** ** | **Change** | ** ** | **2007** | ** ** |
| Multiservice access DSP products |       | $                                | 11.9       |                           | 27         | % | $ | 9.3 |   | $ | 21.8 |   | 19 | % | $ | 18.3 |   |
| High-performance analog products |       | 10.1                             |       | 24                             | %          | 8.2 |   | 20.7 |   | 15 | % | 18.0 |   |
| WAN communications products      |       | 14.2                             |       | 7                              | %          | 13.3 |   | 29.0 |   | 18 | % | 24.6 |   |
| Net revenues                     |       | $                                | 36.2       |                           | 18         | % | $ | 30.8 |   | $ | 71.5 |   | 17 | % | $ | 60.9 |   |

 

For the fiscal 2008 secondquarter, the 18% increase in our revenues compared to the second quarter offiscal 2007 reflects higher sales volumes in each of our product families including approximately $1.7 million inrevenues from leveraging our intellectual property portfolio by licensing orselling our patents which are no longer core to our business. Revenues fromour multiservice access DSP products increased by $2.6 million, or 27%,principally reflecting a combination of increased sales volumes across our newerVoIP product families as telecommunication service providers deploy IP-basedaccess and enterprise networks as well as revenues recorded on the sale ofintellectual property. Revenues from our high-performance analog productsincreased by $1.9 million, or 24%, primarily as a result of increased shipmentsof our switching and signal conditioning products. Sales of our WANcommunications products increased by $0.9 million, or 7%, reflecting acombination of salesof Ethernet products added to the WAN portfolio as a result of the acquisitionof certain assets of Ample Communications in the fourth quarter of fiscal 2007,revenue recorded on the sale of intellectual property and increased shipmentsof our high-level data link controller (HDLC) devices.  These benefits were partially offset by a decrease indemand for our network processors.

 

For the first six months offiscal 2008, the 17% increase in our revenues compared to the similar fiscal2007 period reflects higher sales volumes across each of our product families including approximately $4.35 million inrevenues from leveraging our portfolio by licensing or selling patents andother intellectual property. Net revenues from our multiservice accessDSP products increased $3.5 million, or 19%, reflecting a decrease in sales inour legacy products more than offset by a combination of increased salesvolumes across our newer VoIP product families, as well as revenues recorded onthe sale of intellectual property.  We believewe are benefiting from the increasing deployment of IP-based networks both innew network buildouts worldwide and the replacement of circuit-switchednetworks. Netrevenues from our high-performance analog products increased $2.7 million, or15%, reflecting a benefit from increased demand for our switching and signalconditioning products.Net revenues from our WAN communications products increased $4.4 million, or18% reflecting a combination of sales of Ethernet products added to the WAN portfolioas a result of the acquisition of certain assets of Ample Communications in thefourth quarter of fiscal 2007, revenue recorded on the sale of intellectualproperty and increased shipments of our high-level data link controller (HDLC)devices.  These benefits were partiallyoffset by a decrease in demand for our network processors.

 

**Gross Margin**

 
| ** **                    | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                    | ** ** | **March 28,**               | ** ** | ** **                     | ** ** | **March 30,** | ** ** | **March 28,** | ** ** | ** ** | ** ** | **March 30,** | ** ** |
| **($ in millions)** | ** ** | **2008**                         | ** ** | **Change**                     | ** ** | **2007** | ** ** | **2008** | ** ** | **Change** | ** ** | **2007** | ** ** |
| Gross margin                  |       | $                                | 24.4       |                           | 23         | % | $ | 19.9 |   | $ | 49.4 |   | 25 | % | $ | 39.4 |   |
| Percent of net revenues       |       | 67                               | %          |                           |       | 65 | % | 69 | % |   |   | 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.

 

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Our gross margin for thefiscal 2008 second quarter increased $4.5 million over the comparable fiscal2007 period, principally reflecting an increase in product sales and the saleof intellectual property with a zero cost basis.  The improvement of our gross margin as apercent of net revenues for the second quarter of fiscal 2008 includes a 1.6percent benefit ($1.7 million) from the sale of certain patents that are nolonger core to our business.  Inaddition, the provision for excess and obsolete inventories was a $0.7 millionnet credit for the fiscal 2008 second quarter, compared to a provision of $0.1million for the comparable fiscal 2007 period. Our grossmargin improvement was partially offset by a decrease in sales in the secondquarter of fiscal 2008 of inventory previously written down to a zero costbasis in fiscal 2001 to $0.4 million in the second quarter of fiscal 2008 from$0.8 million in the second quarter of fiscal 2007.

 

Our gross margin for thefirst six months of fiscal 2008 increased $10.0 million over the comparablefiscal 2007 period, principally reflecting an increase in product sales and thesale of intellectual property with a zero cost basis. The improvement of ourgross margin as a percent of net revenues for the first six months of fiscal2008 includes a 2.0 percent benefit ($4.35 million) from the sale of certainpatents that are no longer core to our business. In addition, the provision for excess andobsolete inventories was a $1.1 million net credit for the first six months offiscal 2008, compared to $0.2 million net credit for the comparable fiscal 2007period.  Our gross margin improvement was partially offset by adecrease in sales in the second quarter of fiscal 2008 of inventory previouslywritten down to a zero cost basis in fiscal 2001 to $0.9 million in the firstsix months of fiscal 2008 from $2.0 million in the first six months of fiscal2007.

 

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 the quantitiesof inventory on hand exceed foreseeable demand from existing OEM customers intowhose products our products have been designed, we generally will be unable tosell our excess inventories to others, and the estimated realizable value ofsuch inventories to us is generally zero.

 

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

 

**Research and Development**

 
| ** **                    | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                    | ** ** | **March 28,**               | ** ** | ** **                     | ** ** | **March 30,** | ** ** | **March 28,** | ** ** | ** ** | ** ** | **March 30,** | ** ** |
| **($ in millions)** | ** ** | **2008**                         | ** ** | **Change**                     | ** ** | **2007** | ** ** | **2008** | ** ** | **Change** | ** ** | **2007** | ** ** |
| Research and development      |       | $                                | 13.7       |                           | (7         | )% | $ | 14.7 |   | $ | 27.4 |   | (10 | )% | $ | 30.3 |   |
| Percent of net revenues       |       | 38                               | %          |                           |       | 48 | % | 38 | % |   |   | 50 | % |
|                               |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Our research and development (R&D) expensesconsist principally of direct personnel costs, photomasks, electronic designautomation tools and pre-production evaluation and test costs. The $1.0million decrease in R&D expenses for the second quarter of fiscal 2008compared to the second quarter of fiscal 2007 includes a $0.5 million decreasein compensation and personnel-related costs and a $0.3 million decrease indepreciation expense, principally resulting from certain assets reaching theend of their depreciable lives. The decrease in R&D expenses also reflectsa $0.2 million decrease in the cost of our facilities as a result of expensereduction actions taken in the first quarter of fiscal 2007.

 

The $2.9 million decrease inR&D expenses for the first six months of fiscal 2008 compared to the firstsix months of fiscal 2007 reflects a $1.1 million decrease in compensation andpersonnel-related costs and a $0.4 million decrease in the cost of ourfacilities resulting from our expense reduction actions. The decrease inR&D expenses also reflects a $0.6 million decrease in depreciationexpense, principally resulting from certain assets reaching the end of theirdepreciable lives, and a $0.4 million decrease in the cost of materials,photomasks and preproduction devices.

 

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**Selling, General and Administrative**

 
| ** **                          | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **March 28,**               | ** ** | ** **                     | ** ** | **March 30,** | ** ** | **March 28,** | ** ** | ** ** | ** ** | **March 30,** | ** ** |
| **($ in millions)**       | ** ** | **2008**                         | ** ** | **Change**                     | ** ** | **2007** | ** ** | **2008** | ** ** | **Change** | ** ** | **2007** | ** ** |
| Selling, general and administrative |       | $                                | 11.7       |                           | 4          | % | $ | 11.3 |   | $ | 23.2 |   | 5 | % | $ | 22.1 |   |
| Percent of net revenues             |       | 32                               | %          |                           |       | 37 | % | 32 | % |   |   | 36 | % |
|                                     |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Our selling, general andadministrative (SG&A) expenses include personnel costs, independent salesrepresentative commissions and product marketing, applications engineering andother marketing costs. Our SG&A expenses also include costs of corporatefunctions including accounting, finance, legal, human resources, information systemsand communications. The $0.4 million increase in our SG&A expenses for thesecond quarter of fiscal 2008 compared to the second quarter of fiscal 2007reflects a $0.3 million increase in professional fees primarily due to expensesincurred in connection with the printing and distribution of our proxystatement which occurred later in fiscal 2008 than it had in previousyears.  In addition, commissions andtravel expenses increased by a total of $0.3 million primarily as a result ofthe increase in sales. These increases were partially offset by a net decreaseof $0.3 million in personnel-related costs including stock compensationexpense.

 

The $1.1 million increase inour SG&A expenses for the first six months of fiscal 2008 compared to thecomparable fiscal 2007 period reflects $0.3 million in severance benefits payable to a formerofficer of the company as well as a $0.6 million increase in professionalfees.  The increase in professional feesis primarily due to expenses incurred in connection with the printing anddistribution of our proxy statement and the addition of submitting a proposalfor stockholder approval to amend our certificate of incorporation to effect areverse stock split and reduce our authorized shares of common stock.

 

**Special Charges**

 

Special charges consist ofthe following (in thousands):

 
| ** **            | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-----------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **            | ** ** | **March 28,**               | ** ** | **March 30,**             | ** ** | **March 28,** | ** ** | **March 30,** | ** ** |
| ** **            | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Restructuring charges |       | $                                | 93         |                           | $          | 1,237 |   | $ | 174 |   | $ | 4,832 |   |
|                       |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

*Restructuring Charges*

 

*MindspeedRestructuring Plans*— In fiscal 2006 and 2007, we implemented a numberof cost reduction initiatives to improve our operating cost structure. The costreduction initiatives included workforce reductions, significant reductions incapital spending, the consolidation of certain facilities and salary reductionsfor the senior management team.  Weexpect to incur a total of approximately $0.1 million of additionalrestructuring costs in future periods related to these plans.

 

Activity and liabilitybalances related to the Mindspeed restructuring plans through March 28,2008 are as follows (in thousands):

 
| ** **                                                    | ** ** | **Workforce  Reductions** | ** ** | **Facility  and Other** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------|------------|---------------------------|------------|------------------------------|------------|-----------|------------|
| Restructuring balance, September 28, 2007 |       | $                         | 232        |                         | $          | 1,252     |       | $ | 1,484 |   |
| Charged to costs and expenses             |       | —                    |       | 174                          |       | 174       |       |
| Cash payments                                                 |       | (152                      | )          | (960                         | )          | (1,112    | )          |
| Restructuring balance, March 28, 2008                    |       | $                         | 80         |                         | $          | 466       |       | $ | 546 |   |

 

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

 

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**Interest Expense**

** **
| ** **                    | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                    | ** ** | **March 28,**               | ** ** | **March 30,**             | ** ** | **March 28,** | ** ** | **March 30,** | ** ** |
| **($ in millions)** | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Interest expense              |       | $                                | 0.6        |                           | $          | 0.6 |   | $ | 1.1 |   | $ | 1.1 |   |
|                               |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

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

 

**Other (Expense) Income, Net**

 
| ** **                    | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                    | ** ** | **March 28,**               | ** ** | **March 30,**             | ** ** | **March 28,** | ** ** | **March 30,** | ** ** |
| **($ in millions)** | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Other (expense) income, net   |       | $                                | (0.2       | )                              | $          | 0.3 |   | $ | (0.0 | ) | $ | 0.3 |   |
|                               |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

Other (expense) incomeprincipally consists of interest income, foreign exchange gains and losses andother non-operating gains and losses. The increase in other expense for thesecond quarter of fiscal 2008 compared to the second quarter of fiscal 2007principally reflects higher foreign exchange losses incurred in the secondquarter of fiscal 2008 than in the second quarter of fiscal 2007.  In addition, interest income for the secondquarter of 2008 was lower than interest income in the second quarter of 2007resulting from lower invested cash balances and lower interest rates.   The decrease in other income for the firstsix months of fiscal 2008 compared to the first six months of fiscal 2007principally reflects lower interest income in the first six months of 2008 thanin the same period in the prior year resulting from lower invested cashbalances and lower interest rates.

 

**Provision for Income Taxes**

 

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

 

**Liquidity and Capital Resources**

 

Cash provided by operating activities was $8.2 millionfor the first six months of fiscal 2008 compared to cash used in operatingactivities of $7.4 million for the first six months of fiscal 2007.  Operating cash flows for the first six monthsof fiscal 2008 reflect our net loss of $2.7 million, offset by non-cash charges(depreciation and amortization, stock-based compensation expense, inventoryprovisions and other) of $5.3 million, and net working capital decreases ofapproximately $5.5 million.

 

The net working capital decreases for the first sixmonths of fiscal 2008 consisted principally of a $6.4 million decrease in netinventories resulting from our efforts to reduce inventory on hand and a$1.3 million increase in payables mainly due to the timing ofpayments.   In addition, other currentassets decreased by $1.3 million mainly due to decreases in prepaid insuranceand prepaid software licenses.  These working capital decreases werepartially offset by a $3.9 million increase in accounts receivable.

 

Cash used in investing activities of $5.3 million forthe first six months of fiscal 2008 principally consisted of $4.1 million ofcapital expenditures and payments associated with our acquisition ofcertain assets of Ample Communications of $1.2 million. For the first six months of fiscal2007, cash used in investing activities of $1.3 million principally consistedof capital expenditures of $1.8 million, partially offset by purchases ofmarketable securities (net of sales) of $0.5 million.

 

Cash provided by financing activities of $111,000 and$2.4 million for the first six months of fiscal 2008 and 2007, respectively,consisted of proceeds from the exercise of stock options.

 

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*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 certainfundamental changes (as defined in the indenture), holders of notes may requireus to repurchase some or all of their notes at 100% of the principal amountplus accrued and unpaid interest. If, upon notice of certain eventsconstituting a fundamental change, holders of the notes elect to convert thenotes, we may be required to make an additional cash payment per $1,000principal amount of notes in connection with the conversion. The amount of theadditional cash payment, if any, will be determined by reference to a table setforth in the indenture governing the notes and our average stock price (as determinedin accordance with the indenture) for the 20 trading days following theconversion date.  If an applicablefundamental change were to occur between November 18, 2007 and November 18,2008, the amount of the additional cash payment would be equal to such averagestock price 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 the indenture).  In the event of a non-stock change of controlconstituting a “public acquirer change of control” (as defined in theindenture), we may, in lieu of making an additional cash payment uponconversion as required by the indenture, elect to adjust the conversion priceand 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 March 28,2008, the liability under the fundamental change adjustment has been recordedat its estimated fair value and is 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 pershare, exercisable for a period of ten years after the Distribution. The warrantmay be 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 securities, the warrant’s exercise price will be reducedand the number of shares issuable under the warrant will be increased. Theamount 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.

 

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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 stockissuable upon exercise of the warrant over the exercise price of the warrant.Such an issuance of common stock would be immediately dilutive to the interestsof other stockholders.

 

*Liquidity*

 

Our principal sources ofliquidity are our existing cash balances and cash generated from product sales.During the first six months of fiscal 2008, we also received approximately $4.35million in cash from licenses and sales of our intellectual property. As of March 28,2008, our cash and cash equivalents totaled $28.7 million. Our workingcapital at March 28, 2008 was $38.2 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 six months 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 product sales,will be sufficient to fund our operations, research and development efforts,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 business thatare more severe or longer than anticipated or if we fail to achieve anticipatedrevenue and expense levels. However, we cannot assure you that such financingwill be available to us on favorable terms, or at all.

 

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**Off-Balance Sheet Arrangements**

 

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

 

**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

** **

Our cash and cash equivalents consist of demanddeposits and highly-liquid money market funds. Our main investment objectivesare the 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 for speculativeor 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 March 28, 2008, the carryingvalue 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 for speculativeor trading purposes. At March 28, 2008, we held no foreign currencyforward exchange contracts. Based on our overall currency rate exposure at March 28,2008, a 10% change in currency rates would not have a material effect on ourconsolidated financial position, results of operations or cash flows.

 

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**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 March 28, 2008. Disclosurecontrols and procedures are defined under SEC rules as controls and otherprocedures that are designed to ensure that information required to bedisclosed by us in the reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within required time periods.Based upon that evaluation, our Chief Executive Officer and our Chief FinancialOfficer have concluded that, as of March 28, 2008, these disclosurecontrols and procedures were effective.

 

**Changes in Internal Control overFinancial Reporting**

 

There were no changes in our internal control overfinancial reporting during the fiscal quarter ended March 28, 2008 thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**ITEM 1A. RISK FACTORS**

 

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

 

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

 

***We are incurring substantial operating losses, and we anticipateadditional future******losses.***

 

We incurred a net loss of$2.7 million in the first six 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 fiscal 2008, andwe may incur additional losses and negative cash flows in subsequent 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 six months of fiscal 2008, wehave completed a series of cost reduction actions which have improved ouroperating 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 six months offiscal 2008, we generated $8.2 million in cash from operating activitiescompared to net cash used of $7.4 million in the first six 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 March 28, 2008, our cash and cash equivalents totaled$28.7 million. We believe that our existing sources of liquidity will besufficient to fund our operations, research and development efforts,anticipated capital expenditures, working capital and other financingrequirements for at least the next 12 months. However, this may not be thecase, and if we continue to incur operating losses and negative cash flows inthe future, we may need to reduce further our operating costs or obtainalternate sources of financing, or both. We may not have access to additionalsources of capital on favorable terms or at all. If we raise additional fundsthrough the issuance of equity, equity-based or debt securities, suchsecurities may have rights, preferences or privileges senior to those of ourcommon stock and our stockholders may experience dilution of their ownership interests.

 

***The price of our common stock may fluctuate significantly and ourcommon stock could be delisted from the NASDAQ Stock Market.***

 

The price of our commonstock is volatile and may fluctuate significantly. On February 29, 2008, wereceived a letter from The NASDAQ Stock Market notifying us that for the 30consecutive business days preceding the date of the letter the bid price of ourcommon stock had closed below the $1.00 per share minimum bid price requiredfor continued inclusion on The NASDAQ Global Market pursuant to NASDAQMarketplace Rule 4450(a)(5). 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;

 

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

 

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

 

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

 

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

 

·**            **domestic and internationaleconomic conditions.

 

In addition, public stockmarkets have experienced, and may in the future experience, extreme price andtrading volume volatility, particularly in the technology sectors of themarket. This volatility has significantly affected the market prices ofsecurities of many technology companies for reasons frequently unrelated to ordisproportionately impacted by the operating performance of these companies.These broad market fluctuations may adversely affect the market price of ourcommon stock.

 

If we do not regaincompliance with the NASDAQ minimum bid price requirement, or if we otherwise donot meet the requirements for continued quotation on the NASDAQ, our commonstock could be delisted.  If NASDAQ delists our common stock, wecould face material adverse consequences, including:

 

·**            **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;

 

·**            **increased difficulty inretaining customers and employees; and

 

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

 

***We may implement a reverse stock split of our common stock.***

 

In order to regain compliancewith the NASDAQ minimum bid price rule, we may implement a reverse stock split.At our 2008 Annual Meeting of Stockholders on April 7, 2008, our stockholdersapproved a proposal to amend our Restated Certificate of Incorporation topermit a reverse stock split of our common stock at a ratio of betweenone-for-three and one-for-eight shares, to be determined at the discretion ofour Board of Directors, and to reduce authorized shares of common stock by thesame ratio.  The Board of Directors mayor may not implement the reverse stock split in its sole discretion.  If implemented, there can be no assurancethat the reverse stock split will result in a sustained higher price per shareof our common stock.  If a reverse stocksplit is effected and the per share price of our common stock declines, thepercentage decline as an absolute number and as a percentage of our overallmarket capitalization may be greater than would occur in the absence of areverse stock split.  Furthermore, theliquidity of our common stock could be adversely affected by the reduced numberof shares that would be outstanding after the reverse stock split.  In addition, a reverse stock split willlikely increase the number of stockholders who own odd lots (less than 100shares).  Stockholders who hold odd lotstypically will experience an increase in the cost of selling their shares, aswell as possible greater difficulty in effecting such sales.  In evaluating whether or not to authorize theproposed reverse stock split, our Board of Directors also took into accountvarious other negative factors associated with a reverse stock split including:(i) the negative perception of reverse stock splits held by someinvestors, analysts and other stock market participants; (ii) the factthat the stock price of some companies that have effected reverse stock splitshas subsequently declined back to pre-reverse stock split levels; and (iii) thecosts associated with implementing a reverse stock split.  Also, other factors such as our financialresults, market conditions and the market perception of our business mayadversely affect the market price of our common stock.  As a result, there can be no assurance thatthe price of our common stock would be maintained at the per share price ineffect immediately following the effective time of a reverse stock split.

 

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***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 similarfluctuations in our business in the future.

 

***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 in end-user demandfor the products manufactured and sold by our customers;

 

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

 

·             fluctuations in the levelsof component inventories held by our customers and changes in our customers’inventory management practices;

 

·             shifts in our product mixand the effect of maturing products;

 

·             availability and cost ofproducts from our suppliers;

 

·             the gain or loss ofsignificant customers;

 

·             market acceptance of ourproducts and our customers’ products;

 

·             our ability to develop,introduce, market and support new products and technologies on a timely basis;

 

·             the timing and extent ofproduct development costs;

 

·             new product and technologyintroductions by us or our competitors;

 

·             fluctuations inmanufacturing yields;

 

·             significant warranty claims,including those not covered by our suppliers;

 

·             intellectual propertydisputes; and

 

·             the effects of competitivepricing pressures, including decreases in average selling prices of ourproducts.

 

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.

 

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To the extent that we shift any operations or labor offshore tojurisdictions with lower cost structures, we may experience challenges ineffectively managing those operations as a result of several factors, includingtime zone differences and regulatory, legal, cultural and logistical issues.Additionally, the relocation of labor resources may have a negative impact onour existing employees, which could negatively impact our operations. If we areunable to effectively manage our offshore research and development staff andany other offshore operations, our business and results of operations could beadversely affected.

 

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

 

·**            **politicaluncertainties;

 

·**            **wage inflation;

 

·**            **exposure toforeign currency fluctuations;

 

·**            **tariffs and othertrade barriers; and

 

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

 

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

 

***We are entirely dependent upon third partiesfor the manufacture of our products and******are vulnerable to their capacityconstraints during times of increasing demand for******semiconductor products.***

 

We areentirely dependent upon outside wafer fabrication facilities, known asfoundries, for wafer fabrication services. Our principal suppliers of waferfabrication services are TSMC and Jazz. We are also dependent upon thirdparties, including Amkor, for the assembly and testing of all of our products.Under our fabless business model, our long-term revenue growth is dependent onour ability to obtain sufficient external manufacturing capacity, includingwafer production capacity. Periods of upturns in the semiconductor industry maybe characterized by rapid increases in demand and a shortage of capacity for waferfabrication and assembly and test services.

 

The risksassociated with our reliance on third parties for manufacturing servicesinclude:

 

·             the financial viability of our suppliers;

 

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

 

·**            **increased leadtimes;

 

·**            **limited controlover delivery schedules, manufacturing yields, production costs and productquality; and

 

·**            **theunavailability of, or delays in obtaining, products or access to key processtechnologies.

 

Our standardlead time, or the time required to manufacture our products (including waferfabrication, assembly and testing) is typically 12 to 16 weeks. During periodsof manufacturing capacity shortages, the foundries and other suppliers on whomwe rely may devote their limited capacity to fulfill the productionrequirements of other clients that are larger or better financed than we are,or who have superior contractual rights to enforce manufacture of theirproducts, including to the exclusion of producing our products.

 

Additionally,if we are required to seek alternative foundries or assembly and test serviceproviders, we would be subject to longer lead times, indeterminate deliveryschedules and increased manufacturing costs, including costs to find andqualify acceptable suppliers. For example, if we choose to use a new foundry,the qualification process may take as long as six months over the standard leadtime before we can begin shipping products from the new foundry.

 

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Wafer fabrication processes are subject to obsolescence, and foundriesmay discontinue a wafer fabrication process used for certain of our products.In such 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 foundriesand other suppliers on whom we rely may experience financial difficulties orsuffer disruptions in their operations due to causes beyond our control,including labor strikes, work stoppages, electrical power outages, fire,earthquake, flooding or other natural disasters. Certain of our suppliers’manufacturing facilities are located near major earthquake fault lines in theAsia-Pacific region and in California. In the event of a disruption of theoperations of one or more of our suppliers, we may not have an alternate sourceimmediately available. Such an event could cause significant delays inshipments until we are able to shift the products from an affected facility orsupplier to another facility or supplier. The manufacturing processes we relyon are specialized and are available from a limited number of suppliers.Alternate sources of manufacturing capacity, particularly wafer productioncapacity, may not be available to us on a timely basis. Even if alternatemanufacturing capacity is available, we may not be able to obtain it onfavorable terms, or at all. Difficulties or delays in securing an adequatesupply of our products on favorable terms, or at all, could impair our abilityto meet our customers’ requirements and have a material adverse effect on ouroperating results.

 

In addition,the highly complex and technologically demanding nature of semiconductormanufacturing has caused foundries to experience, from time to time, lower thananticipated manufacturing yields, particularly in connection with theintroduction of new products and the installation and start-up of new processtechnologies. Lower than anticipated manufacturing yields may affect ourability to fulfill our customers’ demands for our products on a timely basis.Moreover, lower than anticipated manufacturing yields may adversely affect ourcost of goods sold and our results of operations.

 

***We are subject tointense competition.***

 

Thecommunications semiconductor industry in general, and the markets in which wecompete in particular, are intensely competitive. We compete worldwide with anumber of U.S. and international semiconductor manufacturers that are bothlarger and smaller than we are in terms of resources and market share. Wecurrently face significant competition in our markets and expect that intenseprice and product competition will continue. This competition has resulted, andis expected to continue to result, in declining average selling prices for ourproducts.

 

Many of ourcurrent and potential competitors have certain advantages over us, including:

 

·**            **strongerfinancial position and liquidity;

 

·**            **longer presencein key markets;

 

·**            **greater namerecognition;

 

·**            **more securesupply chain;

 

·**            **access to largercustomer bases; and

 

·**            **significantlygreater sales and marketing, manufacturing, distribution, technical and otherresources.

 

As a result,these competitors may be able to adapt more quickly to new or emergingtechnologies and changes in customer requirements or may be able to devotegreater resources to the development, promotion and sale of their products thanwe can. Moreover, we have incurred substantial operating losses and weanticipate future losses. We believe that financial stability of suppliers isan important consideration in our customers’ purchasing decisions. If our OEMcustomers perceive that we lack adequate financial stability, they may choosesemiconductor suppliers that they believe have a stronger financial position orliquidity.

 

Current andpotential competitors also have established or may establish financial orstrategic relationships among themselves or with our existing or potentialcustomers, resellers or other third parties. These relationships may affectcustomers’ purchasing decisions. Accordingly, it is possible that newcompetitors or alliances among competitors could emerge and rapidly acquiresignificant market share. We may not be able to compete successfully againstcurrent and potential competitors.

 

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

 

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

 

***Our success depends on our ability to developcompetitive new products in a timely******manner.***

 

Our operatingresults will depend largely on our ability to continue to introduce new andenhanced semiconductor products on a timely basis. Successful productdevelopment and introduction depends on numerous factors, including, amongothers:

 

·**            **our ability toanticipate customer and market requirements and changes in technology andindustry standards;

 

·**            **our ability toaccurately define new products;

 

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

 

·**            **our ability todifferentiate our products from offerings of our competitors; and

 

·**            **overall marketacceptance of our products.

 

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

 

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

 

***If we are not able to keep abreast of therapid technological changes in our markets,******our products could become obsolete.***

 

The demand forour products can change quickly and in ways we may not anticipate because ourmarkets generally exhibit the following characteristics:

 

·**            **rapidtechnological developments;

 

·**            **rapid changes incustomer requirements;

 

·**            **frequent newproduct introductions and enhancements;

 

·**            **declining pricesover the life cycle of products; and

 

·**            **evolving industrystandards.

 

Our productscould become obsolete sooner than we expect because of faster than anticipated,or unanticipated, 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.

 

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

 

Our sales aretypically made pursuant to individual purchase orders and we generally do nothave long-term supply arrangements with our customers. Generally, our customersmay cancel orders until 30 days prior to shipment. In addition, we sell asubstantial portion of our products through distributors, some of whom have aright to return unsold products to us. Sales to distributors accounted forapproximately 54% of our net revenues for both the first six months of fiscal2008 and fiscal 2007.

 

Because of thesignificant lead times for wafer fabrication and assembly and test services, weroutinely purchase inventory based on estimates of end-market demand for ourcustomers’ products, which may be subject to dramatic changes and is difficultto predict. This difficulty may be compounded when we sell to OEMs indirectlythrough distributors or contract manufacturers, or both, as our forecasts ofdemand are then based on estimates provided by multiple parties. In addition,our customers may change their inventory practices on short notice for anyreason. The cancellation or deferral of product orders, the return ofpreviously sold products or overproduction due to the failure of anticipatedorders to materialize could result in our holding excess or obsolete inventory,which could result in write-downs of inventory. Conversely, if we fail toanticipate inventory needs we may be unable to fulfill demand for our products,resulting in a loss of potential revenue.

 

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

 

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

 

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

 

Our customersgenerally need six months or longer to test and evaluate our products and anadditional six months or more to begin volume production of equipment thatincorporates our products. These lengthy periods also increase the possibilitythat a customer may decide to cancel or change product plans, which couldreduce or eliminate sales to that customer. As a result of this lengthy salescycle, we may incur significant research and development and selling, generaland administrative expenses before we generate any revenues from new products.We may never generate the anticipated revenues if our customers cancel orchange their product plans.

 

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

 

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

 

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

 

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

 

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

 

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·**            **discontinue theuse of infringing technology;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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***We may not be able to attract and retainqualified personnel necessary for the******design, development, sale andsupport of our products. Our success could be******negatively affected if key personnelleave.***

 

Our futuresuccess depends on our ability to attract, retain and motivate qualifiedpersonnel, including executive officers and other key management, technical andsupport personnel. As the source of our technological and product innovations,our key technical personnel represent a significant asset. The competition forsuch personnel can be intense in the semiconductor industry. We may not be ableto attract and retain qualified management and other personnel necessary forthe design, development, sale and support of our products.

 

 In periods of poor operating performance, wehave experienced, and may experience in the future, particular difficultyattracting and retaining key personnel. If we are not successful in assuringour employees of our financial stability and our prospects for success, ouremployees may seek other employment, which may materially and adversely affectour business. Moreover, our recent expense reduction and restructuringinitiatives, including a series of worldwide workforce reductions, havesignificantly reduced the number of our technical employees. We intend tocontinue to expand our international business activities including expansion ofdesign and operational centers abroad and may have difficulty attracting andmaintaining international employees. The loss of the services of one or more ofour key employees, including Raouf Y. Halim, our chief executive officer, orcertain key design and technical personnel, or our inability to attract, retainand motivate qualified personnel could have a material adverse effect on ourability to operate our business.

 

Many of ourengineers are foreign nationals working in the United States under visas. Thevisas held by many of our employees permit qualified foreign nationals workingin specialty occupations, such as certain categories of engineers, to reside inthe United States during their employment. The number of new visas approvedeach year may be limited and may restrict our ability to hire additionalqualified technical employees. In addition, immigration policies are subject tochange, and these policies have generally become more stringent since theevents of September 11, 2001. Any additional significant changes inimmigration laws, rules or regulations may further restrict our ability toretain or hire technical personnel.

 

***We are subject to the risks of doing businessinternationally.***

 

A significantpart of our strategy involves our continued pursuit of growth opportunities ina number of international markets. We market, sell, design and service ourproducts internationally. Sales to customers located outside the United States,primarily in the Asia-Pacific region and Europe, were approximately 69% of ournet revenues for both the first six months of fiscal 2008 and fiscal 2007. Inaddition, we have design centers, customer support centers, and rely onsuppliers, located outside the United States, including foundries and assemblyand 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 exchangerate fluctuations;

 

·**            **local economicand political conditions;

 

·**            **disruptions ofcapital and trading markets;

 

·**            **accountsreceivable collection and longer payment cycles;

 

·**            **difficulties instaffing and managing foreign operations;

 

·**            **potentialhostilities and changes in diplomatic and trade relationships;

 

·**            **restrictivegovernmental actions (such as restrictions on the transfer or repatriation offunds and trade protection measures, including export duties and quotas andcustoms duties and tariffs);

 

·**            **changes in legalor regulatory requirements;

 

·**            **difficulty inobtaining distribution and support;

 

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·**            **the laws andpolicies of the United States and other countries affecting trade, foreigninvestment and loans and import or export licensing requirements;

 

·**            **tax laws;

 

·**            **limitations onour ability under local laws to protect our intellectual property;

 

·**            **culturaldifferences in the conduct of business; and

 

·**            **naturaldisasters, acts of terrorism and war.

 

Because mostof our international sales are currently denominated in U.S. dollars, ourproducts could become less competitive in international markets if the value ofthe U.S. dollar increases relative to foreign currencies. As we continue toshift a portion of our operations offshore, more of our expenses are incurredin currencies other than those in which we bill for the related services. Anincrease in the value of certain currencies, such as the Euro, Japanese Yen,Ukrainian hryvnia and Indian rupee, against the U.S. dollar could increasecosts of our offshore operations by increasing labor and other costs that aredenominated in local currencies.

 

From time totime we may enter into foreign currency forward exchange contracts to mitigatethe risk of loss from currency exchange rate fluctuations for foreign currencycommitments entered into in the ordinary course of business. We have notentered into foreign currency forward exchange contracts for other purposes.Our financial condition and results of operations could be adversely affectedby currency fluctuations.

 

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

 

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

 

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

 

·**            **substantial cashpayments;

 

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

 

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

 

·**            **amortizationexpenses related to intangible assets;

 

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

 

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

 

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

 

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

 

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

 

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

 

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***Proposed accounting changes for convertible debt securities, such asour convertible senior notes, may adversely affect our financial results***.

 

The FASB recentlypublished proposed Staff Position (“FSP”) No. APB 14-a “Accounting forConvertible Debt Instruments That May Be Settled in Cash upon Conversion(Including Partial Cash Settlements).” Under the proposed FSP, issuers ofconvertible debt securities that may be settled in cash, including partial cashsettlement, would be required to account for such securities separately, asdebt and equity securities. We believe that this change in methodology, ifadopted, would negatively affect our earnings and earnings per share asinterest expense would be required to reflect the market rate of interest fornonconvertible debt instead of the coupon interest rate. The proposal, ifadopted, would require retrospective application of the new accounting methodto all periods presented.

 

We cannotpredict if or when any such change would be implemented or the exact accountingmethod that will be imposed (which may differ materially from the foregoingdescription). Changes in the accounting method for convertible debt securitiescould have an adverse impact on our past and future reported financial resultswhich in turn could adversely affect the trading price of securities.

 

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

 

Conexant holdsa warrant to acquire 30 million shares of our common stock at a price of $3.408per share, exercisable through June 27, 2013, representing approximately16% of our outstanding common stock on a fully diluted basis. The warrant maybe transferred or sold in whole or part at any time. If Conexant sells thewarrant or if Conexant or a transferee of the warrant exercises the warrant andsells a substantial number of shares of our common stock in the future, or ifinvestors perceive that these sales may occur, the market price of our commonstock could decline or market demand for our common stock could be sharplyreduced. As of March 28, 2008, we have $46.0 million aggregate principalamount of convertible senior notes outstanding. These notes are convertible atany time, at the option of the holder, into approximately 432.9004 shares ofcommon stock per $1,000 principal amount of notes or an aggregate ofapproximately 19.9 million shares of our common stock. The conversion of thenotes and subsequent sale of a substantial number of shares of our common stockcould also adversely affect demand for, and the market price of, our commonstock. Each of these transactions could adversely affect our ability to raiseadditional financing by issuing equity or equity-based securities in the publiccapital markets.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Our restatedcertificate of incorporation, our amended and restated bylaws, our amended rightsagreement and the Delaware General Corporation Law contain several provisionsthat would make more difficult an acquisition of control of us in a transactionnot approved by our board of directors. Our restated certificate ofincorporation and amended and restated bylaws include provisions such as:

 

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

 

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

 

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

 

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

 

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

 

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

 

·**            **a fair priceprovision.

 

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

 

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

 

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

 

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

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

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

 

Messrs. RaoufY. Halim, Donald L. Gips, Jerre L. Stead, and Dwight W. Decker continue toserve as directors.

 

**ITEM 5. OTHER INFORMATION**

 

Thefollowing disclosure would otherwise be filed on Form 8-K under theheading “Item 5.02.  Departure ofDirectors or Certain Officers; Election of Directors; Appointment of CertainOfficers; Compensatory Arrangements of Certain Officers.” On November 23, 2007, we entered into aspecial bonus letter agreement with Simon Biddiscombe, our senior vicepresident, chief financial officer, treasurer and secretary.  Pursuant to the bonus letter agreement, Mr. Biddiscombereceived a special cash bonus of $100,000. The bonus letter agreement stipulated that the special bonus must berepaid to us in the event that Mr. Biddiscombe voluntarily left thecompany or was terminated for cause on or prior to the first anniversary dateof the bonus letter agreement.  Mr. Biddiscomberesigned from his positions with us effective as of April 21, 2008.  In light of Mr. Biddiscombe’sresignation, on April 7, 2008, the compensation and management developmentcommittee of our board of directors approved partial forgiveness of therepayment of the special bonus. Contingent upon and in exchange for Mr. Biddiscombe’s good faithefforts to assist us in transition activity to a new chief financial officerand agreeing to honor a no hire/no solicit promise as described in the specialbonus forgiveness letter, Mr. Biddiscombe will be entitled to retain 50%of the special bonus granted to him under the bonus letter agreement.  Pursuant to the bonus forgiveness letter, Mr. Biddiscombewill be required to repay the remaining 50% of the special bonus.  The bonus forgiveness letter is filed as Exhibit 10.2to this report and incorporated herein by reference.

 

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**ITEM 6. EXHIBITS**

 
|        | 3.1                    |   | Restated  Certificate of Incorporation of the Registrant, filed as Exhibit 4.1 to  the Registrant’s Registration Statement on Form S-3 (Registration  Statement No. 333-106146), is incorporated herein by reference.                                                                      |
|--------|------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                   |   |                                                                                                                                                                                                                                                                                                           |
|   | 3.2                    |   | 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                 |   | 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).                                                       |
|   |                   |   |                                                                                                                                                                                                                                                                                                           |
|   | * 10.2                 |   | Letter Agreement, dated as  of April 9, 2008, by and between the Registrant and Simon Biddiscombe.                                                                                                                                                                                                        |
|   |                   |   |                                                                                                                                                                                                                                                                                                           |
|   |    31.1 |   | Certification of Chief  Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                     |
|   |                   |   |                                                                                                                                                                                                                                                                                                           |
|   |    31.2 |   | Certification of Chief  Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                     |
|   |                   |   |                                                                                                                                                                                                                                                                                                           |
|   |    32.1 |   | Certification of Chief  Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                     |
|   |                   |   |                                                                                                                                                                                                                                                                                                           |
|   |    32.2 |   | Certification of Chief  Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                     |

 

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*                           Management contract or compensatory plan orarrangement.

 

41

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**SIGNATURE**

 

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

 
|                   | MINDSPEED TECHNOLOGIES,  INC. |
|------------------------|-------------------------------|
|                   | (Registrant)                  |
|                   |                          |
| Date: May 6, 2008 | By                            | /s/ RAYMOND D. COOK |
|                   |                          |   |
|                   |                          | Raymond D. Cook |
|                   |                          | Vice President, Interim  Chief Financial |
|                   |                          | Officer and Treasurer |
|                   |                          | (principal financial  officer) |

 

42

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#### **EXHIBIT INDEX**

#### ** **

| 10.1   | 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). |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                     |
| 10.2   | Letter Agreement, dated as  of April 9, 2008, by and between the Registrant and Simon Biddiscombe.                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                     |
| 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.                                                                                                                                               |

 

43

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