UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended July 2, 2010

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-31650

MINDSPEED TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

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

Registrant’s telephone number, including area code:
(949) 579-3000

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of outstanding shares of the Registrant’s Common Stock as of July 30, 2010 was 32,191,504.

 

 

FORWARD-LOOKING STATEMENTS

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

	•		the ability of our relationships with network infrastructure original equipment manufacturers to facilitate early adoption of our products, enhance our ability to obtain design wins and encourage adoption of our technology in the industry;
	•		the growth prospects for the network infrastructure equipment and communications semiconductors markets, including increased demand for network capacity, the upgrade and expansion of existing networks, and the build-out of networks in developing countries;
	•		our belief that our diverse portfolio of semiconductor solutions has positioned us to capitalize on some of the most significant trends in telecommunications spending;
	•		our belief that we are well-situated in China and that fiber deployments are being rolled out by the country’s major telecommunications carriers;
	•		our plans to make substantial investments in research and development and participate in the formulation of industry standards;
	•		our belief that we can maximize our return on our research and development spending by focusing our investment in what we believe are key growth markets;
	•		the continuation of intense price and product competition, and the resulting declining average selling prices for our products;
	•		the dependence of our operating results on our ability to develop and introduce new products and enhancements to existing products on a timely basis;
	•		the increasing trend toward industry consolidation and the effect it could have on our operating results;
	•		the sufficiency of our existing sources of liquidity and expected sources of cash to fund our operations, research and development efforts, anticipated capital expenditures, working capital and other financing requirements, including interest payments on debt obligations, for the next 12 months;
	•		our expectation that our provision for income taxes for fiscal 2010 will principally consist of income taxes related to our foreign operations and amounts related to the alternative minimum tax in the U.S.;
	•		our expectations with respect to our recognition of income tax benefits in the future;
	•		our restructuring plans, including timing, expected workforce reductions, the expected cost savings under our restructuring plans and the uses of those savings, the timing and amount of payments, the impact on our business, the amounts of future charges to complete our restructuring plans, including any future plans to reduce operating expenses and/or increase revenues;

	•		the value of our intellectual property, and our ability to continue recognizing patent-related revenues from the sale or licensing of our intellectual property and our plans to periodically enter into strategic arrangements to leverage our portfolio by licensing or selling our intellectual property;
	•		our intentions with respect to inventories that were previously written down and the effects on future demand and market conditions on inventory write-downs;
	•		our beliefs regarding the end-markets for sales of products to original equipment manufacturers and third-party manufacturing service providers in the Asia-Pacific region;
	•		our intention to continue to expand our international business activities, including expansion of design and operations centers abroad, and the challenges associated with such expansion;
	•		our expectations regarding the cyclical nature of the semiconductor industry;
	•		the impact of recent accounting pronouncements and the adoption of new accounting standards.

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

	•		fluctuations in our operating results and future operating losses;
	•		worldwide political and economic uncertainties and specific conditions in the markets we address;
	•		constraints in the supply of wafers and other product components from our third-party manufacturers;
	•		fluctuations in the price of our common stock;
	•		cash requirements and terms and availability of financing;
	•		loss of or diminished demand from one or more key customers or distributors;
	•		our ability to attract and retain qualified personnel;
	•		doing business internationally and our ability to successfully and cost effectively establish and manage operations in foreign jurisdictions;
	•		pricing pressures and other competitive factors;
	•		successful development and introduction of new products;
	•		lengthy sales cycles;
	•		order and shipment uncertainty;
	•		our ability to obtain design wins and develop revenues from them;
	•		the expense of and our ability to defend our intellectual property against infringement claims by others;
	•		product defects and bugs;

	•		business acquisitions and investments; and
	•		our ability to utilize our net operating loss carryforwards and certain other tax attributes.

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

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

MINDSPEED TECHNOLOGIES, INC.

INDEX

		PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Condensed Balance Sheets — July 2, 2010 and October 2, 2009			7
Consolidated Condensed Statements of Operations — Three Months and Nine Months Ended July 2, 2010 and July 3, 2009			8
Consolidated Condensed Statements of Cash Flows — Nine Months Ended July 2, 2010 and July 3, 2009			9
Notes to Consolidated Condensed Financial Statements			10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 3. Quantitative and Qualitative Disclosures About Market Risk			39
Item 4. Controls and Procedures			40
PART II. OTHER INFORMATION
Item 1A. Risk Factors			40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			52
Item 6. Exhibits			53
Signature			55
Exhibit 10.1
Exhibit 10.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MINDSPEED TECHNOLOGIES, INC.

Consolidated Condensed Balance Sheets
(unaudited, in thousands, except per share amounts)

		July 2,				October 2,
		2010				2009
						As Adjusted-
						Note 5
ASSETS
Current Assets
Cash and cash equivalents		$	34,107			$	20,891
Receivables, net of allowance for doubtful accounts of $189 and $144 at July 2, 2010 and October 2, 2009, respectively			18,507				7,662
Inventories			9,393				10,902
Deferred tax assets — current			1,220				1,574
Prepaid expenses and other current assets			2,461				2,529
Total current assets			65,688				43,558
Property, plant and equipment, net			12,424				11,018
License agreements, net			6,613				6,505
Other assets			1,160				1,382
Total assets		$	85,885			$	62,463
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable		$	9,817			$	6,338
Accrued compensation and benefits			5,886				5,788
Accrued income tax			229				525
Deferred income on sales to distributors			3,672				2,604
Deferred revenue			813				1,106
Restructuring			60				448
Convertible senior notes — short term			—				10,349
Other current liabilities			3,081				2,177
Total current liabilities			23,558				29,335
Convertible senior notes — long term			13,710				13,415
Other liabilities			1,512				823
Total liabilities			38,780				43,573
Commitments and contingencies (Note 6)			—				—
Stockholders’ Equity
Preferred stock, $0.01 par value: 25,000 shares authorized; no shares issued or outstanding			—				—
Common stock, $0.01 par value, 100,000 shares authorized; 32,186 (July 2, 2010) and 28,756 (October 2, 2009) issued and outstanding shares			322				288
Additional paid-in capital			317,437				296,333
Accumulated deficit			(255,020	)			(262,863	)
Accumulated other comprehensive loss			(15,634	)			(14,868	)
Total stockholders’ equity			47,105				18,890
Total liabilities and stockholders’ equity		$	85,885			$	62,463

MINDSPEED TECHNOLOGIES, INC.

Consolidated Condensed Statements of Operations
(unaudited, in thousands, except per share amounts)

		Three months ended								Nine months ended
		July 2,				July 3,				July 2,				July 3,
		2010				2009				2010				2009
						As Adjusted-								As Adjusted-
						Note 5								Note 5
Net revenues:
Products		$	43,281			$	32,545			$	120,560			$	86,809
Intellectual property			—				—				—				5,000
Total net revenues			43,281				32,545				120,560				91,809
Cost of goods sold (including impairments and other charges of $3,667 in the nine months ended July 3, 2009)			15,501				12,618				43,297				36,897
Gross margin			27,780				19,927				77,263				54,912
Operating expenses:
Research and development			12,731				12,097				37,540				38,541
Selling, general and administrative			10,190				9,880				30,215				31,705
Special charges			(184	)			9				605				6,896
Total operating expenses			22,737				21,986				68,360				77,142
Operating income/(loss)			5,043				(2,059	)			8,903				(22,230	)
Interest expense			(396	)			(749	)			(1,420	)			(2,337	)
Other income/(expense), net			323				(285	)			525				1,172
Income/(loss) before income taxes			4,970				(3,093	)			8,008				(23,395	)
Provision for income taxes			106				127				165				389
Net income/(loss)		$	4,864			$	(3,220	)		$	7,843			$	(23,784	)
Net income/(loss) per share:
Basic		$	0.15			$	(0.14	)		$	0.26			$	(1.01	)
Diluted		$	0.15			$	(0.14	)		$	0.25			$	(1.01	)
Weighted-average number of shares used in per share computation:
Basic			31,481				23,619				29,781				23,533
Diluted			36,075				23,619				30,942				23,533

See accompanying notes to consolidated condensed financial statements.

MINDSPEED TECHNOLOGIES, INC.

Consolidated Condensed Statements of Cash Flows
(unaudited, in thousands)

		Nine months ended
		July 2,				July 3,
		2010				2009
						As Adjusted-
						Note 5
Cash Flows From Operating Activities
Net income/(loss)		$	7,843			$	(23,784	)
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:
Depreciation and amortization			4,568				4,582
Asset impairments			—				5,498
Special charges			605				4,031
Stock-based compensation			3,165				2,196
Inventory provisions			1,417				1,279
Gain on debt extinguishment			—				(1,121	)
Amortization of debt discount on convertible senior notes			446				1,117
Other non-cash items, net			346				103
Changes in assets and liabilities:
Receivables			(10,881	)			6,277
Inventories			92				3,384
Accounts payable			3,070				(4,746	)
Deferred income on sales to distributors			1,068				(2,030	)
Restructuring			(1,005	)			(2,825	)
Accrued expenses and other current liabilities			384				(2,615	)
Other			(633	)			1,002
Net cash provided by/(used in) operating activities			10,485				(7,652	)
Cash Flows From Investing Activities
Capital expenditures			(4,945	)			(5,932	)
Net cash used in investing activities			(4,945	)			(5,932	)
Cash Flows From Financing Activities
Gross proceeds from sale of equity			18,300				—
Offering costs from sale of equity			(1,307	)			—
Retirement of convertible debt			(10,500	)			(17,320	)
Payments made on capital lease obligations			(380	)			—
Borrowings under line of credit			7,000				—
Payments made on line of credit			(7,000	)			—
Debt issuance costs			—				(256	)
Exercise of stock options and warrants			1,470				—
Net cash provided by/(used in) financing activities			7,583				(17,576	)
Effect of foreign currency exchange rates on cash			93				(2	)
Net increase/(decrease) in cash and cash equivalents			13,216				(31,162	)
Cash and cash equivalents at beginning of period			20,891				43,033
Cash and cash equivalents at end of period		$	34,107			$	11,871

See accompanying notes to consolidated condensed financial statements.

MINDSPEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)

1. Basis of Presentation and Significant Accounting Policies

Mindspeed Technologies, Inc. (Mindspeed or the Company) designs, develops and sells semiconductor solutions for communications applications in the wireline and wireless network infrastructure, which includes today’s separate, but interrelated and converging, enterprise, broadband access, metropolitan and wide area networks. On June 27, 2003, Conexant Systems, Inc. (Conexant) completed the distribution (the Distribution) to Conexant stockholders of all 18,066,689 outstanding shares of common stock of its wholly owned subsidiary, Mindspeed. Prior to the Distribution, Conexant transferred to Mindspeed the assets and liabilities of the Mindspeed business, including the stock of certain subsidiaries, and certain other assets and liabilities which were allocated to Mindspeed under the Distribution Agreement entered into between Conexant and Mindspeed. Also prior to the Distribution, Conexant contributed to Mindspeed cash in an amount such that at the time of the distribution Mindspeed’s cash balance was $100.0 million. Mindspeed issued to Conexant a warrant to purchase approximately 6.1 million shares of Mindspeed common stock at a price of $16.74 per share, as adjusted, exercisable for a period beginning one year and ending ten years after the Distribution. Following the Distribution, Mindspeed began operations as an independent, publicly held company.

Basis of Presentation — The consolidated condensed financial statements, prepared in accordance with accounting principles generally accepted in the United States of America, include the accounts of Mindspeed and each of its subsidiaries. All intercompany accounts and transactions among Mindspeed and its subsidiaries have been eliminated in consolidation. In the opinion of management, the accompanying consolidated condensed financial statements contain all adjustments, consisting of adjustments of a normal recurring nature and special charges (Note 8), necessary to present fairly the Company’s financial position, results of operations and cash flows in accordance with generally accepted accounting principles (GAAP) in the United States of America. The results of operations for interim periods are not necessarily indicative of the results that may be expected for a full year. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 2, 2009, and the Current Report on Form 8-K filed on November 24, 2009 to update the financial information in its Annual Report on Form 10-K for the fiscal year ended October 2, 2009.

In June 2009, the Financial Accounting Standards Board, or FASB, established the Accounting Standards Codification, ASC or Codification, as the source of authoritative GAAP recognized by the FASB. The Codification is effective in the first interim and annual periods ending after September 15, 2009 and had no effect on the Company’s consolidated financial statements.

Fiscal Periods — The Company’s interim fiscal quarters end on the thirteenth Friday of each quarter. The third quarter of fiscal 2010 and 2009 ended on July 2, 2010 and July 3, 2009, respectively.

Recent Accounting Standards — On October 3, 2009, the Company adopted ASC 470-20, for the accounting of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlements), formerly FASB Staff Position APB 14-1. This standard required retrospective adjustments to prior period financial statements to conform with the current accounting treatment. Accordingly, the Company’s prior period financial statements have been adjusted. ASC 470-20 requires that convertible debt instruments that may be settled in cash be separated into a debt component and an equity component. The value assigned to the debt component as of the issuance date is the estimated fair value of a similar debt instrument without the conversion feature. The difference between the proceeds obtained for the instruments and the estimated fair value assigned to the debt component represents the equity component. See Note 5 for additional information on the adoption of this accounting standard.

On October 3, 2009, the Company adopted ASC 260-10-45-61A, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. This authoritative guidance provides that before the completion of an award’s requisite service period, all outstanding awards that contain rights to nonforfeitable dividends in undistributed earnings with common stock are participating securities and shall be included in the computation of earnings per share. The Company determined that a limited number of its instruments granted in share-based payment transactions contained rights to nonforfeitable dividends in undistributed earnings. During the first quarter of fiscal 2010, the Company amended the related instruments’ plan documents to eliminate this provision and therefore no longer has any instruments subject to this authoritative guidance. The Company has determined that there is no impact to its presentation of earnings per share in any historical periods by including the limited number of applicable instruments prior to this plan amendment.

In September 2006, the FASB issued provisions under ASC 820-10, Fair Value Measurements and Disclosures, in order to increase consistency and comparability in fair value measurements by defining fair value, establishing a framework for measuring fair value in accordance with GAAP, and expanding disclosures about fair value measurements. In February 2008, the FASB released additional guidance under ASC 820-10, which delayed the effective date of the September 2006 provisions for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. Consistent with the February 2008 updates, the Company elected to defer the adoption of the September 2006 provisions for nonfinancial assets and liabilities measured at fair value on a non-recurring basis until October 3, 2009. The Company adopted ASC 820-10 for non-financial assets and liabilities on October 3, 2009. This adoption did not have a material impact on the Company’s consolidated financial statements.

Income Taxes — The provision for income taxes for the nine months ended July 2, 2010 and July 3, 2009 principally consists of income taxes incurred by the Company’s foreign subsidiaries and amounts related to the alternative minimum tax in the United States. In the first nine months of fiscal 2010, there has been no change in the balance of unrecognized tax benefits. The Company does not expect that the unrecognized tax benefit will change significantly within the next 12 months.

Per Share Information — Basic income/(loss) per share is computed by dividing net income by the weighted average number of shares outstanding. In computing diluted earnings per share, the weighted average number of shares outstanding is adjusted to additionally reflect the effect of potentially dilutive securities such as stock options, warrants, convertible senior notes, shares to be issued under the Company’s employee stock purchase plan and unvested restricted stock units. The dilutive effect of stock options, warrants, unvested restricted stock units and shares to be issued under the employee stock purchase plan is computed under the provision of ASC 718, Compensation — Stock Compensation, using the treasury stock method. Under ASC 718, the Company is also required to add the weighted average common share equivalents associated with the conversion of its convertible senior notes for all periods in which the securities were determined to be dilutive to the number of shares outstanding to be used in the calculation of diluted earnings per share. A reconciliation of the numerators and denominators of basic and diluted earnings per share consisted of the following (in thousands, except per share amounts):

		Three months ended								Nine months ended
		July 2,				July 3,				July 2,				July 3,
		2010				2009				2010				2009
Earnings per share — basic
Net income/(loss)		$	4,864			$	(3,220	)		$	7,843			$	(23,784	)
Basic weighted average common shares outstanding			31,481				23,619				29,781				23,533
Earnings per share — basic		$	0.15			$	(0.14	)			0.26				(1.01	)
Earnings per share — diluted
Net income/(loss)		$	4,864			$	(3,220	)		$	7,843			$	(23,784	)
Add: Interest expense on convertible notes, net of tax			375				—				—				—
Net income, adjusted		$	5,239			$	(3,220	)		$	7,843			$	(23,784	)
Basic weighted average common shares outstanding			31,481				23,619				29,781				23,533
Effect of dilutive securities:
Convertible senior notes			3,165				—				—				—
Dilutive stock awards			1,411				—				1,161				—
Dilutive employee stock purchase plan shares			18				—				—				—
Diluted weighted average common shares outstanding			36,075				23,619				30,942				23,533
Earnings per share — diluted		$	0.15			$	(0.14	)			0.25				(1.01	)

Stock options and warrants to purchase approximately 8.4 million shares as of July 2, 2010 were outstanding but not included in the computation of diluted earnings per share for the three months ended July 2, 2010 because the effect would have been anti-dilutive. Stock options, warrants and convertible senior notes to purchase approximately 11.8 million shares as of July 2, 2010 were outstanding but not included in the computation of diluted earnings per share for the nine months ended July 2, 2010 because the effect would have been anti-dilutive.

Because the Company incurred a net loss in the three and nine months ended July 3, 2009, the inclusion of the Company’s outstanding stock options, warrants and convertible senior notes would have been anti-dilutive and thus were not included in the computation of diluted loss per share.

Concentrations — Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash and cash equivalents and trade accounts receivable. Cash and cash equivalents consist of demand deposits and money market funds maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with high credit quality financial institutions and therefore have minimal credit risk. The Company’s trade accounts receivable primarily are derived from sales to manufacturers of network infrastructure equipment and electronic component distributors. Management believes that credit risks on trade accounts receivable are moderated by the diversity of its end customers and geographic sales areas. The Company performs ongoing credit evaluations of its customers’ financial condition.

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

		Three months ended								Nine months ended
		July 2,				July 3,				July 2,				July 3,
		2010				2009				2010				2009
Customer A			15	%			10	%			17	%			15	%
Customer B			19	%			14	%			15	%			13	%
Customer C			13	%			19	%			11	%			12	%
Customer D			6	%			18	%			8	%			14	%

The following direct customers accounted for 10% or more of total accounts receivable at each period end:

		July 2,				October 2,
		2010				2009
Customer A			11	%			19	%
Customer B			18	%			10	%
Customer C			19	%			6	%
Customer E			10	%			5	%
Customer F			4	%			10	%

Supplemental Cash Flow Information — Interest paid for the nine months ended July 2, 2010 and July 3, 2009 was $719,000 and $1.2 million, respectively. Income taxes paid, net of refunds received, for the nine months ended July 2, 2010 and July 3, 2009 were $220,000 and $516,000, respectively. Non-cash investing activities in the first nine months of fiscal 2010 consisted of the purchase of $414,000 of property and equipment from suppliers on account, the license of $485,000 of intellectual property on account and the purchase of $1.1 million of equipment through capital leasing arrangements. Non-cash investing activities in the first nine months of fiscal 2009 consisted of the purchase of $59,000 of property and equipment from suppliers on account, as well as the license of $3.8 million of intellectual property on account.

2. Supplemental Financial Statement Data

Inventories

Inventories consist of the following (in thousands):

		July 2,				October 2,
		2010				2009
Work-in-process		$	4,619			$	4,124
Finished goods			4,774				6,778
Total inventories		$	9,393			$	10,902

Cost of goods sold includes the favorable effect of sales of certain inventories that the Company had previously written down to a zero cost basis during fiscal 2001. The favorable effect of such sales was $191,000 in the third quarter of fiscal 2010 and $312,000 in the third quarter of fiscal 2009. For the nine months ended July 2, 2010 and July 3, 2009, the favorable effect of such sales was $1.1 million and $1.3 million, respectively. These sales resulted from renewed demand for certain products that was not anticipated at the time of the write-downs. The previously written-down inventories were generally sold at prices which exceeded their original cost. As of July 2, 2010, the Company continued to hold inventories with an original cost of $2.6 million, which were previously written down to zero in 2001.

Deferred Income on Shipments to Distributors

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

		July 2,				October 2,
		2010				2009
Deferred revenue on shipments to distributors		$	4,052			$	2,984
Deferred cost of inventory on shipments to distributors			(422	)			(422	)
Reserves			42				42
Deferred income on sales to distributors		$	3,672			$	2,604

Comprehensive Income/(Loss)

Comprehensive income/(loss) is as follows (in thousands):

		Three months ended								Nine months ended
		July 2,				July 3,				July 2,				July 3,
		2010				2009				2010				2009
						As Adjusted-								As Adjusted-
						Note 5								Note 5
Net income/(loss)		$	4,864			$	(3,220	)		$	7,843			$	(23,784	)
Foreign currency translation adjustments, net of tax			(444	)			331				(767	)			(303	)
Comprehensive income/(loss)		$	4,420			$	(2,889	)		$	7,076			$	(24,087	)

Comprehensive income/(loss) at July 2, 2010 and July 3, 2009 consist of net income/(loss) and accumulated foreign currency translation adjustments.

Revenues by Product Line

Revenues by product line are as follows (in thousands):

		Three months ended								Nine months ended
		July 2,				July 3,				July 2,				July 3,
		2010				2009				2010				2009
Communications convergence processing products		$	17,823			$	13,642			$	47,946			$	35,212
High-performance analog products			14,332				9,998				39,442				28,679
WAN communications products			11,126				8,905				33,172				22,918
Intellectual property			—				—				—				5,000
Total net revenues		$	43,281			$	32,545			$	120,560			$	91,809

Revenues by Geographic Area

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

		Three months ended								Nine months ended
		July 2,				July 3,				July 2,				July 3,
		2010				2009				2010				2009
Americas		$	10,472			$	6,989			$	26,978			$	28,042
Asia-Pacific			29,832				23,192				84,745				54,389
Europe, Middle East and Africa			2,977				2,364				8,837				9,378
Total net revenues		$	43,281			$	32,545			$	120,560			$	91,809

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

3. Fair Value Measurements

On October 4, 2008, the Company adopted certain provisions under ASC 820, Fair Value Measurements and Disclosures, for financial assets and financial liabilities and for non-financial assets and non-financial liabilities that we recognize or disclose at fair value on a recurring basis (at least annually). As of the date of adoption, these included cash equivalents and convertible senior notes.

ASC 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 establishes a three-level hierarchy for disclosure that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities.

•

Level 1 uses unadjusted quoted prices that are available in active markets for identical assets or liabilities. The Company’s Level 1 assets include investments in money market funds.

•

Level 2 uses inputs other than quoted prices included in Level 1 that are either directly or indirectly observable through correlation with market data. These include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs to valuation models or other pricing methodologies that do not require significant judgment because the inputs used in the model, such as interest rates and volatility, can be corroborated by readily observable market data. The Company’s Level 2 liabilities include convertible senior notes.

•

Level 3 uses one or more significant inputs that are unobservable and supported by little or no market activity, and reflect the use of significant management judgment. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation. The Company does not have any assets or liabilities that are valued using inputs identified under a Level 3 hierarchy.

The following table represents financial assets that the Company measured at fair value in accordance with ASC 825, Financial Instruments. The Company has classified these assets in accordance with the fair value hierarchy set forth in ASC 820 (in thousands):

		Quoted Prices in
		Active Markets
		for Identical				Total Fair Value
		Instruments				as
July 2, 2010		(Level 1)				of July 2, 2010
Assets:
Cash		$	16,606			$	16,606
Money market fund			10,500				10,500
Government money market fund			7,001				7,001
Total cash and cash equivalents		$	34,107			$	34,107

		Quoted Prices in
		Active Markets
		for Identical				Total Fair Value
		Instruments				as
October 2, 2009		(Level 1)				of October 2, 2009
Assets:
Cash		$	20,891			$	20,891
Total cash and cash equivalents		$	20,891			$	20,891

4. Stock-Based Compensation

The Company accounts for stock-based compensation under the provisions of ASC 718, Compensation — Stock Compensation. ASC 718 requires that the Company account for all stock-based compensation using a fair-value method and recognize the fair value of each award as an expense over the service period.

Stock-based compensation awards generally vest over time and require continued service to the Company and, in some cases, require the achievement of specified performance conditions. The amount of compensation expense recognized is based upon the number of equity awards that are ultimately expected 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 history of operating losses and of the uncertainty regarding future operating results, no income tax benefits have been recognized for any U.S. federal and state operating losses—including those related to stock-based compensation expense. The Company does not expect to recognize any income tax benefits relating to its operating losses until it determines that such tax benefits are more likely than not to be realized.

The fair value of stock options awarded during the nine months ended July 2, 2010 and July 3, 2009 was estimated at the date of grant using the Black-Scholes option-pricing model. The following table summarizes the weighted-average assumptions used and the resulting fair value of options granted:

		Nine months ended
		July 2,				July 3,
		2010				2009
Weighted-average fair value of options granted		$	3.16			$	1.07
Weighted-average assumptions:
Expected option life		2.8 years				2.8 years
Risk-free interest rate			1.3	%			1.4	%
Expected volatility			95	%			87	%
Dividend yield			—				—

The expected option term was estimated at issuance based upon historical experience and management’s expectation of exercise behavior. The expected volatility of the Company’s stock price is based upon the historical daily changes in the price of the Company’s common stock. The risk-free interest rate is based upon the current yield on U.S. Treasury securities having a term similar to the expected option term. Dividend yield is estimated at zero because the Company does not anticipate paying dividends in the foreseeable future.

Stock-based compensation expense related to employee stock options and restricted stock under ASC 718 was allocated as follows (in thousands):

		Three months ended								Nine months ended
		July 2,				July 3,				July 2,				July 3,
		2010				2009				2010				2009
Cost of goods sold		$	44			$	18			$	114			$	67
Research and development			216				211				721				651
Selling, general and administrative			688				473				2,330				1,478
Total stock-based compensation expense		$	948			$	702			$	3,165			$	2,196

Stock Compensation Plans

The Company has two principal stock incentive plans: the 2003 Long-Term Incentives Plan and the Directors Stock Plan. The 2003 Long-Term Incentives Plan provides for the grant of stock options, unrestricted stock, restricted stock, restricted stock units and other stock-based awards to officers and employees of the Company. The Directors Stock Plan provides for the grant of stock options, restricted stock units and other stock-based awards to the Company’s non-employee directors. On March 10, 2010, the stockholders of the Company approved a plan amendment, which increased the number of shares authorized for issuance under the Directors Stock Plan to 438,000. The authorized number of shares reserved for issuance under the 2003 Long-Term Incentives Plan is approximately 6.7 million shares. As of July 2, 2010, an aggregate of 1.2 million shares of the Company’s common stock were available for issuance under these plans.

The Company also has a 2003 Stock Option Plan, under which stock options were issued in connection with the Distribution. In the Distribution, each holder of a Conexant stock option (other than options held by persons in certain foreign locations) received an option to purchase a number of shares of Mindspeed common stock. The number of shares subject to, and the exercise prices of, the outstanding Conexant options and the Mindspeed options were adjusted so that the aggregate intrinsic value of the options was equal to the intrinsic value of the Conexant option immediately prior to the Distribution and the ratio of the exercise price per share to the market value per share of each option was the same immediately before and after the Distribution. As a result of such option adjustments, Mindspeed issued options to purchase an aggregate of approximately 6.0 million shares of its common stock to holders of Conexant stock options (including Mindspeed employees) under the 2003 Stock Option Plan. There are no shares available for new stock option awards under the 2003 Stock Option Plan. However, any shares subject to the unexercised portion of any terminated, forfeited or cancelled option are available for future option grants only in connection with an offer to exchange outstanding options for new options.

At the Company’s annual meeting of stockholders held on March 10, 2010, the Company’s stockholders approved an employee stock purchase plan and the reservation of 500,000 shares for issuance under the plan. The purpose of the employee stock purchase plan is to provide eligible employees with the opportunity to purchase shares of the Company’s common stock through payroll deductions at a discount from the then current market price. The purchase price per share at which common stock is purchased on the participant’s behalf for each offering period is equal to the lower of: (i) 85% of the fair market value per share of common stock on the date of commencement of such offering period; and (ii) 85% of the fair market value per share of common stock on the last day of such offering period. Under the plan, eligible employees may authorize payroll deductions of up to 10% of eligible compensation for the purchase of common stock during each semi-annual purchase period. The employee stock purchase plan, and the right of participants to make purchases thereunder, is intended to qualify under the provisions of Sections 421 and 423 of the Internal Revenue Code. The first offering period under this plan began during the third quarter of fiscal 2010 and will end in the first quarter of fiscal 2011.

From time to time, the Company may issue, and has previously issued stock based awards outside of these plans pursuant to stand-alone agreements and in accordance with NASDAQ Listing Rule 5635(c).

Stock Option Awards

Prior to fiscal 2006, stock-based compensation consisted principally of stock options. Eligible employees received grants of stock options at the time of hire, and the Company made broad-based stock option grants covering substantially all employees annually. Stock option awards have exercise prices not less than the market price of the common stock at the grant date and a contractual term of eight or ten years, and are subject to time-based vesting (generally over four years). On April 10, 2009, the Company offered current eligible employees of Mindspeed and its subsidiaries the right to exchange certain unexercised options to purchase shares of the Company’s common stock. The offer period on the exchange program ended on May 15, 2009, at which time the Company exchanged 754,000 previously issued stock options for 250,000 new stock options with an exercise price of $1.70, the market price of the Company’s common stock on that date. The Company has chosen to account for this transaction under the bifurcated approach whereby the remaining unamortized expense of the exchanged awards is recognized over the original award period. The Company recorded an insignificant amount of incremental compensation expense in conjunction with this exchange.

The following table summarizes stock option activity under all plans (shares in thousands):

										Weighted-Average
		Number				Weighted-Average				Remaining
		of Shares				Exercise Price				Contractual Term
Outstanding at October 2, 2009			3,128			$	6.48			4.9 years
Granted			561				5.41
Exercised			(433	)			3.40
Forfeited or expired			(289	)			10.39
Outstanding at July 2, 2010			2,967				6.35			5.0 years
Exercisable at end of period			1,416			$	9.48			3.1 years

As of July 2, 2010, there was unrecognized compensation expense of $2.6 million related to unvested stock options, which the Company expects to recognize over a weighted-average period of 1.5 years. The aggregate intrinsic value of options outstanding and options exercisable as of July 2, 2010 was $6.9 million and $1.7 million, respectively.

On March 10, 2010, the Company amended the terms of stock options held by the Company’s Chairman of the Board to acquire an aggregate of 166,455 shares of the Company’s common stock. The stock options were originally issued in connection with the Distribution, as discussed in Note 1, and were scheduled to expire on March 31, 2010. In recognition of past and continuing contributions to the Company’s business, the Company extended the exercisability period of these stock options until the earlier of: (i) 90 days following his resignation, retirement or removal from the Board; and (ii) scheduled expiration dates through November 2012. Except for the amendments to the exercisability period of the stock options, the stock options will continue to be governed by their original terms and conditions. Modification of these options resulted in $397,000 of stock compensation expense recorded in the second quarter of fiscal 2010. Valuation of this modification was based on the Hull-White Lattice valuation model, which measured the incremental change in the value of these options as a result of the modification.

Stock Awards

The Company’s stock incentive plans also provide for awards of restricted and unrestricted shares of common stock and other stock-based incentive awards and from time to time the Company has used stock awards for incentive or retention purposes.

Restricted stock awards have time-based vesting and/or performance conditions and are generally subject to forfeiture if employment terminates prior to the end of the service period or if the prescribed performance criteria are not met. Restricted stock awards are valued at the grant date based upon the market price of the Company’s common stock and the fair value of each award is charged to expense over the service period. Many of the Company’s restricted stock awards are intended to provide performance emphasis and incentive compensation through vesting tied to each employee’s performance against individual goals, as well as to improvements in the Company’s operating performance. The actual amounts of expense will depend on the number of awards that ultimately vest upon the satisfaction of the related performance and service conditions.

On March 10, 2010, the Company granted awards of 190,000 shares of unrestricted stock to certain executive officers of the Company, with vesting subject to satisfaction of specific market and performance conditions. These awards begin to vest on the date when the average of the closing price of the Company’s common stock over a consecutive 20-day trading period reaches certain minimum amounts. On each vesting trigger date, 8.33% of the shares of common stock underlying these awards will vest for each completed three month period from the grant date to the vesting trigger date. An additional 8.33% of the shares of common stock underlying these awards will vest on each three month anniversary date of the vesting trigger date. If the vesting trigger price is not achieved prior to the three year anniversary date of the grant date, these awards will be forfeited. These unrestricted stock awards were valued using the Monte Carlo simulation model, which estimates value based on the probability of vesting achievement.

The fair value of each stock award is charged to expense over the service period. The following table summarizes restricted stock award activity (shares in thousands):

						Weighted-
		Number				Average
		of				Grant Date
		Shares				Fair Value
Nonvested shares at October 2, 2009			371			$	4.50
Granted			731				6.81
Vested			(327	)			4.71
Forfeited			(12	)			3.00
Nonvested shares at July 2, 2010			763			$	6.44

The total fair value of shares vested during the nine months ended July 2, 2010 was $2.3 million. As of July 2, 2010 there was unrecognized compensation expense of $2.5 million related to unvested stock awards, which the Company expects to recognize over a weighted-average period of approximately one year.

5. Revolving Credit Facility and Convertible Senior Notes

Revolving Credit Facility

In April 2010, the Company amended its revolving credit facility agreement with Silicon Valley Bank and reduced the maximum amount available under the credit line from $15.0 million to $5.0 million. This amendment was initiated in order to reduce fees due under the agreement.

At July 2, 2010, the Company had no outstanding borrowings under the revolving credit facility.

3.75% Convertible Senior Notes due 2009

In December 2004, the Company sold $46.0 million aggregate principal amount of 3.75% convertible senior notes due 2009 for net proceeds (after discounts and commissions) of approximately $43.9 million. The notes were senior unsecured obligations of the Company, ranking equal in right of payment with all future unsecured indebtedness. The convertible senior notes had an interest rate of 3.75%, payable semiannually in arrears each May 18 and November 18.

The notes were convertible, at the option of the holder, at any time prior to maturity into shares of the Company’s common stock. If the notes had been converted, the Company had the option to elect to deliver cash in lieu of shares of its common stock or a combination of cash and shares of common stock. Effective May 13, 2005, the conversion price of the notes was adjusted to $11.55 per share of common stock, which was equal to a conversion rate of approximately 86.58 shares of common stock per $1,000 principal amount of notes. Prior to this adjustment, the conversion price applicable to the notes was $14.05 per share of common stock, which was equal to approximately 71.17 shares of common stock per $1,000 principal amount of notes. The adjustment was made pursuant to the terms of the indenture governing the notes. The conversion price was subject to further adjustment under the terms of the indenture to reflect stock dividends, stock splits, issuances of rights to purchase shares of common stock and certain other events.

In July 2008, $15.0 million of the 3.75% convertible senior notes were exchanged as discussed below. In October 2008, the Company repurchased $20.5 million aggregate principal amount of the notes due in November 2009, for $17.3 million in cash. The repurchases occurred in two separate transactions on October 16 and October 23, 2008. During the first quarter of fiscal 2010, the 3.75% convertible senior notes matured and the remaining balance of $10.5 million was repaid.

6.50% Convertible Senior Notes due 2013

On July 30, 2008, the Company entered into separate exchange agreements with certain holders of its 3.75% convertible senior notes, pursuant to which holders of an aggregate of $15.0 million of the notes agreed to exchange their notes for $15.0 million in aggregate principal amount of a new series of 6.50% convertible senior notes due 2013 (the “Exchange Offer”). The exchanges closed on August 1, 2008. The Company paid at the closing an aggregate of approximately $100,000 in accrued and unpaid interest on the 3.75% convertible senior notes that were exchanged for the 6.50% convertible senior notes, as well as approximately $900,000 in transaction fees.

The 6.50% convertible senior notes are convertible at the option of the holders, at any time on or prior to maturity, into shares of the Company’s common stock at a conversion rate initially equal to approximately $4.74 per share of common stock, which is subject to adjustment in certain circumstances. Upon conversion of the notes, the Company generally has the right to deliver to the holders thereof, at the Company’s option: (i) cash; (ii) shares of the Company’s common stock; or (iii) a combination thereof. The initial conversion price of the 6.50% convertible senior notes will be adjusted to reflect stock dividends, stock splits, issuances of rights to purchase shares of the Company’s common stock, and upon other events. If the Company undergoes certain fundamental changes prior to maturity of the notes, the holders thereof will have the right, at their option, to require us to repurchase for cash some or all of their 6.50% convertible senior notes at a repurchase price equal to 100% of the principal amount of the notes being repurchased, plus accrued and unpaid interest (including additional interest, if any) to, but not including, the repurchase date, or convert the notes into shares of its common stock and, under certain circumstances, receive additional shares of its common stock in the amount provided in the indenture.

For financial accounting purposes, the Company’s contingent obligation to issue additional shares or make additional cash payment upon conversion following a fundamental change is an “embedded derivative.” As of July 2, 2010, the liability under the fundamental change adjustment has been recorded at its estimated fair value and is not significant.

Impact of Adoption of New Accounting Standard

ASC 470-20, the new accounting standard for convertible debt that may be settled in cash upon conversion, changed the accounting for the Company’s convertible notes and the related debt issuance costs. Prior to the issuance of this accounting standard, the Company reported the 3.75% convertible senior notes at their principal amount of $46.0 million, less an original issuance discount of $2.1 million, in long-term debt and capitalized debt issuance costs amounting to approximately $400,000. Upon adoption of the new accounting standard as of October 3, 2009, the Company adjusted the accounting for these convertible notes and the related deferred financing costs for all prior periods since their initial issuance, as described in Note 1. The Company determined that the estimated fair value of debt instruments similar to its 3.75% convertible senior notes, without the conversion feature, was $28.4 million at the time of issuance. The resulting $17.6 million discount on the debt was amortized through interest expense over the period from December 2004 through November 2009, which represented the expected life of the debt. The equity component, recorded as additional paid-in capital, was $15.6 million as of the date of issuance, which represents the difference between the proceeds from issuance of the 3.75% senior convertible notes and the fair value of the debt as of the date of issuance. Additionally, the Company reclassified approximately $146,000 of the deferred financing costs to equity as equity issuance costs, which will not be amortized to the statement of operations.

On July 30, 2008, the Company completed the Exchange Offer. Prior to the issuance of ASC 470-20, the Company reported the 6.50% convertible senior notes at their principal amount of $15.0 million in long-term debt and capitalized debt issuance costs amounting to approximately $900,000. Upon adoption of the new accounting standard as of October 3, 2009, the Company also adjusted the accounting for these convertible notes and the related deferred financing costs for all prior periods since their initial issuance. The Company determined that the estimated fair value of debt instruments similar to its 6.50% convertible senior notes, without the conversion feature, was $13.0 million at the time of issuance. The resulting $2.0 million discount on the debt will be amortized through interest expense over the period from August 2008 through August 2013, which represents the expected life of the debt. In conjunction with the exchange, the Company recorded a gain of approximately $200,000 representing the difference between the fair value of the debt component of the newly issued instrument and the book value of the old debt instrument, less unamortized issuance costs. The carrying amount of the equity component upon the Exchange Offer was $2.0 million; however, there was no net change to additional paid-in capital.

In October 2008, the Company repurchased $20.5 million aggregate principal amount of its 3.75% convertible senior notes due in November 2009, for cash of $17.3 million. The repurchases occurred in two separate transactions on October 16 and October 23, 2008. In accordance with ASC 470-20, the Company recorded a gain of $1.1 million related to these repurchases. The gain was calculated as the difference between the fair value of the liability component of the notes immediately before settlement, and the book value of the notes net of unamortized debt issuance costs. To measure the fair value of the repurchased notes as of the settlement dates, the Company calculated an implied interest rate of approximately 17% using Level 2 observable inputs. This rate was applied to the repurchased portion of the notes using the same present value technique used in the valuation performed as of the issuance date. No value was allocated to the equity component of the instrument at the time of these extinguishments.

The October 2, 2009 condensed consolidated balance sheet, the consolidated condensed statement of operations for the three and nine months ended July 3, 2009, and the consolidated condensed statement of cash flows for the nine months ended July 3, 2009 have been adjusted for the change in accounting principle as follows:

Consolidated Balance Sheet		As Previously
October 2, 2009 (in thousands)		Reported				Adjustment				As Adjusted
Other assets — long term		$	1,479			$	(97	)		$	1,382
Total assets			62,560				(97	)			62,463
Convertible senior notes — short term			10,486				(137	)			10,349
Total current liabilities			29,472				(137	)			29,335
Convertible senior notes — long term			15,000				(1,585	)			13,415
Total liabilities			45,295				(1,722	)			43,573
Additional paid-in capital			280,919				15,414				296,333
Accumulated deficit			(249,074	)			(13,789	)			(262,863	)
Total stockholders’ equity			17,265				1,625				18,890
Total liabilities and stockholders’ equity		$	62,560			$	(97	)		$	62,463

Consolidated Condensed Statement of Operations		As Previously
Three months ended July 3, 2009 (in thousands)		Reported				Adjustment				As Adjusted
Interest expense		$	462			$	287			$	749
Loss before income taxes			(2,806	)			(287	)			(3,093	)
Net loss		$	(2,933	)		$	(287	)		$	(3,220	)
Net loss per share, basic and diluted		$	(0.12	)		$	(0.02	)		$	(0.14	)
Weighted average number of shares used in per share calculation			23,619								23,619

Consolidated Condensed Statement of Operations		As Previously
Nine months ended July 3, 2009 (in thousands)		Reported				Adjustment				As Adjusted
Interest expense		$	1,364			$	973			$	2,337
Other income, net			2,931				(1,759	)			1,172
Loss before income taxes			(20,663	)			(2,732	)			(23,395	)
Net loss		$	(21,052	)		$	(2,732	)		$	(23,784	)
Net loss per share, basic and diluted		$	(0.89	)		$	(0.12	)		$	(1.01	)
Weighted average number of shares used in per share calculation			23,533								23,533

Consolidated Condensed Statement of Cash Flows		As Previously
Nine months ended July 3, 2009 (in thousands)		Reported				Adjustment				As Adjusted
Cash flows from operating activities:
Net loss		$	(21,052	)		$	(2,732	)		$	(23,784	)
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on debt extinguishment			(2,880	)			1,759				(1,121	)
Amortization of debt discount			—				1,117				1,117
Other non-cash items, net*			247				(144	)			103
Net cash used in operating activities		$	(7,652	)		$	—			$	(7,652	)

The following table sets forth balance sheet information related to the notes (in thousands):

		July 2, 2010				October 2, 2009
3.75% convertible senior notes
Principal value of the liability component		$	—			$	10,500
Unamortized value of the liability component			—				151
Net carrying value of the liability component		$	—			$	10,349
6.50% convertible senior notes
Principal value of the liability component		$	15,000			$	15,000
Unamortized value of the liability component			1,290				1,585
Net carrying value of the liability component		$	13,710			$	13,415

The following table sets forth interest expense information related to the notes (in thousands):

		Three months ended								Nine months ended
		July 2,				July 3,				July 2,				July 3,
		2010				2009				2010				2009
3.75% convertible senior notes
Interest expense — coupon		$	—			$	98			$	48			$	334
Interest expense — debt discount amortization			—				243				151				831
Total		$	—			$	341			$	199			$	1,165
Effective interest rate on the liability component for the period			—				12.99	%			14.68	%			13.19	%
6.50% convertible senior notes
Interest expense — coupon		$	244			$	244			$	731			$	731
Interest expense — debt discount amortization			99				96				295				286
Total		$	343			$	340			$	1,026			$	1,017
Effective interest rate on the liability component for the period			9.15	%			9.07	%			9.12	%			9.04	%

6. Commitments and Contingencies

Various lawsuits, claims and proceedings have been or may be instituted or asserted against the Company, including those pertaining to product liability, intellectual property, environmental, safety and health and employment matters. In connection with the Distribution, the Company assumed responsibility for all contingent liabilities and current and future litigation against Conexant or its subsidiaries to the extent such matters relate to the Company.

The outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be determined unfavorably against the Company. Many intellectual property disputes have a risk of injunctive relief and there can be no assurance that the Company will be able to license a third party’s intellectual property. Injunctive relief could have a material adverse effect on the financial condition or results of operations of the Company. Based on its evaluation of matters which are pending or asserted, management of the Company believes the disposition of such matters will not have a material adverse effect on the financial condition or results of operations of the Company.

7. Asset Impairments and Other Charges

There were no asset impairments included within cost of goods sold for the three and nine months ended July 2, 2010, or within the three months ended July 3, 2009. Included within cost of goods sold for the nine months ended July 3, 2009 are asset impairments and other charges totaling $3.7 million. These charges include a $2.3 million write-down of the carrying value of developed technology related to the Company’s acquisition of certain assets of Ample Communications, Inc. which occurred in the fourth quarter of fiscal 2007. Management evaluated the recoverability of the assets related to Ample Communications to determine whether their value was impaired, based upon the future cash flows expected to be generated by the associated products over the remainder of their life cycles. Because the estimated undiscounted cash flows were less than the carrying value of the related assets, management determined that such assets were impaired. The Company recorded an impairment charge equal to the full book value of the assets by comparing the estimated fair value of the asset to their carrying value. The fair value was determined by computing the present value of the expected future cash flows using a discount rate of 20%, which management believes is commensurate with the underlying risks associated with the projected cash flows. Management believes the assumptions used in the discounted cash flow model represent a reasonable estimate of the fair value of the assets.

In addition, in the nine months ended July 3, 2009, asset impairments and other charges within cost of goods sold includes a $1.1 million write-down of Ample Communications related inventory due to a decrease in demand for these products. The Company assesses the recoverability of its inventories at least quarterly through a review of inventory levels in relation to foreseeable demand (generally over 12 months). Foreseeable demand is based upon all available information, including sales backlog and forecasts, product marketing plans and product life cycles. When the inventory on hand exceeds the foreseeable demand, the Company writes down the value of those inventories which, at the time of its review, the Company expects to be unable to sell. The amount of the inventory write-down is the excess of historical cost over estimated realizable value (generally zero). Once established, these write-downs are considered permanent adjustments to the cost basis of the excess inventory.

Also in the nine months ended July 3, 2009, the Company recorded other asset impairments within cost of goods sold totaling approximately $300,000 associated with manufacturing related property and equipment that the Company determined to abandon or scrap.

8. Special Charges

Special charges consisted of the following (in thousands):

		Three months ended								Nine months ended
		July 2,				July 3,				July 2,				July 3,
		2010				2009				2010				2009
Asset impairments		$	—			$	—			$	—			$	2,865
Restructuring charges			(184	)			9				605				4,031
Total special charges		$	(184	)		$	9			$	605			$	6,896

Asset Impairments

There were no asset impairments included within special charges for the three and nine months ended July 2, 2010, or in the three months ended July 3, 2009. In the nine months ended July 3, 2009, in addition to the $3.7 million in asset impairments and other charges included within cost of goods sold discussed in Note 7, the Company recorded asset impairment charges of $2.9 million. Included in this amount are asset impairment charges of approximately $500,000 related to software and property and equipment that the Company determined to abandon or scrap, as well as asset impairment charges of $2.4 million to write-down the carrying value of goodwill related to the Company’s acquisition of certain assets of Ample in the fourth quarter of fiscal 2007. In the second quarter of fiscal 2009, the Ample reporting unit experienced a severe decline in sales and profitability due to a significant decline in demand that the Company believes was a result of the downturn in global economic conditions, as well as a bankruptcy filed by the reporting unit’s most significant customer. The drop in market demand resulted in significant declines in unit sales. Due to these market and economic conditions, the Ample reporting unit experienced a significant decline in market value. As a result, the Company concluded that there were sufficient factual circumstances for interim impairment analyses. Accordingly, in the second quarter of fiscal 2009, the Company performed an assessment of goodwill for impairment. Based on the results of its assessment of goodwill for impairment, the Company determined that the carrying value of the Ample reporting unit exceeded its estimated fair value. Therefore, the Company performed a second step of the impairment test to estimate the implied fair value of goodwill. The required analysis indicated that there would be no remaining implied value attributable to goodwill in the Ample reporting unit and the Company impaired the entire goodwill balance of $2.4 million in the second quarter of fiscal 2009.

Restructuring Charges

Mindspeed First Quarter Fiscal 2010 Restructuring Plan — In the first quarter of fiscal 2010, the Company announced the implementation of cost reduction measures consisting of a facilities consolidation and a targeted headcount reduction. During the first nine months of fiscal 2010, the Company incurred special charges of $860,000 in connection with this restructuring, primarily related to contractual obligations on vacated space at its Newport Beach, California headquarters. The Company does not expect to incur any significant additional expenses related to this plan in future periods.

Activity and liability balances related to the Company’s first quarter of fiscal 2010 restructuring plan through July 2, 2010 were as follows (in thousands):

		Workforce				Facility and
		Reductions				Other				Total
Charged to costs and expenses		$	287			$	573			$	860
Cash payments			(225	)			(573	)			(798	)
Non-cash charges /(credits)			(62	)			—				(62	)
Restructuring balance, July 2, 2010		$	—			$	—			$	—

At July 2, 2010, there was no remaining accrued restructuring balance related to this plan.

Mindspeed Second Quarter Fiscal 2009 Restructuring Plan — In the second quarter of fiscal 2009, the Company announced the implementation of cost reduction measures with most of the savings expected to be derived from focused reductions in the areas of sales, general and administrative and wide area networking communication spending, including the closure of its Dubai facility. During fiscal 2009, the Company incurred special charges of $1.1 million in connection with this restructuring, primarily related to severance costs for affected employees. This restructuring plan is complete and the Company does not expect to incur significant additional expenses related to this restructuring plan in future periods.

Activity and liability balances related to the Company’s second quarter fiscal 2009 restructuring plan from October 2, 2009 through July 2, 2010 were as follows (in thousands):

		Workforce				Facility and
		Reductions				Other				Total
Restructuring balance, October 2, 2009		$	78			$	—			$	78
Cash payments			(30	)			—				(30	)
Non-cash charges /(credits)			(23	)			—				(23	)
Restructuring balance, July 2, 2010		$	25			$	—			$	25

The remaining accrued restructuring balance principally represents employee severance benefits. The Company expects to pay these obligations over their respective terms, which expire at various dates through fiscal 2010.

Mindspeed First Quarter Fiscal 2009 Restructuring Plan — During the first quarter of fiscal 2009, the Company implemented a restructuring plan under which it reduced its workforce by approximately 6%. In connection with this reduction in workforce, the Company recorded a charge of $2.4 million for severance benefits payable to the affected employees. In December 2008, the Company vacated approximately 70% of its Massachusetts facility and recorded a charge related to contractual obligations on this space of approximately $400,000. This restructuring plan is complete and the Company does not expect to incur significant additional expenses related to this restructuring plan in future periods.

Activity and liability balances related to the Company’s first quarter fiscal 2009 restructuring plan from October 2, 2009 through July 2, 2010 were as follows (in thousands):

		Workforce				Facility
		Reductions				and Other				Total
Restructuring balance, October 2, 2009		$	287			$	86			$	373
Cash payments			(93	)			(80	)			(173	)
Non-cash charges /(credits)			(159	)			(6	)			(165	)
Restructuring balance, July 2, 2010		$	35			$	—			$	35

The remaining accrued restructuring balance principally represents employee severance benefits and other contractual commitments. The Company expects to pay these obligations over their respective terms, which expire at various dates through fiscal 2011.

9. Related Party Transactions

For the nine months ended July 2, 2010 and July 3, 2009, rent and operating expenses related to the Company’s corporate headquarters in Newport Beach, California and paid to Conexant were $4.0 million and $3.9 million, respectively. In June 2010, the Company paid Conexant $100,000 to settle a legal dispute related to its corporate headquarters. On June 26, 2010, the Company’s sublease of its corporate headquarters from Conexant expired. The Company entered into a new lease with the current owner of the property who is not a related party.

10. Subsequent Events

In July 2010, the Company announced that it entered into an agreement for the sale of certain legacy patents for $10.0 million, of which $7.5 million in cash should be received in the Company’s fourth quarter of fiscal 2010 and the remaining $2.5 million in cash should be received in the Company’s first quarter of fiscal 2011. The patent sale agreement does not include potential future revenues derived from licensing royalties.

On July 26, 2010, the Company committed to the implementation of a new restructuring plan. The plan consists primarily of a targeted headcount reduction in the Company’s wide area networking business unit and selling, general and administrative functions. The restructuring plan is expected to be substantially completed during the fiscal fourth quarter of 2010. The Company made the decision to implement the restructuring in furtherance of its efforts to maintain tight controls over operating expenses and to continue to reallocate resources from certain of its business units and selling, general and administrative functions to its two growth drivers, communications convergence processing and high-performance analog. The Company currently expects to incur total special charges ranging from approximately $1.1 million to $1.5 million and to make cash expenditures ranging from approximately $800,000 to $1.2 million resulting from these actions. Of the $1.1 million to $1.5 million total special charges: $700,000 to $1.0 million is primarily related to severance costs for affected employees; $100,000 to $200,000 is primarily related to facilities costs; and $300,000 is primarily related to abandoned technology.

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

This information should be read in conjunction with our unaudited consolidated condensed financial statements and the notes thereto included in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for our fiscal year ended October 2, 2009.

Overview

Mindspeed Technologies, Inc. (we or Mindspeed) designs, develops and sells semiconductor solutions for communications applications in the wireline and wireless network infrastructure, which includes today’s separate, but interrelated and converging, enterprise, broadband access, metropolitan and wide area networks. Our products are classified into three focused product families: communications convergence processing (formerly known as multiservice access); high-performance analog; and wide area networking. Our communications convergence processing products include ultra-low-power multi-core digital signal processor (DSP) system-on-a-chip products for carrier-class triple-play edge gateways, metro trunking gateways and voice-over-IP (VoIP) and multi-play service platforms in the carrier infrastructure. Our communications convergence processing products are also used in broadband customer premises equipment (CPE) gateways and other equipment that carriers are deploying in order to deliver voice, data and video services to residential subscribers. Our high-performance analog products include high-density crosspoint switches, optical drivers and other devices, plus timing, equalization and signal-conditioning solutions for next-generation fiber access networks, including ethernet passive optical networking (EPON) and gigabit passive optical networking (GPON) equipment. Our high-performance analog technology also helps address switching, timing and signal-conditioning challenges being used in enterprise storage equipment, and is helping to drive the broadcast-video network transition to 3G high-definition transmission. Our wide area networking (WAN) communications products include a broad portfolio for legacy requirements in the existing circuit-switched network, as well as emerging 3G wireless backhaul applications.

Our products are sold to original equipment manufacturers (OEMs) for use in a variety of network infrastructure equipment, including voice and media gateways, high-speed routers, switches, access multiplexers, cross-connect systems, add-drop multiplexers, digital loop carrier equipment, IP private branch exchanges, optical modules, broadcast video systems and wireless basestation equipment. Service providers use this equipment for:

	•		packet processing in high-speed multiservice access applications, including advanced VoIP and triple-play (voice, data and video) service delivery;
	•		high-speed analog transmission and switching for next-generation optical networking, enterprise storage and broadcast video transmission applications, with difficult switching, timing and synchronization requirements; and
	•		WAN communications over the public switched telephone network, which furnishes much of the Internet’s underlying long-distance infrastructure.

Our customers include Alcatel-Lucent, Cisco Systems, Inc., Huawei Technologies Co. Ltd., Hitachi Ltd., LM Ericsson Telephone Company, Nokia Siemens Networks and Zhongxing Telecom Equipment Corp.

Trends and Factors Affecting Our Business

Our products are components of network infrastructure equipment. As a result, we rely on network infrastructure OEMs to select our products from among alternative offerings to be designed into their equipment. These “design wins” are an integral part of the long sales cycle for our products. Our customers may need six months or longer to test and evaluate our products and an additional six months or more to begin volume production of equipment that incorporates our products. We believe our close relationships with leading network infrastructure OEMs facilitate early adoption of our products during development of their products, enhance our ability to obtain design wins and encourage adoption of our technology by the industry. We believe our diverse portfolio of semiconductor solutions has us well positioned to capitalize on some of the most significant trends in telecommunications spending, including: next generation network convergence; VoIP/fiber access deployment in developing and developed markets; 3G/4G wireless infrastructure build-out; the adoption of higher speed interconnectivity solutions; and the migration of broadcast video to high definition.

We market and sell our semiconductor products directly to network infrastructure OEMs. We also sell our products indirectly through electronic component distributors and third-party electronic manufacturing service providers, who manufacture products incorporating our semiconductor networking solutions for OEMs. Sales to distributors accounted for approximately 50% of our revenues for the first nine months of fiscal 2010 and 44% of our revenues for the first nine months of fiscal 2009. Our revenue is diversified globally, with 78% of revenue in the first nine months of fiscal 2010 coming from outside of the Americas. We believe a portion of the products we sell to OEMs and third-party manufacturing service providers in the Asia-Pacific region is ultimately shipped to end markets in the Americas and Europe. We believe we are well-situated in China, where fiber deployments are being rolled out by the country’s major telecommunications carriers. Through our OEM customers, we are shipping into the fiber-to-the-building (FTTB) deployments of China Telecom Corporation Limited, China Unicom Limited and China Mobile Limited. In the first nine months of fiscal 2010, 34% of our revenue was derived from China, compared to 42% in the first nine months of fiscal 2009.

We have significant research, development, engineering and product design capabilities. Our success depends to a substantial degree upon our ability to develop and introduce in a timely fashion new products and enhancements to our existing products that meet changing customer requirements and emerging industry standards. We have made, and plan to make, substantial investments in research and development and to participate in the formulation of industry standards. We spent approximately $37.5 million on research and development in the first nine months of fiscal 2010 and $38.5 million in the first nine months of fiscal 2009. We seek to maximize our return on our research and development spending by focusing our research and development investment in what we believe are key growth markets, including VoIP and other high-bandwidth multiservice access applications, plus high-performance analog applications, such as optical networking and broadcast-video transmission, and wireless infrastructure solutions for basestation processing and backhaul applications. We have developed and maintain a broad intellectual property portfolio, and we may periodically enter into strategic arrangements to leverage our portfolio by licensing or selling our intellectual property.

We are dependent upon third parties for the development, manufacturing, assembly and testing of our products. Our ability to bring new products to market, to fulfill orders and to achieve long-term revenue growth is dependent upon our ability to obtain sufficient external manufacturing capacity, including wafer fabrication capacity. Periods of upturn in the semiconductor industry may be characterized by rapid increases in demand and a shortage of capacity for wafer fabrication and assembly and test services. In such periods, we may experience longer lead times or indeterminate delivery schedules, which may adversely affect our ability to fulfill orders for our products. During periods of capacity shortages for manufacturing, assembly and testing services, our primary foundries and other suppliers may devote their limited capacity to fulfill the requirements of other clients that are larger than we are, or who have superior contractual rights to enforce manufacture of their products, including to the exclusion of producing our products. We may also incur increased manufacturing costs, including costs of finding acceptable alternative foundries or assembly and test service providers. In order to achieve sustained profitability and positive cash flows from operations, we may need to further reduce operating expenses and/or increase our revenues. We have completed a series of cost reduction actions which have improved our operating cost structure, and we will continue to perform additional actions, when necessary.

Our ability to achieve revenue growth will depend on increased demand for network infrastructure equipment that incorporates our products, which in turn depends primarily on the level of capital spending by communications service providers the level of which may decrease due to general economic conditions and uncertainty, over which we have no control. We believe the market for network infrastructure equipment in general, and for communications semiconductors in particular, offers attractive long-term growth prospects due to increasing demand for network capacity, the continued upgrading and expansion of existing networks and the build-out of telecommunication networks in developing countries. However, the semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving technical standards, short product life cycles and wide fluctuations in product supply and demand. In addition, there has been an increasing trend toward industry consolidation, particularly among major network equipment and telecommunications companies. Consolidation in the industry may lead to pricing pressure and loss of market share. These factors have caused substantial fluctuations in our revenues and our results of operations in the past, and we may experience cyclical fluctuations in our business in the future.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with generally accepted accounting principles in the United States (GAAP) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among the significant estimates affecting our consolidated financial statements are those relating to inventories, stock-based compensation, revenue recognition, income taxes and impairment of long-lived assets. We regularly evaluate our estimates and assumptions based upon historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. To the extent actual results differ from those estimates, our future results of operations may be affected.

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

Our products are used by OEMs that have designed our products into network infrastructure equipment. For many of our products, we gain these design wins through a lengthy sales cycle, which often includes providing technical support to the OEM customer. In the event of the loss of business from existing OEM customers, we may be unable to secure new customers for our existing products without first achieving new design wins. In the event that the quantities of inventory on hand exceed foreseeable demand from existing OEM customers into whose products our products have been designed, we generally are unable to sell our excess inventories to others, and the estimated realizable value of such inventories to us is generally zero.

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

In the second quarter of fiscal 2009, we recorded a $1.1 million write-down of carrier Ethernet inventory, related to certain assets of Ample Communications, Inc. that we acquired, due to a decrease in demand for these products. For further information on this write-down, see Notes 7 and 8 to our consolidated financial statements.

Stock-Based Compensation — We account for stock-based compensation transactions using a fair-value method and recognize the fair value of each award as an expense over the service period. The fair value of restricted stock awards is based upon the market price of our common stock at the grant date. For the majority of our awards, we estimate the fair value of stock option awards, as of the grant date, using the Black-Scholes option-pricing model. The use of the Black-Scholes model requires that we make a number of estimates, including the expected option term, the expected volatility in the price of our common stock, the risk-free rate of interest and the dividend yield on our common stock. If our expected option term and stock-price volatility assumptions were different, the resulting determination of the fair value of stock option awards could be materially different. In addition, judgment is also required in estimating the number of share-based awards that we expect will ultimately vest upon the fulfillment of service conditions (such as time-based vesting) or the achievement of specific performance conditions. If the actual number of awards that ultimately vest differs significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted. We classify compensation expense related to these awards in our consolidated statement of operations based on the department to which the recipient reports.

Revenue Recognition — Our products are often integrated with software that is essential to the functionality of the equipment. Additionally, we provide unspecified software upgrades and enhancements through our maintenance contracts for many of our products. Accordingly, we account for revenue in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 985-605, Software Revenue Recognition, and all related interpretations. For sales of products where software is not included or is incidental to the equipment, we apply the provisions of ASC 605, Revenue Recognition, and all related interpretations.

We generate revenues from direct product sales, sales to distributors, maintenance contracts, development agreements and the sale and license of intellectual property. We recognize revenues when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) our price to the customer is fixed or determinable; and (iv) collection of the sales price is reasonably assured. In instances where final acceptance of the product, system, or solution is specified by the customer, revenue is deferred until all acceptance criteria have been met. Technical support services revenue is deferred and recognized ratably over the period during which the services are to be performed. Advanced services revenue is recognized upon delivery or completion of performance.

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

We recognize revenues on sales to distributors based on the rights granted to these distributors in our distribution agreements. We have certain distributors who have been granted return rights and receive credits for changes in selling prices to end customers, the magnitude of which is not known at the time products are shipped to the distributor. The return rights granted to these distributors consist of limited stock rotation rights, which allow them to rotate up to 10% of the products in their inventory twice a year, as well as certain product return rights if the applicable distribution agreement is terminated. These distributors also receive price concessions because they resell our products to end customers at various negotiated price points which vary by end customer, product, quantity, geography and competitive pricing environments. When a distributor’s resale is priced at a discount from the distributor’s invoice price, we credit back to the distributor a portion of the distributor’s original purchase price after the resale transaction is complete. Thus, a portion of the “Deferred income on sales to distributors” balance will be credited back to the distributor in the future. Under these agreements, we defer recognition of revenue until the products are resold by the distributor, at which time our final net sales price is fixed and the distributor’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 because there is a legally enforceable obligation from the distributor to pay us currently for product delivered, (ii) we relieve inventory for the carrying value of products shipped because legal title has passed to the distributor, and (iii) we record deferred revenue and deferred cost of inventory under the “Deferred income on sales to distributors” caption in the liability section of our consolidated balance sheets. We evaluate the deferred cost of inventory component of this account for possible impairment by considering potential obsolescence of products that might be returned to us and by considering the potential of resale prices of these products being below our cost. By reviewing deferred inventory costs in the manners discussed above, we ensure that any portion of deferred inventory costs that are not recoverable from future contractual revenue are charged to cost of sales as an expense. “Deferred income on sales to distributors” effectively represents the gross margin on sales to distributors; however, the amount of gross margin we recognize in future periods may be less than the originally recorded deferred income as a result of negotiated price concessions. In recent years, such concessions have exceeded 30% of list price on average. For detail of this account balance, see Note 2 to our consolidated financial statements.

We recognize revenues from other distributors at the time of shipment and when title and risk of loss transfer to the distributor, in accordance with the terms specified in the arrangement, and when the four above mentioned revenue recognition criteria are met. These distributors may also be given business terms to return a portion of inventory, however they do not receive credits for changes in selling prices to end customers. At the time of shipment, product prices are fixed or determinable and the amount of future returns can be reasonably estimated and accrued.

Revenue from the sale and license of intellectual property is recognized when the above mentioned four revenue recognition criteria are met. Development revenue is recognized when services are performed and customer acceptance has been received and was not significant for any of the periods presented.

Deferred Income Taxes and Uncertain Tax Positions — We have provided a full valuation allowance against our U.S federal and state deferred tax assets. If sufficient positive evidence of our ability to generate future U.S federal and/or state taxable income becomes apparent, we may be required to reduce our valuation allowance, resulting in income tax benefits in our statement of operations. We evaluate the realizability of our deferred tax assets and assess the need for a valuation allowance quarterly. We follow ASC 740, Income Taxes, for the accounting for uncertainty in income taxes recognized in an entity’s financial statements. ASC 740 prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under ASC 740, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the actual liability for U.S. or foreign taxes may be materially different from our estimates, which could result in the need to record additional tax liabilities or potentially reverse previously recorded tax liabilities.

Impairment of Long-Lived Assets — We regularly monitor and review long-lived assets, including fixed assets, goodwill and intangible assets, for impairment including whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The determination of recoverability is based on an estimate of the undiscounted cash flows expected to result from the use of an asset and its eventual disposition. The estimate of cash flows is based upon, among other things, certain assumptions about expected future operating performance, growth rates and other factors. Our estimates of undiscounted cash flows may differ from actual cash flows due to, among other things, technological changes, economic conditions, changes to our business model or changes in our operating performance. If the sum of the undiscounted cash flows (excluding interest) is less than the carrying value, we recognize an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset. We recorded impairment charges on certain long-lived assets totaling $5.5 million in the second quarter of fiscal 2009. For further information on these asset impairments, see Notes 7 and 8 to our consolidated financial statements.

Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board, or FASB, established the Accounting Standards Codification, ASC or Codification, as the source of authoritative GAAP recognized by the FASB. The Codification is effective in the first interim and annual periods ending after September 15, 2009 and had no effect on our consolidated financial statements.

On October 3, 2009, we adopted ASC 470-20, for the accounting of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlements), formerly FASB Staff Position APB 14-1. This standard required retrospective adjustments to prior period financial statements to conform with current period accounting treatment. Accordingly, our prior period financial statements have been adjusted. ASC 420 requires that convertible debt instruments that may be settled in cash be separated into a debt component and an equity component. The value assigned to the debt component as of the issuance date is the estimated fair value of a similar debt instrument without the conversion feature. The difference between the proceeds obtained for the instruments and the estimated fair value assigned to the debt component represents the equity component. See Note 5 to our consolidated financial statements for additional information on the adoption of this accounting standard.

On October 3, 2009, we adopted ASC 260-10-45-61A, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. This authoritative guidance provides that before the completion of an award’s requisite service period, all outstanding awards that contain rights to nonforfeitable dividends in undistributed earnings with common stock are participating securities and shall be included in the computation of earnings per share. We determined that a limited number of its instruments granted in share-based payment transactions contained rights to nonforfeitable dividends in undistributed earnings. During the first quarter of fiscal 2010, we amended the related instruments’ plan documents to eliminate this provision and therefore no longer have any instruments subject to this authoritative guidance. We have determined that there is no impact to our presentation of earnings per share in any historical periods by including the limited number of applicable instruments prior to this plan amendment.

In September 2006, the FASB issued provisions under ASC 820-10, Fair Value Measurements and Disclosures, in order to increase consistency and comparability in fair value measurements by defining fair value, establishing a framework for measuring fair value in generally accepted accounting principles, and expanding disclosures about fair value measurements. In February 2008, the FASB released additional guidance under ASC 820-10, which delayed the effective date of the September 2006 provisions for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. Consistent with the February 2008 updates, we elected to defer the adoption of the September 2006 provisions for nonfinancial assets and liabilities measured at fair value on a non-recurring basis until October 3, 2009. We adopted ASC 820-10 for non-financial assets and liabilities on October 3, 2009. Our adoption did not have a material impact on our consolidated financial statements.

Results of Operations

Net Revenues

The following table summarizes our net revenues:

		Three months ended												Nine months ended
		July 2,								July 3,				July 2,								July 3,
($ in millions)		2010				Change				2009				2010				Change				2009
Communications convergence processing products		$	17.8				31	%		$	13.6			$	47.9				36	%		$	35.2
High-performance analog products			14.4				44	%			10.0				39.5				38	%			28.7
WAN communications products			11.1				25	%			8.9				33.2				45	%			22.9
Intellectual property			—				—				—				—				(100	)%			5.0
Net revenues		$	43.3				33	%		$	32.5			$	120.6				31	%		$	91.8

The 33% increase in our net revenues for the third quarter of fiscal 2010 compared to the comparable fiscal 2009 period reflects higher sales volume in all three of our product families. Net revenues from our communications convergence processing products increased $4.2 million, or 31%, mainly reflecting an increase in shipments in our CPE products, which are used in broadband CPE gateways and other equipment that service providers are deploying in order to deliver voice, data and video services to residential subscribers. Within communications convergence processing, we also experienced an increase in shipments in VoIP processors for fiber optic access, particularly to customers in China. Net revenues from our high-performance analog products increased $4.4 million, or 44%, when comparing the third quarter of fiscal 2010 to the third quarter of fiscal 2009, due primarily to an increased demand for crosspoint switches from strength in the telecommunications market in China and an increased demand for our physical media devices which are primarily used in equipment for fiber-to-the-premise deployments. Net revenues from our WAN communications products increased $2.2 million, or 25%, in the third quarter of fiscal 2010 compared to the third quarter of fiscal 2009 due primarily to an increase in shipments in our network processor products, our T/E carrier transmission products and our Carrier Ethernet products.

For the first nine months of fiscal 2010, the 31% increase in our net revenues compared to the comparable fiscal 2009 period mainly reflects higher sales volume in all three of our product families, partially offset by an absence of revenues from the sale and licensing of intellectual property. Net revenues from our communications convergence processing products increased $12.7 million, or 36%, mainly reflecting an increase in shipments in our CPE products, which are used in broadband CPE gateways and other equipment that service providers are deploying in order to deliver voice, data and video services to residential subscribers. Within communications convergence processing, we also experienced an increase in shipments in VoIP processors for fiber optic access, particularly to customers in China. Net revenues from our high-performance analog products increased $10.8 million, or 38%, when comparing the first nine months of fiscal 2010 to the first nine months of fiscal 2009 due primarily to increased demand for crosspoint switches due to strength in the telecommunications market in China and increased demand for our physical media devices, which are primarily used in equipment for fiber-to-the-premise deployments. Net revenues from our WAN communications products increased $10.3 million, or 45%, mainly reflecting an increase in shipments in our network processor products and our carrier Ethernet products in the first nine months of fiscal 2010. Net revenues from intellectual property licensing and sales decreased $5.0 million, or 100%, in the first nine months of fiscal 2010 compared to the first nine months of fiscal 2009, because we did not recognize any intellectual property sales in the first nine months of fiscal 2010. We have developed and maintain a broad intellectual property portfolio, and we may periodically enter into strategic arrangements to leverage our portfolio by licensing or selling our patents.

Gross Margin

		Three months ended												Nine months ended
		July 2,								July 3,				July 2,								July 3,
($ in millions)		2010				Change				2009				2010				Change				2009
Gross margin		$	27.8				40	%		$	19.9			$	77.3				41	%		$	54.9
Percent of net revenues			64	%							61	%			64	%							60	%

Gross margin represents net revenues less cost of goods sold. As a fabless semiconductor company, we use third parties (including Taiwan Semiconductor Manufacturing Co., Ltd. (TSMC), Amkor Technology, Inc. and Advanced Semiconductor Engineering, Inc. (ASE)) for wafer fabrication, assembly and test services. Our cost of goods sold consists predominantly of: purchased finished wafers; assembly and test services; royalty and other intellectual property costs; labor and overhead costs associated with product procurement; the cost of mask sets purchased; and sustaining engineering expenses pertaining to products sold.

Our gross margin for the third quarter of fiscal 2010 increased $7.9 million from our gross margin for the third quarter of fiscal 2009, principally reflecting a 33% increase in revenues between such periods. Gross margin as a percent of net revenues increased 3% for the third quarter of fiscal 2010 compared to the same fiscal 2009 period and is due primarily to manufacturing efficiencies gained from increased production levels.

Our gross margin for the first nine months of fiscal 2010 increased $22.4 million over our gross margin for the first nine months of fiscal 2009, principally reflecting a combination of a 31% increase in revenues between such periods, as well as the effect of asset impairment charges totaling $3.7 million taken in the second quarter of fiscal 2009. Second quarter fiscal 2009 asset impairments consisted of $2.3 million related to the write-down of the carrying value of technology developed by Ample Communications, a $1.1 million write-down of Ample Communications-related inventory and an approximate $300,000 write-down of certain manufacturing related fixed assets. Gross margin as a percent of net revenues for the first nine months of fiscal 2009 includes an approximate 4% effect from these asset impairments, which is the most significant factor in the increase in gross margin as a percent of net revenues between the first nine months of fiscal 2010 and the first nine months of fiscal 2009 period. In addition, gross margin as a percent of net revenues increased in the first nine months of fiscal 2010 compared to the same fiscal 2009 period because of manufacturing efficiencies gained from increased production levels during the period. Offsetting these increases in gross margin as a percent of net revenues for the first nine months of fiscal 2010 compared to the same fiscal 2009 period is a drop in revenues associated with the sale or licensing of intellectual property, which have little associated cost.

Cost of goods sold includes the favorable effect of sales of certain inventories that we had previously written down to a zero cost basis during fiscal 2001. The favorable effect of such sales was $191,000 in the third quarter of fiscal 2010 and $312,000 in the third quarter of fiscal 2009. For the nine months ended July 2, 2010 and July 3, 2009, the favorable effect of such sales was $1.1 million and $1.3 million. These sales resulted from renewed demand for certain products that was not anticipated at the time of the write-downs. The previously written-down inventories were generally sold at prices which exceeded their original cost. As of July 2, 2010, we continued to hold inventories with an original cost of $2.6 million which were previously written down to zero in 2001. We currently intend to hold these remaining inventories until they become obsolete and will sell these inventories if we continue to experience demand for these products. While there can be no assurance that we will be able to do so, if we are able to sell a portion of the inventories which are carried at zero cost basis, our gross margin will be favorably affected by an amount equal to the original cost of the zero-cost basis inventory sold. To the extent that we do not experience renewed demand for the remaining inventories, they will be scrapped as they become obsolete.

Research and Development

		Three months ended												Nine months ended
		July 2,								July 3,				July 2,								July 3,
($ in millions)		2010				Change				2009				2010				Change				2009
Research and development		$	12.7				5	%		$	12.1			$	37.5				(3	)%		$	38.5
Percent of net revenues			29	%							37	%			31	%							42	%

Our research and development (R&D) expenses consist principally of direct personnel costs, photomasks, electronic design automation tools and pre-production evaluation and test costs. The approximate $600,000 increase in R&D expenses for the third quarter of fiscal 2010 compared to the third quarter of fiscal 2009 principally reflects a $392,000 increase in compensation and personnel-related costs, as well as an approximate $250,000 increase in the cost of engineering tools, materials and supplies.

The $1.0 million decrease in R&D expenses for the first nine months of fiscal 2010 compared to the first nine months of fiscal 2009 principally reflects a $167,000 decrease in compensation and personnel-related costs, a $297,000 decrease related to a reduction in the cost of engineering hardware and software and a $494,000 decrease in the cost of contracted engineering services, which were mainly utilized during fiscal 2009.

Selling, General and Administrative

		Three months ended												Nine months ended
		July 2,								July 3,				July 2,								July 3,
($ in millions)		2010				Change				2009				2010				Change				2009
Selling, general and administrative		$	10.2				3	%		$	9.9			$	30.2				(5	)%		$	31.7
Percent of net revenues			24	%							30	%			25	%							35	%

Our selling, general and administrative (SG&A) expenses include personnel costs, independent sales representative commissions and product marketing, applications engineering and other marketing costs. Our SG&A expenses also include costs of corporate functions, including accounting, finance, legal, human resources, information systems and communications. The approximate $300,000 increase in our SG&A expenses for the third quarter of fiscal 2010 compared to the third quarter of fiscal 2009 primarily reflects a $262,000 increase in stock compensation related costs primarily resulting from an increase in our stock price .

The $1.5 million decrease in our SG&A expenses for the first nine months of fiscal 2010 compared to the first nine months of fiscal 2009 primarily reflects a $1.9 million decrease in compensation and personnel-related costs, including cash bonuses. This decrease is partially offset by a $938,000 increase in stock compensation-related costs primarily resulting from an increase in our stock price.

Special Charges

Special charges consisted of the following (in thousands):

		Three months ended								Nine months ended
		July 2,				July 3,				July 2,				July 3,
		2010				2009				2010				2009
Asset impairments		$	—			$	—			$	—			$	2,865
Restructuring charges			(184	)			9				605				4,031
Total special charges		$	(184	)		$	9			$	605			$	6,896