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

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 þ 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):

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

     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 29, 2011 was 34,630,374.

 

 

FORWARD-LOOKING STATEMENTS

     This Quarterly Report on Form 10-Q contains statements (including certain projections and business trends) relating to Mindspeed Technologies, Inc. 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 leading 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 increasing trend toward industry consolidation and the effect it could have on our operating results;

•

the sufficiency of our cash balances, along with cash expected from product sales, 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 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 revenue;

•

the value of our intellectual property, our ability to continue recognizing patent-related revenue 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 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 intention to continue to monitor the effect of the events in Japan on end demand patterns and inventory levels throughout the supply chain;

•

our expectations regarding the effect of the recent crisis in Japan on our operations in the fiscal fourth quarter of 2011 and beyond;

•

our expectations regarding the cyclical nature of the semiconductor industry; and

•

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;

•

constraints in the supply of wafers and other product components from our third-party manufacturers;

•

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

•

fluctuations in the price of our common stock;

•

loss of or diminished demand from one or more key customers or distributors;

•

successful development and introduction of new products;

•

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;

•

cash requirements and terms and availability of financing;

•

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

•

pricing pressures and other competitive factors;

•

lengthy sales cycles;

•

order and shipment uncertainty;

•

our ability to obtain design wins and develop revenue from them;

•

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):			5
Consolidated Condensed Balance Sheets — July 1, 2011 and October 1, 2010			5
Consolidated Condensed Statements of Operations — Three Months and Nine Months Ended July 1, 2011 and July 2, 2010			6
Consolidated Condensed Statements of Cash Flows — Nine Months Ended July 1, 2011 and July 2, 2010			7
Notes to Consolidated Condensed Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3. Quantitative and Qualitative Disclosures About Market Risk			35
Item 4. Controls and Procedures			35
PART II. OTHER INFORMATION
Item 1A. Risk Factors			36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			47
Item 6. Exhibits			48
Signature			50
EX-10.4
EX-10.5
EX-10.6
EX-10.7
EX-10.8
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MINDSPEED TECHNOLOGIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited, in thousands)

		July 1,				October 1,
		2011				2010
ASSETS
Current Assets
Cash and cash equivalents		$	43,227			$	43,685
Receivables, net of allowance for doubtful accounts of $375 at July 1, 2011 and $189 at October 1, 2010			16,397				25,678
Inventories			20,412				10,205
Deferred tax assets, net			—				2,264
Prepaid expenses and other current assets			2,778				3,035
Total current assets			82,814				84,867
Property, plant and equipment, net			15,196				12,700
Licensed and purchased intangibles, net			13,982				9,887
Other assets			1,683				1,230
Total assets		$	113,675			$	108,684
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable		$	9,033			$	9,303
Accrued compensation and benefits			5,292				9,336
Accrued income taxes			1,291				1,503
Deferred income on sales to distributors			6,179				5,199
Deferred revenue			521				658
Restructuring			134				710
Other current liabilities			5,863				4,396
Total current liabilities			28,313				31,105
Convertible senior notes — long term			14,114				13,810
Other liabilities			1,815				2,133
Total liabilities			44,242				47,048
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; 33,864 (July 1, 2011) and 32,220 (October 1, 2010) issued and outstanding shares			339				322
Additional paid-in capital			324,778				318,468
Accumulated deficit			(255,597	)			(257,001	)
Accumulated other comprehensive loss			(87	)			(153	)
Total stockholders’ equity			69,433				61,636
Total liabilities and stockholders’ equity		$	113,675			$	108,684

See accompanying notes to consolidated condensed financial statements.

MINDSPEED TECHNOLOGIES, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)

		Three Months Ended								Nine Months Ended
		July 1,				July 2,				July 1,				July 2,
		2011				2010				2011				2010
Net revenue:
Products		$	42,216			$	43,281			$	118,812			$	120,560
Intellectual property			—				—				2,500				—
Total net revenue			42,216				43,281				121,312				120,560
Cost of goods sold			15,967				15,501				44,531				43,297
Gross margin			26,249				27,780				76,781				77,263
Operating expenses:
Research and development			15,077				12,731				43,525				37,540
Selling, general and administrative			11,034				10,190				31,324				30,215
Special charges			—				(184	)			(18	)			605
Total operating expenses			26,111				22,737				74,831				68,360
Operating income			138				5,043				1,950				8,903
Interest expense			(398	)			(396	)			(1,195	)			(1,419	)
Other income/(expense), net			(26	)			323				(67	)			524
Income/(loss) before income taxes			(286	)			4,970				688				8,008
Provision (benefit) for income taxes			(750	)			106				(716	)			165
Net income		$	464			$	4,864			$	1,404			$	7,843
Net income per share:
Basic		$	0.01			$	0.15			$	0.04			$	0.26
Diluted		$	0.01			$	0.15			$	0.04			$	0.25
Weighted-average number of shares used in per share computation:
Basic			32,400				31,481				32,147				29,781
Diluted			33,390				36,075				33,144				30,942

See accompanying notes to consolidated condensed financial statements.

MINDSPEED TECHNOLOGIES, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)

		Nine Months Ended
		July 1,				July 2,
		2011				2010
Cash Flows From Operating Activities
Net income		$	1,404			$	7,843
Adjustments required to reconcile net income/(loss) to net cash provided by operating activities:
Depreciation and amortization			3,969				3,654
Amortization of license agreements			1,716				914
Restructuring (recovery) charges			(18	)			605
Stock-based compensation			4,023				3,165
Inventory (recovery) provision			(40	)			1,417
Amortization of debt discount on convertible debt			325				446
Other non-cash items, net			242				346
Changes in assets and liabilities:
Receivables			9,141				(10,881	)
Inventories			(10,167	)			92
Current deferred tax asset			2,434				—
Other assets, net			(265	)			106
Accounts payable			495				3,070
Deferred income on sales to distributors			980				1,068
Restructuring charges			(569	)			(1,005	)
Accrued compensation and benefits			(4,128	)			248
Accrued expenses and other current liabilities			730				625
Other liabilities, net			134				(738	)
Net cash provided by operating activities			10,406				10,975
Cash Flows From Investing Activities
Purchases of property, plant and equipment			(5,849	)			(3,814	)
Payments under license agreements			(6,819	)			(1,131	)
Net cash paid for acquired companies			(100	)			—
Net cash used in investing activities			(12,768	)			(4,945	)
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	)
Payments made on capital lease obligations			(402	)			(380	)
Borrowings under line of credit			—				7,000
Payments made on borrowings under line of credit			—				(7,000	)
Repurchase of restricted stock for income tax withholding			(362	)			(490	)
Proceeds from equity compensation programs			2,666				1,470
Net cash provided by financing activities			1,902				7,093
Effect of foreign currency exchange rates on cash			2				93
Net increase/ (decrease) in cash and cash equivalents			(458	)			13,216
Cash and cash equivalents at beginning of period			43,685				20,891
Cash and cash equivalents at end of period		$	43,227			$	34,107

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 enterprise networks, broadband access networks (fixed and mobile) and metropolitan and wide area networks.

     Basis of Presentation — The consolidated condensed financial statements, prepared in accordance with generally accepted accounting principles (GAAP) 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 7), necessary to present fairly the Company’s financial position, results of operations and cash flows in accordance with GAAP. 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 1, 2010.

     Fiscal Periods — The Company’s interim fiscal quarters end on the thirteenth Friday of each quarter. The third quarter of fiscal 2011 and 2010 ended on July 1, 2011 and July 2, 2010, respectively.

     Recent Accounting Standards — In September 2009, the Emerging Issues Task Force reached a consensus on Accounting Standards Update, or ASU, 2009-13, Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements, or ASU 2009-13 and ASU 2009-14, Software (Topic 985) — Certain Revenue Arrangements That Include Software Elements, or ASU 2009-14. ASU 2009-13 modifies the requirements that must be met for an entity to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered. ASU 2009-13 eliminates the requirement that all undelivered elements must have either: (i) vendor specific objective evidence (VSOE) of fair value; or (ii) third-party evidence (TPE) before an entity can recognize the portion of an overall arrangement consideration that is attributable to items that have already been delivered. In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, entities will be required to estimate the selling prices of those elements. Overall arrangement consideration will be allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entity’s estimated selling price. The residual method of allocating arrangement consideration has been eliminated. ASU 2009-14 modifies the software revenue recognition guidance to exclude from its scope tangible products that contain both software and non-software components that function together to deliver a product’s essential functionality. These new updates are effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company adopted these provisions effective October 2, 2010, and they did not have a material impact on its consolidated condensed financial statements.

     Revenue Recognition — The Company’s revenue consists principally of sales of semiconductor devices and, to a lesser extent, support and maintenance contracts, development agreements and the sale and license of intellectual property. The Company recognizes revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the price to the customer is fixed or determinable; and (iv) collection of the sales price is probable. 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.

     The Company’s semiconductor products either do not contain software that is more than incidental to the functionality of the product, or the software functions together with non-software deliverables to deliver the essential functionality of the product. Accordingly, the Company accounts for revenue in accordance with the provisions of Accounting Standards Codification 605, Revenue Recognition, or ASC 605, and all related

interpretations. Additionally, the Company provides unspecified software upgrades and enhancements through its support and maintenance contracts for certain of its semiconductor products. Support and maintenance services revenue is deferred and recognized ratably over the period during which the services are to be performed.

     Revenue is recognized 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.

     Revenue is recognized on sales to distributors based on the rights granted to these distributors in the distribution agreements. The Company has 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 the Company’s 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, the Company credits 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, recognition of revenue is deferred until the products are resold by the distributor, at which time the Company’s 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) a trade receivable at the invoiced selling price is recorded because there is a legally enforceable obligation from the distributor to pay the Company currently for product delivered; (ii) inventory is relieved for the carrying value of products shipped because legal title has passed to the distributor; and (iii) deferred revenue and deferred cost of inventory are recorded under the “Deferred income on sales to distributors” caption in the liability section of the Company’s consolidated balance sheets. The Company evaluates the deferred cost of inventory component of this account for possible impairment by considering potential obsolescence of products that might be returned and by considering the potential of resale prices of these products being below the Company’s cost. By reviewing deferred inventory costs in the manner discussed above, the Company ensures that any portion of deferred inventory costs that are not recoverable from future contractual revenue are charged to cost of goods sold as an expense. “Deferred income on sales to distributors” effectively represents the gross margin on sales to distributors; however, the amount of gross margin that is recognized in future periods may be less than the originally recorded deferred income as a result of subsequent negotiated price concessions. In recent years, such concessions have exceeded 30% of list price on average. See Note 2 for detail of this account balance.

     Revenue from other distributors is recognized 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 and 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 four above mentioned 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.

2. Supplemental Financial Statement Data

     Inventories

     Inventories consisted of the following:

		July 1,				October 1,
		2011				2010
		(in thousands)
Work-in-process		$	8,469			$	4,681
Finished goods			11,943				5,524
Total inventories		$	20,412			$	10,205

     Deferred Income on Sales to Distributors

     Deferred income on sales to distributors was as follows:

		July 1,				October 1,
		2011				2010
		(in thousands)
Deferred revenue on shipments to distributors		$	6,706			$	5,674
Deferred cost of goods sold on shipments to distributors			(586	)			(528	)
Reserves			59				53
Deferred income on sales to distributors		$	6,179			$	5,199

     Other Liabilities

     Details of other liabilities were as follows:

		July 1,				October 1,
		2011				2010
		(in thousands)
Current
Deferred rent		$	730			$	1,075
Capital lease obligations			331				478
Royalties			455				426
Licensed intangibles			1,823				1,302
Other			2,524				1,115
Total other current liabilities		$	5,863			$	4,396
Long-term
Capital lease obligations		$	320			$	574
Licensed intangibles			647				952
Other			848				607
Total other liabilities		$	1,815			$	2,133

     Computation of Net Income per Share

     The following table presents the computation of net income per share:

		Three Months Ended								Nine Months Ended
		July 1,				July 2,				July 1,				July 2,
		2011				2010				2011				2010
		(in thousands, except per share amounts)
Earnings per share — basic
Net income		$	464			$	4,864			$	1,404			$	7,843
Basic weighted average comman shares outstanding			32,400				31,481				32,147				29,781
Earnings per share — basic		$	0.01			$	0.15			$	0.04			$	0.26
Basic weighted average common shares outstanding			32,400				31,481				32,147				29,781
Effect of dilutive securities:
Convertible senior notes			—				3,165				—				—
Dilutive stock awards			990				1,411				997				1,161
Dilutive employee stock			—				18				—				—
purchase plan shares
Diluted weighted average common shares outstanding			33,390				36,075				33,144				30,942
Earnings per share — diluted		$	0.01			$	0.15			$	0.04			$	0.25

     The following table presents the number of potentially dilutive shares, of the Company’s common stock excluded from the computation of diluted income per share as their effect would have been antidilutive:

		Three Months Ended								Nine Months Ended
		July 1,				July 2,				July 1,				July 2,
		2011				2010				2011				2010
		(in thousands)
Convertible senior notes			3,165				—				3,165				3,165
Stock awards			2,364				2,316				2,042				2,565
Employee stock purchase plan shares			19				—				19				—
Warrants			6,109				6,109				6,109				6,109
Anti-dilutive weighted average common shares			11,657				8,425				11,335				11,839

     Comprehensive Income

     Comprehensive income was as follows:

		Three Months Ended								Nine Months Ended
		July 1,				July 2,				July 1,				July 2,
		2011				2010				2011				2010
		(in thousands)
Net income		$	464			$	4,864			$	1,404			$	7,843
Foreign currency translation adjustments, net of tax			32				(444	)			66				(767	)
Comprehensive income		$	496			$	4,420			$	1,470			$	7,076

     Net Revenue by Product Line

     Net revenue by product line was as follows:

		Three Months Ended								Nine Months Ended
		July 1,				July 2,				July 1,				July 2,
		2011				2010				2011				2010
		(in thousands)
Communications convergence processing products		$	18,917			$	17,823			$	51,111			$	47,946
High-performance analog products			15,488				14,332				44,541				39,442
WAN communications products			7,811				11,126				23,160				33,172
Intellectual property			—				—				2,500				—
Total net revenue		$	42,216			$	43,281			$	121,312			$	120,560

     Net Revenue by Geographic Area

     Revenue by geographic area, based upon country of destination, was as follows:

		Three Months Ended								Nine Months Ended
		July 1,				July 2,				July 1,				July 2,
		2011				2010				2011				2010
		(in thousands)
Americas		$	6,850			$	10,472			$	26,678			$	26,978
Asia-Pacific			31,725				29,832				84,310				84,745
Europe, Middle East and Africa			3,641				2,977				10,324				8,837
Total net revenue		$	42,216			$	43,281			$	121,312			$	120,560

     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.

     Supplemental Cash Flow Information

     Non-cash investing activities consisted of the following:

		Nine Months Ended
		July 1,				July 2,
		2011				2010
		(in thousands)
Purchase of property and equipment through capital leasing arrangements			—				1,130
Purchase of property and equipment on account			943				414
License of intellectual property on account			2,843				485

     Customer Concentrations

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

		Three Months Ended				Nine Months Ended
		July 1,		July 2,		July 1,		July 2,
		2011		2010		2011		2010
Customer A		29%		19%		24%		15%
Customer B		18%		15%		17%		17%
Customer D		11%		13%		8%		11%

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

		July 1,		October 1,
		2011		2010
Customer A		23%		5%
Customer B		18%		25%
Customer C		10%		8%
Customer D		7%		12%

3. Fair Value Measurements

     The following table represents financial assets measured at fair value:

		July 1, 2011								October 1, 2010
		Quoted Prices in								Quoted Prices in
		Active markets for								Active markets for
		Identical								Identical
		Instruments				Total Fair Value				Instruments				Total Fair Value
		(in thousands)
Assets:
Cash		$	32,713			$	32,713			$	22,174			$	22,174
Money market fund			10,514				10,514				16,007				16,007
Government money market fund			—				—				5,504				5,504
Total cash and cash equivalents		$	43,227			$	43,227			$	43,685			$	43,685

4. Stock-Based Compensation

     The Company has stock-based incentive plans in effect that provide for the grant of stock options, unrestricted stock, restricted stock units and other stock-awards to employees and non-employee directors. These stock-based incentive plans include inducement grants that are occasionally made to new employees of the Company. The Company also provides an employee stock purchase plan for all eligible employees. The fair value of stock-based awards are estimated on the date of grant and recognized as an expense ratably over the requisite service period.

     The following table presents stock-based compensation by functional line item presented on our unaudited consolidated condensed statements of operations:

		Three Months Ended								Nine Months Ended
		July 1,				July 2,				July 1,				July 2,
		2011				2010				2011				2010
		(in thousands)
Cost of goods sold			70				44				158				114
Research and developemnt			524				216				1,140				721
Selling, general and administrative			1,217				688				2,725				2,330
Total stock-based compensation		$	1,811			$	948			$	4,023			$	3,165

     Stock option grant date fair value was estimated using the Black-Scholes pricing model with the following weighted-average assumptions:

		Three Months Ended								Nine Months Ended
		July 1,				July 2,				July 1,				July 2,
		2011				2010				2011				2010
Weighted-average assumptions:
Expected option life		2.9 years				3.2 years				2.9 years				2.8 years
Risk-free interest rate			1.0	%			1.4	%			0.8	%			1.3	%
Expected volatility			95	%			94	%			97	%			95	%
Dividend yield			—				—				—				—
Weighted-average grant date fair value per share		$	5.08			$	5.25			$	4.52			$	3.16

     Stock Option Awards

     The following tables summarize stock option activity:

										Weighted-Average				Aggregate
		Number				Weighted-Average				Remaining				Intrinsic
		of Shares				Exercise Price				Contractual Term				Value
		(in thousands)												(in thousands)
Outstanding at October 1, 2010			2,900			$	6.41			4.8 years
Granted			855				7.61
Exercised			(368	)			3.05
Forfeited or expired			(469	)			7.71
Outstanding at July 1, 2011			2,918				6.98			5.4 years				$	7,168
Exercisable at July 1, 2011			1,376			$	8.22			3.6 years				$	3,524

		Remaining
		Unrecognized				Remaining
		Compensation				Years
Vesting Condition		Cost				to Vest
		(in thousands)
Service based		$	4,579				1.5

   Stock Awards

     On March 10, 2010, the Company granted awards of 190,000 performance shares 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 reaches certain minimum amounts over a consecutive 20-day trading period. 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 awards were valued using the Monte Carlo simulation model, which estimates value based on the probability of vesting achievement.

The following tables summarize restricted stock award activity:

						Weighted-
						Average
		Number				Grant Date				Fair Value of
		of Shares				Fair Value				Shares Vested
		(in thousands)								(in thousands)
Nonvested shares at October 1, 2010			680			$	6.64
Granted			1,104				8.33
Vested			(226	)			5.27			$	1,640
Forfeited			(7	)			5.51
Nonvested shares at July 1, 2011			1,551			$	7.66

		Remaining
		Unrecognized				Remaining
		Compensation				Years
Vesting Condition		Cost				to Vest
		(in thousands)
Service based		$	8,660				1.5
Market based			806				1.0
Stock awards		$	9,466

5. Revolving Credit Facility and Convertible Senior Notes

     Revolving Credit Facility

     At July 1, 2011, the Company had no outstanding borrowings under its available $5.0 million revolving credit facility and was in compliance with all required covenants.

     3.75% Convertible Senior Notes due 2009

     In December 2004, the Company sold an aggregate principal amount of $46.0 million in 3.75% convertible senior notes due in November 2009 for net proceeds (after discounts and commissions) of approximately $43.9 million. Through the end of fiscal 2009, the Company repurchased or exchanged $35.5 million of aggregate principal amount of this debt. During the first quarter of fiscal 2010, the Company’s 3.75% convertible senior notes matured and the remaining balance of $10.5 million was repaid.

     The following table sets forth interest expense information related to the 3.75% convertible senior notes:

		Nine Months Ended
		July 1,				July 2,
		2011				2010
		(in thousands)
Interest expense — coupon		$	—			$	48
Interest expense — debt discount amortization			—				151
Total		$	—			$	199
Effective interest rate on the liability component for the period			—				14.68	%

     6.50% Convertible Senior Notes due 2013

     On July 30, 2008, the Company entered into separate exchange agreements with certain holders of its previously outstanding 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 Exchange Offer 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.

     The Company’s contingent obligation to issue additional shares or make additional cash payment upon conversion following a fundamental change is considered an embedded derivative. As of July 1, 2011, the liability under the fundamental change adjustment has been recorded at its estimated fair value and is not significant.

     The following table sets forth balance sheet information related to the 6.50% convertible senior notes:

		July 1,				October 1,
		2011				2010
		(in thousands)
Principal value of the liability component		$	15,000			$	15,000
Unamortized value of the liability component			886				1,190
Net carrying value of the liability component		$	14,114			$	13,810

     The following table sets forth interest expense information related to the 6.50% convertible senior notes:

		Three Months Ended								Nine Months Ended
		July 1,				July 2,				July 1,				July 2,
		2011				2010				2011				2010
		(in thousands)
Interest expense — coupon		$	243			$	244			$	731			$	731
Interest expense — debt discount amortization			102				99				304				295
Total		$	345			$	343			$	1,035			$	1,026
Effective interest rate on the liability for the period			9.20	%			9.15	%			9.20	%			9.12	%

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. As is common in the industry, the Company currently has in effect a number of agreements in which it has agreed to defend, indemnify and hold harmless certain of its suppliers and customers from damages and costs which may arise from the infringement by the Company’s products of third-party patents, trademarks or other proprietary rights. The Company has never incurred significant costs to defend lawsuits or settle claims related to these indemnification agreements.

     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. Unless specifically noted below, during the period presented we have not: recorded any accrual for loss contingencies associated with the legal proceedings described below; determined that an unfavorable outcome is probable or reasonably possible; or determined that the amount or range of any possible loss is reasonably estimable. Based on its evaluation of matters which are pending or asserted, while there can be no assurance, 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.

     In June 2011, the Company was notified by a customer, with whom there is an indemnification agreement, that it had settled an outstanding patent infringement claim against the customer that it asserts relates to products purchased from the Company. The customer requested that the Company contribute approximately $1.3 million to the settlement, representing its estimate of the Company’s pro rata share of the settlement and related legal fees. The Company has notified the customer that it believes the indemnification agreement does not apply to the contribution sought by the customer, and the Company intends to vigorously defend this position. The outcome of this litigation and any potential exposure to the Company cannot be reasonably estimated at this time. Accordingly, the Company has no liabilities recorded related to this, or other indemnification agreements, as of July 1, 2011.

7. Special Charges

Restructuring Charges

     The Company has, from time to time, and may in the future, commit to restructuring plans to help manage the costs of the Company or to help implement strategic initiatives, among other reasons.

     Fourth Quarter of Fiscal 2010 Restructuring Plan — In the fourth quarter of fiscal 2010, the Company committed to the implementation of a restructuring plan. The plan consisted primarily of a targeted headcount reduction in its wide area networking (WAN) communications product family and selling, general and administrative functions. The restructuring plan was substantially completed during the fourth quarter of fiscal 2010.

     The following table sets forth charges incurred under the plan (in thousands):

Severance costs		$	966
Abandoned technology			311
Total charges incurred		$	1,277

     Activity and liability balances related to the Company’s fourth quarter of fiscal 2010 restructuring plan from October 1, 2010 through July 1, 2011 were as follows:

		Workforce				Facility and
		Reductions				Other				Total
		(in thousands)
Restructuring balance, October 1, 2010		$	701			$	—			$	701
Cash payments			(567	)			—				(567	)
Restructuring balance, July 1, 2011		$	134			$	—			$	134

     The remaining accrued restructuring balance principally represents employee severance benefits. The Company expects to pay these remaining obligations through the second quarter of fiscal 2012.

     Fiscal 2009 Restructuring Plans — In fiscal 2009, the Company implemented two restructuring plans to improve its operating structure. These restructuring plans included workforce reductions, closure of facilities and reductions in areas of selling, general and administrative and WAN communications spending.

     At October 1, 2010, the total remaining accrued restructuring balance under these plans was $20,000. During the first quarter of fiscal 2011, any amounts left to be paid under these plans were paid and any remaining accrued amounts were reversed. At July 1, 2011, there was no remaining accrued restructuring balance related to these plans.

8. Income Taxes

     The Company utilizes the liability method of accounting for income taxes. The federal statutory rate was 34% for all periods. The difference between the Company’s effective tax rate and the federal statutory rate is primarily due to the effect of foreign earnings taxed at rates differing from the federal statutory rate.

     During the third quarter of fiscal 2011, the Company received a $3.1 million payment related to a foreign research and development credit. A portion of this payment was previously recorded as an unrecognized tax benefit. Reversal of this unrecognized tax benefit resulted in a $780,000 income tax benefit, which had a favorable impact on the effective tax rate.

9. Related Party Transactions

     In connection with a June 2003 distribution to stockholders of our former parent of all outstanding shares of common stock of Mindspeed, a warrant was issued to acquire approximately 6.1 million shares of common stock at a price of $16.74 per share, as adjusted, exercisable through June 27, 2013, representing approximately 14% of the Company’s outstanding common stock on a fully diluted basis. The warrant may be transferred or sold in whole or part at any time. For the nine months ended July 2, 2010, rent and operating expenses paid to the warrant holder were approximately $4.0 million. On June 26, 2010, the Company’s sublease of its corporate headquarters in Newport Beach, California from the warrant holder expired.

     In June 2011, the Company entered into an agreement to license certain intellectual property from a related party. The licensor is a related party because one of the Company’s directors also serves as a director of the licensor. Pursuant to terms of the license agreement, the Company will pay an aggregate of $6.0 million upon the completion of certain milestones, including the delivery of licensed intellectual property. In addition, the Company is obligated to pay royalties not to exceed an additional $2.5 million for products sold that include the licensed intellectual property. As of the fiscal quarter ended July 1, 2011, no amounts had been paid under the license agreement. The first payment of $875,000 is due and payable in July 2011.

10. Acquisition

     In April 2011, the Company completed the acquisition of substantially all of the assets of privately held IPG Communications, Inc, a software developer that specialized in advanced signal processing technologies for wideband code division multiple access, for $500,000 cash consideration. The purchase price was primarily allocated to the assigned intellectual property and is included in licensed and purchased intangibles on the accompanying balance sheet at July 1, 2011.

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 1, 2010.

Overview

     Mindspeed Technologies, Inc. designs, develops and sells semiconductor solutions for communications applications in the wireline and wireless network infrastructure, which includes enterprise networks, broadband access networks (fixed and mobile) and metropolitan and wide area networks (WAN). We have organized our solutions for these interrelated and rapidly converging networks into three product families: communications convergence processing (formerly known as multiservice access), high-performance analog and WAN communications. Our communications convergence processing products include ultra-low-power, multi-core digital signal processor (DSP) system-on-chip (SoC) products for the fixed and mobile (3G/4G) carrier infrastructure and residential and enterprise platforms. Our high-performance analog products include high-density crosspoint switches, optical drivers, equalization and signal-conditioning solutions that solve difficult switching, timing and synchronization challenges in next-generation optical networking, enterprise storage and broadcast video transmission applications. Our WAN communications portfolio helps optimize today’s circuit-switched networks that furnish much of the Internet’s underlying long-distance infrastructure.

     Our products are used in a variety of network infrastructure equipment, including:

	•		Communications Convergence Processing — triple-play edge and metro trunking gateways for Voice-over-Internet protocol (VoIP) platforms; broadband customer premises equipment (CPE) gateways and other equipment that carriers use to deliver voice, data and video services to residential subscribers; Internet protocol (IP) private branch exchange (PBX) equipment and security appliances used in the enterprise and 3G/4G mobile base stations in the carrier infrastructure;
	•		High-Performance Analog — next-generation fiber access network equipment (including passive optical networking, or PON, systems); storage and server systems supporting high-speed PCI Express and Serial Attached SCSI (SAS) protocols; and production switches, routers and other systems that are driving the migration to 3G high-definition (HD) transmission; and
	•		WAN Communications — circuit-switched networking equipment that implements asynchronous transfer mode (ATM) and T1/E1 and T3/E3 communications protocols.

     Our customers include Alcatel-Lucent, Cisco Systems, Inc., Huawei Technologies Co. Ltd., Hitachi Ltd., LM Ericsson Telephone Company, Mitsubishi Electric Corporation, 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 58% of our net revenue for the first nine months of fiscal 2011 and approximately 50% of our net revenue for the first nine months of fiscal 2010. Our net revenue is well diversified globally, with 80% of our net revenue for the first nine months of fiscal 2011 coming from outside of the Americas. We believe a substantial 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, China Unicom and China Mobile. In the first nine months of fiscal 2011, 39% of our net revenue was derived from China as compared with 34% in the first nine months of fiscal 2010.

     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 $43.5 million on research and development in the first nine months of fiscal 2011 and $37.5 million in the first nine months of fiscal 2010. 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, high-performance analog applications such as optical networking and broadcast-video transmission, and wireless infrastructure solutions for base station processing. 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 their other customers 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.

     On March 11, 2011, the northeast coast of Japan experienced a severe earthquake followed by a tsunami, with continuing aftershocks. These geological events have caused significant damage in the region, including severe damage to nuclear power plants, and have impacted Japan’s power and other infrastructure, as well as its economy. Certain of our suppliers located outside Japan integrate components or use materials manufactured in Japan in the production of its products. Due to cross dependencies, supply chain disruptions stemming from the occurrences in Japan could negatively impact the demand for our products, including, for example, if our customers are unable to obtain sufficient supply of other components required for their end products. We continue to monitor the effect of the events in Japan on end demand patterns and inventory levels throughout the supply chain. While we recognize that the crisis in Japan has impacted our supply chain, we have secured certain product commitments from our suppliers and therefore we do not currently believe these events will have a material impact on our operations in the fiscal fourth quarter of 2011 unless conditions worsen, including, but not limited to, power outages and expansion of evacuation zones around the nuclear power plants. Beyond the fiscal fourth quarter of 2011, uncertainty exists with respect to the availability of electrical power, the damage to nuclear power plants and the impact to other infrastructure. Thus, there is a risk that we could in the future experience delays or other constraints in obtaining key

components and products and/or price increases related to such components and products that could materially adversely affect our financial condition and operating results.

     In order to achieve sustained profitability and positive cash flows from operations, we may need to further reduce operating expenses and/or increase our revenue. 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, in part, 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 has generally led to pricing pressure and loss of market share. These factors have caused substantial fluctuations in our revenue 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 accounting policies that have the greatest impact on our financial condition and results of operations and that require the most judgment are those relating to revenue recognition, inventories, stock-based compensation, deferred income taxes and uncertain tax positions, and impairment of long-lived assets. These policies are described in further detail in our Annual Report on Form 10-K for the fiscal year ended October 1, 2010. Except as described below, there have been no significant changes in our critical accounting policies and estimates during the fiscal quarter ended July 1, 2011 as compared to what was previously disclosed in our Annual Report on Form 10-K for the fiscal year ended October 1, 2010.

     Revenue Recognition — Our revenue consists principally of sales of semiconductor devices and, to a lesser extent, support and maintenance contracts, development agreements and the sale and license of intellectual property. We recognize revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the price to the customer is fixed or determinable; and (iv) collection of the sales price is probable. 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.

     Our semiconductor products either do not contain software that is more than incidental to the functionality of the product, or the software functions together with non-software deliverables to deliver the essential functionality of the product. Accordingly, we account for revenue in accordance with the provisions of Accounting Standards Codification 605, Revenue Recognition, or ASC 605, and all related interpretations. Additionally, we provide unspecified software upgrades and enhancements through our support and maintenance contracts for certain of our semiconductor products. Support and maintenance services revenue is deferred and recognized ratably over the period during which the services are to be performed.

     We recognize revenue 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 revenue 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 goods sold 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. See Note 2 to our Consolidated Condensed Financial Statements for detail of this account balance.

     We recognize revenue 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.

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

Recent Accounting Pronouncements

     In September 2009, the Emerging Issues Task Force reached a consensus on Accounting Standards Update, or ASU, 2009-13, Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements, or ASU 2009-13 and ASU 2009-14, Software (Topic 985) — Certain Revenue Arrangements That Include Software Elements, or ASU 2009-14. ASU 2009-13 modifies the requirements that must be met for an entity to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered. ASU 2009-13 eliminates the requirement that all undelivered elements must have either: (i) vendor specific objective evidence (VSOE) of fair value; or (ii) third-party evidence (TPE) before an entity can recognize the portion of an overall arrangement consideration that is attributable to items that have already been delivered. In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, entities will be required to estimate the selling prices of those elements. Overall arrangement consideration will be allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entity’s estimated selling price. The residual method of allocating arrangement consideration has been eliminated. ASU 2009-14 modifies the software revenue recognition guidance to exclude from its scope tangible products that contain both software and non-software components that function together to deliver a product’s essential functionality. These new updates are effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We adopted these provisions effective October 2, 2010, and it did not have a material impact on our consolidated condensed financial statements.

Results of Operations

Net Revenue by Product Line

     The following table summarizes fiscal quarter net revenue by product line:

		Three Months Ended
		July 1,				% of Net				July 2,				% of Net				Change
		2011				Revenue				2010				Revenue				$				%
		(in thousands, except percentages)
Communications convergence processing		$	18,917				45	%		$	17,823				41	%		$	1,094				6.1	%
High-performance analog			15,488				37	%			14,332				33	%			1,156				8.1	%
WAN communications			7,811				18	%			11,126				26	%			(3,315	)			-29.8	%
Total net product revenue			42,216				100	%			43,281				100	%			(1,065	)			-2.5	%
Intellectual property			—				0	%			—				0	%			—
Net revenue		$	42,216				100	%		$	43,281				100	%		$	(1,065	)			-2.5	%

     The decrease in our net revenue for the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010 was due to lower sales volumes for our WAN communications products, partially offset by an increase in demand for our communications convergence processing products and our high-performance analog products. Net revenue from our communications convergence processing products increased in the third quarter of fiscal 2011 when compared to the third quarter of fiscal 2010 due to an increase in shipments of 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. This increase was partially offset by a decrease in net revenue from a slowdown in 3G investment which resulted in fewer shipments of wireless media gateways used in terminating calls between the public switch telephone network (PTSN) and wireless media gateways. Net revenue from high-performance analog products increased in the third quarter of fiscal 2011 when compared to the third quarter of fiscal 2010 due to increased demand for physical media devices, which are primarily used in equipment for fiber-to-the-premise deployments. Net revenue from WAN communications products decreased in the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010 due to a slowdown in demand at several large customers, particularly in ATM-based systems. WAN communications products represent a legacy business for us, as we have shifted almost all of our research and development investment into our two growth businesses of communications convergence processing products and high-performance analog products.

     The following table summarizes year-to-date net revenue by product line:

		Nine Months Ended
		July 1,				% of Net				July 2,				% of Net				Change
		2011				Revenue				2010				Revenue				$				%
		(in thousands, except percentages)
Communications convergence processing		$	51,111				42	%		$	47,946				40	%		$	3,165				6.6	%
High-performance analog			44,541				37	%			39,442				33	%			5,099				12.9	%
WAN communications			23,160				19	%			33,172				28	%			(10,012	)			-30.2	%
Total net product revenue			118,812				98	%			120,560				101	%			(1,748	)			-1.4	%
Intellectual property			2,500				2	%			—				0	%			2,500
Net revenue		$	121,312				100	%		$	120,560				101	%		$	752				0.6	%

     The increase in net revenue for the first nine months of fiscal 2011 compared to the first nine months of fiscal 2010 was due to higher sales volume for our communications convergence processing products and high-performance analog products, as well as the sale of intellectual property, mostly offset by a decrease in demand for our WAN communications products. Net revenue from communications convergence processing products increased in the first nine months of fiscal 2011 compared to the first nine months of fiscal 2010 due to an increase in shipments of

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. Net revenue from high-performance analog products increased in the first nine months of fiscal 2011 compared to the first nine months of fiscal 2010 due to increased demand for both physical media devices, which are primarily used in equipment for fiber-to-the-premise deployments, and our video products. Net revenue from WAN communications products decreased in the first nine months of fiscal 2011 compared to the first nine months of fiscal 2010 due to a slowdown in demand at several large customers, particularly in ATM-based systems. Net revenue from intellectual property licensing and sales increased in the first nine months of fiscal 2011 compared to the first nine months of fiscal 2010, due to the timing of intellectual property sales. 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.

Net Revenue by Geographic Region

     The following table summarizes fiscal quarter net revenue by geographic region, based on country of destination:

		Three Months Ended
		July 1,				% of Net				July 2,				% of Net				Change
		2011				Revenue				2010				Revenue				$				%
		(in thousands, except percentages)
Americas		$	6,850				16	%		$	10,472				24	%		$	(3,622	)			-34.6	%
Europe, Middle East and Africa			3,641				9	%			2,977				7	%			664				22.3	%
Asia-Pacific			31,725				75	%			29,832				69	%			1,893				6.3	%
Net revenue		$	42,216				100	%		$	43,281				100	%		$	(1,065	)			-2.5	%

     The decrease in Americas net revenue for the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010 was due to lower sales volumes of our WAN communications products and to a lesser extent lower sales volumes of our communications convergence processing products and our high-performance analog products. The increase in Europe, Middle East and Africa net revenue for the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010 was due to higher sales volumes of our communications convergence processing products and our high-performance analog products. The increase in Asia-Pacific net revenue for the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010 was due to higher sales volumes of our communications convergence processing products and our high-performance analog products partially offset by lower sales volumes of our WAN communications products.

     The following table summarizes fiscal year-to-date net revenue by geographic region, based on country of destination:

		Nine Months Ended
		July 1,				% of Net				July 2,				% of Net				Change
		2011				Revenue				2010				Revenue				$				%
		(in thousands, except percentages)
Americas		$	26,678				22	%		$	26,978				22	%		$	(300	)			-1.1	%
Europe, Middle East and Africa			10,324				9	%			8,837				7	%			1,487				16.8	%
Asia-Pacific			84,310				69	%			84,745				71	%			(435	)			-0.5	%
Net revenue		$	121,312				100	%		$	120,560				100	%		$	752				0.6	%

     The decrease in Americas net revenue for the first nine months of fiscal 2011 compared to the first nine months of fiscal 2010 was due to lower sales volumes of our WAN communications products partially offset by an increase in sales volumes of our communications convergence processing products and our high-performance analog products. The increase in Europe, Middle East and Africa net revenue for the first nine months of fiscal 2011 compared to the first nine months of fiscal 2010 was due to higher sales volumes of our WAN communications products and communications convergence processing products. The decrease in Asia-Pacific net revenue for the first nine months of fiscal 2011 compared to the first nine months of fiscal 2010 was due to lower sales volumes of our WAN communications products partially offset by an increase in sales volumes of our communications convergence processing products and our high-performance analog products.

Gross Margin

     Gross margin represents net revenue 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 and assembly and test services. Cost of goods sold primarily consisted of: purchased finished wafers; assembly and test services; royalty and other intellectual property costs; labor and overhead costs associated with product procurement; amortization of the cost of mask sets purchased; and sustaining engineering expenses pertaining to products sold.

     The following table presents fiscal quarter gross margin:

		Three Months Ended
		July 1,				% of Net				July 2,				% of Net				Change
		2011				Revenue				2010				Revenue				$				%
		(in thousands, except percentages)
Gross margin		$	26,249				62	%		$	27,780				64	%		$	(1,531	)			-5.5	%

     Gross margin decreased for the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010 due partially to a $1.1 million, or 2.5%, decrease in net revenue. The decrease in our gross margin as a percent of net revenue for the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010 was primarily due to a change in product mix.

     The following table presents fiscal year-to-date gross margin:

		Nine Months Ended
		July 1,				% of Net				July 2,				% of Net				Change
		2011				Revenue				2010				Revenue				$				%
		(in thousands, except percentages)
Gross margin		$	76,781				63	%		$	77,263				64	%		$	(482	)			-0.6	%

     Gross margin decreased for the first nine months of fiscal 2011 compared to the first nine months of fiscal 2010 as a result of a decrease in product revenue and a change in product mix partially offset by the favorable impact of intellectual property sales, with no associated costs.

Research and Development

     Research and development (R&D) expenses consisted primarily of: direct personnel costs, including stock-based compensation; photomasks; electronic design automation tools; and pre-production evaluation and test costs.

     The following table presents details of fiscal quarter R&D expenses:

		Three Months Ended
		July 1,				% of Net				July 2,				% of Net				Change
		2011				Revenue				2010				Revenue				$				%
		(in thousands, except percentages)
Personnel-related costs		$	9,519							$	7,904							$	1,615				20.4	%
Stock-based compensation			545								248								297				119.8	%
Design & development costs			2,709								2,510								199				7.9	%
Facilities			1,424								1,447								(23	)			-1.6	%
Depreciation			528								314								214				68.2	%
Other			352								308								44				14.3	%
Research and development		$	15,077				36	%		$	12,731				29	%		$	2,346				18.4	%

     R&D expenses increased for the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010 due to increased investment in our next generation products in both the wireless and enterprise markets that resulted in: an increase in personnel costs, including stock-based compensation, primarily resulting from increased headcount; an increase in the cost of engineering tools; and an increase in depreciation expense resulting from an increase in R&D related capital expenditures.

     The following table presents details of fiscal year-to-date R&D expenses:

		Nine Months Ended
		July 1,				% of Net				July 2,				% of Net				Change
		2011				Revenue				2010				Revenue				$				%
		(in thousands, except percentages)
Personnel-related costs		$	26,409							$	23,399							$	3,010				12.9	%
Stock-based compensation			1,189								782								407				52.0	%
Design & development costs			9,236								6,857								2,379				34.7	%
Facilities			4,191								4,665								(474	)			-10.2	%
Depreciation			1,432								959								473				49.3	%
Other			1,068								878								190				21.6	%
Research and development		$	43,525				36	%		$	37,540				31	%		$	5,985				15.9	%