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 (State of incorporation)		01-0616769 (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):

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

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 April 30, 2010 was 31,931,692.

 

 

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;

•

our ability to achieve design wins and convert design wins into revenue;

•

the continuation of intense price and product competition, and the resulting declining average selling prices for our products;

•

the impact of changes in customer purchasing activities, inventory levels and inventory management practices;

•

the challenges of shifting any operations or labor offshore, including the likelihood of competition in offshore markets for qualified personnel;

•

our ability to achieve revenue growth, sustain profitability and positive cash flows from operations;

•

our anticipation that we will not pay a dividend in the foreseeable future;

•

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 continuation of a 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;

•

the circumstances under which we may need to seek additional financing, our ability to obtain any such financing and any consideration of acquisition opportunities;

•

our expectation that our provision for income taxes for fiscal 2010 will principally consist of income taxes related to our foreign operations;

•

our expectations with respect to our recognition of income tax benefits in the future;

•

our restructuring plans, including timing, expected workforce reductions, the closure of the Dubai facility, the expected cost savings under our restructuring plans and the uses of those savings, the timing and amount of payments to complete the actions, the source of funds for such payments, the impact on our liquidity and the resulting decreases in our research and development and selling, general and administrative expenses, and the amounts of future charges to complete our restructuring plans;

•

our plans with respect to future actions to reduce operating expenses and/or increase revenues;

•

our beliefs regarding the effect of the disposition of pending or asserted legal matters and the possibility of future legal matters;

•

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

•

our plans relating to our use of stock-based compensation, the effectiveness of our incentive compensation programs and the expected amounts of stock-based compensation expense in future periods;

•

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

•

the effects of a downturn in the semiconductor industry and the general economy at large, including the impact of slower economic activity, an increase in bankruptcy filings, concerns about inflation and deflation, increased energy costs, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns in the wired and wireless communications markets, recent international conflicts and terrorist and military activity and the impact of natural disasters and public health emergencies on our revenue and results of operation;

•

the impact of reductions, delays and cancellation of orders from key customers given our dependence on a relatively small number of end customers and distributors for a significant portion of our revenue and our lack of long term purchase commitments;

•

the impact of volatility in the stock market on the market price of our common stock;

•

the impact on our business if we fail to comply with the minimum listing requirements for continued quotation on the Nasdaq Global Market;

•

the effect of changes in the amount of research coverage of our common stock, changes in earnings estimates or buy/sell recommendations by analysts and changes in investor perception of us and the industry in which we operate;

•

the effect of shifts in our product mix and the effect of maturing products;

•

the continued availability and costs of products from our suppliers;

•

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;

•

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

•

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;

•

our expectations regarding fluctuations in our growth patterns;

•

the effects of the recent healthcare legislation on our business; 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;

•

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

•

fluctuations in the price of our common stock;

•

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

•

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;

•

order and shipment uncertainty;

•

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

•

lengthy sales cycles;

•

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 — April 2, 2010 and October 2, 2009			7
Consolidated Condensed Statements of Operations — Three Months and Six Months Ended April 2, 2010 and April 3, 2009			8
Consolidated Condensed Statements of Cash Flows — Six Months Ended April 2, 2010 and April 3, 2009			9
Notes to Consolidated Condensed Financial Statements			10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3. Quantitative and Qualitative Disclosures About Market Risk			38
Item 4. Controls and Procedures			39
PART II. OTHER INFORMATION
Item 1A. Risk Factors			39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			52
Item 6. Exhibits			53
Signature			55
Exhibit 10.5
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I. FINANCIAL INFORMATION

ITEM 1.		FINANCIAL STATEMENTS

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

		April 2,				October 2,
		2010				2009
						As Adjusted-
						Note 4
ASSETS
Current Assets
Cash		$	31,348			$	20,891
Receivables, net of allowance for doubtful accounts of $189 and $144 at April 2, 2010 and October 2, 2009, respectively			14,971				7,662
Inventories			7,485				10,902
Deferred tax assets — current			1,402				1,574
Prepaid expenses and other current assets			2,792				2,529
Total current assets			57,998				43,558
Property, plant and equipment, net			11,717				11,018
License agreements, net			6,993				6,505
Other assets			1,228				1,382
Total assets		$	77,936			$	62,463
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable		$	6,681			$	6,338
Accrued compensation and benefits			6,146				5,788
Accrued income tax			348				525
Deferred income on sales to distributors			4,730				2,604
Deferred revenue			784				1,106
Restructuring			479				448
Convertible senior notes — short term			—				10,349
Other current liabilities			2,746				2,177
Total current liabilities			21,914				29,335
Convertible senior notes — long term			13,611				13,415
Other liabilities			1,372				823
Total liabilities			36,897				43,573
Commitments and contingencies (Note 5)			—				—
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; 31,902 (April 2, 2010) and 28,756 (October 2, 2009) issued and outstanding shares			319				288
Additional paid-in capital			315,794				296,333
Accumulated deficit			(259,884	)			(262,863	)
Accumulated other comprehensive loss			(15,190	)			(14,868	)
Total stockholders’ equity			41,039				18,890
Total liabilities and stockholders’ equity		$	77,936			$	62,463

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								Six months ended
		April 2,				April 3,				April 2,				April 3,
		2010				2009				2010				2009
						As Adjusted-								As Adjusted-
						Note 4								Note 4
Net revenues:
Products		$	40,253			$	26,533			$	77,279			$	54,264
Intellectual property			—				2,000				—				5,000
Total net revenues			40,253				28,533				77,279				59,264
Cost of goods sold (including impairments and other charges of $3,667 in the three and six months ended April 3, 2009)			14,333				14,530				27,796				24,279
Gross margin			25,920				14,003				49,483				34,985
Operating expenses:
Research and development			12,221				13,100				24,809				26,444
Selling, general and administrative			10,391				10,702				20,025				21,825
Special charges			(71	)			4,582				789				6,887
Total operating expenses			22,541				28,384				45,623				55,156
Operating income/(loss)			3,379				(14,381	)			3,860				(20,171	)
Interest expense			(394	)			(675	)			(1,024	)			(1,588	)
Other income, net			196				415				201				1,457
Income/(loss) before income taxes			3,181				(14,641	)			3,037				(20,302	)
Provision for income taxes			42				172				58				262
Net income/(loss)		$	3,139			$	(14,813	)		$	2,979			$	(20,564	)
Net income/(loss) per share:
Basic		$	0.11			$	(0.63	)		$	0.10			$	(0.88	)
Diluted		$	0.10			$	(0.63	)		$	0.10			$	(0.88	)
Weighted-average number of shares used in per share computation:
Basic			29,362				23,573				28,931				23,490
Diluted			30,687				23,573				29,922				23,490

See accompanying notes to consolidated condensed financial statements.

MINDSPEED TECHNOLOGIES, INC.

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

		Six months ended
		April 2,				April 3,
		2010				2009
						As Adjusted-
						Note 4
Cash Flows From Operating Activities
Net income/(loss)		$	2,979			$	(20,564	)
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:
Depreciation and amortization			2,865				3,124
Asset impairments			—				5,498
Special charges			789				4,022
Stock-based compensation			2,217				1,494
Inventory provisions			1,025				1,279
Gain on debt extinguishment			—				(1,121	)
Amortization of debt discount on convertible senior notes			347				778
Other non-cash items, net			215				78
Changes in assets and liabilities:
Receivables			(7,398	)			7,245
Inventories			2,392				703
Accounts payable			111				(5,662	)
Deferred income on sales to distributors			2,126				(1,124	)
Restructuring			(770	)			(1,937	)
Accrued expenses and other current liabilities			334				(1,378	)
Other			(531	)			291
Net cash provided by/(used in) operating activities			6,701				(7,274	)
Cash Flows From Investing Activities
Capital expenditures			(3,047	)			(3,592	)
Net cash used in investing activities			(3,047	)			(3,592	)
Cash Flows From Financing Activities
Gross proceeds from sale of equity			18,300				—
Offering costs from sale of equity			(1,307	)			—
Extinguishment of convertible debt			(10,500	)			(17,320	)
Payments made on capital lease obligations			(249	)			—
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			474				—
Net cash provided by/(used in) financing activities			6,718				(17,576	)
Effect of foreign currency exchange rates on cash			85				(23	)
Net increase/(decrease) in cash			10,457				(28,465	)
Cash at beginning of period			20,891				43,033
Cash at end of period		$	31,348			$	14,568

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 networking solutions for communications applications in enterprise, broadband access, metropolitan and wide-area networks. On June 27, 2003, Conexant Systems, Inc. (Conexant) completed the distribution (the Distribution) to 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 (adjusted to reflect a change in the number of shares and exercise price, which resulted from the offering of common stock that the Company completed in fourth quarter fiscal 2009), 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 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 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.

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 second quarter of fiscal 2010 and 2009 ended on April 2, 2010 and April 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 4 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 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, 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 six months ended April 2, 2010 and April 3, 2009 principally consists of income taxes incurred by the Company’s foreign subsidiaries. In the first six 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 and unvested restricted stock units. The dilutive effect of stock options, warrants and unvested restricted stock units is computed using the treasury stock method, which assumes any proceeds that could be obtained upon the exercise of stock options, warrants and vesting of restricted stock units would be used to purchase common shares at the average market price for the period. The assumed proceeds include the purchase price the grantee pays, the hypothetical windfall tax benefit that the Company receives upon assumed exercise or vesting and the hypothetical average unrecognized compensation expense for the period. The Company calculates the assumed proceeds from excess tax benefits based on the “as-if” deferred tax assets calculated under the provision of ASC 718, Compensation — Stock Compensation

For the three and six months ended April 2, 2010, potentially dilutive securities consisted of stock options and restricted stock and resulted in an upward adjustment to weighted average number of shares outstanding of 1.3 million and 1.0 million, respectively. Stock options, warrants and convertible senior notes to purchase approximately 13.0 million shares and 13.3 million shares for the three months and six months ended April 2, 2010, respectively, were outstanding but not included in the computation of diluted earnings per share because the effect would have been anti-dilutive.

Because the Company incurred a net loss in first three and six months ended April 3, 2009, the potential dilutive effect of the Company’s outstanding stock options, warrants and convertible senior notes was not included in the computation of diluted loss per share because these securities were anti-dilutive.

Concentrations — Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash and trade accounts receivable. Cash consists of demand deposits 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:

		Six months ended
		April 2,				April 3,
		2010				2009
Customer A			18	%			18	%
Customer B			13	%			13	%
Customer C			11	%			8	%
Customer D			9	%			13	%

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

		April 2,				October 2,
		2010				2009
Customer A			26	%			19	%
Customer B			4	%			10	%
Customer C			20	%			6	%
Customer E			6	%			10	%

Supplemental Cash Flow Information — Interest paid for the six months ended April 2, 2010 and April 3, 2009 was $719,000 and $842,000, respectively. Income taxes paid, net of refunds received, for the six months ended April 2, 2010 and April 3, 2009 were $64,000 and $369,000, respectively. Non-cash investing activities in the first six months of fiscal 2010 consisted of the license of $192,000 of intellectual property on account, and the purchase of $840,000 of equipment through capital leasing arrangements. Non-cash investing activities in the first six months of fiscal 2009 consisted of the purchase of $1.0 million of property and equipment from suppliers on account, as well as the license of $2.1 million of intellectual property on account.

2. Supplemental Financial Statement Data

Inventories

Inventories consist of the following (in thousands):

		April 2,				October 2,
		2010				2009
Work-in-process		$	2,989			$	4,124
Finished goods			4,496				6,778
Total inventories		$	7,485			$	10,902

During the six months ended April 2, 2010 and April 3, 2009, the Company’s gross margin included a benefit of approximately $877,000 and $1.0 million, respectively, from the sale of inventory that had been written down to a zero cost basis during fiscal 2001. As of April 2, 2010, the Company continued to hold inventories with an original cost of $2.8 million, which were written down to a zero cost basis during fiscal 2001.

Deferred Income on Shipments to Distributors

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

		April 2,				October 2,
		2010				2009
Deferred revenue on shipments to distributors		$	5,179			$	2,984
Deferred cost of inventory on shipments to distributors			(499	)			(422	)
Reserves			50				42
Deferred income on sales to distributors		$	4,730			$	2,604

Comprehensive Income/(Loss)

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

		Three months ended								Six months ended
		April 2,				April 3,				April 2,				April 3,
		2010				2009				2010				2009
						As Adjusted-								As Adjusted-
						Note 4								Note 4
Net income/(loss)		$	3,139			$	(14,813	)		$	2,979			$	(20,564	)
Foreign currency translation adjustments, net of tax			(231	)			(293	)			(323	)			(634	)
Comprehensive income/(loss)		$	2,908			$	(15,106	)		$	2,656			$	(21,198	)

Comprehensive income/(loss) at April 2, 2010 and April 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								Six months ended
		April 2,				April 3,				April 2,				April 3,
		2010				2009				2010				2009
Multiservice access DSP products		$	16,168			$	10,781			$	30,123			$	21,570
High-performance analog products			13,531				8,162				25,111				18,681
WAN communications products			10,554				7,590				22,045				14,013
Intellectual property			—				2,000				—				5,000
Total net revenues		$	40,253			$	28,533			$	77,279			$	59,264

Revenues by Geographic Area

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

		Three months ended								Six months ended
		April 2,				April 3,				April 2,				April 3,
		2010				2009				2010				2009
Americas		$	7,888			$	8,734			$	16,506			$	21,053
Asia-Pacific			28,857				16,266				54,913				31,197
Europe, Middle East and Africa			3,508				3,533				5,860				7,014
Total net revenues		$	40,253			$	28,533			$	77,279			$	59,264

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. 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 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 six months ended April 2, 2010 and April 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:

		Six months ended
		April 2,				April 3,
		2010				2009
Weighted-average fair value of options granted		$	2.92			$	0.63
Weighted-average assumptions:
Expected option life		2.7 years				3.3 years
Risk-free interest rate			1.3	%			1.3	%
Expected volatility			95	%			82	%
Dividend yield			—				—

The expected option term was estimated 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								Six months ended
		April 2,				April 3,				April 2,				April 3,
		2010				2009				2010				2009
Cost of goods sold		$	38			$	14			$	70			$	49
Research and development			198				100				505				440
Selling, general and administrative			1,041				413				1,642				1,005
Total stock-based compensation expense		$	1,277			$	527			$	2,217			$	1,494

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 April 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 received approval of 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 will begin during the third quarter of fiscal 2010.

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; the Company also 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			508				5.05
Exercised			(136	)			3.63
Forfeited or expired			(85	)			9.55
Outstanding at April 2, 2010			3,415				6.24			4.9 years
Exercisable at end of period			1,431			$	10.80			2.6 years

As of April 2, 2010, there was unrecognized compensation expense of $2.5 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 April 2, 2010 was $11.0 million and $1.1 million, respectively.

On March 10, 2010, the Company amended the terms of options to acquire an aggregate of 166,455 shares of the Company’s common stock held by the Company’s Chairman of the Board. 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 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 (3) 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 (3) month anniversary date of the vesting trigger date. If the vesting trigger price is not achieved prior to the three (3) 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			708				6.75
Vested			(202	)			5.08
Forfeited			(11	)			2.98
Nonvested shares at April 2, 2010			866			$	6.88

The total fair value of shares vested during the six months ended April 2, 2010 was $1.2 million. As of April 2, 2010 there was unrecognized compensation expense of $2.7 million related to unvested stock awards, which the Company expects to recognize over a weighted-average period of approximately one year.

4. Revolving Credit Facility and Convertible Senior Notes

Revolving Credit Facility

At April 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 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 April 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 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. Prior to the issuance of this accounting standard, 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 this exchange transaction 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 six months ended April 3, 2009, and the consolidated condensed statement of cash flows for the six months ended April 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 April 3, 2009 (in thousands)		Reported				Adjustment				As Adjusted
Interest expense		$	433			$	242			$	675
Loss before income taxes			(14,399	)			(242	)			(14,641	)
Net loss		$	(14,571	)		$	(242	)		$	(14,813	)
Net loss per share, basic and diluted		$	(0.62	)		$	(0.01	)		$	(0.63	)
Weighted average number of shares used in per share calculation			23,573								23,573

Consolidated Condensed Statement of Operations		As Previously
Six months ended April 3, 2009 (in thousands)		Reported				Adjustment				As Adjusted
Interest expense		$	902			$	686			$	1,588
Other income, net			3,216				(1,759	)			1,457
Loss before income taxes			(17,857	)			(2,445	)			(20,302	)
Net loss		$	(18,119	)		$	(2,445	)		$	(20,564	)
Net loss per share, basic and diluted		$	(0.77	)		$	(0.11	)		$	(0.88	)
Weighted average number of shares used in per share calculation			23,490								23,490

Consolidated Condensed Statement of Cash Flows		As Previously
Six months ended April 3, 2009 (in thousands)		Reported				Adjustment				As Adjusted
Cash flows from operating activities:
Net loss		$	(18,119	)		$	(2,445	)		$	(20,564	)
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			—				778				778
Other non-cash items, net*			170				(92	)			78
Net cash used in operating activities		$	(7,274	)			—			$	(7,274	)

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

		April 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			1,389				1,585
Net carrying value of the liability component		$	13,611			$	13,415

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

		Three months ended								Six months ended
		April 2,				April 3,				April 2,				April 3,
		2010				2009				2010				2009
3.75% convertible senior notes
Interest expense — coupon		$	—			$	98			$	48			$	235
Interest expense — debt discount amortization			—				237				151				588
Total		$	—			$	335			$	199			$	823
Effective interest rate on the liability component for the period			—				12.76	%			14.68	%			13.26	%
6.50% convertible senior notes
Interest expense — coupon		$	244			$	244			$	488			$	488
Interest expense — debt discount amortization			99				95				197				190
Total		$	343			$	339			$	685			$	678
Effective interest rate on the liability component for the period			9.15	%			9.04	%			9.13	%			9.04	%

5. Commitments and Contingencies

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

The outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to 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.

6. Asset Impairments and Other Charges

There were no asset impairments included within cost of goods sold for the three and six months ended April 2, 2010. Included within cost of goods sold for the three months and six months ended April 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 three and six months ended April 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 three and six months ended April 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.

7. Special Charges

Special charges consists of the following (in thousands):

		Three months ended								Six months ended
		April 2,				April 3,				April 2,				April 3,
		2010				2009				2010				2009
Asset impairments		$	—			$	2,865			$	—			$	2,865
Restructuring charges			(71	)			1,717				789				4,022
Total special charges		$	(71	)		$	4,582			$	789			$	6,887

Asset Impairments

There were no asset impairments included within special charges for the three and six months ended April 2, 2010. In addition to the $3.7 million in asset impairments and other charges included within cost of goods sold discussed in Note 6, in the second quarter of fiscal 2009, 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.

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 six months of fiscal 2010, the Company incurred special charges of $789,000 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 April 2, 2010 are as follows (in thousands):

		Workforce				Facility and
		Reductions				Other				Total
Charged to costs and expenses		$	287			$	573			$	860
Cash payments			(195	)			(384	)			(579	)
Non-cash charges/(credits)			(71	)			—				(71	)
Restructuring balance, April 2, 2010		$	21			$	189			$	210

The remaining accrued restructuring balance principally represents obligations under non-cancelable leases, 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 2010.

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 April 2, 2010 are as follows (in thousands):

		Workforce				Facility and
		Reductions				Other				Total
Restructuring balance, October 2, 2009		$	78			$	—			$	78
Cash payments			(25	)			—				(25	)
Restructuring balance, April 2, 2010		$	53			$	—			$	53

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 April 2, 2010 are as follows (in thousands):

		Workforce				Facility
		Reductions				and Other				Total
Restructuring balance, October 2, 2009		$	287			$	86			$	373
Cash payments			(82	)			(80	)			(162	)
Restructuring balance, April 2, 2010		$	205			$	6			$	211

The remaining accrued restructuring balance principally represents obligations under non-cancelable leases, 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.

Fiscal 2006 and 2007 Mindspeed Restructuring Plans — In fiscal 2006 and 2007, the Company implemented a number of cost reduction initiatives to improve its operating cost structure. These cost reduction initiatives included workforce reductions, significant reductions in capital spending and the consolidation of certain facilities. Activity under these initiatives was minimal in fiscal 2009 and the first six months of fiscal 2010. The remaining accrued restructuring balance related to these plans is $5,000 at April 2, 2010.

8. Related Party Transactions

The Company leases its headquarters and principal design center in Newport Beach, California from Conexant. For the six months ended April 2, 2010 and April 3, 2009 rent and operating expenses paid to Conexant were $987,000 and $2.6 million, respectively.

9. Subsequent Events

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.

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: multiservice access; high-performance analog; and wide area networking. Our multiservice access digital signal processor (DSP) products include ultra-low-power multi-core 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 multiservice access 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) 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 48% of our revenues for the first six months of fiscal 2010 and 47% of our revenues for the first six months of fiscal 2009. Our revenue is diversified globally, with 79% of revenue in the first six 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 and China Unicom. In the first six months of fiscal 2010, 32% of our revenue was derived from China, compared to 36% in the first six 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 $24.8 million on research and development in the first six months of fiscal 2010 and $26.4 million in the first six 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 intend to periodically enter into strategic arrangements to leverage our portfolio by licensing or selling our intellectual property. We recognized our first revenues from the sale of patents during the fourth quarter of fiscal 2007, and continued to recognize patent-related revenues in most of our fiscal quarters through the second quarter of fiscal 2009.

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 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, revenue recognition, stock-based compensation, income taxes, assumptions used to measure the fair value of the debt component of our senior convertible notes 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 three months ended April 3, 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 6 and 7 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. 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 6 and 7 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												Six months ended
		April 2,								April 3,				April 2,								April 3,
($ in millions)		2010				Change				2009				2010				Change				2009
Multiservice access DSP products		$	16.2				50	%		$	10.8			$	30.1				39	%		$	21.6
High-performance analog products			13.5				67	%			8.1				25.1				34	%			18.7
WAN communications products			10.6				39	%			7.6				22.1				58	%			14.0
Intellectual property			—				(100	)%			2.0				—				(100	)%			5.0
Net revenues		$	40.3				41	%		$	28.5			$	77.3				30	%		$	59.3

The 41% increase in our net revenues for the second quarter of fiscal 2010 compared to the comparable fiscal 2009 period mainly reflects higher sales volume in all three of our product families, partially offset by lower revenues from the sale and licensing of intellectual property. Net revenues from our multiservice access DSP products increased $5.4 million, or 50%, 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 multiservice access, 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 $5.4 million, or 67%, when comparing the second quarter of fiscal 2010 to the second quarter of fiscal 2009, due primarily to an increased demand in crosspoint switches from strength in the telecommunications market in China and an increased demand for our physical media devices, which are used in equipment for fiber-to-the-premise deployments, metropolitan area networks and wide area networks. Net revenues from our WAN communications products increased $3.0 million, or 39%, in the second quarter of fiscal 2010 compared to the second quarter of fiscal 2009 due primarily to the decrease in demand for our WAN products in the second quarter of fiscal 2009 resulting from weak economic conditions, particularly in the U.S. Demand subsequently increased in the second quarter of fiscal 2010, which resulted in an increase in shipments in our network processor products, our T/E carrier transmission products and our Carrier Ethernet products. Net revenues from intellectual property licensing and sales decreased $2.0 million, or 100%, because we did not recognize any intellectual property sales in the second quarter of fiscal 2010. We have developed and maintain a broad intellectual property portfolio, and we periodically enter into strategic arrangements to leverage our portfolio by licensing or selling our patents. We recognized our first revenues from the sale of patents during the fourth quarter of fiscal 2007, and continued to recognize patent-related revenues in most of our fiscal quarters through the second quarter of fiscal 2009. Our sales of intellectual property subsequent to the second quarter of fiscal 2009 have been negatively impacted by the downturn in the economy, which has decreased the number of buyers and prices buyers are willing to pay in the intellectual property market.

For the first six months of fiscal 2010, the 30% 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 lower revenues from the sale and licensing of intellectual property. Net revenues from our multiservice access DSP products increased $8.5 million, or 39%, 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 multiservice access, 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 $6.4 million, or 34%, when comparing the second quarter of fiscal 2010 to the second quarter of fiscal 2009 due primarily to increased demand in crosspoint switches due to strength in the telecommunications market in China and increased demand for our physical media devices, which are used in equipment for fiber-to-the-premise deployments, metropolitan area networks and wide area networks. Net revenues from our WAN communications products increased $8.1 million, or 58%, mainly reflecting the decrease in demand we saw for our WAN products in the first six months of fiscal 2009 due to weak economic conditions, particularly in the U.S. Demand subsequently increased in the first six months of fiscal 2010, which resulted in an increase in shipments mainly in our network processor products and our carrier Ethernet products. Net revenues from intellectual property licensing and sales decreased $5.0 million, or 100%, in the first six months of fiscal 2010 compared to the first six months of fiscal 2009, because we did not recognize any intellectual property sales in the first six months of fiscal 2010. We have developed and maintain a broad intellectual property portfolio, and we periodically enter into strategic arrangements to leverage our portfolio by licensing or selling our patents. We recognized our first revenues from the sale of patents during the fourth quarter of fiscal 2007, and continued to recognize patent-related revenues in most of our fiscal quarters through the second quarter of fiscal 2009. Our sales of intellectual property subsequent to the second quarter of fiscal 2009 have been impacted by the downturn in the economy, which has decreased the number of buyers and prices buyers are willing to pay in the intellectual property market.

Gross Margin

		Three months ended												Six months ended
		April 2,								April 3,				April 2,								April 3,
($ in millions)		2010				Change				2009				2010				Change				2009
Gross margin		$	25.9				85	%		$	14.0			$	49.5				41	%		$	35.0
Percent of net revenues			64	%							49	%			64	%							59	%

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 and 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 second quarter of fiscal 2010 increased $11.9 million from our gross margin for the second quarter of fiscal 2009, principally reflecting a combination of a 41% 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 second quarter of fiscal 2009 includes an approximate 13% effect from these asset impairments and explains the majority of the 15% increase in gross margin as a percent of net revenues from the second quarter of fiscal 2009 to the second quarter of fiscal 2010. The remaining 2% increase in our gross margin as a percent of net revenues for the second quarter of fiscal 2010 compared to the same fiscal 2009 period is due primarily to manufacturing efficiencies gained from increased production levels during the quarter partially offset by a drop in revenues associated with the sale or licensing of intellectual property, which have little associated cost.

Our gross margin for the first six months of fiscal 2010 increased $14.5 million over our gross margin for the first six months of fiscal 2009, principally reflecting a combination of a 30% increase in revenues between such periods, as well as the effect of the asset impairment charges related to Ample Communications discussed above. Gross margin as a percent of net revenues for the second quarter of fiscal 2009 includes an approximate 6% effect from these asset impairments and is the most significant driver in the 5% increase in gross margin as a percent of net revenues when comparing the first six months of fiscal 2009 to the comparable fiscal 2010 period. This increase in gross margin as a percent of net revenues is partially offset by a drop in revenues associated with the sale or licensing of intellectual property, which have little associated cost.

Our gross margin benefited from the sale of inventories with an original cost of $385,000 in the second quarter of fiscal 2010 and $330,000 in the second quarter of fiscal 2009 that we had written down to a zero cost basis during fiscal 2001. 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 April 2, 2010, we continued to hold inventories with an original cost of $2.8 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 a renewed 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												Six months ended
		April 2,								April 3,				April 2,								April 3,
($ in millions)		2010				Change				2009				2010				Change				2009
Research and development		$	12.2				(7	)%		$	13.1			$	24.8				(6	)%		$	26.4
Percent of net revenues			30	%							46	%			32	%							45	%

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 $900,000 decrease in R&D expenses for the second quarter of fiscal 2010 compared to the second quarter of fiscal 2009 principally reflects a $298,000 decrease in compensation and personnel-related costs, a $175,000 decrease in the cost of our facilities, mainly due to restructuring activities we have conducted over the last 12 months, and a decrease of $449,000 related to a reduction in the cost of engineering hardware and software.

The $1.6 million decrease in R&D expenses for the first six months of fiscal 2010 compared to the first six months of fiscal 2009 principally reflects a $558,000 decrease in compensation and personnel-related costs, a $326,000 decrease in the cost of our facilities, mainly due to restructuring activities we have conducted over the last 12 months, and a decrease of $546,000 related to a reduction in the cost of engineering hardware and software.

Selling, General and Administrative

		Three months ended												Six months ended
		April 2,								April 3,				April 2,								April 3,
($ in millions)		2010				Change				2009				2010				Change				2009
Selling, general and administrative		$	10.4				(3	)%		$	10.7			$	20.0				(8	)%		$	21.8
Percent of net revenues			26	%							38	%			26	%							37	%

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 decrease in our SG&A expenses for the second quarter of fiscal 2010 compared to the second quarter of fiscal 2009 primarily reflects a $135,000 decrease in compensation and personnel-related costs and a $96,000 decrease in our insurance costs. These cost reductions are mainly due to restructuring activities we have conducted over the last 12 months and our focus on cost containment.

The $1.8 million decrease in our SG&A expenses for the first six months of fiscal 2010 compared to the first six months of fiscal 2009 primarily reflects a $1.2 million decrease in compensation and personnel-related costs, including cash bonuses. In addition, the costs associated with our facilities have decreased $137,000, commissions paid to our sales representatives have decreased $155,000, our insurance costs have decreased $143,000 and telecom related costs have decreased $110,000. These cost reductions are mainly due to restructuring activities we have conducted over the last 12 months and our focus on cost containment.

Special Charges

Special charges consists of the following (in thousands):

		Three months ended								Six months ended
		April 2,				April 3,				April 2,				April 3,
		2010				2009				2010				2009
Asset impairments		$	—			$	2,865			$	—			$	2,865
Restructuring charges			(71	)			1,717				789				4,022
Total special charges		$	(71	)		$	4,582			$	789			$	6,887

Asset Impairments

We did not record any asset impairments during the three and six months ended April 2, 2010. During the three and six months ended April 3, 2009, we recorded asset impairment charges totaling $2.4 million to write-down the carrying value of goodwill related to our acquisition of certain assets of Ample Communications, which occurred in the fourth quarter of fiscal 2007. In the second quarter of fiscal 2009, our Ample Communications reporting unit experienced a severe decline in sales and profitability due to a significant decline in demand that we believe 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, our Ample Communications reporting unit has experienced a significant decline in market value. As a result, we concluded that there were sufficient factual circumstances for interim impairment analyses under ASC 350-20. Accordingly, in the second quarter of fiscal 2009, we performed an assessment of goodwill for impairment. Based on the results of our assessment of goodwill for impairment, we determined that the carrying value of the Ample Communications reporting unit exceeded its estimated fair value. Therefore, we 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 Communications reporting unit and accordingly, we impaired the entire goodwill balance of $2.4 million.

In addition to the goodwill impairment discussed above, we recorded asset impairment charges totaling $0.5 million related to software and property and equipment that we determined to abandon or scrap.

Restructuring Charges

Mindspeed First Quarter of Fiscal 2010 Restructuring Plan — In the first quarter of fiscal 2010, we announced the implementation of cost reduction measures consisting of a facilities consolidation and a targeted headcount reduction. During the first six months of fiscal 2010, we incurred special charges of $789,000 in connection with this restructuring, primarily related to contractual obligations on vacated space at our Newport Beach, California headquarters. We do not expect to incur any significant additional expenses related to this plan in future periods.

Activity and liability balances related to our first quarter of fiscal 2010 restructuring plan through April 2, 2010 are as follows (in thousands):

		Workforce				Facility and
		Reductions				Other				Total
Charged to costs and expenses		$	287			$	573			$	860
Cash payments			(195	)			(384	)			(579	)
Non-cash charges/(credits)			(71	)			—				(71	)
Restructuring balance, April 2, 2010		$	21			$	189			$	210

The remaining accrued restructuring balance principally represents obligations under non-cancelable leases, employee severance benefits and other contractual commitments. We expect to pay these obligations over their respective terms, which expire at various dates through fiscal 2010.

Mindspeed Second Quarter of Fiscal 2009 Restructuring Plan — In the second quarter of fiscal 2009, we 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 our Dubai facility. During fiscal 2009, we 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 we do not expect to incur significant additional expenses related to this restructuring plan in future periods.

Activity and liability balances related to our second quarter of fiscal 2009 restructuring plan from October 2, 2009 through April 2, 2010 are as follows (in thousands):

		Workforce				Facility and
		Reductions				Other				Total
Restructuring balance, October 2, 2009		$	78			$	—			$	78
Cash payments			(25	)			—				(25	)
Restructuring balance, April 2, 2010		$	53			$	—			$	53

The remaining accrued restructuring balance principally represents employee severance benefits. We expect 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, we implemented a restructuring plan under which we reduced our workforce by approximately 6%. In connection with this reduction in workforce, we recorded a charge of $2.4 million for severance benefits payable to the affected employees. In December 2008, we vacated approximately 70% of our Massachusetts facility and recorded a charge related to contractual obligations on this space of approximately $400,000. This restructuring plan is complete and we do not expect to incur significant additional expenses related to this restructuring plan in future periods.

Activity and liability balances related to our first quarter of fiscal 2009 restructuring plan from October 2, 2009 through April 2, 2010 are as follows (in thousands):

		Workforce				Facility
		Reductions				and Other				Total
Restructuring balance, October 2, 2009		$	287			$	86			$	373
Cash payments			(82	)			(80	)			(162	)
Restructuring balance, April 2, 2010		$	205			$	6			$	211