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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended March 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number: 000-24923
 CONEXANT SYSTEMS, INC.
  Delaware
(State of incorporation)
    
    25-1799439
(I.R.S. Employer Identification No.)
 4000 MacArthur Boulevard
Newport Beach, California 92660-3095
 (949) 483-4600
 þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
 o þ




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##### Table of Contents



FORWARD-LOOKING STATEMENTS
  
    
    the uncertainties of litigation, including claims of infringement of third-party
intellectual property rights or demands that we license third-party technology, and the
demands it may place on the time and attention of our management and the expense it may
place on our company;
    
    the risk that capital needed for our business and to repay our convertible notes
will not be available when needed;
    
    the risk that the value of our common stock may be adversely affected by market volatility;
    
    general economic and political conditions and conditions in the markets we address;
    
    the substantial losses we have incurred;
    
    the cyclical nature of the semiconductor industry and the markets addressed by our
products and our customers products;
    
    continuing volatility in the technology sector and the semiconductor industry;
    
    demand for and market acceptance of our new and existing products;
    
    our successful development of new products;
    
    the timing of our new product introductions and our product quality;
    
    our ability to anticipate trends and develop products for which there will be market demand;
    
    the availability of manufacturing capacity;
    
    pricing pressures and other competitive factors;
    
    changes in our product mix;
    
    product obsolescence;
    
    the ability of our customers to manage inventory;
    
    our ability to develop and implement new technologies and to obtain protection for
the related intellectual property; and
    
    possible disruptions in commerce related to terrorist activity or armed conflict,
  1




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##### 



CONEXANT SYSTEMS, INC.
 INDEX
 PAGEPART I. FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited):Condensed Consolidated Balance Sheets  March 31, 2006 and September 30, 2005
    
    3Condensed Consolidated Statements of Operations  Three and Six Months Ended
March 31, 2006 and 2005
    
    4Condensed Consolidated Statements of Cash Flows  Six Months Ended March 31,
2006 and 2005
    
    5Notes to Condensed Consolidated Financial Statements
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    26Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    52Item 4. Controls and Procedures
    
    54PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    55Item 4. Submission of Matters to a Vote of Security Holders
    
    57Item 6. Exhibits
    
    58Signature
    
    59EXHIBIT 10.2EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 CONEXANT SYSTEMS, INC.
 
 Condensed Consolidated Balance Sheets
 (unaudited, in thousands, except par value)
 March 31,
    
    
    September 30,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    454,795
    
    
    $
    202,704Marketable securities
    
    
    140,347
    
    
    
    139,306Restricted cash
    
    
    8,800
    
    
    
    Receivables, net of allowances of $816 and $3,803
    
    
    103,085
    
    
    
    87,240Inventories
    
    
    87,302
    
    
    
    95,329Other current assets
    
    
    32,762
    
    
    
    14,701Total current assets
    
    
    827,091
    
    
    
    539,280Property, plant and equipment, net
    
    
    55,519
    
    
    
    50,700Goodwill
    
    
    714,786
    
    
    
    717,013Intangible assets, net
    
    
    91,046
    
    
    
    106,709Mindspeed warrant
    
    
    64,468
    
    
    
    33,137Marketable securities  long-term
    
    
    
    
    
    
    38,485Other assets
    
    
    102,007
    
    
    
    96,200Total assets
    
    $
    1,854,917
    
    
    $
    1,581,524LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    653,325
    
    
    $
    196,825Short-term debt
    
    
    80,000
    
    
    
    Accounts payable
    
    
    134,335
    
    
    
    108,957Accrued compensation and benefits
    
    
    27,465
    
    
    
    27,505Other current liabilities
    
    
    106,135
    
    
    
    63,197Total current liabilities
    
    
    1,001,260
    
    
    
    396,484Long-term debt
    
    
    200,000
    
    
    
    515,000Other liabilities
    
    
    89,490
    
    
    
    100,947Total liabilities
    
    
    1,290,750
    
    
    
    1,012,431Commitments and contingencies (Note 5)Shareholders equity:Preferred and junior preferred stock
    
    
    
    
    
    
    Common stock, $0.01 par value: 1,000,000 shares authorized; 481,306
and 474,683 shares issued; and 480,024 and 473,500 shares
outstanding
    
    
    4,813
    
    
    
    4,747Treasury stock: 1,282 and 1,184 shares, at cost
    
    
    (5,823
    )
    
    
    (5,584
    )Additional paid-in capital
    
    
    4,676,750
    
    
    
    4,657,901Accumulated deficit
    
    
    (4,087,569
    )
    
    
    (4,053,166
    )Accumulated other comprehensive loss
    
    
    (23,858
    )
    
    
    (22,012
    )Notes receivable from stock sales
    
    
    (146
    )
    
    
    (304
    )Unearned compensation
    
    
    
    
    
    
    (12,489
    )Total shareholders equity
    
    
    564,167
    
    
    
    569,093Total liabilities and shareholders equity
    
    $
    1,854,917
    
    
    $
    1,581,524
  3




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##### Table of Contents



CONEXANT SYSTEMS, INC.
 
 Condensed Consolidated Statements of Operations
 (unaudited, in thousands, except per share amounts)
 Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Net revenues
    
    $
    242,583
    
    
    $
    169,738
    
    
    $
    473,289
    
    
    $
    310,359Cost of goods sold (1)
    
    
    136,373
    
    
    
    109,766
    
    
    
    271,326
    
    
    
    243,231Gross margin
    
    
    106,210
    
    
    
    59,972
    
    
    
    201,963
    
    
    
    67,128Operating expenses:Research and development (1)
    
    
    64,831
    
    
    
    70,539
    
    
    
    129,190
    
    
    
    143,080Selling, general and administrative (1)
    
    
    36,320
    
    
    
    28,362
    
    
    
    74,921
    
    
    
    58,368Amortization of intangible assets
    
    
    7,758
    
    
    
    8,140
    
    
    
    15,665
    
    
    
    16,433Special charges
    
    
    38,854
    
    
    
    13,596
    
    
    
    39,769
    
    
    
    32,853Total operating expenses
    
    
    147,763
    
    
    
    120,637
    
    
    
    259,545
    
    
    
    250,734Operating loss
    
    
    (41,553
    )
    
    
    (60,665
    )
    
    
    (57,582
    )
    
    
    (183,606
    )Interest expense
    
    
    10,052
    
    
    
    8,463
    
    
    
    18,854
    
    
    
    16,894Other (income) expense, net
    
    
    (42,208
    )
    
    
    3,429
    
    
    
    (43,484
    )
    
    
    (7,757
    )Loss before income taxes
    
    
    (9,397
    )
    
    
    (72,557
    )
    
    
    (32,952
    )
    
    
    (192,743
    )Provision for income taxes
    
    
    735
    
    
    
    630
    
    
    
    1,451
    
    
    
    1,162Net loss
    
    $
    (10,132
    )
    
    $
    (73,187
    )
    
    $
    (34,403
    )
    
    $
    (193,905
    )Net loss per share  basic and diluted
    
    $
    (0.02
    )
    
    $
    (0.16
    )
    
    $
    (0.07
    )
    
    $
    (0.41
    )Shares used in basic and diluted per-share
computation
    
    
    477,480
    
    
    
    470,189
    
    
    
    475,761
    
    
    
    469,279
 
 (1)
    
    These captions include non-cash employee stock-based compensation expense as follows
(see Note 1): Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Cost of goods sold
    
    $
    131
    
    
    $
    
    
    
    $
    429
    
    
    $
    Research and development
    
    
    5,858
    
    
    
    2,275
    
    
    
    11,148
    
    
    
    4,520Selling, general and administrative
    
    
    6,763
    
    
    
    744
    
    
    
    15,491
    
    
    
    1,488Total
    
    $
    12,752
    
    
    $
    3,019
    
    
    $
    27,068
    
    
    $
    6,008
  4




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##### Table of Contents



CONEXANT SYSTEMS, INC.
 
 Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
 Six Months EndedMarch 31,2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (34,403
    )
    
    $
    (193,905
    )Adjustments to reconcile net loss to net cash provided by
(used in) operating activities, net of effects of
acquisitions:Depreciation
    
    
    9,104
    
    
    
    9,530Amortization of intangible assets
    
    
    15,665
    
    
    
    16,433Reduction of provision for bad debt
    
    
    (2,243
    )
    
    
    (1,100
    )Inventory provisions
    
    
    58
    
    
    
    46,010Increase in fair value of Mindspeed warrant
    
    
    (31,331
    )
    
    
    (1,281
    )Losses of equity method investments
    
    
    2,655
    
    
    
    6,460Gains on
sales of equity securities
    
    
    (4,414
    )
    
    
    (11,112
    )Stock-based compensation
    
    
    27,068
    
    
    
    6,008Other non-cash items, net
    
    
    (1,809
    )
    
    
    (382
    )Changes in assets and liabilities:Receivables
    
    
    (13,602
    )
    
    
    91,582Inventories
    
    
    7,784
    
    
    
    40,639Accounts payable
    
    
    23,058
    
    
    
    (49,814
    )Agere patent litigation settlement
    
    
    
    
    
    
    (8,000
    )Special charges and other restructuring related items
    
    
    (11,830
    )
    
    
    4,607Accrued expenses and other current liabilities
    
    
    51,935
    
    
    
    (2,246
    )Other
    
    
    (23,412
    )
    
    
    (4,397
    )Net cash provided by (used in) operating activities
    
    
    14,283
    
    
    
    (50,968
    )Cash flows from investing activities:Payments for acquisitions, net of cash acquired
    
    
    (6,900
    )
    
    
    (18,001
    )Restricted cash
    
    
    (8,800
    )
    
    
    Proceeds from sales of equity securities
    
    
    5,200
    
    
    
    11,724Purchases of marketable securities
    
    
    (26,473
    )
    
    
    (42,668
    )Sales and maturities of marketable securities
    
    
    61,944
    
    
    
    67,245Net proceeds from purchase and sale-leaseback
    
    
    
    
    
    
    49,053Purchases of property, plant and equipment
    
    
    (13,139
    )
    
    
    (12,362
    )Investments in businesses
    
    
    (1,848
    )
    
    
    (2,580
    )Net cash provided by investing activities
    
    
    9,984
    
    
    
    52,411Cash flows from financing activities:Proceeds from short-term debt, net of expenses of $1,534
    
    
    78,466
    
    
    
    Proceeds from long-term debt, net of expenses of $4,910
    
    
    195,090
    
    
    
    Repurchases and retirements of long-term debt
    
    
    (57,859
    )
    
    
    Proceeds from issuance of common stock
    
    
    11,964
    
    
    
    536Repayment of notes receivable from stock sales
    
    
    163
    
    
    
    196Net cash provided by financing activities
    
    
    227,824
    
    
    
    732Net increase in cash and cash equivalents
    
    
    252,091
    
    
    
    2,175Cash and cash equivalents at beginning of period
    
    
    202,704
    
    
    
    139,031Cash and cash equivalents at end of period
    
    $
    454,795
    
    
    $
    141,206
  5




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##### Table of Contents



CONEXANT SYSTEMS, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 1. Basis of Presentation and Significant Accounting Policies
      Interim Reporting 
 Fiscal Periods
 Supplemental Cash Flow Information
 Revenue Recognition
  6




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Shipping and Handling 
 Cash and Cash Equivalents 
 Marketable Securities 
  Restricted Cash
 Stock-Based Compensation
  7




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Three Months Ended
    
    
    Six Months EndedMarch 31, 2005
    
    
    March 31, 2005Net loss, as reported
    
    $
    (73,187
    )
    
    $
    (193,905
    )Add: stock-based compensation expense included in reported net loss,
net of tax
    
    
    3,019
    
    
    
    6,008Deduct: stock-based compensation expense determined under fair
value method, net of tax
    
    
    (17,307
    )
    
    
    (34,500
    )Net loss, pro forma
    
    $
    (87,475
    )
    
    $
    (222,397
    )Net loss per share:Basic  as reported
    
    $
    (0.16
    )
    
    $
    (0.41
    )Basic  pro forma
    
    $
    (0.19
    )
    
    $
    (0.47
    )Diluted  as reported
    
    $
    (0.16
    )
    
    $
    (0.41
    )Diluted  pro forma
    
    $
    (0.19
    )
    
    $
    (0.47
    )
   8




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Three Months Ended
    
    Six Months EndedMarch 31,
    
    March 31,
    
    March 31,
    
    March 31,2006
    
    2005
    
    2006
    
    2005Stock option plans:Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected stock price volatility
    
    
    76
    %
    
    
    97
    %
    
    
    76
    %
    
    
    97
    %Risk-free interest rate
    
    
    4.4
    %
    
    
    4.2
    %
    
    
    4.4
    %
    
    
    3.9
    %Average expected life (in years)
    
    
    5.25
    
    
    
    4.50
    
    
    
    5.25
    
    
    
    4.50Stock purchase plan:Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected stock price volatility
    
    
    76
    %
    
    
    79
    %
    
    
    76
    %
    
    
    79
    %Risk-free interest rate
    
    
    4.4
    %
    
    
    4.0
    %
    
    
    4.4
    %
    
    
    4.0
    %Average expected life (in years)
    
    
    0.50
    
    
    
    0.50
    
    
    
    0.50
    
    
    
    0.50
  Net Income (Loss) Per Share
  Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Stock options and warrants
    
    
    15,559
    
    
    
    1,346
    
    
    
    9,883
    
    
    
    1,6335.25% convertible subordinated notes due May 2006
    
    
    5,840
    
    
    
    5,840
    
    
    
    5,840
    
    
    
    5,8404.25% convertible subordinated notes due May 2006
    
    
    7,364
    
    
    
    7,364
    
    
    
    7,364
    
    
    
    7,3644.00% convertible subordinated notes due February 2007
    
    
    11,796
    
    
    
    12,137
    
    
    
    11,967
    
    
    
    12,1374.00% convertible subordinated notes due March 2026
    
    
    11,168
    
    
    
    
    
    
    
    5,584
    
    
    
    Total
    
    
    51,727
    
    
    
    26,687
    
    
    
    40,638
    
    
    
    26,974
 Recent Accounting Pronouncements 
 9




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Reclassification 
 2. Business Combinations
 Paxonet Communications, Inc.
   10




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 3. Supplemental Financial Information
 Marketable Securities
  Gross
    
    
    GrossCost or
    
    
    Unrealized
    
    
    UnrealizedAmortized
    
    
    Holding
    
    
    Holding
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueMarch 31, 2006:Corporate debt securities
    
    $
    35,033
    
    
    $
    
    
    
    $
    (317
    )
    
    $
    34,716Domestic government agency securities
    
    
    63,799
    
    
    
    
    
    
    
    (88
    )
    
    
    63,711Equity securities
    
    
    52,524
    
    
    
    
    
    
    
    (10,604
    )
    
    
    41,920$
    151,356
    
    
    $
    
    
    
    $
    (11,009
    )
    
    $
    140,347September 30, 2005:Corporate debt securities
    
    $
    37,974
    
    
    $
    
    
    
    $
    (40
    )
    
    $
    37,934Domestic government agency securities
    
    
    58,137
    
    
    
    2
    
    
    
    (171
    )
    
    
    57,968Equity securities
    
    
    52,524
    
    
    
    
    
    
    
    (9,120
    )
    
    
    43,404$
    148,635
    
    
    $
    2
    
    
    $
    (9,331
    )
    
    $
    139,306
  Gross
    
    
    GrossCost or
    
    
    Unrealized
    
    
    UnrealizedAmortized
    
    
    Holding
    
    
    Holding
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueSeptember 30, 2005:Domestic government agency securities
    
    $
    15,964
    
    
    $
    
    
    
    $
    (102
    )
    
    $
    15,862Corporate debt securities
    
    
    22,910
    
    
    
    
    
    
    
    (287
    )
    
    
    22,623$
    38,874
    
    
    $
    
    
    
    $
    (389
    )
    
    $
    38,485
   Inventories
  March 31,
    
    
    September 30,2006
    
    
    2005Work-in-process
    
    $
    62,951
    
    
    $
    61,535Finished goods
    
    
    24,351
    
    
    
    33,794$
    87,302
    
    
    $
    95,329
  11




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Goodwill
  Goodwill at September 30, 2005
    
    $
    717,013Additions
    
    
    6,000Adjustments
    
    
    (8,227
    )Goodwill at March 31, 2006
    
    $
    714,786
  Intangible Assets
  March 31, 2006
    
    
    September 30, 2005Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    Book
    
    
    Carrying
    
    
    Accumulated
    
    
    BookAmount
    
    
    Amortization
    
    
    Value
    
    
    Amount
    
    
    Amortization
    
    
    ValueDeveloped technology
    
    $
    146,146
    
    
    $
    (68,200
    )
    
    $
    77,946
    
    
    $
    146,146
    
    
    $
    (54,133
    )
    
    $
    92,013Customer base
    
    
    4,660
    
    
    
    (2,216
    )
    
    
    2,444
    
    
    
    4,660
    
    
    
    (1,781
    )
    
    
    2,879Other intangible assets
    
    
    21,888
    
    
    
    (11,232
    )
    
    
    10,656
    
    
    
    21,888
    
    
    
    (10,071
    )
    
    
    11,817$
    172,694
    
    
    $
    (81,648
    )
    
    $
    91,046
    
    
    $
    172,694
    
    
    $
    (65,985
    )
    
    $
    106,709
  Remainderof 2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    ThereafterAmortization expense
    
    $
    15,041
    
    
    $
    29,801
    
    
    $
    29,333
    
    
    $
    13,831
    
    
    $
    2,079
    
    
    $
    961
 Mindspeed Warrant
   12




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Short-Term Debt
  Long-Term Debt
    March 31,
    
    
    September 30,2006
    
    
    20055.25% convertible subordinated notes due May 2006 with a conversion price of $22.26
    
    $
    130,000
    
    
    $
    130,0004.25% convertible subordinated notes due May 2006 with a conversion price of $9.08
    
    
    66,825
    
    
    
    66,8254.00% convertible subordinated notes due February 2007 with a conversion price of $42.43
    
    
    456,500
    
    
    
    515,0004.00% convertible subordinated notes due March 2026 with a conversion price of $4.92
    
    
    200,000
    
    
    
    Total
    
    
    853,325
    
    
    
    711,825Less: current portion of long-term debt
    
    
    (653,325
    )
    
    
    (196,825
    )Long-term debt
    
    $
    200,000
    
    
    $
    515,000
 13




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Other (Income) Expense, Net
  Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Investment and interest income
    
    $
    (6,632
    )
    
    $
    (1,223
    )
    
    $
    (9,897
    )
    
    $
    (1,774
    )Decrease (increase) in fair value
of the Mindspeed warrant
    
    
    (35,642
    )
    
    
    13,492
    
    
    
    (31,331
    )
    
    
    (1,281
    )Losses of equity method investments
    
    
    584
    
    
    
    3,371
    
    
    
    2,655
    
    
    
    6,460Gains on sales of equity securities
    
    
    (577
    )
    
    
    (11,112
    )
    
    
    (4,414
    )
    
    
    (11,112
    )Other
    
    
    59
    
    
    
    (1,099
    )
    
    
    (497
    )
    
    
    (50
    )$
    (42,208
    )
    
    $
    3,429
    
    
    $
    (43,484
    )
    
    $
    (7,757
    )
 4. Shareholders Equity
  1 1
 Stock Option Plans
   WeightedAverage
    
    
    AggregateWeighted
    
    
    Remaining
    
    
    IntrinsicShares
    
    
    Average Exercise
    
    
    Contractual
    
    
    Value(in thousands)
    
    
    Price Per Share
    
    
    Term (in years)
    
    
    (in thousands)Outstanding, September 30, 2005
    
    
    111,195
    
    
    $
    2.81Granted
    
    
    13,498
    
    
    
    2.69Exercised
    
    
    (4,616
    )
    
    
    2.05Canceled
    
    
    (9,310
    )
    
    
    4.22Outstanding, March 31, 2006
    
    
    110,767
    
    
    $
    2.70
    
    
    
    5.04
    
    
    $
    32,406Exercisable, March 31, 2006
    
    
    66,056
    
    
    $
    3.17
    
    
    
    3.57
    
    
    $
    29,645
 14




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
   Directors Stock Plan
  Employee Stock Purchase Plan
   Performance Share Plan
  5. Commitments and Contingencies
 Lease Commitments
  15




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Fiscal Year
    
    Lease Payments
    
    
    Sublease Income
    
    
    Net ObligationRemainder of 2006
    
    $
    16,794
    
    
    $
    (4,013
    )
    
    $
    12,7812007
    
    
    29,384
    
    
    
    (8,081
    )
    
    
    21,3032008
    
    
    23,650
    
    
    
    (6,753
    )
    
    
    16,8972009
    
    
    16,220
    
    
    
    (3,096
    )
    
    
    13,1242010
    
    
    15,808
    
    
    
    (3,125
    )
    
    
    12,683Thereafter
    
    
    77,331
    
    
    
    (8,862
    )
    
    
    68,469Total future minimum lease payments
    
    $
    179,187
    
    
    $
    (33,930
    )
    
    $
    145,257
   Legal Matters
  IPO Litigation 
 16




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Texas Instruments, Inc. 
    17




---



##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Class Action Suits  Witriol v. Conexant, et al.
 Graden v. Conexant, et al.
 Shareholder Derivative Suits Witriol
v. Conexant, et al Witriol
 18




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Guarantees and Indemnifications
    Other
   19




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 6. Comprehensive Income (Loss)
  Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Net loss
    
    $
    (10,132
    )
    
    $
    (73,187
    )
    
    $
    (34,403
    )
    
    $
    (193,905
    )Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    194
    
    
    
    (749
    )
    
    
    (707
    )
    
    
    879Unrealized gains (losses) on
available-for-sale securities
    
    
    10,676
    
    
    
    (27,887
    )
    
    
    (1,291
    )
    
    
    (43,351
    )Reclassification adjustment for
realized gains on available-for-sale
securities
    
    
    
    
    
    
    (11,260
    )
    
    
    
    
    
    
    (11,260
    )Minimum pension liability adjustments
    
    
    79
    
    
    
    51
    
    
    
    152
    
    
    
    138Other comprehensive income (loss)
    
    
    10,949
    
    
    
    (39,845
    )
    
    
    (1,846
    )
    
    
    (53,594
    )Comprehensive income (loss)
    
    $
    817
    
    
    $
    (113,032
    )
    
    $
    (36,249
    )
    
    $
    (247,499
    )
  March 31,
    
    
    September 30,2006
    
    
    2005Foreign currency translation adjustments
    
    $
    (4,127
    )
    
    $
    (3,420
    )Unrealized losses on available-for-sale securities
    
    
    (11,009
    )
    
    
    (9,718
    )Minimum pension liability adjustments
    
    
    (8,722
    )
    
    
    (8,874
    )Accumulated other comprehensive loss
    
    $
    (23,858
    )
    
    $
    (22,012
    )
 7. Special Charges
  Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Restructuring charges (credits)
    
    $
    (1,146
    )
    
    $
    5,768
    
    
    $
    (216
    )
    
    $
    17,739Integration charges (credits)
    
    
    
    
    
    
    1,586
    
    
    
    (400
    )
    
    
    5,111Asset impairments
    
    
    
    
    
    
    3,008
    
    
    
    85
    
    
    
    3,463Litigation charge
    
    
    40,000
    
    
    
    
    
    
    
    40,000
    
    
    
    Other special charges
    
    
    
    
    
    
    3,234
    
    
    
    300
    
    
    
    6,540$
    38,854
    
    
    $
    13,596
    
    
    $
    39,769
    
    
    $
    32,853
 Restructuring Charges (Credits)
  2006 Restructuring Action
 20




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Workforce
    
    
    FacilityReductions
    
    
    and Other
    
    
    TotalRestructuring balance, September 30, 2005
    
    $
    
    
    
    $
    
    
    
    $
    Charged to costs and expenses
    
    
    278
    
    
    
    
    
    
    
    278Cash payments
    
    
    (5
    )
    
    
    
    
    
    
    (5
    )Restructuring balance, December 31, 2005
    
    
    273
    
    
    
    
    
    
    
    273Charged to costs and expenses
    
    
    1,220
    
    
    
    
    
    
    
    1,220Cash payments
    
    
    (227
    )
    
    
    
    
    
    
    (227
    )Restructuring balance, March 31, 2006
    
    $
    1,266
    
    
    $
    
    
    
    $
    1,266
 2005 Restructuring Action
  Workforce
    
    
    FacilityReductions
    
    
    and Other
    
    
    TotalRestructuring balance, September 30, 2005
    
    $
    3,544
    
    
    $
    19,338
    
    
    $
    22,882Charged to costs and expenses
    
    
    191
    
    
    
    346
    
    
    
    537Reclassification to accrued compensation and benefits
    
    
    1,899
    
    
    
    
    
    
    
    1,899Cash payments
    
    
    (1,626
    )
    
    
    (1,675
    )
    
    
    (3,301
    )Restructuring balance, December 31, 2005
    
    
    4,008
    
    
    
    18,009
    
    
    
    22,017Charged (credited) to costs and expenses
    
    
    (2,720
    )
    
    
    321
    
    
    
    (2,399
    )Reclassifications
    
    
    (55
    )
    
    
    55
    
    
    
    Cash payments
    
    
    (561
    )
    
    
    (1,070
    )
    
    
    (1,631
    )Restructuring balance, March 31, 2006
    
    $
    672
    
    
    $
    17,315
    
    
    $
    17,987
 2004 Restructuring Actions
 21




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
   Workforce
    
    
    FacilityReductions
    
    
    and Other
    
    
    TotalRestructuring balance, September 30, 2005
    
    $
    
    
    
    $
    3,345
    
    
    $
    3,345Credited to costs and expenses
    
    
    
    
    
    
    (55
    )
    
    
    (55
    )Cash payments
    
    
    
    
    
    
    (141
    )
    
    
    (141
    )Restructuring balance, December 31, 2005
    
    
    
    
    
    
    3,149
    
    
    
    3,149Cash payments
    
    
    
    
    
    
    (154
    )
    
    
    (154
    )Restructuring balance, March 31, 2006
    
    $
    
    
    
    $
    2,995
    
    
    $
    2,995
   22




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Workforce
    
    
    FacilityReductions
    
    
    and Other
    
    
    TotalRestructuring balance, September 30, 2005
    
    $
    65
    
    
    $
    831
    
    
    $
    896Charged to costs and expenses
    
    
    170
    
    
    
    
    
    
    
    170Cash payments
    
    
    (224
    )
    
    
    (183
    )
    
    
    (407
    )Restructuring balance, December 31, 2005
    
    
    11
    
    
    
    648
    
    
    
    659Charged to costs and expenses
    
    
    33
    
    
    
    
    
    
    
    33Cash payments
    
    
    (42
    )
    
    
    (167
    )
    
    
    (209
    )Restructuring balance, March 31, 2006
    
    $
    2
    
    
    $
    481
    
    
    $
    483
 2003 Corporate Restructuring Plan 
  Workforce
    
    
    FacilityReductions
    
    
    and Other
    
    
    TotalRestructuring balance, September 30, 2005
    
    $
    
    
    
    $
    716
    
    
    $
    716Cash payments
    
    
    
    
    
    
    (144
    )
    
    
    (144
    )Restructuring balance, December 31, 2005
    
    
    
    
    
    
    572
    
    
    
    572Cash payments
    
    
    
    
    
    
    (143
    )
    
    
    (143
    )Restructuring balance, March 31, 2006
    
    $
    
    
    
    $
    429
    
    
    $
    429
 2002 Corporate and Manufacturing Restructuring Plan
  23




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Workforce
    
    
    FacilityReductions
    
    
    and Other
    
    
    TotalRestructuring balance, September 30, 2005
    
    $
    
    
    
    $
    990
    
    
    $
    990Cash payments
    
    
    
    
    
    
    (489
    )
    
    
    (489
    )Restructuring balance, December 31, 2005
    
    
    
    
    
    
    501
    
    
    
    501Cash payments
    
    
    
    
    
    
    (183
    )
    
    
    (183
    )Restructuring balance, March 31, 2006
    
    $
    
    
    
    $
    318
    
    
    $
    318
  Integration Charges (Credits)
   Asset Impairments
   Litigation Charge
  Other Special Charges
  8. Segment and Geographic Information
  24




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  
    
    the nature of products and services;
    
    the nature of the production processes;
    
    the type or class of customer for their products and services; and
    
    the methods used to distribute their products or provide their services.
  
    
    the sale of semiconductor products is the only material source of revenue for each
of our four operating segments;
    
    the products sold by each of our operating segments use the same standard manufacturing process;
    
    the products marketed by each of our operating segments are sold to similar customers; and
    
    all of our products are sold through our internal sales force and common distributors.
   Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Americas
    
    $
    23,849
    
    
    $
    21,267
    
    
    $
    43,059
    
    
    $
    39,706Asia-Pacific
    
    
    203,232
    
    
    
    132,585
    
    
    
    400,096
    
    
    
    238,057Europe, Middle East and Africa
    
    
    15,502
    
    
    
    15,886
    
    
    
    30,134
    
    
    
    32,596$
    242,583
    
    
    $
    169,738
    
    
    $
    473,289
    
    
    $
    310,359
   March 31,
    
    
    September 30,2006
    
    
    2005Americas
    
    $
    83,049
    
    
    $
    76,270Asia-Pacific
    
    
    11,937
    
    
    
    6,845Europe, Middle East and Africa
    
    
    2,080
    
    
    
    2,702$
    97,066
    
    
    $
    85,817
 25




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  Overview
    26




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##### Table of Contents



Results of Operations
 Net Revenues
 Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net revenues
    
    $
    242,583
    
    
    $
    169,738
    
    
    $
    473,289
    
    
    $
    310,359
    Gross Margin
 Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Gross margin
    
    $
    106,210
    
    
    $
    59,972
    
    
    $
    201,963
    
    
    $
    67,128Percent of net revenues
    
    
    44
    %
    
    
    35
    %
    
    
    43
    %
    
    
    22
    %
   27




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005E&O reserves at beginning of period
    
    $
    42,157
    
    
    $
    51,475
    
    
    $
    44,833
    
    
    $
    23,319Additions
    
    
    4,578
    
    
    
    1,009
    
    
    
    7,174
    
    
    
    29,165Release upon sales of product
    
    
    (3,608
    )
    
    
    (1,001
    )
    
    
    (6,651
    )
    
    
    (1,001
    )Scrap
    
    
    (1,197
    )
    
    
    (2,060
    )
    
    
    (2,842
    )
    
    
    (2,041
    )Standards adjustments and other
    
    
    (2,137
    )
    
    
    3,879
    
    
    
    (2,721
    )
    
    
    3,860E&O reserves at end of period
    
    $
    39,793
    
    
    $
    53,302
    
    
    $
    39,793
    
    
    $
    53,302
   28




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005LCM reserves at beginning of period
    
    $
    8,864
    
    
    $
    18,854
    
    
    $
    6,739
    
    
    $
    Additions
    
    
    371
    
    
    
    
    
    
    
    3,321
    
    
    
    18,854Release upon sales of product
    
    
    (3,007
    )
    
    
    (3,882
    )
    
    
    (3,786
    )
    
    
    (3,882
    )Standards adjustments and other
    
    
    
    
    
    
    (3,879
    )
    
    
    (46
    )
    
    
    (3,879
    )LCM reserves at end of period
    
    $
    6,228
    
    
    $
    11,093
    
    
    $
    6,228
    
    
    $
    11,093
 Research and Development
 Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Research and development
    
    $
    64,831
    
    
    $
    70,539
    
    
    $
    129,190
    
    
    $
    143,080Percent of net revenues
    
    
    27
    %
    
    
    42
    %
    
    
    27
    %
    
    
    46
    %
    Selling, General and Administrative
 Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Selling, general and administrative
    
    $
    36,320
    
    
    $
    28,362
    
    
    $
    74,921
    
    
    $
    58,368Percent of net revenues
    
    
    15
    %
    
    
    17
    %
    
    
    16
    %
    
    
    19
    %
 29




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##### Table of Contents



Amortization of Intangible Assets
 Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Amortization of intangible assets
    
    $
    7,758
    
    
    $
    8,140
    
    
    $
    15,665
    
    
    $
    16,433
   Special Charges
 Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Restructuring charges (credits)
    
    $
    (1,146
    )
    
    $
    5,768
    
    
    $
    (216
    )
    
    $
    17,739Integration charges (credits)
    
    
    
    
    
    
    1,586
    
    
    
    (400
    )
    
    
    5,111Asset impairments
    
    
    
    
    
    
    3,008
    
    
    
    85
    
    
    
    3,463Litigation charge
    
    
    40,000
    
    
    
    
    
    
    
    40,000
    
    
    
    Other special charges
    
    
    
    
    
    
    3,234
    
    
    
    300
    
    
    
    6,540$
    38,854
    
    
    $
    13,596
    
    
    $
    39,769
    
    
    $
    32,853
  30




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##### Table of Contents



Interest Expense
 Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Interest expense
    
    $
    10,052
    
    
    $
    8,463
    
    
    $
    18,854
    
    
    $
    16,894
   Other (Income) Expense, Net
 Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,
    
    
    March 31,
    
    
    March 31,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Investment and interest income
    
    $
    (6,632
    )
    
    $
    (1,223
    )
    
    $
    (9,897
    )
    
    $
    (1,774
    )Decrease (increase) in fair value
of the Mindspeed warrant
    
    
    (35,642
    )
    
    
    13,492
    
    
    
    (31,331
    )
    
    
    (1,281
    )Losses of equity method investments
    
    
    584
    
    
    
    3,371
    
    
    
    2,655
    
    
    
    6,460Gains on sales of equity securities
    
    
    (577
    )
    
    
    (11,112
    )
    
    
    (4,414
    )
    
    
    (11,112
    )Other
    
    
    59
    
    
    
    (1,099
    )
    
    
    (497
    )
    
    
    (50
    )$
    (42,208
    )
    
    $
    3,429
    
    
    $
    (43,484
    )
    
    $
    (7,757
    )
   31




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Provision for Income Taxes
    Liquidity and Capital Resources
   32




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March 31,
    
    
    September 30,(in thousands)
    
    2006
    
    
    2005Cash and cash equivalents
    
    $
    454,795
    
    
    $
    202,704Short-term marketable debt securities (primarily domestic government agency
securities and corporate debt securities)
    
    
    98,427
    
    
    
    95,902Long-term marketable debt securities (primarily domestic government agency
securities and corporate debt securities)
    
    
    
    
    
    
    38,485Subtotal
    
    
    553,222
    
    
    
    337,091Marketable equity securities (6.2 million shares of Skyworks Solutions, Inc.)
    
    
    41,920
    
    
    
    43,404Total cash, cash equivalents and marketable securities
    
    $
    595,142
    
    
    $
    380,495
     33




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##### Table of Contents



Payments due by periodLess than 1
    
    
    
    
    
    
    
    
    
    
    More than 5(in millions)
    
    Total
    
    
    year
    
    
    1-3 years
    
    
    3-5 years
    
    
    yearsLong-term debt
    
    $
    853.3
    
    
    $
    653.3
    
    
    $
    
    
    
    $
    
    
    
    $
    200.0Short-term debt
    
    
    80.0
    
    
    
    80.0
    
    
    
    
    
    
    
    
    
    
    
    Interest on debt
    
    
    185.8
    
    
    
    33.8
    
    
    
    16.0
    
    
    
    16.0
    
    
    
    120.0Operating leases
    
    
    179.2
    
    
    
    16.8
    
    
    
    53.1
    
    
    
    32.0
    
    
    
    77.3Assigned leases
    
    
    5.9
    
    
    
    2.3
    
    
    
    1.6
    
    
    
    1.3
    
    
    
    0.7Capital commitments
    
    
    4.9
    
    
    
    4.9
    
    
    
    
    
    
    
    
    
    
    
    $
    1,309.1
    
    
    $
    791.1
    
    
    $
    70.7
    
    
    $
    49.3
    
    
    $
    398.0
  Off-Balance Sheet Arrangements
    34




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Special Purpose Entities
   Recent Accounting Pronouncements
   Critical Accounting Policies
  35




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Business combinations
  Revenue recognition
   Allowance for doubtful accounts
  36




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Inventories
  Long-lived assets
   Deferred income taxes
  Valuation of derivative instruments
  37




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Non-marketable equity securities
  Stock-based compensation
    38




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Restructuring charges
  Employee benefit plans
  Risk Factors
   39




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A jury in the U.S. District Court for the District of New Jersey has rendered a verdict against us
in the patent infringement phase of the Texas Instruments litigation and awarded damages of $112
million which, because of the willfulness finding, may be increased up to threefold at the judges
discretion, plus costs and prejudgment interest. If we do not succeed on our claims in the
antitrust phase, including patent misuse, if we lose on the contract reformation claims related to
our patent license agreement with Texas Instruments and if we are not able to secure a license from
Texas Instruments in respect of the ADSL products of our Conexant, Inc. subsidiary, Texas
Instruments may seek to enjoin us from selling any unlicensed ADSL products of our Conexant, Inc.
subsidiary, we may be liable for additional claims arising through our contractual indemnification
of our customers for intellectual property matters, and we will be required to pay significant
damages, which will have a material adverse effect on our business, financial condition, results of
operations and cash flows.
     40




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We may be subject to claims of infringement of third-party intellectual property rights or demands
that we license third-party technology, which could result in significant expense and loss of our
ability to use, make, sell, export or import our products or one or more components comprising our
products.
  
    
    pay substantial damages;
    
    cease the manufacture, use or sale of infringing products;
    
    discontinue the use of infringing technology;
    
    expend significant resources to develop non-infringing technology; or
    
    license technology from the third party claiming infringement, which license may not
be available on commercially reasonable terms, or at all.
 We face a risk that capital needed for our business and to repay our convertible notes will not be
available when we need it.
   41




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The value of our common stock may be adversely affected by market volatility.
  
    
    our operating and financial performance and prospects;
    
    our ability to repay our debt;
    
    the depth and liquidity of the market for our common stock;
    
    investor perception of us and the industry and markets in which we operate;
    
    our inclusion in, or removal from, any equity market indices;
    
    the level of research coverage of our common stock;
    
    changes in earnings estimates or buy/sell recommendations by analysts;
    
    general financial, domestic, international, economic and other market conditions; and
    
    judgments favorable or adverse to us.
  We have recently incurred substantial losses and we anticipate additional future losses.
  We operate in the highly cyclical semiconductor industry, which is subject to significant
downturns.
   42




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Our operating results may be negatively affected by substantial quarterly and annual fluctuations
and market downturns.
  
    
    changes in end-user demand for the products manufactured and sold by our customers;
    
    the timing of receipt, reduction or cancellation of significant orders by customers;
    
    seasonal customer demand;
    
    the gain or loss of significant customers;
    
    market acceptance of our products and our customers products;
    
    our ability to develop, introduce and market new products and technologies on a timely basis;
    
    the timing and extent of product development costs;
    
    new product and technology introductions by competitors;
    
    changes in the mix of products we develop and sell;
    
    fluctuations in manufacturing yields;
    
    availability and cost of products from our suppliers;
    
    intellectual property disputes; and
    
    the effects of competitive pricing pressures, including decreases in average selling
prices of our products.
  We are subject to intense competition.
   
    
    time-to-market;
    
    product quality, reliability and performance;
    
    level of integration;
    
    price and total system cost;
    
    compliance with industry standards;
    
    design and engineering capabilities;
    
    strategic relationships with customers;
    
    customer support;
    
    new product innovation; and
    
    access to manufacturing capacity.
  43




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The loss of a key customer could seriously impact our revenue levels and harm our business. In
addition, if we are unable to continue to sell existing and new products to our key customers in
significant quantities or to attract new significant customers, our future operating results could
be adversely affected.
   
    
    most of our customers can stop incorporating our products into their own products
with limited notice to us and suffer little or no penalty;
    
    our agreements with our customers typically do not require them to purchase a
minimum quantity of our products;
    
    many of our customers have pre-existing or concurrent relationships with our current
or potential competitors that may affect the customers decisions to purchase our
products;
    
    our customers face intense competition from other manufacturers that do not use our products; and
    
    some of our customers offer or may offer products that compete with our products.
  Our success depends on our ability to timely develop competitive new products and reduce costs.
  
    
    our ability to anticipate customer and market requirements and changes in technology
and industry standards;
    
    our ability to accurately define new products;
    
    our ability to timely complete development of new products and bring our products to
market on a timely basis;
    
    our ability to differentiate our products from offerings of our competitors;
    
    overall market acceptance of our products;
    
    our ability to invest in significant amounts of research and development; and
    
    our ability to transition product development efforts between and among our sites,
particularly into India and China.
 
 44




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Our success depends, in part, on our ability to effect suitable investments, alliances and
acquisitions.
   
    
    issuances of equity securities dilutive to our existing shareholders;
    
    large initial one-time write-offs of in-process research and development;
    
    the incurrence of substantial debt and assumption of unknown liabilities;
    
    the potential loss of key employees from the acquired company;
    
    amortization expenses related to intangible assets; and
    
    the diversion of managements attention from other business concerns.
  45




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We are subject to the risks of doing business internationally.
  
    
    currency exchange rate fluctuations;
    
    local economic and political conditions;
    
    disruptions of commerce and capital or trading markets due to or related to
terrorist activity or armed conflict;
    
    restrictive governmental actions, such as restrictions on the transfer or
repatriation of funds and trade protection measures, including export duties and quotas
and customs duties and tariffs;
    
    changes in legal or regulatory requirements;
    
    difficulty in obtaining distribution and support;
    
    the laws and policies of the United States and other countries affecting trade,
foreign investment and loans, and import or export licensing requirements;
    
    tax laws, including the cost of services provided and products sold between the
Company and its subsidiaries which are subject to review by taxing authorities; and
    
    limitations on our ability under local laws to protect our intellectual property.
    46




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We may not be able to keep abreast of the rapid technological changes in our markets.
  
    
    rapid technological developments;
    
    rapid changes in customer requirements;
    
    frequent new product introductions and enhancements;
    
    short product life cycles with declining prices over the life cycle of the products; and
    
    evolving industry standards.
  We may not be able to attract and retain qualified management, technical and other personnel
necessary for the design, development and sale of our products. Our success could be negatively
affected if key personnel leave.
  If OEMs of communications electronics products do not design our products into their equipment, we
will be unable to sell those products. Moreover, a design win from a customer does not guarantee
future sales to that customer.
  Because of the lengthy sales cycles of many of our products, we may incur significant expenses
before we generate any revenues related to those products.
  47




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Uncertainties involving the ordering and shipment of our products could adversely affect our
business.
  We are dependent upon third parties for the manufacture, assembly and test of our products.
   
    
    the lack of assured wafer supply, potential wafer shortages and higher wafer prices;
    
    limited control over delivery schedules, manufacturing yields, production costs and
product quality; and
    
    the unavailability of, or delays in obtaining, access to key process technologies.
    48




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We may experience difficulties in transitioning to smaller geometry process technologies or in
achieving higher levels of design integration, which may result in reduced manufacturing yields,
delays in product deliveries and increased expenses.
  49




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##### Table of Contents



If we are not successful in protecting our intellectual property rights, it may harm our ability to
compete.
  
    
    the steps we take to prevent misappropriation or infringement of our intellectual
property or the intellectual property of our customers will be successful;
    
    any existing or future patents will not be challenged, invalidated or circumvented; or
    
    any of the measures described above would provide meaningful protection.
  Uncertainties involving litigation could adversely affect our business.
  We may be liable for penalties under environmental laws, rules and regulations, which could
adversely impact our business.
   50




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We may be limited in the future in the amount of net operating losses that we can use to offset
taxable income.
  Provisions in our organizational documents and rights agreement and Delaware law may make it
difficult for someone to acquire control of us.
  
    
    the division of our board of directors into three classes to be elected on a
staggered basis, one class each year;
    
    the ability of our board of directors to issue shares of our preferred stock in one
or more series without further authorization of our shareholders;
    
    a prohibition on shareholder action by written consent;
    
    a requirement that shareholders provide advance notice of any shareholder
nominations of directors or any proposal of new business to be considered at any
meeting of shareholders;
    
    a requirement that a supermajority vote be obtained to remove a director for cause
or to amend or repeal certain provisions of our restated certificate of incorporation
or by-laws;
    
    elimination of the right of shareholders to call a special meeting of shareholders; and
    
    a fair price provision.
   51




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
         (in millions)
    
    Carrying Value
    
    Fair ValueCash and cash equivalents
    
    $
    454.8
    
    
    $
    454.8Marketable debt securities
    
    
    98.4
    
    
    
    98.4Marketable equity securities
    
    
    41.9
    
    
    
    41.9Mindspeed warrant
    
    
    64.5
    
    
    
    64.5Short-term debt
    
    
    80.0
    
    
    
    80.0Current portion of long-term debt
    
    
    653.3
    
    
    
    645.8Long-term debt
    
    
    200.0
    
    
    
    203.5
 52




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##### Table of Contents



53




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
   54




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PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 Texas Instruments, Inc. 
    55




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##### Table of Contents



Class Action Suits  Witriol v. Conexant, et al.
 Graden v. Conexant, et al.
 56




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##### Table of Contents



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   For
    
    WithheldDwight. W. Decker
    
    
    405,364,317
    
    
    
    19,696,991F. Craig Farrill
    
    
    406,350,530
    
    
    
    18,710,778John W. Marren
    
    
    391,254,606
    
    
    
    33,806,702
  For
    
    
    411,610,161Against
    
    
    6,385,926Abstain
    
    
    1,003,513Broker non-vote
    
    
    N/A
 57




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##### Table of Contents



ITEM 6. EXHIBITS
 Exhibit No.
    
    Description4
    
    
    Indenture, dated as of March 7, 2006, by and between the
Company and J. P. Morgan Trust Company, National Association,
as trustee, including the form of the Companys 4% Convertible
Subordinated Notes due March 1, 2026 attached as Exhibit A
thereto, filed as Exhibit 4.1 to the Companys Current Report
on Form 8-K filed on March 8, 2006, is incorporated by
reference.10.1
    
    
    Registration Rights Agreement, dated as of March 7, 2006, by
and between the Company and Lehman Brothers, Inc., filed as
Exhibit 4.3 to the Companys Current Report on Form 8-K filed
on March 8, 2006, is incorporated by reference.10.2
    
    
    Amendment, dated as of January 20, 2006, between the Company
and F.M. Rhodes to Employment Agreement, dated as of January
15, 2004, as amended, between the Company and F.M. Rhodes.31.1
    
    
    Certification of the Chief Executive Officer of Periodic
Report Pursuant to Rule 13a-15(e) or 15d-15(e).31.2
    
    
    Certification of the Chief Financial Officer of Periodic
Report Pursuant to Rule 13a-15(e) or 15d-15(e).32
    
    
    Certification by Chief Executive Officer and Chief Financial
Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350.
 58




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##### Table of Contents



SIGNATURE
  CONEXANT SYSTEMS, INC.
(Registrant)Date: April 28, 2006
    By   /s/ J. Scott BlouinJ. Scott BlouinSenior Vice President and
Chief Financial Officer
(principal financial officer) 59




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EXHIBIT INDEX
 Exhibit No.
    
    Description4
    
    
    Indenture, dated as of March 7, 2006, by and between the
Company and J. P. Morgan Trust Company, National Association,
as trustee, including the form of the Companys 4% Convertible
Subordinated Notes due March 1, 2026 attached as Exhibit A
thereto, filed as Exhibit 4.1 to the Companys Current Report
on Form 8-K filed on March 8, 2006, is incorporated by
reference.10.1
    
    
    Registration Rights Agreement, dated as of March 7, 2006, by
and between the Company and Lehman Brothers, Inc., filed as
Exhibit 4.3 to the Companys Current Report on Form 8-K filed
on March 8, 2006, is incorporated by reference.10.2
    
    
    Amendment, dated as of January 20, 2006, between the Company
and F.M. Rhodes to Employment Agreement, dated as of January
15, 2004, as amended, between the Company and F.M. Rhodes.31.1
    
    
    Certification of the Chief Executive Officer of Periodic
Report Pursuant to Rule 13a-15(e) or 15d-15(e).31.2
    
    
    Certification of the Chief Financial Officer of Periodic
Report Pursuant to Rule 13a-15(e) or 15d-15(e).32
    
    
    Certification by Chief Executive Officer and Chief Financial
Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350.
 60