##### Table of Contents



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 June 29, 2007
 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
  þ o o
 o þ




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##### Table of Contents



FORWARD-LOOKING STATEMENTS
  
    
    pricing pressures and other competitive factors;
    
    the timing of our new product introductions and product quality;
    
    the cyclical nature of the semiconductor industry and the markets addressed by our
products and our customers products;
    
    the risk that the value of our common stock may be adversely affected by market volatility;
    
    the substantial losses we have incurred recently;
    
    general economic and political conditions and conditions in the markets we address;
    
    continuing volatility in the technology sector and the semiconductor industry;
    
    demand for and market acceptance of new and existing products;
    
    successful development of new products;
    
    our ability to anticipate trends and develop products for which there will be market demand;
    
    the risk that capital needed for our business and to repay our indebtedness will not be
available when needed;
    
    the availability of manufacturing capacity;
    
    changes in 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;
    
    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; and
    
    possible disruptions in commerce related to terrorist activity or armed conflict,




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##### 



CONEXANT SYSTEMS, INC.
 INDEX
 PAGEPART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (unaudited):Condensed Consolidated Balance Sheets  June 29, 2007 and September 29, 2006
    
    3Condensed Consolidated Statements of Operations  Three and Nine Months Ended June 29, 2007 and June 30, 2006
    
    4Condensed Consolidated Statements of Cash Flows  Nine Months Ended June 29, 2007 and June 30, 2006
    
    5Notes to Condensed Consolidated Financial Statements
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    34Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    50Item 4.
    
    Controls and Procedures
    
    51PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    52Item 1A.
    
    Risk Factors
    
    54Item 6.
    
    Exhibits
    
    65Signature
    
    66EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 10.3EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
  2




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Balance Sheets
 (unaudited, in thousands, except par value)
 June 29,
    
    
    September 29,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    158,162
    
    
    $
    225,626Marketable securities
    
    
    65,969
    
    
    
    115,709Restricted cash
    
    
    8,800
    
    
    
    8,800Receivables, net of allowances of $1,732 and $842
    
    
    95,121
    
    
    
    123,025Inventories, net
    
    
    63,318
    
    
    
    97,460Other current assets
    
    
    22,194
    
    
    
    19,353Total current assets
    
    
    413,564
    
    
    
    589,973Property, plant and equipment, net
    
    
    70,084
    
    
    
    65,405Goodwill
    
    
    580,694
    
    
    
    710,790Intangible assets, net
    
    
    41,123
    
    
    
    76,008Other assets
    
    
    92,594
    
    
    
    131,449Total assets
    
    $
    1,198,059
    
    
    $
    1,573,625LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    43,900
    
    
    $
    188,375Short-term debt
    
    
    80,000
    
    
    
    80,000Accounts payable
    
    
    68,650
    
    
    
    113,690Accrued compensation and benefits
    
    
    28,672
    
    
    
    28,307Other current liabilities
    
    
    44,023
    
    
    
    51,966Total current liabilities
    
    
    265,245
    
    
    
    462,338Long-term debt
    
    
    481,100
    
    
    
    518,125Other liabilities
    
    
    66,668
    
    
    
    83,064Total liabilities
    
    
    813,013
    
    
    
    1,063,527Commitments and contingencies (Note 4)Shareholders equity:Preferred and junior preferred stock
    
    
    
    
    
    
    Common stock, $0.01 par value: 1,000,000 shares authorized; 490,631
and 486,482 shares issued; and 490,631 and 485,200 shares
outstanding
    
    
    4,906
    
    
    
    4,866Treasury stock: zero and 1,282 shares, at cost
    
    
    
    
    
    
    (5,823
    )Additional paid-in capital
    
    
    4,715,410
    
    
    
    4,699,029Accumulated deficit
    
    
    (4,343,454
    )
    
    
    (4,175,757
    )Accumulated other comprehensive income (loss)
    
    
    8,282
    
    
    
    (12,096
    )Shareholder notes receivable
    
    
    (98
    )
    
    
    (121
    )Total shareholders equity
    
    
    385,046
    
    
    
    510,098Total liabilities and shareholders equity
    
    $
    1,198,059
    
    
    $
    1,573,625
  3




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Operations
 (unaudited, in thousands, except per share amounts)
 Three Months Ended
    
    
    Nine Months EndedJune 29,
    
    
    June 30,
    
    
    June 29,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net revenues
    
    $
    179,549
    
    
    $
    251,635
    
    
    $
    624,948
    
    
    $
    724,924Cost of goods sold (1)
    
    
    101,503
    
    
    
    137,598
    
    
    
    347,564
    
    
    
    408,924Gain on cancellation of supply agreement
    
    
    
    
    
    
    (17,500
    )
    
    
    
    
    
    
    (17,500
    )Gross margin
    
    
    78,046
    
    
    
    131,537
    
    
    
    277,384
    
    
    
    333,500Operating expenses:Research and development (1)
    
    
    68,890
    
    
    
    70,096
    
    
    
    209,685
    
    
    
    199,286Selling, general and administrative (1)
    
    
    26,234
    
    
    
    27,037
    
    
    
    80,513
    
    
    
    101,958Amortization of intangible assets
    
    
    4,823
    
    
    
    7,520
    
    
    
    17,315
    
    
    
    23,185Special charges
    
    
    5,071
    
    
    
    32,610
    
    
    
    168,090
    
    
    
    72,379Total operating expenses
    
    
    105,018
    
    
    
    137,263
    
    
    
    475,603
    
    
    
    396,808Operating loss
    
    
    (26,972
    )
    
    
    (5,726
    )
    
    
    (198,219
    )
    
    
    (63,308
    )Interest expense
    
    
    (11,349
    )
    
    
    (10,426
    )
    
    
    (37,605
    )
    
    
    (29,280
    )Other income (expense), net
    
    
    3,656
    
    
    
    (49,259
    )
    
    
    26,377
    
    
    
    (3,120
    )Loss before income taxes and gain (loss) on equity
method investments
    
    
    (34,665
    )
    
    
    (65,411
    )
    
    
    (209,447
    )
    
    
    (95,708
    )Provision for income taxes
    
    
    741
    
    
    
    1,031
    
    
    
    2,444
    
    
    
    2,482Loss before gain (loss) on equity method investments
    
    
    (35,406
    )
    
    
    (66,442
    )
    
    
    (211,891
    )
    
    
    (98,190
    )Gain (loss) on equity method investments
    
    
    179
    
    
    
    (648
    )
    
    
    44,194
    
    
    
    (3,303
    )Net loss
    
    $
    (35,227
    )
    
    $
    (67,090
    )
    
    $
    (167,697
    )
    
    $
    (101,493
    )Net loss per
share  basic and diluted
    
    $
    (0.07
    )
    
    $
    (0.14
    )
    
    $
    (0.34
    )
    
    $
    (0.21
    )Shares used in basic and diluted per-share
computations
    
    
    490,558
    
    
    
    481,626
    
    
    
    488,613
    
    
    
    477,716
 
 (1)
    
    These captions include non-cash employee stock-based compensation expense as follows
(see Note 1): Three Months Ended
    

Nine Months EndedJune 29,
    
    June 30,
    
    June 29,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Cost of goods sold
    
    $
    143
    
    
    $
    31
    
    
    $
    361
    
    
    $
    460Research and development
    
    
    3,104
    
    
    
    6,643
    
    
    
    8,186
    
    
    
    17,791Selling, general and administrative
    
    
    1,891
    
    
    
    3,502
    
    
    
    5,699
    
    
    
    18,993
  4




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Cash Flows
 (unaudited, in thousands)
 Nine Months EndedJune 29,
    
    
    June 30,2007
    
    
    2006Cash flows from operating activities:Net loss
    
    $
    (167,697
    )
    
    $
    (101,493
    )Adjustments to reconcile net loss to net cash used in operating
activities, net of effects of acquisitions:Depreciation
    
    
    18,441
    
    
    
    14,167Amortization of intangible assets
    
    
    17,315
    
    
    
    23,185Asset impairments
    
    
    158,415
    
    
    
    Reversal of provision for bad debts, net
    
    
    (219
    )
    
    
    (2,243
    )(Reversal of) charges for inventory provisions, net
    
    
    (4,203
    )
    
    
    1,594Stock-based compensation
    
    
    14,246
    
    
    
    37,244(Increase) decrease in fair value of derivative instruments
    
    
    (7,868
    )
    
    
    3,800(Gains) losses on equity method investments
    
    
    (44,194
    )
    
    
    3,303Gains on sales of equity securities and other assets
    
    
    (6,291
    )
    
    
    (4,414
    )Gain on cancellation of supply agreement
    
    
    
    
    
    
    (17,500
    )Impairment loss on Skyworks investment
    
    
    
    
    
    
    18,456Other items, net
    
    
    (858
    )
    
    
    (898
    )Changes in assets and liabilities:Receivables
    
    
    28,123
    
    
    
    (55,929
    )Inventories
    
    
    39,584
    
    
    
    10,063Accounts payable
    
    
    (44,346
    )
    
    
    22,610Accrued expenses and other current liabilities
    
    
    (11,129
    )
    
    
    (3,295
    )Other, net
    
    
    (7,267
    )
    
    
    (2,913
    )Net cash used in operating activities
    
    
    (17,948
    )
    
    
    (54,263
    )Cash flows from investing activities:Proceeds from sales of equity securities and other assets
    
    
    105,923
    
    
    
    5,200Proceeds from sales and maturities of marketable securities
    
    
    84,819
    
    
    
    89,862Purchases of marketable securities
    
    
    (26,462
    )
    
    
    (62,796
    )Purchases of property, plant and equipment
    
    
    (23,133
    )
    
    
    (23,500
    )Payments for acquisitions, net of cash acquired
    
    
    (5,029
    )
    
    
    (6,900
    )Purchases of equity securities
    
    
    (600
    )
    
    
    (705
    )Restricted cash
    
    
    
    
    
    
    (8,800
    )Net cash provided by (used in) investing activities
    
    
    135,518
    
    
    
    (7,639
    )Cash flows from financing activities:Proceeds from short-term debt, net of expenses of $1,198 and $1,541
    
    
    (1,198
    )
    
    
    78,459Proceeds from long-term debt, net of expenses of $9,988 and $6,391
    
    
    265,012
    
    
    
    243,609Repurchases and retirements of long-term debt
    
    
    (456,500
    )
    
    
    (254,684
    )Proceeds from issuance of common stock
    
    
    7,627
    
    
    
    17,112Repayment of shareholder notes receivable
    
    
    25
    
    
    
    163Net cash (used in) provided by financing activities
    
    
    (185,034
    )
    
    
    84,659Net (decrease) increase in cash and cash equivalents
    
    
    (67,464
    )
    
    
    22,757Cash and cash equivalents at beginning of period
    
    
    225,626
    
    
    
    202,704Cash and cash equivalents at end of period
    
    $
    158,162
    
    
    $
    225,461
  5




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
 
 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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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
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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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
  Three Months Ended
    
    Nine Months EndedJune 29,
    
    June 30,
    
    June 29,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Stock option plans:Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected stock price volatility
    
    
    68
    %
    
    
    74
    %
    
    
    68
    %
    
    
    76
    %Risk-free interest rate
    
    
    4.6
    %
    
    
    4.9
    %
    
    
    4.6
    %
    
    
    4.5
    %Average expected life (in years)
    
    
    5.25
    
    
    
    5.25
    
    
    
    5.25
    
    
    
    5.25Stock purchase plan:Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected stock price volatility
    
    
    53
    %
    
    
    76
    %
    
    
    60
    %
    
    
    76
    %Risk-free interest rate
    
    
    4.7
    %
    
    
    4.4
    %
    
    
    4.8
    %
    
    
    4.4
    %Average expected life (in years)
    
    
    0.50
    
    
    
    0.50
    
    
    
    0.50
    
    
    
    0.50
  Derivative Financial Instruments
   8




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
  Net Loss Per Share
  Three Months Ended
    
    
    Nine Months EndedJune 29,
    
    
    June 30,
    
    
    June 29,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Stock options and warrants
    
    
    1,167
    
    
    
    20,971
    
    
    
    3,830
    
    
    
    13,6365.25% convertible subordinated notes due May 2006
    
    
    
    
    
    
    2,824
    
    
    
    
    
    
    
    4,8354.25% convertible subordinated notes due May 2006
    
    
    
    
    
    
    2,428
    
    
    
    
    
    
    
    5,7184.00% convertible subordinated notes due February
2007
    
    
    
    
    
    
    10,758
    
    
    
    4,887
    
    
    
    11,5644.00% convertible subordinated notes due March 2026
    
    
    50,813
    
    
    
    46,457
    
    
    
    50,813
    
    
    
    19,20951,980
    
    
    
    83,438
    
    
    
    59,530
    
    
    
    54,962
 Business Enterprise Segments
  
    
    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
the Companys four operating segments;
    
    the products sold by each of the Companys operating segments use the same standard
manufacturing process;
    
    the products marketed by each of the Companys operating segments are sold to similar customers; and
    
    all of the Companys products are sold through its internal sales force and common distributors.
  9




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 Recent Accounting Pronouncements 
     Reclassification
 10




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 Three Months
    
    
    Nine MonthsEnded
    
    
    EndedJune 30, 2006
    
    
    June 30, 2006Other expense, net, before reclassification
    
    $
    (49,907
    )
    
    $
    (6,423
    )Losses on equity method investments
    
    
    648
    
    
    
    3,303Other expense, net, after reclassification
    
    $
    (49,259
    )
    
    $
    (3,120
    )
 2. Business Combination
   3. Supplemental Financial Information
 Marketable Securities
  Gross
    
    
    GrossCost or
    
    
    Unrealized
    
    
    UnrealizedAmortized
    
    
    Holding
    
    
    Holding
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueJune 29, 2007:Corporate debt securities
    
    $
    2,383
    
    
    $
    23
    
    
    $
    
    
    
    $
    2,406U.S. government agency securities
    
    
    12,804
    
    
    
    151
    
    
    
    
    
    
    
    12,955Equity securities
    
    
    44,063
    
    
    
    11,376
    
    
    
    (4,831
    )
    
    
    50,608$
    59,250
    
    
    $
    11,550
    
    
    $
    (4,831
    )
    
    $
    65,969September 29, 2006:Corporate debt securities
    
    $
    22,719
    
    
    $
    30
    
    
    $
    (29
    )
    
    $
    22,720U.S. government agency securities
    
    
    60,777
    
    
    
    134
    
    
    
    (11
    )
    
    
    60,900Equity securities
    
    
    34,068
    
    
    
    
    
    
    
    (1,979
    )
    
    
    32,089$
    117,564
    
    
    $
    164
    
    
    $
    (2,019
    )
    
    $
    115,709
  11




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
  Inventories
  June 29,
    
    
    September 29,2007
    
    
    2006Work-in-process
    
    $
    23,356
    
    
    $
    53,884Finished goods
    
    
    39,962
    
    
    
    43,576$
    63,318
    
    
    $
    97,460
  Goodwill
  Goodwill at September 29, 2006
    
    $
    710,790Impairment
    
    
    (135,000
    )Additions
    
    
    1,921Other adjustments
    
    
    2,983Goodwill at June 29, 2007
    
    $
    580,694
   12




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 Intangible Assets
  June 29, 2007
    
    
    September 29, 2006Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    Book
    
    
    Carrying
    
    
    Accumulated
    
    
    BookAmount
    
    
    Amortization
    
    
    Value
    
    
    Amount
    
    
    Amortization
    
    
    ValueDeveloped technology
    
    $
    125,614
    
    
    $
    (89,778
    )
    
    $
    35,836
    
    
    $
    139,483
    
    
    $
    (74,477
    )
    
    $
    65,006Product licenses
    
    
    9,327
    
    
    
    (6,298
    )
    
    
    3,029
    
    
    
    12,769
    
    
    
    (5,263
    )
    
    
    7,506Other intangible assets
    
    
    6,015
    
    
    
    (3,757
    )
    
    
    2,258
    
    
    
    7,015
    
    
    
    (3,519
    )
    
    
    3,496$
    140,956
    
    
    $
    (99,833
    )
    
    $
    41,123
    
    
    $
    159,267
    
    
    $
    (83,259
    )
    
    $
    76,008
  Remainderof 2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    ThereafterAmortization expense
    
    $
    4,785
    
    
    $
    18,853
    
    
    $
    11,123
    
    
    $
    4,638
    
    
    $
    679
    
    
    $
    1,045
  Mindspeed Warrant
   Short-Term Debt
  13




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
   Long-Term Debt
  June 29,
    
    
    September 29,2007
    
    
    2006Floating rate senior secured notes due November 2010
    
    $
    275,000
    
    
    $
    4.00% convertible subordinated notes due March 2026
    
    
    250,000
    
    
    
    250,0004.00% convertible subordinated notes due February 2007
    
    
    
    
    
    
    456,500Total
    
    
    525,000
    
    
    
    706,500Less: current portion of long-term debt
    
    
    (43,900
    )
    
    
    (188,375
    )Long-term debt
    
    $
    481,100
    
    
    $
    518,125
 Floating rate senior secured notes due November 2010
 14




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
     4.00% convertible subordinated notes due March 2026
  4.00% convertible subordinated notes due February 2007
 15




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 4. Commitments and Contingencies
 Lease Commitments
   Fiscal Year
    
    Lease Payments
    
    
    Sublease Income
    
    
    Net ObligationRemainder of 2007
    
    $
    7,485
    
    
    $
    (2,165
    )
    
    $
    5,3202008
    
    
    26,290
    
    
    
    (7,167
    )
    
    
    19,1232009
    
    
    18,814
    
    
    
    (3,384
    )
    
    
    15,4302010
    
    
    17,371
    
    
    
    (3,330
    )
    
    
    14,0412011
    
    
    14,791
    
    
    
    (2,178
    )
    
    
    12,613Thereafter
    
    
    64,590
    
    
    
    (5,582
    )
    
    
    59,008Total
    
    $
    149,341
    
    
    $
    (23,806
    )
    
    $
    125,535
   Contingencies
  Legal Matters
  IPO Litigation 
 16




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
  Class Action Suits  Witriol v. Conexant, et al. (Witriol)
 Graden v. Conexant, et al. Gradens
 Shareholder Derivative Suits Witriol Witriol
 17




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
  Guarantees and Indemnifications
   Other
 Tax Matter
 India Fringe Benefit Tax 
 Environmental Remediation
 Capital Investments
 18




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 5. Shareholders Equity
  th th
 Stock Option Plans
   WeightedAverageExerciseShares
    
    PriceOutstanding, September 29, 2006
    
    
    103,782
    
    
    $
    2.65Granted
    
    
    14,740
    
    
    
    1.48Exercised
    
    
    (3,358
    )
    
    
    1.41Canceled
    
    
    (14,045
    )
    
    
    3.23Outstanding, June 29, 2007
    
    
    101,119
    
    
    
    2.44Exercisable, June 29, 2007
    
    
    69,901
    
    
    
    2.69
   19




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
  Directors Stock Plan
  Employee Stock Purchase Plan
  Performance Share Plan
   20




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 6. Comprehensive Income (Loss)
  Three Months Ended
    
    
    Nine Months EndedJune 29,
    
    
    June 30,
    
    
    June 29,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net loss
    
    $
    (35,227
    )
    
    $
    (67,090
    )
    
    $
    (167,697
    )
    
    $
    (101,493
    )Other comprehensive income (loss):Currency translation adjustments
    
    
    887
    
    
    
    (226
    )
    
    
    5,391
    
    
    
    (933
    )Unrealized gains (losses) on
marketable securities
    
    
    7,661
    
    
    
    (7,703
    )
    
    
    14,405
    
    
    
    (8,994
    )Unrealized gains on foreign currency
forward hedge contracts
    
    
    45
    
    
    
    82
    
    
    
    417
    
    
    
    82Reclassification adjustment for
realized losses on
available-for-sale securities
    
    
    
    
    
    
    18,456
    
    
    
    
    
    
    
    18,456Minimum pension liability adjustments
    
    
    56
    
    
    
    80
    
    
    
    165
    
    
    
    232Other comprehensive income
    
    
    8,649
    
    
    
    10,689
    
    
    
    20,378
    
    
    
    8,843Comprehensive loss
    
    $
    (26,578
    )
    
    $
    (56,401
    )
    
    $
    (147,319
    )
    
    $
    (92,650
    )
   June 29,
    
    
    September 29,2007
    
    
    2006Currency translation adjustments
    
    $
    1,595
    
    
    $
    (3,796
    )Unrealized gains (losses) on marketable securities
    
    
    12,550
    
    
    
    (1,855
    )Unrealized gains on foreign currency forward hedge contracts
    
    
    597
    
    
    
    180Minimum pension liability adjustments
    
    
    (6,460
    )
    
    
    (6,625
    )Accumulated other comprehensive income (loss)
    
    $
    8,282
    
    
    $
    (12,096
    )
 7. Special Charges
  Three Months Ended
    
    
    Nine Months EndedJune 29,
    
    
    June 30,
    
    
    June 29,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Asset impairments
    
    $
    3,415
    
    
    $
    
    
    
    $
    158,415
    
    
    $
    85Restructuring charges
    
    
    1,656
    
    
    
    2,610
    
    
    
    8,053
    
    
    
    2,394Litigation charges
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    70,000Other special charges (credits)
    
    
    
    
    
    
    
    
    
    
    1,622
    
    
    
    (100
    )$
    5,071
    
    
    $
    32,610
    
    
    $
    168,090
    
    
    $
    72,379
 Asset Impairments
  21




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
  Restructuring Charges
  Fiscal 2007 Restructuring Actions
  Workforce
    
    
    FacilityReductions
    
    
    And Other
    
    
    TotalCharged to costs and expenses
    
    $
    2,027
    
    
    $
    
    
    
    $
    2,027Cash payments
    
    
    (214
    )
    
    
    
    
    
    
    (214
    )Restructuring balance, December 29, 2006
    
    
    1,813
    
    
    
    
    
    
    
    1,813Charged to costs and expenses
    
    
    3,218
    
    
    
    
    
    
    
    3,218Cash payments
    
    
    (1,276
    )
    
    
    
    
    
    
    (1,276
    )Restructuring balance, March 30, 2007
    
    
    3,755
    
    
    
    
    
    
    
    3,755Charged to costs and expenses
    
    
    1,435
    
    
    
    98
    
    
    
    1,533Cash payments
    
    
    (2,121
    )
    
    
    (74
    )
    
    
    (2,195
    )Restructuring balance, June 29, 2007
    
    $
    3,069
    
    
    $
    24
    
    
    $
    3,093
 Fiscal 2006 Restructuring Actions
  Workforce
    
    
    FacilityReductions
    
    
    and Other
    
    
    TotalRestructuring balance, September 29, 2006
    
    $
    1,216
    
    
    $
    392
    
    
    $
    1,608Charged to costs and expenses
    
    
    533
    
    
    
    5
    
    
    
    538Cash payments
    
    
    (951
    )
    
    
    (48
    )
    
    
    (999
    )Restructuring balance, December 29, 2006
    
    
    798
    
    
    
    349
    
    
    
    1,147Charged (credited) to costs and expenses
    
    
    (200
    )
    
    
    45
    
    
    
    (155
    )Cash payments
    
    
    (191
    )
    
    
    (129
    )
    
    
    (320
    )Restructuring balance, March 30, 2007
    
    
    407
    
    
    
    265
    
    
    
    672Charged (credited) to costs and expenses
    
    
    (169
    )
    
    
    5
    
    
    
    (164
    )Cash payments
    
    
    (30
    )
    
    
    (42
    )
    
    
    (72
    )Restructuring balance, June 29, 2007
    
    $
    208
    
    
    $
    228
    
    
    $
    436
 22




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 Fiscal 2005 Restructuring Action
  Workforce
    
    
    FacilityReductions
    
    
    and Other
    
    
    TotalRestructuring balance, September 29, 2006
    
    $
    196
    
    
    $
    15,288
    
    
    $
    15,484Charged to costs and expenses
    
    
    
    
    
    
    311
    
    
    
    311Cash payments
    
    
    (141
    )
    
    
    (1,190
    )
    
    
    (1,331
    )Restructuring balance, December 29, 2006
    
    
    55
    
    
    
    14,409
    
    
    
    14,464Charged to costs and expenses
    
    
    
    
    
    
    430
    
    
    
    430Cash payments
    
    
    (5
    )
    
    
    (985
    )
    
    
    (990
    )Restructuring balance, March 30, 2007
    
    
    50
    
    
    
    13,854
    
    
    
    13,904Charged to costs and expenses
    
    
    
    
    
    
    287
    
    
    
    287Cash payments
    
    
    (7
    )
    
    
    (725
    )
    
    
    (732
    )Restructuring balance, June 29, 2007
    
    $
    43
    
    
    $
    13,416
    
    
    $
    13,459
 Fiscal 2004 and Prior Years Restructuring Actions
  Facilityand OtherRestructuring balance, September 29, 2006
    
    $
    2,971Charged to costs and expenses
    
    
    22Reclassification to other current liabilities and other liabilities
    
    
    (2,687
    )Cash payments
    
    
    (296
    )Restructuring balance, December 29, 2006
    
    
    10Charged to costs and expenses
    
    
    6Cash payments
    
    
    (16
    )Restructuring balance, March 30, 2007 and June 29, 2007
    
    $
    
  23




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 Litigation Charges
  8. Other Income (Expense), Net
  Three Months Ended
    
    
    Nine Months EndedJune 29,
    
    
    June 30,
    
    
    June 29,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Investment and interest income
    
    $
    2,110
    
    
    $
    4,518
    
    
    $
    11,299
    
    
    $
    14,415Increase (decrease) in fair value of
derivative instruments
    
    
    944
    
    
    
    (35,131
    )
    
    
    7,868
    
    
    
    (3,800
    )Impairment of equity securities
    
    
    
    
    
    
    (18,456
    )
    
    
    
    
    
    
    (18,456
    )Gains on investments in equity securities
    
    
    101
    
    
    
    
    
    
    
    6,570
    
    
    
    4,414Other
    
    
    501
    
    
    
    (190
    )
    
    
    640
    
    
    
    307$
    3,656
    
    
    $
    (49,259
    )
    
    $
    26,377
    
    
    $
    (3,120
    )
   24




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 9. Related Party Transactions
 Jazz Technologies, Inc.
   Wafer and Probe Services Purchases
 Lease Agreement 
 Royalty Agreement
 Services Agreements
 Mindspeed Technologies, Inc.
  Lease Agreement
 25




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
  Skyworks Solutions, Inc.
  Inventory and Assembly and Test Services Purchases
 Sublease Rent Share Agreement
 10. Geographic Information
  Three Months Ended
    
    
    Nine Months EndedJune 29,
    
    
    June 30,
    
    
    June 29,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006United States
    
    $
    8,919
    
    
    $
    25,872
    
    
    $
    51,469
    
    
    $
    57,974Other Americas
    
    
    8,095
    
    
    
    6,474
    
    
    
    28,906
    
    
    
    17,431Total Americas
    
    
    17,014
    
    
    
    32,346
    
    
    
    80,375
    
    
    
    75,405China
    
    
    102,725
    
    
    
    127,572
    
    
    
    337,380
    
    
    
    363,503South Korea
    
    
    14,972
    
    
    
    20,593
    
    
    
    53,859
    
    
    
    76,265Taiwan
    
    
    9,489
    
    
    
    13,834
    
    
    
    33,578
    
    
    
    51,633Other Asia-Pacific
    
    
    22,343
    
    
    
    34,628
    
    
    
    80,043
    
    
    
    105,322Total Asia-Pacific
    
    
    149,529
    
    
    
    196,627
    
    
    
    504,860
    
    
    
    596,723Europe, Middle East and Africa
    
    
    13,006
    
    
    
    22,662
    
    
    
    39,713
    
    
    
    52,796$
    179,549
    
    
    $
    251,635
    
    
    $
    624,948
    
    
    $
    724,924
  26




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
  June 29,
    
    
    September 29,2007
    
    
    2006United States
    
    $
    96,058
    
    
    $
    90,095India
    
    
    16,683
    
    
    
    10,826Other Asia-Pacific
    
    
    9,410
    
    
    
    7,117Europe, Middle East and Africa
    
    
    1,918
    
    
    
    2,201$
    124,069
    
    
    $
    110,239
 11. Supplemental Guarantor Financial Information
   27




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
  June 29, 2007Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedCurrent assets:Cash and cash equivalents
    
    $
    124,809
    
    
    $
    
    
    
    $
    33,353
    
    
    $
    
    
    
    $
    158,162Marketable securities
    
    
    65,969
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65,969Restricted cash
    
    
    
    
    
    
    
    
    
    
    8,800
    
    
    
    
    
    
    
    8,800Receivables
    
    
    (10,441
    )
    
    
    
    
    
    
    105,562
    
    
    
    
    
    
    
    95,121Inventories
    
    
    63,318
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,318Other current assets
    
    
    15,531
    
    
    
    2
    
    
    
    6,661
    
    
    
    
    
    
    
    22,194Total current assets
    
    
    259,186
    
    
    
    2
    
    
    
    154,376
    
    
    
    
    
    
    
    413,564Property and equipment, net
    
    
    43,800
    
    
    
    
    
    
    
    26,284
    
    
    
    
    
    
    
    70,084Goodwill
    
    
    68,079
    
    
    
    481,659
    
    
    
    30,956
    
    
    
    
    
    
    
    580,694Intangible assets, net
    
    
    6,443
    
    
    
    32,378
    
    
    
    2,302
    
    
    
    
    
    
    
    41,123Other assets
    
    
    90,649
    
    
    
    
    
    
    
    1,945
    
    
    
    
    
    
    
    92,594Investments in subsidiaries
    
    
    682,388
    
    
    
    4,839
    
    
    
    
    
    
    
    (687,227
    )
    
    
    Total assets
    
    $
    1,150,545
    
    
    $
    518,878
    
    
    $
    215,863
    
    
    $
    (687,227
    )
    
    $
    1,198,059Current liabilities:Current portion of long-term debt
    
    $
    43,900
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    43,900Short-term debt
    
    
    
    
    
    
    
    
    
    
    80,000
    
    
    
    
    
    
    
    80,000Accounts payable
    
    
    65,324
    
    
    
    
    
    
    
    3,326
    
    
    
    
    
    
    
    68,650Accrued compensation and benefits
    
    
    20,927
    
    
    
    
    
    
    
    7,745
    
    
    
    
    
    
    
    28,672Intercompany payable (receivable)
    
    
    63,383
    
    
    
    (153,892
    )
    
    
    90,509
    
    
    
    
    
    
    
    Other current liabilities
    
    
    41,714
    
    
    
    (148
    )
    
    
    2,457
    
    
    
    
    
    
    
    44,023Total current liabilities
    
    
    235,248
    
    
    
    (154,040
    )
    
    
    184,037
    
    
    
    
    
    
    
    265,245Long-term debt
    
    
    481,100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    481,100Other liabilities
    
    
    65,220
    
    
    
    
    
    
    
    1,448
    
    
    
    
    
    
    
    66,668Total liabilities
    
    
    781,568
    
    
    
    (154,040
    )
    
    
    185,485
    
    
    
    
    
    
    
    813,013Shareholders equity
    
    
    368,977
    
    
    
    672,918
    
    
    
    30,378
    
    
    
    (687,227
    )
    
    
    385,046Total liabilities and equity
    
    $
    1,150,545
    
    
    $
    518,878
    
    
    $
    215,863
    
    
    $
    (687,227
    )
    
    $
    1,198,059
 28




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 September 29, 2006Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedCurrent assets:Cash and cash equivalents
    
    $
    175,398
    
    
    $
    
    
    
    $
    50,228
    
    
    $
    
    
    
    $
    225,626Marketable securities
    
    
    115,709
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115,709Restricted cash
    
    
    
    
    
    
    
    
    
    
    8,800
    
    
    
    
    
    
    
    8,800Receivables
    
    
    19,140
    
    
    
    
    
    
    
    103,885
    
    
    
    
    
    
    
    123,025Inventories
    
    
    97,460
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97,460Other current assets
    
    
    13,480
    
    
    
    3
    
    
    
    5,870
    
    
    
    
    
    
    
    19,353Total current assets
    
    
    421,187
    
    
    
    3
    
    
    
    168,783
    
    
    
    
    
    
    
    589,973Property and equipment, net
    
    
    45,430
    
    
    
    
    
    
    
    19,975
    
    
    
    
    
    
    
    65,405Goodwill
    
    
    54,914
    
    
    
    616,659
    
    
    
    39,217
    
    
    
    
    
    
    
    710,790Intangible assets, net
    
    
    6,213
    
    
    
    66,751
    
    
    
    3,044
    
    
    
    
    
    
    
    76,008Other assets
    
    
    131,037
    
    
    
    
    
    
    
    412
    
    
    
    
    
    
    
    131,449Investments in subsidiaries
    
    
    862,726
    
    
    
    (37,902
    )
    
    
    
    
    
    
    (824,824
    )
    
    
    Total assets
    
    $
    1,521,507
    
    
    $
    645,511
    
    
    $
    231,431
    
    
    $
    (824,824
    )
    
    $
    1,573,625Current liabilities:Current portion of long-term debt
    
    $
    188,375
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    188,375Short-term debt
    
    
    
    
    
    
    
    
    
    
    80,000
    
    
    
    
    
    
    
    80,000Accounts payable
    
    
    111,516
    
    
    
    
    
    
    
    2,174
    
    
    
    
    
    
    
    113,690Accrued compensation and benefits
    
    
    22,824
    
    
    
    
    
    
    
    5,483
    
    
    
    
    
    
    
    28,307Intercompany payable (receivable)
    
    
    50,218
    
    
    
    (117,590
    )
    
    
    67,372
    
    
    
    
    
    
    
    Other current liabilities
    
    
    51,109
    
    
    
    
    
    
    
    857
    
    
    
    
    
    
    
    51,966Total current liabilities
    
    
    424,042
    
    
    
    (117,590
    )
    
    
    155,886
    
    
    
    
    
    
    
    462,338Long-term debt
    
    
    518,125
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    518,125Other liabilities
    
    
    81,823
    
    
    
    
    
    
    
    1,241
    
    
    
    
    
    
    
    83,064Total liabilities
    
    
    1,023,990
    
    
    
    (117,590
    )
    
    
    157,127
    
    
    
    
    
    
    
    1,063,527Shareholders equity
    
    
    497,517
    
    
    
    763,101
    
    
    
    74,304
    
    
    
    (824,824
    )
    
    
    510,098Total liabilities and equity
    
    $
    1,521,507
    
    
    $
    645,511
    
    
    $
    231,431
    
    
    $
    (824,824
    )
    
    $
    1,573,625
 29




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
  Three Months Ended June 29, 2007Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    148,412
    
    
    $
    6,271
    
    
    $
    31,137
    
    
    $
    (6,271
    )
    
    $
    179,549Cost of goods sold
    
    
    80,097
    
    
    
    
    
    
    
    27,677
    
    
    
    (6,271
    )
    
    
    101,503Gross margin
    
    
    68,315
    
    
    
    6,271
    
    
    
    3,460
    
    
    
    
    
    
    
    78,046Operating expenses:Research and development
    
    
    68,407
    
    
    
    
    
    
    
    483
    
    
    
    
    
    
    
    68,890Selling, general and administrative
    
    
    23,113
    
    
    
    
    
    
    
    3,121
    
    
    
    
    
    
    
    26,234Amortization of intangible assets
    
    
    718
    
    
    
    3,861
    
    
    
    244
    
    
    
    
    
    
    
    4,823Special charges
    
    
    5,071
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,071Total operating expenses
    
    
    97,309
    
    
    
    3,861
    
    
    
    3,848
    
    
    
    
    
    
    
    105,018Operating income (loss)
    
    
    (28,994
    )
    
    
    2,410
    
    
    
    (388
    )
    
    
    
    
    
    
    (26,972
    )Equity in income (loss) of subsidiaries
    
    
    5,759
    
    
    
    643
    
    
    
    
    
    
    
    (6,402
    )
    
    
    Interest expense
    
    
    (9,701
    )
    
    
    
    
    
    
    (1,648
    )
    
    
    
    
    
    
    (11,349
    )Other income (expense), net
    
    
    (1,963
    )
    
    
    
    
    
    
    5,619
    
    
    
    
    
    
    
    3,656Income (loss) before income taxes and
gain on equity method investments
    
    
    (34,899
    )
    
    
    3,053
    
    
    
    3,583
    
    
    
    (6,402
    )
    
    
    (34,665
    )Provision for income taxes
    
    
    507
    
    
    
    
    
    
    
    234
    
    
    
    
    
    
    
    741Income (loss) before gain on equity
method investments
    
    
    (35,406
    )
    
    
    3,053
    
    
    
    3,349
    
    
    
    (6,402
    )
    
    
    (35,406
    )Gain on equity method investments
    
    
    179
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    179Net income (loss)
    
    $
    (35,227
    )
    
    $
    3,053
    
    
    $
    3,349
    
    
    $
    (6,402
    )
    
    $
    (35,227
    )
 Three Months Ended June 30, 2006Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    134,787
    
    
    $
    81,158
    
    
    $
    44,697
    
    
    $
    (9,007
    )
    
    $
    251,635Cost of goods sold
    
    
    34,026
    
    
    
    72,121
    
    
    
    40,458
    
    
    
    (9,007
    )
    
    
    137,598Gain on cancellation of supply
agreement
    
    
    (17,500
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,500
    )Gross margin
    
    
    118,261
    
    
    
    9,037
    
    
    
    4,239
    
    
    
    
    
    
    
    131,537Operating expenses:Research and development
    
    
    69,325
    
    
    
    2
    
    
    
    769
    
    
    
    
    
    
    
    70,096Selling, general and administrative
    
    
    25,554
    
    
    
    (1,897
    )
    
    
    3,380
    
    
    
    
    
    
    
    27,037Amortization of intangible assets
    
    
    676
    
    
    
    6,556
    
    
    
    288
    
    
    
    
    
    
    
    7,520Special charges
    
    
    2,610
    
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    
    32,610Total operating expenses
    
    
    98,165
    
    
    
    34,661
    
    
    
    4,437
    
    
    
    
    
    
    
    137,263Operating income (loss)
    
    
    20,096
    
    
    
    (25,624
    )
    
    
    (198
    )
    
    
    
    
    
    
    (5,726
    )Equity in income (loss) of subsidiaries
    
    
    (23,743
    )
    
    
    392
    
    
    
    
    
    
    
    23,351
    
    
    
    Interest expense
    
    
    (7,986
    )
    
    
    (841
    )
    
    
    (1,599
    )
    
    
    
    
    
    
    (10,426
    )Other income (expense), net
    
    
    (54,203
    )
    
    
    
    
    
    
    4,944
    
    
    
    
    
    
    
    (49,259
    )Income (loss) before income taxes and
loss on equity method investments
    
    
    (65,836
    )
    
    
    (26,073
    )
    
    
    3,147
    
    
    
    23,351
    
    
    
    (65,411
    )Provision for income taxes
    
    
    606
    
    
    
    
    
    
    
    425
    
    
    
    
    
    
    
    1,031Income (loss) before loss on equity
method investments
    
    
    (66,442
    )
    
    
    (26,073
    )
    
    
    2,722
    
    
    
    23,351
    
    
    
    (66,442
    )Loss on equity method investments
    
    
    (648
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (648
    )Net income (loss)
    
    $
    (67,090
    )
    
    $
    (26,073
    )
    
    $
    2,722
    
    
    $
    23,351
    
    
    $
    (67,090
    )
 30




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
  Nine Months Ended June 29, 2007Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    528,234
    
    
    $
    19,374
    
    
    $
    96,714
    
    
    $
    (19,374
    )
    
    $
    624,948Cost of goods sold
    
    
    277,924
    
    
    
    
    
    
    
    89,014
    
    
    
    (19,374
    )
    
    
    347,564Gross margin
    
    
    250,310
    
    
    
    19,374
    
    
    
    7,700
    
    
    
    
    
    
    
    277,384Operating expenses:Research and development
    
    
    208,106
    
    
    
    
    
    
    
    1,579
    
    
    
    
    
    
    
    209,685Selling, general and administrative
    
    
    70,656
    
    
    
    
    
    
    
    9,857
    
    
    
    
    
    
    
    80,513Amortization of intangible assets
    
    
    2,199
    
    
    
    14,373
    
    
    
    743
    
    
    
    
    
    
    
    17,315Special charges
    
    
    13,090
    
    
    
    155,000
    
    
    
    
    
    
    
    
    
    
    
    168,090Total operating expenses
    
    
    294,051
    
    
    
    169,373
    
    
    
    12,179
    
    
    
    
    
    
    
    475,603Operating loss
    
    
    (43,741
    )
    
    
    (149,999
    )
    
    
    (4,479
    )
    
    
    
    
    
    
    (198,219
    )Equity in income (loss) of subsidiaries
    
    
    (143,111
    )
    
    
    1,850
    
    
    
    
    
    
    
    141,261
    
    
    
    Interest expense
    
    
    (32,634
    )
    
    
    
    
    
    
    (4,971
    )
    
    
    
    
    
    
    (37,605
    )Other income, net
    
    
    9,880
    
    
    
    
    
    
    
    16,497
    
    
    
    
    
    
    
    26,377Income
(loss) before income taxes and gain on equity method investments
    
    
    (209,606
    )
    
    
    (148,149
    )
    
    
    7,047
    
    
    
    141,261
    
    
    
    (209,447
    )Provision for income taxes
    
    
    2,285
    
    
    
    
    
    
    
    159
    
    
    
    
    
    
    
    2,444Income (loss) before gain on equity
method investments
    
    
    (211,891
    )
    
    
    (148,149
    )
    
    
    6,888
    
    
    
    141,261
    
    
    
    (211,891
    )Gain on equity method investments
    
    
    44,194
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,194Net income (loss)
    
    $
    (167,697
    )
    
    $
    (148,149
    )
    
    $
    6,888
    
    
    $
    141,261
    
    
    $
    (167,697
    )
 Nine Months Ended June 30, 2006Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    397,078
    
    
    $
    267,905
    
    
    $
    109,639
    
    
    $
    (49,698
    )
    
    $
    724,924Cost of goods sold
    
    
    116,639
    
    
    
    219,310
    
    
    
    100,406
    
    
    
    (27,431
    )
    
    
    408,924Gain on cancellation of supply
agreement
    
    
    (17,500
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,500
    )Gross margin
    
    
    297,939
    
    
    
    48,595
    
    
    
    9,233
    
    
    
    (22,267
    )
    
    
    333,500Operating expenses:Research and development
    
    
    197,663
    
    
    
    18,991
    
    
    
    2,371
    
    
    
    (19,739
    )
    
    
    199,286Selling, general and administrative
    
    
    81,505
    
    
    
    13,424
    
    
    
    9,557
    
    
    
    (2,528
    )
    
    
    101,958Amortization of intangible assets
    
    
    2,026
    
    
    
    20,294
    
    
    
    865
    
    
    
    
    
    
    
    23,185Special charges
    
    
    2,379
    
    
    
    70,000
    
    
    
    
    
    
    
    
    
    
    
    72,379Total operating expenses
    
    
    283,573
    
    
    
    122,709
    
    
    
    12,793
    
    
    
    (22,267
    )
    
    
    396,808Operating income (loss)
    
    
    14,366
    
    
    
    (74,114
    )
    
    
    (3,560
    )
    
    
    
    
    
    
    (63,308
    )Equity in income (loss) of subsidiaries
    
    
    (72,186
    )
    
    
    1,277
    
    
    
    
    
    
    
    70,909
    
    
    
    Interest expense
    
    
    (21,582
    )
    
    
    (4,254
    )
    
    
    (3,444
    )
    
    
    
    
    
    
    (29,280
    )Other income (expense), net
    
    
    (16,958
    )
    
    
    
    
    
    
    13,838
    
    
    
    
    
    
    
    (3,120
    )Income (loss) before income taxes and
loss on equity method investments
    
    
    (96,360
    )
    
    
    (77,091
    )
    
    
    6,834
    
    
    
    70,909
    
    
    
    (95,708
    )Provision for income taxes
    
    
    1,830
    
    
    
    
    
    
    
    652
    
    
    
    
    
    
    
    2,482Income (loss) before loss on equity
method investments
    
    
    (98,190
    )
    
    
    (77,091
    )
    
    
    6,182
    
    
    
    70,909
    
    
    
    (98,190
    )Loss on equity method investments
    
    
    (3,303
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,303
    )Net income (loss)
    
    $
    (101,493
    )
    
    $
    (77,091
    )
    
    $
    6,182
    
    
    $
    70,909
    
    
    $
    (101,493
    )
 31




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
  Nine Months Ended June 29, 2007Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedNet cash (used in) provided by
operating activities
    
    $
    (13,085
    )
    
    $
    
    
    
    $
    15,578
    
    
    $
    (20,441
    )
    
    $
    (17,948
    )Cash flows from investing activities:Proceeds from equity securities and
other assets
    
    
    105,923
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105,923Proceeds from sales and maturities
of marketable securities
    
    
    84,819
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84,819Purchases of marketable securities
    
    
    (26,462
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,462
    )Purchases of property and equipment
    
    
    (12,319
    )
    
    
    
    
    
    
    (10,814
    )
    
    
    
    
    
    
    (23,133
    )Payments for acquisitions
    
    
    (5,029
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,029
    )Purchases of equity securities
    
    
    (600
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (600
    )Purchases of accounts receivable
    
    
    
    
    
    
    
    
    
    
    (473,774
    )
    
    
    473,774
    
    
    
    Collections of accounts receivable
    
    
    
    
    
    
    
    
    
    
    469,028
    
    
    
    (469,028
    )
    
    
    Net cash provided by (used in)
investing activities
    
    
    146,332
    
    
    
    
    
    
    
    (15,560
    )
    
    
    4,746
    
    
    
    135,518Cash flows from financing activities:Proceeds from short-term debt, net
    
    
    
    
    
    
    
    
    
    
    (1,198
    )
    
    
    
    
    
    
    (1,198
    )Proceeds from long-term debt, net
    
    
    265,012
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    265,012Repurchases and retirements of
long-term debt
    
    
    (456,500
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (456,500
    )Proceeds from issuance of common
stock
    
    
    7,627
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,627Repayment of shareholder notes
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25Dividends paid
    
    
    
    
    
    
    
    
    
    
    (15,695
    )
    
    
    15,695
    
    
    
    Net cash used in financing activities
    
    
    (183,836
    )
    
    
    
    
    
    
    (16,893
    )
    
    
    15,695
    
    
    
    (185,034
    )Net decrease in cash and cash
equivalents
    
    
    (50,589
    )
    
    
    
    
    
    
    (16,875
    )
    
    
    
    
    
    
    (67,464
    )Cash and cash equivalents at
beginning of period
    
    
    175,398
    
    
    
    
    
    
    
    50,228
    
    
    
    
    
    
    
    225,626Cash and cash equivalents at end of
period
    
    $
    124,809
    
    
    $
    
    
    
    $
    33,353
    
    
    $
    
    
    
    $
    158,162
 32




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 Nine Months Ended June 30, 2006Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by (used in)
operating activities
    
    $
    9,994
    
    
    $
    
    
    
    $
    8,400
    
    
    $
    (72,657
    )
    
    $
    (54,263
    )Cash flows from investing activities:Proceeds from equity securities and
other assets
    
    
    5,200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,200Proceeds from sales and maturities
of marketable securities
    
    
    89,862
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    89,862Purchases of marketable securities
    
    
    (62,796
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (62,796
    )Purchases of property and equipment
    
    
    (13,222
    )
    
    
    
    
    
    
    (10,278
    )
    
    
    
    
    
    
    (23,500
    )Payments for acquisitions
    
    
    (6,900
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,900
    )Purchases of equity securities
    
    
    (705
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (705
    )Restricted cash
    
    
    
    
    
    
    
    
    
    
    (8,800
    )
    
    
    
    
    
    
    (8,800
    )Purchases of accounts receivable
    
    
    
    
    
    
    
    
    
    
    (416,368
    )
    
    
    416,368
    
    
    
    Collections of accounts receivable
    
    
    
    
    
    
    
    
    
    
    343,711
    
    
    
    (343,711
    )
    
    
    Net cash provided by (used in)
investing activities
    
    
    11,439
    
    
    
    
    
    
    
    (91,735
    )
    
    
    72,657
    
    
    
    (7,639
    )Cash flows from financing activities:Proceeds from short-term debt, net
    
    
    
    
    
    
    
    
    
    
    78,459
    
    
    
    
    
    
    
    78,459Proceeds from long-term debt, net
    
    
    243,609
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    243,609Repurchases and retirements of
long-term debt
    
    
    (254,684
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (254,684
    )Proceeds from issuance of common
stock
    
    
    17,112
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,112Repayment of shareholder notes
    
    
    163
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    163Net cash provided by financing
activities
    
    
    6,200
    
    
    
    
    
    
    
    78,459
    
    
    
    
    
    
    
    84,659Net increase (decrease) in cash and
cash equivalents
    
    
    27,633
    
    
    
    
    
    
    
    (4,876
    )
    
    
    
    
    
    
    22,757Cash and cash equivalents at
beginning of period
    
    
    170,793
    
    
    
    
    
    
    
    31,911
    
    
    
    
    
    
    
    202,704Cash and cash equivalents at end of
period
    
    $
    198,426
    
    
    $
    
    
    
    $
    27,035
    
    
    $
    
    
    
    $
    225,461
 12. Subsequent Events
    
 33




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  Overview
   Business Enterprise Segments
   
    
    the nature of products and services;
 34




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
    
    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.
  Results of Operations
 Net Revenues
 Three Months Ended
    
    Nine Months EndedJune 29,
    
    June 30,
    
    June 29,
    
    June 30,(in thousands)
    
    2007
    
    2006
    
    2007
    
    2006Net revenues
    
    $
    179,549
    
    
    $
    251,635
    
    
    $
    624,948
    
    
    $
    724,924
     35




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Gross Margin
 Three Months Ended
    
    Nine Months EndedJune 29,
    
    June 30,
    
    June 29,
    
    June 30,(in thousands)
    
    2007
    
    2006
    
    2007
    
    2006Gross margin
    
    $
    78,046
    
    
    $
    131,537
    
    
    $
    277,384
    
    
    $
    333,500Percent of net revenues
    
    
    43
    %
    
    
    52
    %
    
    
    44
    %
    
    
    46
    %
    Three Months Ended
    
    
    Nine Months EndedJune 29,
    
    
    June 30,
    
    
    June 29,
    
    
    June 30,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006E&O reserves, beginning of period
    
    $
    26,631
    
    
    $
    39,793
    
    
    $
    36,632
    
    
    $
    44,833Additions
    
    
    2,112
    
    
    
    4,949
    
    
    
    5,873
    
    
    
    12,123Release upon sales of product
    
    
    (2,739
    )
    
    
    (2,175
    )
    
    
    (8,871
    )
    
    
    (8,826
    )Scrap
    
    
    (4,332
    )
    
    
    (2,503
    )
    
    
    (10,350
    )
    
    
    (5,345
    )Standards adjustments and other
    
    
    564
    
    
    
    (1,168
    )
    
    
    (1,048
    )
    
    
    (3,889
    )E&O reserves, end of period
    
    $
    22,236
    
    
    $
    38,896
    
    
    $
    22,236
    
    
    $
    38,896
 36




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Three Months Ended
    
    
    Nine Months EndedJune 29,
    
    
    June 30,
    
    
    June 29,
    
    
    June 30,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006LCM reserves, beginning of period
    
    $
    653
    
    
    $
    6,228
    
    
    $
    1,761
    
    
    $
    6,739Additions
    
    
    
    
    
    
    288
    
    
    
    467
    
    
    
    3,609Release upon sales of product
    
    
    (320
    )
    
    
    (1,526
    )
    
    
    (1,672
    )
    
    
    (5,312
    )Standards adjustments and other
    
    
    
    
    
    
    
    
    
    
    (223
    )
    
    
    (46
    )LCM reserves, end of period
    
    $
    333
    
    
    $
    4,990
    
    
    $
    333
    
    
    $
    4,990
 Research and Development
 Three Months Ended
    
    Nine Months EndedJune 29,
    
    June 30,
    
    June 29,
    
    June 30,(in thousands)
    
    2007
    
    2006
    
    2007
    
    2006Research and development
    
    $
    68,890
    
    
    $
    70,096
    
    
    $
    209,685
    
    
    $
    199,286Percent of net revenues
    
    
    38
    %
    
    
    28
    %
    
    
    34
    %
    
    
    27
    %
   37




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Selling, General and Administrative
 Three Months Ended
    
    Nine Months EndedJune 29,
    
    June 30,
    
    June 29,
    
    June 30,(in thousands)
    
    2007
    
    2006
    
    2007
    
    2006Selling, general and administrative
    
    $
    26,234
    
    
    $
    27,037
    
    
    $
    80,513
    
    
    $
    101,958Percent of net revenues
    
    
    15
    %
    
    
    11
    %
    
    
    13
    %
    
    
    14
    %
    Amortization of Intangible Assets
 Three Months Ended
    
    Nine Months EndedJune 29,
    
    June 30,
    
    June 29,
    
    June 30,(in thousands)
    
    2007
    
    2006
    
    2007
    
    2006Amortization of intangible assets
    
    $
    4,823
    
    
    $
    7,520
    
    
    $
    17,315
    
    
    $
    23,185
  38




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Special Charges
 Three Months Ended
    
    
    Nine Months EndedJune 29,
    
    
    June 30,
    
    
    June 29,
    
    
    June 30,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Asset impairments
    
    $
    3,415
    
    
    $
    
    
    
    $
    158,415
    
    
    $
    85Restructuring charges
    
    
    1,656
    
    
    
    2,610
    
    
    
    8,053
    
    
    
    2,394Litigation charges
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    70,000Other special charges (credits)
    
    
    
    
    
    
    
    
    
    
    1,622
    
    
    
    (100
    )$
    5,071
    
    
    $
    32,610
    
    
    $
    168,090
    
    
    $
    72,379
   Interest Expense
 Three Months Ended
    
    Nine Months EndedJune 29,
    
    June 30,
    
    June 29,
    
    June 30,(in thousands)
    
    2007
    
    2006
    
    2007
    
    2006Interest expense
    
    $
    11,349
    
    
    $
    10,426
    
    
    $
    37,605
    
    
    $
    29,280
  39




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Other Income (Expense), Net
 Three Months Ended
    
    
    Nine Months EndedJune 29,
    
    
    June 30,
    
    
    June 29,
    
    
    June 30,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Investment and interest income
    
    $
    2,110
    
    
    $
    4,518
    
    
    $
    11,299
    
    
    $
    14,415Increase (decrease) in fair value of
derivative instruments
    
    
    944
    
    
    
    (35,131
    )
    
    
    7,868
    
    
    
    (3,800
    )Impairment of equity securities
    
    
    
    
    
    
    (18,456
    )
    
    
    
    
    
    
    (18,456
    )Gains on investments in equity securities
    
    
    101
    
    
    
    
    
    
    
    6,570
    
    
    
    4,414Other
    
    
    501
    
    
    
    (190
    )
    
    
    640
    
    
    
    307$
    3,656
    
    
    $
    (49,259
    )
    
    $
    26,377
    
    
    $
    (3,120
    )
   Provision for Income Taxes
    40




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Gain (Loss) on Equity Method Investments
 Three Months Ended
    
    Nine Months EndedJune 29,
    
    June 30,
    
    June 29,
    
    June 30,(in thousands)
    
    2007
    
    2006
    
    2007
    
    2006Gain (loss) on equity method
Investments
    
    $
    179
    
    
    $
    (648
    )
    
    $
    44,194
    
    
    $
    (3,303
    )
  Liquidity and Capital Resources
  June 29,
    
    
    September 29,(in thousands)
    
    2007
    
    
    2006Cash and cash equivalents
    
    $
    158,162
    
    
    $
    225,626Marketable debt securities
    
    
    15,361
    
    
    
    83,620Subtotal
    
    
    173,523
    
    
    
    309,246Marketable
equity securities  Skyworks Solutions,
Inc. (6.2 million shares at June 29, 2007 and
September 29, 2006)
    
    
    45,444
    
    
    
    32,089Marketable
equity securities  Jazz Technologies, Inc.
(1.7 million shares at June 29, 2007)
    
    
    5,164
    
    
    
    Subtotal
    
    
    50,608
    
    
    
    32,089Total cash, cash equivalents and marketable securities
    
    $
    224,131
    
    
    $
    341,335
   41




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Nine Months EndedJune 29,
    
    
    June 30,(in thousands)
    
    2007
    
    
    2006Net cash used in operating activities
    
    $
    (17,948
    )
    
    $
    (54,263
    )Net cash provided by (used in) investing activities
    
    
    135,518
    
    
    
    (7,639
    )Net cash (used in) provided by financing activities
    
    
    (185,034
    )
    
    
    84,659Net (decrease) increase in cash and cash equivalents
    
    $
    (67,464
    )
    
    $
    22,757
   42




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Payments due by periodLess than 1
    
    
    
    
    
    
    
    
    
    
    More than 5(in thousands)
    
    Total
    
    
    year
    
    
    1-3 years
    
    
    3-5 years
    
    
    yearsLong-term debt
    
    $
    525,000
    
    
    $
    43,900
    
    
    $
    
    
    
    $
    481,100
    
    
    $
    Short-term debt
    
    
    80,000
    
    
    
    80,000
    
    
    
    
    
    
    
    
    
    
    
    Interest on debt
    
    
    118,671
    
    
    
    36,038
    
    
    
    62,106
    
    
    
    20,527
    
    
    
    Operating leases
    
    
    149,341
    
    
    
    27,203
    
    
    
    38,414
    
    
    
    23,978
    
    
    
    59,746Capital leases
    
    
    190
    
    
    
    190
    
    
    
    
    
    
    
    
    
    
    
    Assigned leases
    
    
    3,354
    
    
    
    842
    
    
    
    1,282
    
    
    
    1,230
    
    
    
    Purchase commitments
    
    
    65,015
    
    
    
    43,482
    
    
    
    20,803
    
    
    
    730
    
    
    
    Capital commitments
    
    
    3,611
    
    
    
    3,611
    
    
    
    
    
    
    
    
    
    
    
    $
    945,182
    
    
    $
    235,266
    
    
    $
    122,605
    
    
    $
    527,565
    
    
    $
    59,746
  43




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Off-Balance Sheet Arrangements
    Special Purpose Entities
   44




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Recent Accounting Pronouncements
      Critical Accounting Policies
  45




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Business combinations
  Revenue recognition
   Allowance for doubtful accounts
  Inventories
  46




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Long-lived assets
   Deferred income taxes
  47




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Valuation of warrants
  Valuation of equity securities
  Stock-based compensation
    48




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Restructuring charges
  49




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
        (in thousands)
    
    Carrying Value
    
    Fair ValueCash and cash equivalents
    
    $
    158,162
    
    
    $
    158,162Marketable debt securities
    
    
    15,361
    
    
    
    15,361Marketable equity securities
    
    
    50,608
    
    
    
    50,608Mindspeed warrant
    
    
    24,339
    
    
    
    24,339Short-term debt
    
    
    80,000
    
    
    
    80,000Long-term debt: senior secured notes
    
    
    275,000
    
    
    
    280,500Long-term debt: convertible subordinated notes
    
    
    250,000
    
    
    
    216,250
  50




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ITEM 4. CONTROLS AND PROCEDURES
   51




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PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 IPO Litigation 
 Class Action Suits  Witriol v. Conexant, et al. (Witriol)
 Graden v. Conexant, et al. Gradens
 52




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Shareholder Derivative Suits Witriol Witriol
 53




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ITEM 1A. RISK FACTORS
  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.
  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 in India and China.
 54




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We operate in the highly cyclical semiconductor industry, which is subject to significant downturns
that may negatively impact our business, financial condition and results of operations.
  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;
 55




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
    
    intellectual property disputes; and
    
    the effects of competitive pricing pressures, including decreases in average selling
prices of our products.
  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, processes or technologies;
    
    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.
 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 may incur additional future losses.
  56




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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.
  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;
 57




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
    
    tax laws, including the cost of services provided and products sold between us and our
subsidiaries which are subject to review by taxing authorities; and
    
    limitations on our ability under local laws to protect our intellectual property.
    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 face a risk that capital needed for our business and to repay our debt obligations will not be
available when we need it.
   58




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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.
  59




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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.
  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.
    60




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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, increased expenses and loss of design wins to our competitors.
  If we are not successful in protecting our intellectual property rights, it may harm our ability to
compete.
  61




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
    
    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.
  Our success depends, in part, on our ability to effect suitable investments, alliances and
acquisitions.
   
    
    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.
  We have significant goodwill and intangible assets, and future impairment of our goodwill and
intangible assets could have a material negative impact on our financial condition and results of
operations.
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We may be liable for penalties under environmental laws, rules and regulations, which could
adversely impact our business.
   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.
  63




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
    
    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.
   64




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ITEM 6. EXHIBITS
 Exhibit No.
    
    Description10.1
    
    Employment agreement dated June 21, 2007, between the Company and Daniel A. Artusi.10.2
    
    Form of Restricted Stock Unit Award Agreement under the Conexant Systems, Inc.
2004 New-Hire Equity Incentive Plan.10.3
    
    Schedule identifying agreements substantially similar to the Form of Indemnity
Agreement constituting Exhibit 10-q-1 to the Companys Annual Report on Form 10-K
for the year ended September 30, 2004, entered into between the Company and the
directors and certain executives of the Company.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.
 65




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SIGNATURE
  CONEXANT SYSTEMS, INC.
(Registrant)Date: August 6, 2007
    By
    /s/ J. Scott BlouinJ. Scott BlouinSenior Vice President and Chief Financial Officer
(principal financial officer) 66




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EXHIBIT INDEX
 Exhibit No.
    
    Description10.1
    
    Employment agreement dated June 21, 2007, between the Company and Daniel A. Artusi.10.2
    
    Form of Restricted Stock Unit Award Agreement under the Conexant Systems, Inc.
2004 New-Hire Equity Incentive Plan.10.3
    
    Schedule identifying agreements substantially similar to the Form of Indemnity
Agreement constituting Exhibit 10-q-1 to the Companys Annual Report on Form 10-K
for the year ended September 30, 2004, entered into between the Company and the
directors and certain executives of the Company.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.
 67