##### 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 30, 2005*
 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
    
    25-1799439(State of incorporation)
    
    (I.R.S. Employer Identification No.)
 4000 MacArthur Boulevard
Newport Beach, California 92660-3095
 (949) 483-4600
 þ o
 þ o
   *
    
    For presentation purposes of this Form 10-Q, references made to the June 30, 2005 period
relate to the actual second fiscal quarter ended July 1, 2005.




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CAUTIONARY STATEMENT
    2




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CONEXANT SYSTEMS, INC.
 INDEX
 PAGEPART I. FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited):Consolidated Condensed Balance Sheets  June 30, 2005 and September 30, 2004
    
    
    4Consolidated Condensed Statements of Operations  Three and Nine Months Ended
June 30, 2005 and 2004
    
    
    5Consolidated Condensed Statements of Cash Flows  Nine Months Ended June 30,
2005 and 2004
    
    
    6Notes to Consolidated Condensed Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    26Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    49Item 4. Controls and Procedures
    
    
    51PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    52Item 6. Exhibits
    

    
    53Signature
    
    
    54EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  3




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 CONEXANT SYSTEMS, INC.
 
 Consolidated Condensed Balance Sheets
 (unaudited, in thousands, except per share amounts)
 June 30,
    
    September 30,2005
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    160,496
    
    
    $
    139,031Short-term investments
    
    
    153,286
    
    
    
    163,040Receivables, net of allowance of $3,955 and $5,974 at
June 30, 2005 and September 30, 2004, respectively
    
    
    82,345
    
    
    
    185,037Inventories
    
    
    103,491
    
    
    
    194,754Mindspeed warrant-current portion
    
    
    
    
    
    
    3,599Other current assets
    
    
    19,745
    
    
    
    20,768Total current assets
    
    
    519,363
    
    
    
    706,229Property, plant and equipment, net
    
    
    50,333
    
    
    
    55,741Goodwill
    
    
    718,335
    
    
    
    708,544Intangible assets, net
    
    
    114,628
    
    
    
    135,241Mindspeed warrant
    
    
    11,242
    
    
    
    23,000Marketable securities
    
    
    72,024
    
    
    
    137,604Other assets
    
    
    105,871
    
    
    
    114,163Total assets
    
    $
    1,591,796
    
    
    $
    1,880,522LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    94,655
    
    
    $
    141,533Accrued compensation and benefits
    
    
    38,149
    
    
    
    40,423Restructuring and reorganization liabilities
    
    
    25,278
    
    
    
    22,427Other current liabilities
    
    
    58,329
    
    
    
    67,044Current portion of convertible subordinated notes
    
    
    196,825
    
    
    
    Total current liabilities
    
    
    413,236
    
    
    
    271,427Convertible subordinated notes, net of current portion
    
    
    515,000
    
    
    
    711,825Other liabilities
    
    
    97,653
    
    
    
    68,883Total liabilities
    
    
    1,025,889
    
    
    
    1,052,135Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Preferred and junior preferred stock
    
    
    
    
    
    
    Common stock, $0.01 par value: 1,000,000 shares
authorized; 472,471 and 469,441 shares issued, and
471,288 shares and 468,257 shares outstanding at
June 30, 2005 and September 30, 2004,
respectively
    
    
    4,725
    
    
    
    4,694Treasury stock: 1,184 shares at cost
    
    
    (5,584
    )
    
    
    (5,584
    )Additional paid-in capital
    
    
    4,654,913
    
    
    
    4,648,325Accumulated deficit
    
    
    (4,103,247
    )
    
    
    (3,877,176
    )Accumulated other comprehensive income
    
    
    30,945
    
    
    
    82,551Notes receivable from stock sales
    
    
    (336
    )
    
    
    (576
    )Unearned compensation
    
    
    (15,509
    )
    
    
    (23,847
    )Total shareholders equity
    
    
    565,907
    
    
    
    828,387Total liabilities and shareholders equity
    
    $
    1,591,796
    
    
    $
    1,880,522
  4




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CONEXANT SYSTEMS, INC.
 
 Consolidated Condensed Statements of Operations
 (unaudited, in thousands, except per share amounts)
 Three months ended
    
    Nine months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net revenues
    
    $
    197,464
    
    
    $
    267,617
    
    
    $
    507,823
    
    
    $
    688,731Cost of goods sold
    
    
    122,430
    
    
    
    155,136
    
    
    
    365,661
    
    
    
    395,448Gross margin
    
    
    75,034
    
    
    
    112,481
    
    
    
    142,162
    
    
    
    293,283Operating expenses:Research and development (1)
    
    
    66,282
    
    
    
    74,317
    
    
    
    209,362
    
    
    
    167,205Selling, general and administrative (1)
    
    
    31,081
    
    
    
    36,371
    
    
    
    89,449
    
    
    
    89,782Amortization of intangible assets
    
    
    7,969
    
    
    
    7,956
    
    
    
    24,402
    
    
    
    12,564In-process research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    160,818Special charges
    
    
    8,409
    
    
    
    8,294
    
    
    
    41,262
    
    
    
    14,413Total operating expenses
    
    
    113,741
    
    
    
    126,938
    
    
    
    364,475
    
    
    
    444,782Operating loss
    
    
    (38,707
    )
    
    
    (14,457
    )
    
    
    (222,313
    )
    
    
    (151,499
    )Interest expense
    
    
    8,396
    
    
    
    8,373
    
    
    
    25,290
    
    
    
    22,322Other (income) expense, net
    
    
    (15,610
    )
    
    
    47,935
    
    
    
    (23,367
    )
    
    
    (1,031
    )Loss before income taxes
    
    
    (31,493
    )
    
    
    (70,765
    )
    
    
    (224,236
    )
    
    
    (172,790
    )Provision for income taxes
    
    
    673
    
    
    
    661
    
    
    
    1,835
    
    
    
    1,368Net loss
    
    $
    (32,166
    )
    
    $
    (71,426
    )
    
    $
    (226,071
    )
    
    $
    (174,158
    )Net loss per share  basic and diluted
    
    $
    (0.07
    )
    
    $
    (0.15
    )
    
    $
    (0.48
    )
    
    $
    (0.48
    )Number of shares used in per share
computation
    
    
    471,247
    
    
    
    463,804
    
    
    
    469,935
    
    
    
    363,654
 
 (1)
    
    Non-cash employee stock compensation is included in the above captions as follows: Three months ended
    
    Nine months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Research and development
    
    $
    2,275
    
    
    $
    2,237
    
    
    $
    6,795
    
    
    $
    3,131Selling, general and administrative
    
    
    744
    
    
    
    743
    
    
    
    2,232
    
    
    
    1,029
  5




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CONEXANT SYSTEMS, INC.
 
 Consolidated Condensed Statements of Cash Flows
 (unaudited, in thousands)
 Nine months ended June 30,2005
    
    2004Cash flows from operating activities:Net loss
    
    $
    (226,071
    )
    
    $
    (174,158
    )Adjustments to reconcile net loss to net cash provided by
(used in) operating activities, net of effects of
acquisitions:Depreciation
    
    
    14,054
    
    
    
    11,337Amortization of intangible assets
    
    
    24,402
    
    
    
    12,564In-process research and development
    
    
    
    
    
    
    160,818Reduction of provision for bad debt
    
    
    (1,543
    )
    
    
    Inventory provisions
    
    
    50,150
    
    
    
    6,046Decrease in fair value of Skyworks note and Mindspeed
warrant
    
    
    14,804
    
    
    
    44,671Equity in losses (earnings) of equity method investees
    
    
    8,587
    
    
    
    (12,750
    )Gain on sale of equity securities, investments and
other assets
    
    
    (42,310
    )
    
    
    (27,017
    )Stock compensation, option modification charges and
other
    
    
    9,027
    
    
    
    6,268Other non-cash items, net
    
    
    (299
    )
    
    
    6,200Changes in assets and liabilities:Receivables
    
    
    104,386
    
    
    
    (42,174
    )Inventories
    
    
    43,324
    
    
    
    (18,631
    )Accounts payable
    
    
    (47,535
    )
    
    
    30,131Agere patent litigation settlement
    
    
    (8,000
    )
    
    
    Special charges and other restructuring
related items, net of $45.5 million and $10.9
million of payments, respectively
    
    
    (4,241
    )
    
    
    3,542Accrued expenses and other current liabilities
    
    
    7,947
    
    
    
    5,400Other
    
    
    (5,348
    )
    
    
    (10,589
    )Net cash provided by (used in) operating activities
    
    
    (58,666
    )
    
    
    1,658Cash flows from investing activities:Cash paid for acquisitions, net of cash acquired
    
    
    (18,817
    )
    
    
    24,752Sales of equity securities, investments and other assets
    
    
    44,360
    
    
    
    31,580Purchases of marketable securities
    
    
    (45,244
    )
    
    
    (67,816
    )Sales and maturities of other marketable securities
    
    
    68,831
    
    
    
    38,384Net proceeds from purchase and sale-leaseback and other
    
    
    49,071
    
    
    
    Capital expenditures
    
    
    (16,426
    )
    
    
    (13,922
    )Payment of merger costs
    
    
    
    
    
    
    (29,764
    )Payment of deferred purchase consideration
    
    
    
    
    
    
    (4,000
    )Investments in businesses
    
    
    (2,580
    )
    
    
    (2,619
    )Net cash provided by (used in) investing activities
    
    
    79,195
    
    
    
    (23,405
    )Cash flows from financing activities:Proceeds from exercise of stock options
    
    
    740
    
    
    
    24,110Repayment of notes receivable from stock sales
    
    
    196
    
    
    
    Net cash provided by financing activities
    
    
    936
    
    
    
    24,110Net increase in cash and cash equivalents
    
    
    21,465
    
    
    
    2,363Cash and cash equivalents at beginning of period
    
    
    139,031
    
    
    
    76,186Cash and cash equivalents at end of period
    
    $
    160,496
    
    
    $
    78,549
  6




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CONEXANT SYSTEMS, INC.
 
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
 1. Basis of Presentation and Significant Accounting Policies
   Interim Reporting 
 Fiscal Periods 
 Supplemental Cash Flow Information
 Revenue Recognition
  Income (Loss) Per Share
 7




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CONEXANT SYSTEMS, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
  Three months ended
    
    Nine months ended(weighted-average number of shares, in thousands)
    
    June 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Stock options and warrants (under the treasury stock method)
    
    
    479
    
    
    
    21,734
    
    
    
    1,284
    
    
    
    24,2394.25% Convertible Subordinated Notes due 2006
    
    
    7,364
    
    
    
    7,364
    
    
    
    7,364
    
    
    
    7,3645.25% Convertible Subordinated Notes due 2006
    
    
    5,840
    
    
    
    5,840
    
    
    
    5,840
    
    
    
    2,6954.00% Convertible Subordinated Notes due 2007
    
    
    12,137
    
    
    
    12,137
    
    
    
    12,137
    
    
    
    12,137Restricted stock
    
    
    5
    
    
    
    10
    
    
    
    6
    
    
    
    15
 Stock-Based Compensation
  Three months ended
    
    Nine months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net loss, as reported
    
    $
    (32,166
    )
    
    $
    (71,426
    )
    
    $
    (226,071
    )
    
    $
    (174,158
    )Add: expense determined
under fair value accounting
included in net loss, as
reported
    
    
    3,019
    
    
    
    2,980
    
    
    
    9,027
    
    
    
    4,160Deduct: total expense
determined under fair value
accounting for all
awards
    
    
    (14,952
    )
    
    
    (15,946
    )
    
    
    (49,494
    )
    
    
    (38,505
    )Pro forma net loss
    
    $
    (44,099
    )
    
    $
    (84,392
    )
    
    $
    (266,538
    )
    
    $
    (208,503
    )Net loss per share  basic
and diluted, as reported
    
    $
    (0.07
    )
    
    $
    (0.15
    )
    
    $
    (0.48
    )
    
    $
    (0.48
    )Pro forma net loss per
share  basic and diluted
    
    $
    (0.09
    )
    
    $
    (0.18
    )
    
    $
    (0.57
    )
    
    $
    (0.48
    )
  Three months ended
    
    Nine months endedMarch 31,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Risk-free interest rate
    
    
    3.77
    %
    
    
    3.93
    %
    
    
    3.85
    %
    
    
    3.33
    %Expected volatility
    
    
    86
    %
    
    
    97
    %
    
    
    86
    %
    
    
    97
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expected life (years)
    
    
    5.0
    
    
    
    4.5
    
    
    
    4.9
    
    
    
    4.1Weighted-average fair value
of options granted
    
    $
    1.02
    
    
    $
    3.63
    
    
    $
    1.03
    
    
    $
    5.04
  8




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CONEXANT SYSTEMS, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
   Shipping and Handling 
 Recent Accounting Pronouncements 
 Cash, Cash Equivalents and Investments  Marketable Securities 
   June 30,
    
    September 30,2005
    
    2004Cash and cash equivalents
    
    $
    160,496
    
    
    $
    139,031Equity securities- Skyworks Solutions, Inc. (6.2 million shares at June 30, 2005 and September 30,
2004)
    
    
    46,248
    
    
    
    61,767Equity securities- SiRF Technology Holdings, Inc.
(2.8 million and 5.9 million shares at June 30, 2005
and September 30, 2004, respectively)
    
    
    48,977
    
    
    
    87,509Other short-term marketable securities (primarily
mutual funds, domestic government agency securities and corporate debt securities)
    
    
    58,061
    
    
    
    13,764Subtotal- short-term investments
    
    
    153,286
    
    
    
    163,040Long-term marketable securities (primarily domestic
government agency securities and corporate debt securities)
    
    
    72,024
    
    
    
    137,604Total cash, cash equivalents and marketable securities
    
    $
    385,806
    
    
    $
    439,675
 9




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CONEXANT SYSTEMS, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
   2. Acquisitions
 Fiscal 2005
 Acquisition of Paxonet Communications, Inc.
     Fiscal 2004
 Acquisition of Amphion Semiconductor
   10




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CONEXANT SYSTEMS, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
   Merger with GlobespanVirata, Inc.
    11




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CONEXANT SYSTEMS, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
 3. Supplemental Financial Statement Data
 Marketable Securities
  Gross
    
    GrossUnrealized
    
    UnrealizedAmortized
    
    Holding
    
    Holding
    
    FairShort-term investments (in thousands):
    
    Cost
    
    Gains
    
    Losses
    
    ValueJune 30, 2005:Corporate debt securities
    
    $
    24,015
    
    
    $
    
    
    
    $
    (3
    )
    
    $
    24,012Domestic government agency securities
    
    
    34,051
    
    
    
    
    
    
    
    (2
    )
    
    
    34,049Equity securities
    
    
    54,459
    
    
    
    47,042
    
    
    
    (6,276
    )
    
    
    95,225$
    112,525
    
    
    $
    47,042
    
    
    $
    (6,281
    )
    
    $
    153,286September 30, 2004:Mutual funds
    
    $
    10,837
    
    
    $
    
    
    
    $
    (125
    )
    
    $
    10,712Corporate debt securities
    
    
    2,274
    
    
    
    
    
    
    
    (3
    )
    
    
    2,271Equity securities
    
    
    56,524
    
    
    
    93,533
    
    
    
    
    
    
    
    150,057$
    69,635
    
    
    $
    93,533
    
    
    $
    (128
    )
    
    $
    163,040
   Gross Unrealized
    
    Gross UnrealizedAmortized
    
    Holding
    
    Holding
    
    FairLong-term investments (in thousands):
    
    Cost
    
    Gains
    
    Losses
    
    ValueJune 30, 2005:Domestic government agency securities
    
    $
    41,974
    
    
    $
    
    
    
    $
    (232
    )
    
    $
    41,742Corporate debt securities
    
    
    30,564
    
    
    
    1
    
    
    
    (283
    )
    
    
    30,282$
    72,538
    
    
    $
    1
    
    
    $
    (515
    )
    
    $
    72,024September 30, 2004:Domestic government agency securities
    
    $
    105,956
    
    
    $
    
    
    
    $
    (800
    )
    
    $
    105,156Corporate debt securities
    
    
    32,595
    
    
    
    
    
    
    
    (147
    )
    
    
    32,448$
    138,551
    
    
    $
    
    
    
    $
    (947
    )
    
    $
    137,604
  12




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CONEXANT SYSTEMS, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
 Inventories
  June 30,
    
    September 30,2005
    
    2004Work-in-process
    
    $
    62,000
    
    
    $
    99,226Finished goods.
    
    
    41,491
    
    
    
    95,528$
    103,491
    
    
    $
    194,754
  Three months ended
    
    Nine months endedJune 30, 2005
    
    June 30, 2005E&O reserves, beginning of period
    
    $
    53,302
    
    
    $
    23,319Additions
    
    
    2,131
    
    
    
    31,296Release upon sales of product
    
    
    (1,298
    )
    
    
    (2,299
    )Scrap
    
    
    (3,460
    )
    
    
    (5,502
    )Standards adjustments and other
    
    
    (864
    )
    
    
    2,997E&O reserves, end of period
    
    $
    49,811
    
    
    $
    49,811
    Three months ended
    
    Nine months endedJune 30, 2005
    
    June 30, 2005LCM reserves, beginning of period
    
    $
    11,093
    
    
    $
    Additions
    
    
    
    
    
    
    18,854Release upon sales of product
    
    
    (1,488
    )
    
    
    (5,370
    )Scrap
    
    
    
    
    
    
    Standards adjustments and other
    
    
    (2,588
    )
    
    
    (6,467
    )LCM reserves, end of period
    
    $
    7,017
    
    
    $
    7,017
 13




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##### Table of Contents



CONEXANT SYSTEMS, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
 Goodwill
  Goodwill, September 30, 2004
    
    $
    708,544Acquisitions
    
    
    16,097Adjustments to prior purchase price allocation (1)
    
    
    (6,306
    )Goodwill, June 30, 2005
    
    $
    718,335
 
 (1)
    
    In the Merger, the Company acquired a reserve for income tax contingencies for
foreign income tax matters which arose due to items recorded in the income tax returns of the
former GlobespanVirata subsidiaries. In the quarter ended December 31, 2004, a portion of this
income tax contingency was settled with the taxing authorities, and as a result, the amount of the
liability in excess of the settlement amount, or $5.4 million, was reduced with a corresponding
reduction to goodwill. In addition, in the quarter ended March 31, 2005, as a result of subsequent
decisions on the consolidation of facilities, the Company reduced certain restructuring and other
facilities reserves established at the time of the Merger by a net of $0.9 million. A
corresponding reduction was made to goodwill. Intangible Assets
  June 30, 2005
    
    September 30, 2004Gross
    
    Accumulated
    
    
    
    
    
    Gross
    
    AccumulatedAsset
    
    Amortization
    
    Net
    
    Asset
    
    Amortization
    
    NetDeveloped technology
    
    $
    146,146
    
    
    $
    (47,033
    )
    
    $
    99,113
    
    
    $
    145,946
    
    
    $
    (25,359
    )
    
    $
    120,587Customer base
    
    
    4,660
    
    
    
    (1,549
    )
    
    
    3,111
    
    
    
    2,050
    
    
    
    (847
    )
    
    
    1,203Other intangible assets
    
    
    21,888
    
    
    
    (9,484
    )
    
    
    12,404
    
    
    
    20,908
    
    
    
    (7,457
    )
    
    
    13,451$
    172,694
    
    
    $
    (58,066
    )
    
    $
    114,628
    
    
    $
    168,904
    
    
    $
    (33,663
    )
    
    $
    135,241
  Remainder of2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    ThereafterAmortization expense
    
    $
    7,918
    
    
    $
    30,701
    
    
    $
    29,801
    
    
    $
    29,334
    
    
    $
    13,831
    
    
    $
    3,043
 Mindspeed Warrant
   14




---



##### Table of Contents



CONEXANT SYSTEMS, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
 Convertible Subordinated Notes
  4.00% Convertible Subordinated Notes due February 2007
with a conversion price of $42.43
    
    $
    515,0004.25% Convertible Subordinated Notes due May 2006 with a
conversion price of $9.08
    
    
    66,8255.25% Convertible Subordinated Notes due May 2006 with a
conversion price of $22.26
    
    
    130,000Total
    
    
    711,825Less, current portion of convertible subordinated notes
    
    
    (196,825
    )Long- term portion of convertible subordinated notes
    
    $
    515,000
 Purchase and Sale-Leaseback
   Other (Income) Expense, Net
  Three months ended
    
    Nine months endedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Investment and interest income
    
    $
    (2,182
    )
    
    $
    (1,404
    )
    
    $
    (3,956
    )
    
    $
    (6,703
    )Decrease in fair value of the conversion right under the
Skyworks 15% convertible senior subordinated notes
    
    
    
    
    
    
    17,837
    
    
    
    
    
    
    
    6,292Decrease in fair value of the Mindspeed warrant
    
    
    16,085
    
    
    
    60,924
    
    
    
    14,804
    
    
    
    38,379Equity in (earnings) losses of equity method investees
    
    
    2,127
    
    
    
    (1,934
    )
    
    
    8,587
    
    
    
    (12,750
    )Gains on sales of equity securities, investments and assets
    
    
    (31,198
    )
    
    
    (27,107
    )
    
    
    (42,310
    )
    
    
    (27,017
    )Other
    
    
    (442
    )
    
    
    (471
    )
    
    
    (492
    )
    
    
    768Other (income) expense, net
    
    $
    (15,610
    )
    
    $
    47,935
    
    
    $
    (23,367
    )
    
    $
    (1,031
    )
   15




---



##### Table of Contents



CONEXANT SYSTEMS, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
 4. Skyworks Notes
   5. Commitments and Contingencies
 Legal Matters
  IPO Litigation .
 16




---



##### Table of Contents



CONEXANT SYSTEMS, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
 Texas Instruments, Inc.
 Class Action Suits. Witriol
v. Conexant, et al.,
 Graden v. Conexant, et al.
 Shareholder Derivative Suits. Witriol v. Conexant, et al. Witriol
 Other
  17




---



##### Table of Contents



CONEXANT SYSTEMS, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
    Fiscal Year2005 remaining 3 months
    
    $
    8,5502006
    
    
    29,3822007
    
    
    24,7322008
    
    
    20,0512009
    
    
    17,109Thereafter
    
    
    105,750Total future minimum lease payments
    
    $
    205,574
       18




---



##### Table of Contents



CONEXANT SYSTEMS, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
 6. Comprehensive Loss
  Three months ended June 30,
    
    Nine months ended June 30,2005
    
    2004
    
    2005
    
    2004Net loss
    
    $
    (32,166
    )
    
    $
    (71,426
    )
    
    $
    (226,071
    )
    
    $
    (174,158
    )Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    (481
    )
    
    
    (556
    )
    
    
    398
    
    
    
    346Change in unrealized gains on available-for-sale securities
    
    
    29,387
    
    
    
    65,762
    
    
    
    (13,964
    )
    
    
    67,441Reclassification adjustment for realized gains on
available-for-sale securities included in net loss
    
    
    (26,987
    )
    
    
    
    
    
    
    (38,247
    )
    
    
    Minimum pension liability adjustments
    
    
    69
    
    
    
    87
    
    
    
    207
    
    
    
    260Effect of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    172Other comprehensive income (loss)
    
    
    1,988
    
    
    
    65,293
    
    
    
    (51,606
    )
    
    
    68,219Comprehensive loss
    
    $
    (30,178
    )
    
    $
    (6,133
    )
    
    $
    (277,677
    )
    
    $
    (105,939
    )
  June 30,
    
    September 30,2005
    
    2004Foreign currency translation adjustments
    
    $
    (2,808
    )
    
    $
    (3,206
    )Unrealized gains on available-for-sale securities
    
    
    40,247
    
    
    
    92,458Minimum pension liability adjustments
    
    
    (6,494
    )
    
    
    (6,701
    )Accumulated other comprehensive income
    
    $
    30,945
    
    
    $
    82,551
 7. Special Charges
  Three months ended June 30,
    
    Nine months ended June 30,2005
    
    2004
    
    2005
    
    2004Asset impairments
    
    $
    29
    
    
    $
    2,508
    
    
    $
    3,492
    
    
    $
    4,534Restructuring charges
    
    
    6,731
    
    
    
    3,627
    
    
    
    24,470
    
    
    
    4,075Integration charges
    
    
    1,649
    
    
    
    1,565
    
    
    
    6,760
    
    
    
    4,168Other
    
    
    
    
    
    
    594
    
    
    
    6,540
    
    
    
    1,636$
    8,409
    
    
    $
    8,294
    
    
    $
    41,262
    
    
    $
    14,413
 Asset Impairments
   Restructuring Charges
  19




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##### Table of Contents



CONEXANT SYSTEMS, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
  2005 Restructuring Action
  Workforce
    
    Facilityreductions
    
    and other
    
    TotalCharged to costs and expenses
    
    $
    6,073
    
    
    $
    4,006
    
    
    $
    10,079Non-cash items
    
    
    (22
    )
    
    
    979
    
    
    
    957Cash payments
    
    
    (3,333
    )
    
    
    
    
    
    
    (3,333
    )Restructuring balance, December 31, 2004
    
    
    2,718
    
    
    
    4,985
    
    
    
    7,703Charged to costs and expenses
    
    
    5,936
    
    
    
    74
    
    
    
    6,010Cash payments
    
    
    (2,819
    )
    
    
    (168
    )
    
    
    (2,987
    )Restructuring balance, March 31, 2005
    
    
    5,835
    
    
    
    4,891
    
    
    
    10,726Charged to costs and expenses
    
    
    5,837
    
    
    
    864
    
    
    
    6,701Non-cash items
    
    
    (23
    )
    
    
    
    
    
    
    (23
    )Cash payments
    
    
    (3,937
    )
    
    
    (203
    )
    
    
    (4,140
    )Restructuring balance, June 30, 2005
    
    $
    7,712
    
    
    $
    5,552
    
    
    $
    13,264
 2004 Restructuring Actions
  20




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##### Table of Contents



CONEXANT SYSTEMS, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
   Workforce
    
    Facilityreductions
    
    and other
    
    TotalRecorded in purchase price allocation
    
    $
    1,300
    
    
    $
    13,509
    
    
    $
    14,809Adjusted to purchase price allocation
    
    
    210
    
    
    
    (3,554
    )
    
    
    (3,344
    )Cash payments
    
    
    (536
    )
    
    
    (788
    )
    
    
    (1,324
    )Restructuring balance, September 30, 2004
    
    
    974
    
    
    
    9,167
    
    
    
    10,141Cash payments
    
    
    (277
    )
    
    
    (273
    )
    
    
    (550
    )Restructuring balance, December 31, 2004
    
    
    697
    
    
    
    8,894
    
    
    
    9,591Adjusted to purchase price allocation
    
    
    
    
    
    
    (1,226
    )
    
    
    (1,226
    )Cash payments
    
    
    (444
    )
    
    
    (241
    )
    
    
    (685
    )Restructuring balance, March 31, 2005
    
    
    253
    
    
    
    7,427
    
    
    
    7,680Cash payments
    
    
    (201
    )
    
    
    (166
    )
    
    
    (367
    )Restructuring balance, June 30, 2005
    
    $
    52
    
    
    $
    7,261
    
    
    $
    7,313
   21




---



##### Table of Contents



CONEXANT SYSTEMS, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
  Workforce
    
    Facilityreductions
    
    and other
    
    TotalCharged to costs and expenses
    
    $
    7,066
    
    
    $
    1,877
    
    
    $
    8,943Cash payments
    
    
    (2,368
    )
    
    
    (281
    )
    
    
    (2,649
    )Restructuring balance, September 30, 2004
    
    
    4,698
    
    
    
    1,596
    
    
    
    6,294Charged to costs and expenses
    
    
    1,892
    
    
    
    
    
    
    
    1,892Cash payments
    
    
    (2,034
    )
    
    
    (197
    )
    
    
    (2,231
    )Restructuring balance, December 31, 2004
    
    
    4,556
    
    
    
    1,399
    
    
    
    5,955Charged to costs and expenses
    
    
    (350
    )
    
    
    108
    
    
    
    (242
    )Cash payments
    
    
    (2,805
    )
    
    
    (235
    )
    
    
    (3,040
    )Restructuring balance, March 31, 2005
    
    
    1,401
    
    
    
    1,272
    
    
    
    2,673Charged to costs and expenses
    
    
    30
    
    
    
    
    
    
    
    30Cash payments
    
    
    (627
    )
    
    
    (205
    )
    
    
    (832
    )Restructuring balance, June 30, 2005
    
    $
    804
    
    
    $
    1,067
    
    
    $
    1,871
 2003 Corporate Restructuring Plan
  Workforce
    
    Facilityreductions
    
    and other
    
    TotalCharged to costs and expenses
    
    $
    1,181
    
    
    $
    2,830
    
    
    $
    4,011Cash payments
    
    
    (364
    )
    
    
    
    
    
    
    (364
    )Restructuring balance, September 30, 2003
    
    
    817
    
    
    
    2,830
    
    
    
    3,647Charged to costs and expenses
    
    
    350
    
    
    
    98
    
    
    
    448Expense reversal
    
    
    (81
    )
    
    
    
    
    
    
    (81
    )Cash payments
    
    
    (1,086
    )
    
    
    (933
    )
    
    
    (2,019
    )Restructuring balance, September 30, 2004
    
    
    
    
    
    
    1,995
    
    
    
    1,995Cash payments
    
    
    
    
    
    
    (38
    )
    
    
    (38
    )Restructuring balance, December 31, 2004
    
    
    
    
    
    
    1,957
    
    
    
    1,957Cash payments
    
    
    
    
    
    
    (44
    )
    
    
    (44
    )Restructuring balance, March 31, 2005
    
    
    
    
    
    
    1,913
    
    
    
    1,913Cash payments
    
    
    
    
    
    
    (110
    )
    
    
    (110
    )Restructuring balance, June 30, 2005
    
    $
    
    
    
    $
    1,803
    
    
    $
    1,803
 2002 Corporate and Manufacturing Restructuring Plan
  22




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##### Table of Contents



CONEXANT SYSTEMS, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
   Workforce
    
    Facilityreductions
    
    and other
    
    TotalCharged to costs and expenses
    
    $
    2,437
    
    
    $
    12,519
    
    
    $
    14,956Cash payments
    
    
    (1,664
    )
    
    
    (431
    )
    
    
    (2,095
    )Restructuring balance, September 30,
2002
    
    
    773
    
    
    
    12,088
    
    
    
    12,861Charged to costs and expenses
    
    
    2,898
    
    
    
    888
    
    
    
    3,786Expense reversal
    
    
    
    
    
    
    (1,100
    )
    
    
    (1,100
    )Cash payments
    
    
    (3,173
    )
    
    
    (3,930
    )
    
    
    (7,103
    )Restructuring balance, September 30,
2003
    
    
    498
    
    
    
    7,946
    
    
    
    8,444Expense reversal
    
    
    (46
    )
    
    
    
    
    
    
    (46
    )Cash payments
    
    
    (452
    )
    
    
    (3,949
    )
    
    
    (4,401
    )Restructuring balance, September 30,
2004
    
    
    
    
    
    
    3,997
    
    
    
    3,997Cash payments
    
    
    
    
    
    
    (998
    )
    
    
    (998
    )Restructuring balance, December 31, 2004
    
    
    
    
    
    
    2,999
    
    
    
    2,999Cash payments
    
    
    
    
    
    
    (1,072
    )
    
    
    (1,072
    )Restructuring balance, March 31, 2005
    
    
    
    
    
    
    1,927
    
    
    
    1,927Cash payments
    
    
    
    
    
    
    (899
    )
    
    
    (899
    )Restructuring balance, June 30, 2005
    
    $
    
    
    
    $
    1,028
    
    
    $
    1,028
  Integration Charges
  Other
   8. Segment Information
  23




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##### Table of Contents



CONEXANT SYSTEMS, INC.
 NOTES TO CONSOLIDATED CONDENSED 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 its four
operating segments;
    
    the products sold by each of its operating segments use a similar standard manufacturing process;
    
    the products marketed by each of its operating segments are sold to similar customers; and
    
    all of its products are sold through internal sales force and common distributors.
   Three months ended
    
    Nine months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Americas
    
    $
    24,490
    
    
    $
    29,499
    
    
    $
    64,196
    
    
    $
    77,442Asia-Pacific
    
    
    160,989
    
    
    
    215,797
    
    
    
    399,046
    
    
    
    554,457Europe, Middle East and Africa
    
    
    11,985
    
    
    
    22,321
    
    
    
    44,581
    
    
    
    56,832$
    197,464
    
    
    $
    267,617
    
    
    $
    507,823
    
    
    $
    688,731
  9. Guarantees
  24




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##### Table of Contents



CONEXANT SYSTEMS, INC.
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
 10. Stock Option Exchange Program
   
 25




---



##### Table of Contents



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




---



##### Table of Contents



Results of Operations
 Net Revenues
 Three months ended
    
    Change from
    
    Change fromJune 30,
    
    March 31,
    
    June 30,
    
    March 2005
    
    June 2004(in millions)
    
    2005
    
    2005
    
    2004
    
    Quarter
    
    QuarterNet revenues
    
    $
    197.5
    
    
    $
    169.7
    
    
    $
    267.6
    
    
    
    16
    %
    
    
    (26
    )%
 Nine months endedJune 30,
    
    June 30,(in millions)
    
    2005
    
    2004
    
    ChangeNet revenues
    
    $
    507.8
    
    
    $

    688.7
    
    
    
    (26
    )%
     27




---



##### Table of Contents



Gross Margin
 Three months ended
    
    Change from
    
    Change fromJune 30,
    
    March 31,
    
    June 30,
    
    March 2005
    
    June 2004(in millions)
    
    2005
    
    2005
    
    2004
    
    Quarter
    
    QuarterGross margin
    
    $
    75.0
    
    
    $
    60.0
    
    
    $
    112.5
    
    
    
    25
    %
    
    
    (33
    )%Percent of net revenues
    
    
    38
    %
    
    
    35
    %
    
    
    42
    %
 Nine months endedJune 30,
    
    June 30,(in millions)
    
    2005
    
    2004
    
    ChangeGross margin
    
    $
    142.2
    
    
    $
    293.3
    
    
    
    (52
    )%Percent of net revenues
    
    
    28
    %
    
    
    43
    %
     28




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##### Table of Contents



Three months ended
    
    Nine months endedJune 30, 2005
    
    June 30, 2005E&O reserves, beginning of period
    
    $
    53,302
    
    
    $
    23,319Additions
    
    
    2,131
    
    
    
    31,296Release upon sales of product
    
    
    (1,298
    )
    
    
    (2,299
    )Scrap
    
    
    (3,460
    )
    
    
    (5,502
    )Standards adjustments and other
    
    
    (864
    )
    
    
    2,997E&O reserves, end of period
    
    $
    49,811
    
    
    $
    49,811
    Three months ended
    
    Nine months endedJune 30, 2005
    
    June 30, 2005LCM reserves, beginning of period
    
    $
    11,093
    
    
    $
    Additions
    
    
    
    
    
    
    18,854Release upon sales of product
    
    
    (1,488
    )
    
    
    (5,370
    )Scrap
    
    
    
    
    
    
    Standards adjustments and other
    
    
    (2,588
    )
    
    
    (6,467
    )LCM reserves, end of period
    
    $
    7,017
    
    
    $
    7,017
 29




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##### Table of Contents



Research and Development
 Three months ended
    
    Change from
    
    Change fromJune 30,
    
    March 31,
    
    June 30,
    
    March 2005
    
    June 2004(in millions)
    
    2005
    
    2005
    
    2004
    
    Quarter
    
    QuarterResearch and development
    
    $
    66.3
    
    
    $
    70.5
    
    
    $
    74.3
    
    
    
    (6
    )%
    
    
    (11
    )%Percent of net revenues
    
    
    34
    %
    
    
    42
    %
    
    
    28
    %
 Nine months endedJune 30,
    
    June 30,(in millions)
    
    2005

    
    2004
    
    ChangeResearch and development
    
    $
    209.4
    
    
    $
    167.2
    
    
    
    25
    %Percent of net revenues
    
    
    41
    %
    
    
    24
    %
     30




---



##### Table of Contents



Selling, General and Administrative
 Three months ended
    
    Change from
    
    Change fromJune 30,
    
    March 31,
    
    June 30,
    
    March 2005
    
    June 2004(in millions)
    
    2005
    
    2005
    
    2004
    
    Quarter
    
    QuarterSelling, general and administrative
    
    $
    31.1
    
    
    $
    28.4
    
    
    $
    36.4
    
    
    
    10
    %
    
    
    (15
    )%Percent of net revenues
    
    
    16
    %
    
    
    17
    %
    
    
    14
    %
 Nine months endedJune 30,
    
    June 30,(in millions)
    
    2005
    
    2004
    
    ChangeSelling, general and administrative
    
    $
    89.4
    
    
    $
    89.8
    
    
    nmPercent of net revenues
    
    
    18
    %
    
    
    13
    %
 
 nm = not meaningful     Amortization of Intangible Assets
 Three months ended June 30,(in millions)
    
    2005
    
    Change
    
    2004Amortization of intangible assets
    
    $
    8.0
    
    
    
    
    
    
    $
    8.0Percent of net revenues
    
    nm
    
    
    
    
    
    nm
 Nine months ended June 30,(in millions)
    
    2005
    
    Change
    
    2004Amortization of intangible assets
    
    $
    24.4
    
    
    nm
    
    $
    12.6Percent of net revenues
    
    nm
    
    
    
    
    
    nm
 
 nm = not meaningful  31




---



##### Table of Contents



In-Process Research and Development
 Nine months ended June 30,(in millions)
    
    2005
    
    Change
    
    2004Amortization of intangible assets
    
    $
    
    
    
    nm
    
    $
    160.8Percent of net revenues
    
    nm
    
    
    
    
    
    nm
 
 nm = not meaningful  Special Charges
  Three months ended June 30,
    
    Nine months ended June 30,(in millions)
    
    2005
    
    Change
    
    2004
    
    2005
    
    Change
    
    2004Restructuring charges
    
    $
    6.7
    
    
    nm
    
    $
    3.6
    
    
    $
    24.5
    
    
    nm
    
    $
    4.1Asset impairment charges
    
    
    0.1
    
    
    nm
    
    
    2.5
    
    
    
    3.5
    
    
    nm
    
    
    4.5Integration charges
    
    
    1.6
    
    
    nm
    
    
    1.6
    
    
    
    6.8
    
    
    nm
    
    
    4.2Other special charges
    
    
    
    
    
    nm
    
    
    0.6
    
    
    
    6.5
    
    
    nm
    
    
    1.6$
    8.4
    
    
    
    
    
    
    $
    8.3
    
    
    $
    41.3
    
    
    
    
    
    
    $
    14.4
 
 nm = not meaningful  Interest Expense
 Three months ended June 30,(in millions)
    
    2005
    
    Change
    
    2004Interest expense
    
    $
    8.4
    
    
    
    
    
    
    $
    8.4Percent of net revenues
    
    nm
    
    
    
    
    
    nm
 Nine months ended June 30,(in millions)
    
    2005
    
    Change
    
    2004Interest expense
    
    $
    25.3
    
    
    nm
    
    $
    22.3Percent of net revenues
    
    nm
    
    
    
    
    
    nm
 
 nm = not meaningful   32




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##### Table of Contents



Other (Income) Expense, Net
 Three months ended June 30,(in millions)
    
    2005
    
    Change
    
    2004Other (income) expense, net
    
    $
    (15.6
    )
    
    nm
    
    $
    47.9Percent of net revenues
    
    nm
    
    
    
    
    
    nm
 Nine months ended June 30,(in millions)
    
    2005
    
    Change
    
    2004Other (income) expense, net
    
    $
    (23.4
    )
    
    nm
    
    $
    (1.0
    )Percent of net revenues
    
    nm
    
    
    
    
    
    nm
 
 nm = not meaningful     Provision for Income Taxes
   33




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Liquidity and Capital Resources
     34




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##### Table of Contents



(in millions)
    
    June 30,
    
    September 30,2005
    
    2004Cash and cash equivalents
    
    $
    160.5
    
    
    $
    139.0Other short-term marketable securities (primarily
mutual funds, domestic government agencies and

corporate debt securities)
    
    
    58.1
    
    
    
    13.8Long-term marketable securities (primarily domestic
government agencies and corporate debt securities)
    
    
    72.0
    
    
    
    137.6Subtotal
    
    
    290.6
    
    
    
    290.4Equity securities- Skyworks Solutions, Inc. (6.2 million shares at June 30, 2005 and September 30,
2004)
    
    
    46.2
    
    
    
    61.8Equity securities- SiRF Technology Holdings, Inc.
(2.8 million shares at June 30, 2005 and 5.9 million
 shares at September 30, 2004)
    
    
    49.0
    
    
    
    87.5Subtotal Skyworks and SiRF
    
    
    95.2
    
    
    
    149.3Total cash, cash equivalents and marketable securities
    
    $
    385.8
    
    
    $
    439.7
    Payments due by periodLess than 1
    
    
    
    
    
    
    
    
    
    More than 5(in millions)
    
    Total
    
    Year
    
    1-3 years
    
    3-5 years
    
    yearsConvertible subordinated notes (1)
    
    $
    711.8
    
    
    $
    196.8
    
    
    $
    515.0
    
    
    $
    
    
    
    $
    Operating leases
    
    
    205.6
    
    
    
    30.6
    
    
    
    47.1
    
    
    
    35.0
    
    
    
    92.9Assigned leases
    
    
    8.3
    
    
    
    0.4
    
    
    
    3.4
    
    
    
    
    
    
    
    4.5Contingent consideration on acquisitions
    
    
    6.0
    
    
    
    6.0
    
    
    
    
    
    
    
    
    
    
    
    Capital commitments
    
    
    5.9
    
    
    
    5.9
    
    
    
    
    
    
    
    
    
    
    
    Employee commitments
    
    
    1.3
    
    
    
    1.3
    
    
    
    
    
    
    
    
    
    
    
    $
    938.9
    
    
    $
    241.0
    
    
    $
    565.5
    
    
    $
    35.0
    
    
    $
    97.4
 
 (1)
    
    Excludes interest. See Note 3 of Notes to Consolidated Condensed Financial Statements
for interest terms.  35




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##### Table of Contents



Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
  Critical Accounting Policies
  Business combinations
  Impairment of long-lived assets
  36




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##### Table of Contents



Deferred income taxes
  Inventories
  Allowance for doubtful accounts
  Non-marketable equity securities
  37




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Revenue recognition
   Valuation of derivative instruments
 
 Restructuring charges
  Employee benefit plans
  38




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##### Table of Contents



Stock-based compensation
  Certain Business Risks
    We have recently incurred substantial losses and we anticipate additional future losses.
   39




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##### Table of Contents



We face a risk that capital needed for our business and to repay our convertible notes will not be
available when we need it.
    We operate in the highly cyclical semiconductor industry, which is subject to significant
downturns.
   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;
 40




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##### Table of Contents




    
    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.
   We may have difficulty integrating businesses we acquire. In particular, we may be unable to
integrate successfully the operations of Conexant and GlobespanVirata and realize the full cost
savings we anticipated.
   41




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##### Table of Contents




    
    the challenge of effecting integration while carrying on an ongoing business;
    
    the necessity of coordinating geographically separate organizations;
    
    retaining and integrating personnel with diverse business backgrounds;
    
    the challenge of realizing expected operating efficiencies of combining two companies;
    
    retaining existing customers and strategic partners of each company; and
    
    implementing and maintaining consistent standards, controls, procedures, policies and information systems.
  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.
  The value of our common stock may be adversely affected by market volatility.
  
    
    our operating and financial performance and prospects;
    
    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;
 42




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##### Table of Contents




    
    changes in earnings estimates or buy/sell recommendations by analysts; and
    
    general financial, domestic, international, economic and other market conditions.
  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 sites, particularly into India, as we complete
our restructuring actions.
    We
may not be able to keep abreast of the rapid technological changes in
our markets
  
    
    rapid technological developments;
 43




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##### Table of Contents




    
    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.
  44




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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.
     45




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##### Table of Contents



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 Conexant 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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##### Table of Contents



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.
 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.
  47




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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.
  
    
    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.
 48




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##### Table of Contents



Our internal control over financial reporting may not be considered effective, which could result
in a loss of investor confidence in our financial reports and in turn have an adverse effect on our
stock price.
   
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  .
  49




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(in millions)
    
    Carrying Value
    
    Fair ValueCash and cash equivalents
    
    $
    160.5
    
    
    $
    160.5Marketable debt securities
    
    
    54.3
    
    
    
    54.3Marketable government agency securities
    
    
    75.8
    
    
    
    75.8Marketable equity securities
    
    
    95.2
    
    
    
    95.2Mindspeed warrant
    
    
    11.2
    
    
    
    11.2Current portion of long-term debt
    
    
    196.8
    
    
    
    193.3Long-term debt
    
    
    515.0
    
    
    
    476.4
  50




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ITEM 4. CONTROLS AND PROCEDURES
   51




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 IPO Litigation .
 Class Action Suits . Witriol
v. Conexant, et al
 Graden v. Conexant, et al
 Shareholder Derivative Suits. Witriol v. Conexant, et al. Witriol
 52




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##### Table of Contents



ITEM 6. EXHIBITS
  10.1
    
    Dwight W. Decker Performance Share Award Grant Letter and Terms and Conditions filed as Exhibit 10.2 to
the Companys Current Report on Form 8-K dated May 9, 2005 (File No. 000-24923), is incorporated herein
by reference.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.
 53




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##### Table of Contents



SIGNATURE
  CONEXANT SYSTEMS, INC.
(Registrant)Date: August 9, 2005
    By /s/ J. Scott BlouinJ. Scott BlouinSenior Vice President and
Chief Financial Officer
(principal financial officer) 54




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EXHIBIT INDEX
 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.
 55