##### 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 27, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number: 000-24923
 CONEXANT SYSTEMS, INC.
  Delaware
(State of incorporation)
    
    25-1799439
(I.R.S. Employer Identification No.)
 4000 MacArthur Boulevard
Newport Beach, California 92660-3095
 (949) 483-4600
 þ o
  Large accelerated filer oAccelerated filer þNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company o o þ




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##### Table of Contents



FORWARD-LOOKING STATEMENTS
  
    
    pricing pressures and other competitive factors;
    
    our ability to anticipate trends and successfully develop products for which there will
be market demand;
    
    the market acceptance and timing of our new product introductions, demand for existing
products and product quality;
    
    the cyclical nature of the semiconductor industry and the markets addressed by our
products and our customers products;
    
    continuing volatility in the technology sector and the semiconductor industry;
    
    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;
    
    our ability to develop and implement new technologies and to obtain protection for the
related intellectual property;
    
    the risk that the value of our common stock may be adversely affected by market
volatility;
    
    the Companys ability to identify and execute
acquisitions, divestitures, mergers or restructurings, as deemed
appropriate by management.
    
    the substantial losses we have incurred recently;
    
    changes in product mix and product obsolescence;
    
    changes in general economic conditions, conditions in the markets we address, and
changes in financial markets, including fluctuations in interest rates and exchange rates;
    
    the ability of our customers to manage inventory;
    
    the availability of manufacturing capacity;
    
    the risk that capital needed for our business and to repay our indebtedness will not be
available when needed;
    
    the ability of management to structure and execute on new restructuring plans;
    
    possible disruptions in commerce related to terrorist activity or armed conflict,




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##### 



CONEXANT SYSTEMS, INC.
 INDEX
 PAGEPART I. FINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial Statements (unaudited):Condensed Consolidated Balance Sheets  June 27, 2008 and September 28, 2007
    
    
    3Condensed Consolidated Statements of Operations  Three and Nine Months
Ended June 27, 2008 and June 29, 2007
    
    
    4Condensed Consolidated Statements of Cash Flows  Nine Months Ended June
27, 2008 and June 29, 2007
    
    
    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
    
    
    44Item 4.
    
    Controls and Procedures
    
    
    45PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    46Item 1A.
    
    Risk Factors
    
    
    47Item 6.
    
    Exhibits
    
    
    48Signature
    
    
    49EXHIBIT 3.1EXHIBIT 10.3EXHIBIT 10.4EXHIBIT 10.5EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
  2




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PART I. FINANCIAL INFORMATION
 
 ITEM 1.
    
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited, in thousands, except par value)
 June 27,
    
    
    September 28,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    134,626
    
    
    $
    234,147Restricted cash
    
    
    37,800
    
    
    
    8,800Receivables,
net of allowances of $961 and $1,659
    
    
    78,499
    
    
    
    80,856Inventories
    
    
    36,713
    
    
    
    42,007Other current assets
    
    
    32,560
    
    
    
    18,131Current assets held for sale
    
    
    107,833
    
    
    
    250,451Total current assets
    
    
    428,031
    
    
    
    634,392Property, plant and equipment, net
    
    
    24,749
    
    
    
    46,676Goodwill
    
    
    105,379
    
    
    
    214,635Intangible assets, net
    
    
    11,625
    
    
    
    24,597Other assets
    
    
    54,879
    
    
    
    65,669Total assets
    
    $
    624,663
    
    
    $
    985,969LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    
    
    
    $
    58,000Short-term debt
    
    
    77,177
    
    
    
    80,000Accounts payable
    
    
    61,836
    
    
    
    80,571Accrued compensation and benefits
    
    
    18,908
    
    
    
    23,191Other current liabilities
    
    
    59,890
    
    
    
    70,345Current liabilities to be assumed
    
    
    4,234
    
    
    
    3,925Total current liabilities
    
    
    222,045
    
    
    
    316,032Long-term debt
    
    
    471,400
    
    
    
    467,000Other liabilities
    
    
    63,750
    
    
    
    56,422Total liabilities
    
    
    757,195
    
    
    
    839,454Commitments and contingencies (Note 6)Shareholders (deficit) equity:Preferred and junior preferred stock
    
    
    
    
    
    
    Common stock, $0.10 par value: 100,000 shares authorized; 49,507
and 49,236 shares issued and outstanding
    
    
    4,951
    
    
    
    4,924Additional paid-in capital
    
    
    4,737,192
    
    
    
    4,721,298Accumulated deficit
    
    
    (4,880,129
    )
    
    
    (4,578,219
    )Accumulated other comprehensive income (loss)
    
    
    5,532
    
    
    
    (1,385
    )Shareholder notes receivable
    
    
    (78
    )
    
    
    (103
    )Total shareholders (deficit) equity
    
    
    (132,532
    )
    
    
    146,515Total liabilities and shareholders (deficit) equity
    
    $
    624,663
    
    
    $
    985,969
  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 27,
    
    
    June 29,
    
    
    June 27,
    
    
    June 29,2008
    
    
    2007
    
    
    2008
    
    
    2007Net revenues
    
    $
    115,594
    
    
    $
    134,252
    
    
    $
    380,045
    
    
    $
    434,643Cost of goods sold (1)
    
    
    57,186
    
    
    
    70,547
    
    
    
    177,479
    
    
    
    222,628Gross margin
    
    
    58,408
    
    
    
    63,705
    
    
    
    202,566
    
    
    
    212,015Operating expenses:Research and development (1)
    
    
    27,410
    
    
    
    42,502
    
    
    
    95,883
    
    
    
    131,151Selling, general and administrative (1)
    
    
    24,700
    
    
    
    22,297
    
    
    
    65,138
    
    
    
    68,488Amortization of intangible assets
    
    
    3,629
    
    
    
    4,613
    
    
    
    11,059
    
    
    
    16,685Asset impairments
    
    
    120,617
    
    
    
    
    
    
    
    120,747
    
    
    
    155,000Special charges
    
    
    8,425
    
    
    
    1,141
    
    
    
    15,238
    
    
    
    8,510Total operating expenses
    
    
    184,781
    
    
    
    70,553
    
    
    
    308,065
    
    
    
    379,834Operating loss
    
    
    (126,373
    )
    
    
    (6,848
    )
    
    
    (105,499
    )
    
    
    (167,819
    )Interest expense
    
    
    (6,669
    )
    
    
    (9,195
    )
    
    
    (24,746
    )
    
    
    (31,578
    )Other income (expense), net
    
    
    9,036
    
    
    
    3,656
    
    
    
    (457
    )
    
    
    26,377Loss from continuing operations before income
taxes and gain (loss) on equity method investments
    
    
    (124,006
    )
    
    
    (12,387
    )
    
    
    (130,702
    )
    
    
    (173,020
    )Provision for income taxes
    
    
    2,466
    
    
    
    530
    
    
    
    4,045
    
    
    
    1,748Loss from continuing operations before gain on
equity method investments
    
    
    (126,472
    )
    
    
    (12,917
    )
    
    
    (134,747
    )
    
    
    (174,768
    )Gain on equity method investments
    
    
    53
    
    
    
    179
    
    
    
    3,612
    
    
    
    44,194Loss from continuing operations
    
    
    (126,419
    )
    
    
    (12,738
    )
    
    
    (131,135
    )
    
    
    (130,574
    )Loss from discontinued operations, net of tax
    
    
    (23,452
    )
    
    
    (22,489
    )
    
    
    (169,958
    )
    
    
    (37,123
    )Net loss
    
    $
    (149,871
    )
    
    $
    (35,227
    )
    
    $
    (301,093
    )
    
    $
    (167,697
    )Loss per share from continuing operations  basic
and diluted
    
    $
    (2.56
    )
    
    $
    (0.26
    )
    
    $
    (2.66
    )
    
    $
    (2.67
    )Loss per share from discontinued operations 
basic and diluted
    
    $
    (0.47
    )
    
    $
    (0.46
    )
    
    $
    (3.45
    )
    
    $
    (0.76
    )Net loss per share  basic and diluted
    
    $
    (3.03
    )
    
    $
    (0.72
    )
    
    $
    (6.11
    )
    
    $
    (3.43
    )Shares used in basic and diluted per-share
computations
    
    
    49,450
    
    
    
    49,056
    
    
    
    49,333
    
    
    
    48,861
 
 (1)
    
    These captions include non-cash employee stock-based compensation expense as follows (see Note 7): Three Months Ended
    
    Nine Months EndedJune 27,
    
    June 29,
    
    June 27,
    
    June 29,2008
    
    2007
    
    2008
    
    2007Cost of goods sold
    
    $
    42
    
    
    $
    143
    
    
    $
    237
    
    
    $
    361Research and development
    
    
    939
    
    
    
    2,446
    
    
    
    3,463
    
    
    
    6,457Selling, general and administrative
    
    
    5,215
    
    
    
    1,622
    
    
    
    8,383
    
    
    
    5,017
  4




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
 Nine Months EndedJune 27,
    
    
    June 29,2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (301,093
    )
    
    $
    (167,697
    )Adjustments to reconcile net loss to net cash used in operating
activities, net of effects of acquisitions:Depreciation
    
    
    16,779
    
    
    
    18,441Amortization of intangible assets
    
    
    11,690
    
    
    
    17,315Asset impairments
    
    
    263,513
    
    
    
    158,415Reversal of provision for bad debts, net
    
    
    (698
    )
    
    
    (219
    )Charges for (reversal of) inventory provisions, net
    
    
    6,225
    
    
    
    (4,203
    )Stock-based compensation
    
    
    13,753
    
    
    
    14,246Loss on termination of defined benefit plan
    
    
    6,294
    
    
    
    Decrease (increase) in fair value of derivative instruments
    
    
    12,780
    
    
    
    (7,868
    )Gains on equity method investments
    
    
    (3,612
    )
    
    
    (44,194
    )Gains on sales of equity securities and other assets
    
    
    
    
    
    
    (6,291
    )Other items, net
    
    
    869
    
    
    
    (858
    )Changes in assets and liabilities:Receivables
    
    
    3,058
    
    
    
    28,123Inventories
    
    
    4,406
    
    
    
    39,584Accounts payable
    
    
    (18,831
    )
    
    
    (44,346
    )Accrued expenses and other current liabilities
    
    
    (13,627
    )
    
    
    (11,129
    )Other, net
    
    
    (16,043
    )
    
    
    (7,267
    )Net cash used in operating activities
    
    
    (14,537
    )
    
    
    (17,948
    )Cash flows from investing activities:Proceeds from sales of equity securities and other assets
    
    
    
    
    
    
    105,923Proceeds from sales and maturities of marketable securities
    
    
    
    
    
    
    84,819Purchases of marketable securities
    
    
    
    
    
    
    (26,462
    )Proceeds from sales of property, plant and equipment
    
    
    8,949
    
    
    
    Purchases of property, plant and equipment
    
    
    (4,240
    )
    
    
    (23,133
    )Payments for acquisitions, net of cash acquired
    
    
    
    
    
    
    (5,029
    )Purchases of equity securities
    
    
    (755
    )
    
    
    (600
    )Restricted cash
    
    
    (29,000
    )
    
    
    Net cash
(used in) provided by investing activities
    
    
    (25,046
    )
    
    
    135,518Cash flows from financing activities:Interest rate swap security deposit
    
    
    (4,250
    )
    
    
    Proceeds from short-term debt
    
    
    70,480
    
    
    
    Repayments of short-term debt, net of expenses of $1,117 and $1,198
    
    
    (73,303
    )
    
    
    (1,198
    )Proceeds from long-term debt, net of expenses of $9,988
    
    
    
    
    
    
    265,012Repurchases and retirements of long-term debt
    
    
    (53,600
    )
    
    
    (456,500
    )Proceeds from issuance of common stock
    
    
    710
    
    
    
    7,627Repayment of shareholder notes receivable
    
    
    25
    
    
    
    25Net cash used in by financing activities
    
    
    (59,938
    )
    
    
    (185,034
    )Net decrease in cash and cash equivalents
    
    
    (99,521
    )
    
    
    (67,464
    )Cash and cash equivalents at beginning of period
    
    
    234,147
    
    
    
    225,626Cash and cash equivalents at end of period
    
    $
    134,626
    
    
    $
    158,162
  5




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 1. Description of Business
  2. Basis of Presentation and Significant Accounting Policies
 Interim Reporting 
  Fiscal Periods
 Common Stock 
 Revenue Recognition
  6




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
  Uncertain Tax Positions
   Liquidity
  Restricted Cash
  Reclassifications
 Three Months
    
    
    Nine MonthsEnded
    
    
    EndedJune 29, 2007
    
    
    June 29, 2007Special charges, before reclassification
    
    $
    1,141
    
    
    $
    163,510Asset impairments
    
    
    
    
    
    
    (155,000
    )Special charges, after reclassification
    
    $
    1,141
    
    
    $
    8,510
 7




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 Review of Accounting for Research and Development Costs 
 Derivative Financial Instruments
 Foreign currency forward exchange contracts
  Interest Rate Swaps 
 8




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 Mindspeed Warrant
 Non-cash
Investing Activity
 Supplemental
Cash Flow Information
 Net Loss Per Share
  Three Months Ended
    
    Nine Months EndedJune 27,
    
    June 29,
    
    June 27,
    
    June 29,2008
    
    2007
    
    2008
    
    2007Stock options and warrants
    
    
    394
    
    
    
    117
    
    
    
    237
    
    
    
    3834.00% convertible subordinated notes due February
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4892007
4.00% convertible subordinated notes due March 2026
    
    
    5,081
    
    
    
    5,081
    
    
    
    5,081
    
    
    
    5,0815,475
    
    
    
    5,198
    
    
    
    5,318
    
    
    
    5,953
 Long-lived assets
 9




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




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
        11




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
    3. Sale of Broadband Media Processing Business
  Accounting for the
Impairment or Disposal of Long-Lived Assets
 Allocation Interest to Discontinued
Operations
 12




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
  Cash and cash equivalents
    
    $
    1,621Accounts receivable
    
    
    46Inventories
    
    
    15,831Other current assets
    
    
    2,434Total current assets
    
    
    19,932Property, plant and equipment, net
    
    
    13,233Goodwill
    
    
    72,088Intangible assets, net
    
    
    840Other assets
    
    
    1,740Total assets
    
    $
    107,833Accrued compensation and benefits
    
    $
    3,332Other current liabilities
    
    
    439Total current liabilities
    
    
    3,771Other liabilities
    
    
    463Total liabilities
    
    $
    4,234
  4. Impairments
  Broadband Access
   Goodwill at September 28, 2007
    
    $
    214,635Additions
    
    
    Impairments
    
    
    (108,570
    )Other Adjustments
    
    
    (686
    )Goodwill at June 27, 2008
    
    $
    105,379
 13




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 Broadband Media Processing
  Electronic Design Automation Tools
    5. Supplemental Financial Information
 Inventories
  June 27,
    
    
    September 28,2008
    
    
    2007Work-in-process
    
    $
    15,005
    
    
    $
    15,173Finished goods
    
    
    21,708
    
    
    
    26,834$
    36,713
    
    
    $
    42,007
  Intangible Assets
  June 27, 2008
    
    
    September 28, 2007Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    Book
    
    
    Carrying
    
    
    Accumulated
    
    
    BookAmount
    
    
    Amortization
    
    
    Value
    
    
    Amount
    
    
    Amortization
    
    
    ValueDeveloped technology
    
    $
    67,724
    
    
    $
    (58,850
    )
    
    $
    8,874
    
    
    $
    71,665
    
    
    $
    (51,875
    )
    
    $
    19,790Product licenses
    
    
    8,832
    
    
    
    (6,796
    )
    
    
    2,036
    
    
    
    9,327
    
    
    
    (6,547
    )
    
    
    2,780Other intangible assets
    
    
    2,628
    
    
    
    (1,913
    )
    
    
    715
    
    
    
    6,015
    
    
    
    (3,988
    )
    
    
    2,027$
    79,184
    
    
    $
    (67,559
    )
    
    $
    11,625
    
    
    $
    87,007
    
    
    $
    (62,410
    )
    
    $
    24,597
 14




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
  Remainderof 2008
    
    2009
    
    2010
    
    2011
    
    2012
    
    ThereafterAmortization expense
    
    $
    3,455
    
    
    $
    6,768
    
    
    $
    911
    
    
    $
    376
    
    
    $
    100
    
    
    $
    15
 Short-Term Debt
    Long-Term Debt
  June 27,
    
    
    September 28,2008
    
    
    2007Floating rate senior secured notes due November 2010
    
    $
    221,400
    
    
    $
    275,0004.00% convertible subordinated notes due March 2026
with a conversion price of $49.20
    
    
    250,000
    
    
    
    250,000Total
    
    
    471,400
    
    
    
    525,000Less: current portion of long-term debt
    
    
    
    
    
    
    (58,000
    )Long-term debt
    
    $
    471,400
    
    
    $
    467,000
 Floating rate senior secured notes due November 2010
 15




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
     4.00% convertible subordinated notes due March 2026
  16




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 6. Commitments and Contingencies
  IPO Litigation 
 Class Action Suit  Graden v. Conexant,
et al.
  17




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 Guarantees and Indemnifications
   Other
 Capital Investments
 Income Taxes
 7. Stock Option Plans
   18




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
   Three Months Ended
    
    Nine Months EndedJune 27,
    
    June 29,
    
    June 27,
    
    June 29,2008
    
    2007
    
    2008
    
    2007Stock option plans:Expected dividend yield
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Expected stock price volatility
    
    
    67
    %
    
    
    68
    %
    
    
    68
    %
    
    
    76
    %Risk-free interest rate
    
    
    3.2
    %
    
    
    4.6
    %
    
    
    3.2
    %
    
    
    4.6
    %Average expected life (in years)
    
    
    5.25
    
    
    
    5.25
    
    
    
    5.25
    
    
    
    5.25Stock purchase plan:Expected dividend yield
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Expected stock price volatility
    
    
    68
    %
    
    
    53
    %
    
    
    68
    %
    
    
    60
    %Risk-free interest rate
    
    
    3.0
    %
    
    
    4.7
    %
    
    
    3.0
    %
    
    
    4.8
    %Average expected life (in years)
    
    
    0.50
    
    
    
    0.50
    
    
    
    0.50
    
    
    
    0.50
   WeightedAverageShares
    
    Exercise PriceOutstanding, September 28, 2007
    
    
    10,081
    
    
    $
    23.90Granted
    
    
    315
    
    
    
    7.49Exercised
    
    
    (1
    )
    
    
    5.97Forfeited
    
    
    (2,284
    )
    
    
    22.81Outstanding, June 27, 2008
    
    
    8,111
    
    
    
    23.63Exercisable, June 27, 2008
    
    
    6,584
    
    
    
    25.20
  Directors Stock Plan
  19




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 Employee Stock Purchase Plan
   2001 Performance Share Plan and 2004 New Hire Equity Incentive Plan
  Performance Plan
  WeightedAverage GrantShares
    
    
    Date Fair ValueOutstanding, September 28, 2007
    
    
    90
    
    
    $
    22.90Granted
    
    
    388
    
    
    
    6.49Forfeited
    
    
    (70
    )
    
    
    22.90Outstanding, June 27, 2008
    
    
    408
    
    
    $
    6.85
 WeightedAverage GrantShares
    
    
    Date Fair ValueOutstanding, September 29, 2006
    
    
    28
    
    
    $
    29.00Granted
    
    
    90
    
    
    
    22.90Vested
    
    
    (28
    )
    
    
    29.00Outstanding, June 29, 2007
    
    
    90
    
    
    $
    22.90
 20




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
  2004 New Hire Plan
  WeightedAverage GrantShares
    
    
    Date Fair ValueOutstanding, September 28, 2007
    
    
    311
    
    
    $
    11.50Granted
    
    
    25
    
    
    
    4.50Vested
    
    
    (150
    )
    
    
    15.30Forfeited
    
    
    (100
    )
    
    
    15.30Outstanding, June 27, 2008
    
    
    86
    
    
    $
    11.03
    21




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 8. Comprehensive Income (Loss)
  Three Months Ended
    
    
    Nine Months EndedJune 27,
    
    
    June 29,
    
    
    June 27,
    
    
    June 29,2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    $
    (149,871
    )
    
    $
    (35,227
    )
    
    $
    (301,093
    )
    
    $
    (167,697
    )Other comprehensive income (loss):Currency translation adjustments
    
    
    (797
    )
    
    
    887
    
    
    
    706
    
    
    
    5,391Unrealized gains on marketable securities
    
    
    480
    
    
    
    7,661
    
    
    
    480
    
    
    
    14,405Unrealized gains on foreign currency
forward hedge contracts and interest
rate swaps
    
    
    4,154
    
    
    
    45
    
    
    
    1,972
    
    
    
    417Minimum pension liability adjustments
    
    
    4,832
    
    
    
    56
    
    
    
    3,759
    
    
    
    165Other comprehensive income
    
    
    8,669
    
    
    
    8,649
    
    
    
    6,917
    
    
    
    20,378Comprehensive loss
    
    $
    (141,202
    )
    
    $
    (26,578
    )
    
    $
    (294,176
    )
    
    $
    (147,319
    )
  June 27,
    
    
    September 28,2008
    
    
    2007Foreign currency translation adjustments
    
    $
    2,700
    
    
    $
    1,994Unrealized gains on foreign currency forward
hedge contracts and interest rate swaps
    
    
    2,352
    
    
    
    380Unrealized gains on marketable securities
    
    
    480Minimum pension liability adjustments
    
    
    
    
    
    
    (3,759
    )Accumulated other comprehensive income (loss)
    
    $
    5,532
    
    
    $
    (1,385
    )
 9. Special Charges
 Loss on Termination of Defined Benefit Plan
  Restructuring Charges
  Accounting for Costs Associated with Exit or Disposal Activities
 22




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
  Fiscal 2008 Restructuring Actions
  Workforce
    
    
    FacilityReductions
    
    
    And Other
    
    
    TotalRestructuring balance, September 28, 2007
    
    $
    
    
    
    $
    
    
    
    $
    Charged to costs and expenses
    
    
    3,042
    
    
    
    1,145
    
    
    
    4,187Cash payments
    
    
    (1,756
    )
    
    
    (53
    )
    
    
    (1,809
    )Restructuring balance, December 28, 2007
    
    
    1,286
    
    
    
    1,092
    
    
    
    2,378Charged to costs and expenses
    
    
    1,107
    
    
    
    85
    
    
    
    1,192Cash payments
    
    
    (1,210
    )
    
    
    (260
    )
    
    
    (1,470
    )Restructuring balance, March 28, 2008
    
    
    1,183
    
    
    
    917
    
    
    
    2,100Charged to costs and expenses
    
    
    2,276
    
    
    
    46
    
    
    
    2,322Cash payments
    
    
    (1,119
    )
    
    
    (238
    )
    
    
    (1,357
    )Restructuring balance, June 27, 2008
    
    $
    2,340
    
    
    $
    725
    
    
    $
    3,065
 Fiscal 2007 Restructuring Actions
  Workforce
    
    
    FacilityReductions
    
    
    And Other
    
    
    TotalRestructuring balance, September 28, 2007
    
    $
    3,636
    
    
    $
    6,640
    
    
    $
    10,276Charged to costs and expenses
    
    
    373Non-cash items
    
    
    
    
    
    
    (70
    )
    
    
    (70
    )Cash payments
    
    
    (1,071
    )
    
    
    (632
    )
    
    
    (1,703
    )Restructuring balance, December 28, 2007
    
    
    2,938
    
    
    
    8,024
    
    
    
    10,962Charged to costs and expenses
    
    
    (290
    )
    
    
    2,050
    
    
    
    1,760Non-cash items
    
    
    
    
    
    
    1,287
    
    
    
    1,287Cash payments
    
    
    (1,818
    )
    
    
    (1,110
    )
    
    
    (2,928
    )Restructuring balance, March 28, 2008
    
    
    830
    
    
    
    10,251
    
    
    
    11,081Charged to costs and expenses
    
    
    (577
    )
    
    
    178
    
    
    
    (399
    )Cash payments
    
    
    (164
    )
    
    
    (1,259
    )
    
    
    (1,423
    )Restructuring balance, June 27, 2008
    
    $
    89
    
    
    $
    9,170
    
    
    $
    9,259
 23




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 Fiscal 2006 and 2005 Restructuring Actions
  Workforce
    
    
    FacilityReductions
    
    
    and Other
    
    
    TotalRestructuring balance, September 28, 2007
    
    $
    131
    
    
    $
    17,988
    
    
    $
    18,119Charged to costs and expenses
    
    
    
    
    
    
    244
    
    
    
    244Cash payments
    
    
    (1
    )
    
    
    (2,071
    )
    
    
    (2,072
    )Restructuring balance, December 28, 2007
    
    
    130
    
    
    
    16,161
    
    
    
    16,291Charged (credited) to costs and expenses
    
    
    (130
    )
    
    
    59
    
    
    
    (71
    )Cash payments
    
    
    
    
    
    
    (2,327
    )
    
    
    (2,327
    )Restructuring balance, March 28, 2008
    
    
    
    
    
    
    13,893
    
    
    
    13,893Charged to costs and expenses
    
    
    
    
    
    
    192
    
    
    
    192Cash payments
    
    
    
    
    
    
    (791
    )
    
    
    (791
    )Restructuring balance, June 27, 2008
    
    $
    
    
    
    $
    13,294
    
    
    $
    13,294
 10. Other Income (Expense), Net
  Three Months Ended
    
    
    Nine Months EndedJune 27,
    
    
    June 29,
    
    
    June 27,
    
    
    June 29,2008
    
    
    2007
    
    
    2008
    
    
    2007Investment and interest income
    
    $
    1,315
    
    
    $
    2,110
    
    
    $
    6,855
    
    
    $
    11,299Gain (loss) in fair value of Mindspeed
warrants
    
    
    1,881
    
    
    
    944
    
    
    
    (12,662
    )
    
    
    7,868Gains on investments in equity securities
    
    
    
    
    
    
    101
    
    
    
    
    
    
    
    6,570Gain on sale of building
    
    
    6,567
    
    
    
    
    
    
    
    6,567
    
    
    
    Other
    
    
    (727
    )
    
    
    501
    
    
    
    (1,217
    )
    
    
    640Other income (expense), net
    
    $
    9,036
    
    
    $
    3,656
    
    
    $
    (457
    )
    
    $
    26,377
   24




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
  11. Related Party Transactions
 Mindspeed Technologies, Inc.
  Lease Agreement
 12. Geographic Information
  Three Months Ended
    
    
    Nine Months EndedJune 27,
    
    
    June 29,
    
    
    June 27,
    
    
    June 29,2008
    
    
    2007
    
    
    2008
    
    
    2007United States
    
    $
    6,742
    
    
    $
    8,117
    
    
    $
    18,864
    
    
    $
    26,044Other Americas
    
    
    2,253
    
    
    
    3,329
    
    
    
    7,372
    
    
    
    9,440Total Americas
    
    
    8,995
    
    
    
    11,446
    
    
    
    26,236
    
    
    
    35,485China
    
    
    76,466
    
    
    
    82,418
    
    
    
    237,779
    
    
    
    252,157South Korea
    
    
    1,007
    
    
    
    4,269
    
    
    
    7,536
    
    
    
    16,462Taiwan
    
    
    7,509
    
    
    
    8,192
    
    
    
    23,592
    
    
    
    30,240Other Asia-Pacific
    
    
    14,708
    
    
    
    20,070
    
    
    
    65,111
    
    
    
    75,863Total Asia-Pacific
    
    
    99,690
    
    
    
    114,949
    
    
    
    334,018
    
    
    
    374,722Europe, Middle East and Africa
    
    
    6,909
    
    
    
    7,857
    
    
    
    19,791
    
    
    
    24,436$
    115,594
    
    
    $
    134,252
    
    
    $
    380,045
    
    
    $
    434,643
  25




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
  June 27,
    
    
    September 28,2008
    
    
    2007United States
    
    $
    65,382
    
    
    $
    79,281India
    
    
    5,306
    
    
    
    10,544Other Asia-Pacific
    
    
    6,083
    
    
    
    6,280Europe, Middle East and Africa
    
    
    
    
    
    
    721$
    76,771
    
    
    $
    96,826
 13. Supplemental Guarantor Financial Information
   26




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
  June 27, 2008Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedCurrent assets:Cash and cash equivalents
    
    $
    90,990
    
    
    $
    
    
    
    $
    43,636
    
    
    $
    
    
    
    $
    134,626Restricted cash
    
    
    29,000
    
    
    
    
    
    
    
    8,800
    
    
    
    
    
    
    
    37,800Receivables
    
    
    (5,507
    )
    
    
    
    
    
    
    84,006
    
    
    
    
    
    
    
    78,499Inventories
    
    
    36,713
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,713Other current assets
    
    
    26,631
    
    
    
    3
    
    
    
    5,926
    
    
    
    
    
    
    
    32,560Current assets held for sale
    
    
    23,324
    
    
    
    54,040
    
    
    
    30,469
    
    
    
    
    
    
    
    107,833Total current assets
    
    
    201,151
    
    
    
    54,043
    
    
    
    172,837
    
    
    
    
    
    
    
    428,031Property and equipment, net
    
    
    13,967
    
    
    
    
    
    
    
    10,782
    
    
    
    
    
    
    
    24,749Goodwill
    
    
    59,235
    
    
    
    39,949
    
    
    
    6,195
    
    
    
    
    
    
    
    105,379Intangible assets, net
    
    
    1,909
    
    
    
    9,229
    
    
    
    487
    
    
    
    
    
    
    
    11,625Other assets
    
    
    52,782
    
    
    
    
    
    
    
    2,097
    
    
    
    
    
    
    
    54,879Investments in subsidiaries
    
    
    297,196
    
    
    
    18,129
    
    
    
    
    
    
    
    (315,325
    )
    
    
    Total assets
    
    $
    626,240
    
    
    $
    121,350
    
    
    $
    192,398
    
    
    $
    (315,325
    )
    
    $
    624,663Current liabilities:Short-term debt
    
    $
    
    
    
    $
    
    
    
    $
    77,177
    
    
    $
    
    
    
    $
    77,177Accounts payable
    
    
    59,966
    
    
    
    
    
    
    
    1,870
    
    
    
    
    
    
    
    61,836Accrued compensation and benefits
    
    
    12,609
    
    
    
    
    
    
    
    6,299
    
    
    
    
    
    
    
    18,908Intercompany payable (receivable)
    
    
    112,599
    
    
    
    (169,158
    )
    
    
    56,559
    
    
    
    
    
    
    
    Other current liabilities
    
    
    55,322
    
    
    
    932
    
    
    
    3,636
    
    
    
    
    
    
    
    59,890Current liabilities to be assumed
    
    
    1,975
    
    
    
    
    
    
    
    2,259
    
    
    
    
    
    
    
    4,234Total current liabilities
    
    
    242,471
    
    
    
    (168,226
    )
    
    
    147,800
    
    
    
    
    
    
    
    222,045Long-term debt
    
    
    471,400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    471,400Other liabilities
    
    
    61,854
    
    
    
    
    
    
    
    1,896
    
    
    
    
    
    
    
    63,750Total liabilities
    
    
    775,725
    
    
    
    (168,226
    )
    
    
    149,696
    
    
    
    
    
    
    
    757,195Shareholders equity
    
    
    (149,485
    )
    
    
    289,576
    
    
    
    42,702
    
    
    
    (315,325
    )
    
    
    (132,532
    )Total liabilities and equity
    
    $
    626,240
    
    
    $
    121,350
    
    
    $
    192,398
    
    
    $
    (315,325
    )
    
    $
    624,663
 27




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 September 28, 2007Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedCurrent assets:Cash and cash equivalents
    
    $
    199,263
    
    
    $
    
    
    
    $
    34,884
    
    
    $
    
    
    
    $
    234,147Restricted cash
    
    
    
    
    
    
    
    
    
    
    8,800
    
    
    
    
    
    
    
    8,800Receivables
    
    
    (10,101
    )
    
    
    
    
    
    
    90,957
    
    
    
    
    
    
    
    80,856Inventories
    
    
    42,007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,007Other current assets
    
    
    11,957
    
    
    
    2
    
    
    
    6,172
    
    
    
    
    
    
    
    18,131Current assets held for sale
    
    
    42,060
    
    
    
    173,640
    
    
    
    34,751
    
    
    
    
    
    
    
    250,451Total current assets
    
    
    285,186
    
    
    
    173,642
    
    
    
    175,564
    
    
    
    
    
    
    
    634,392Property and equipment, net
    
    
    29,833
    
    
    
    
    
    
    
    16,843
    
    
    
    
    
    
    
    46,676Goodwill
    
    
    68,834
    
    
    
    133,411
    
    
    
    12,390
    
    
    
    
    
    
    
    214,635Intangible assets, net
    
    
    5,764
    
    
    
    18,244
    
    
    
    589
    
    
    
    
    
    
    
    24,597Other assets
    
    
    63,554
    
    
    
    
    
    
    
    2,115
    
    
    
    
    
    
    
    65,669Investments in subsidiaries
    
    
    513,340
    
    
    
    11,563
    
    
    
    
    
    
    
    (524,903
    )
    
    
    Total assets
    
    $
    966,511
    
    
    $
    336,860
    
    
    $
    207,501
    
    
    $
    (524,903
    )
    
    $
    985,969Current liabilities:Current portion of long-term debt
    
    $
    58,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    58,000Short-term debt
    
    
    
    
    
    
    
    
    
    
    80,000
    
    
    
    
    
    
    
    80,000Accounts payable
    
    
    77,581
    
    
    
    
    
    
    
    2,990
    
    
    
    
    
    
    
    80,571Accrued compensation and benefits
    
    
    16,941
    
    
    
    
    
    
    
    6,250
    
    
    
    
    
    
    
    23,191Intercompany payable (receivable)
    
    
    96,258
    
    
    
    (169,158
    )
    
    
    72,900
    
    
    
    
    
    
    
    Other current liabilities
    
    
    65,778
    
    
    
    931
    
    
    
    3,636
    
    
    
    
    
    
    
    70,345Current liabilities to be assumed
    
    
    1,979
    
    
    
    
    
    
    
    1,946
    
    
    
    
    
    
    
    3,925Total current liabilities
    
    
    316,537
    
    
    
    (168,227
    )
    
    
    167,722
    
    
    
    
    
    
    
    316,032Long-term debt
    
    
    467,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    467,000Other liabilities
    
    
    53,226
    
    
    
    
    
    
    
    3,196
    
    
    
    
    
    
    
    56,422Total liabilities
    
    
    836,763
    
    
    
    (168,227
    )
    
    
    170,918
    
    
    
    
    
    
    
    839,454Shareholders equity
    
    
    129,748
    
    
    
    505,087
    
    
    
    36,583
    
    
    
    (524,903
    )
    
    
    146,515Total liabilities and equity
    
    $
    966,511
    
    
    $
    336,860
    
    
    $
    207,501
    
    
    $
    (524,903
    )
    
    $
    985,969
 28




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
  Three Months Ended June 27, 2008Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    109,770
    
    
    $
    18,669
    
    
    $
    5,824
    
    
    $
    (18,669
    )
    
    $
    115,594Cost of goods sold
    
    
    70,637
    
    
    
    
    
    
    
    5,218
    
    
    
    (18,669
    )
    
    
    57,186Gross margin
    
    
    39,133
    
    
    
    18,669
    
    
    
    606
    
    
    
    
    
    
    
    58,408Operating expenses:Research and development
    
    
    27,407
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    27,410Selling, general and administrative
    
    
    23,494
    
    
    
    
    
    
    
    1,206
    
    
    
    
    
    
    
    24,700Amortization of intangible assets
    
    
    379
    
    
    
    3,006
    
    
    
    244
    
    
    
    
    
    
    
    3,629Asset impairments
    
    
    27,887
    
    
    
    92,730
    
    
    
    
    
    
    
    
    
    
    
    120,617Special charges
    
    
    8,245
    
    
    
    
    
    
    
    180
    
    
    
    
    
    
    
    8,425Total operating expenses
    
    
    87,412
    
    
    
    95,736
    
    
    
    1,633
    
    
    
    
    
    
    
    184,781Operating income (loss)
    
    
    (48,279
    )
    
    
    (77,067
    )
    
    
    (1,027
    )
    
    
    
    
    
    
    (126,373
    )Equity in income (loss) of subsidiaries
    
    
    (1
    )
    
    
    5,237
    
    
    
    
    
    
    
    (5,236
    )
    
    
    Interest expense
    
    
    (5,716
    )
    
    
    
    
    
    
    (953
    )
    
    
    
    
    
    
    (6,669
    )Other income (expense), net
    
    
    (1,579
    )
    
    
    
    
    
    
    10,615
    
    
    
    
    
    
    
    9,036Loss before income taxes and gain on
equity method investments
    
    
    (55,575
    )
    
    
    (71,830
    )
    
    
    8,635
    
    
    
    (5,236
    )
    
    
    (124,006
    )Provision for income taxes
    
    
    694
    
    
    
    
    
    
    
    1,772
    
    
    
    
    
    
    
    2,466Income (loss) before gain on equity
method investments
    
    
    (56,269
    )
    
    
    (71,830
    )
    
    
    6,863
    
    
    
    (5,236
    )
    
    
    (126,472
    )Gain on equity method investments
    
    
    53
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53Loss from continuing operations
    
    
    (56,216
    )
    
    
    (71,830
    )
    
    
    6,863
    
    
    
    (5,236
    )
    
    
    (126,419
    )Loss from discontinued operations
    
    
    (22,960
    )
    
    
    
    
    
    
    (492
    )
    
    
    
    
    
    
    (23,452
    )Net income (loss)
    
    $
    (79,176
    )
    
    $
    (71,830
    )
    
    $
    6,371
    
    
    $
    (5,236
    )
    
    $
    (149,871
    )
 Three Months Ended June 29, 2007Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    103,115
    
    
    $
    6,271
    
    
    $
    31,137
    
    
    $
    (6,271
    )
    
    $
    134,252Cost of goods sold
    
    
    49,141
    
    
    
    
    
    
    
    27,677
    
    
    
    (6,271
    )
    
    
    70,547Gross margin
    
    
    53,974
    
    
    
    6,271
    
    
    
    3,460
    
    
    
    
    
    
    
    63,705Operating expenses:Research and development
    
    
    42,453
    
    
    
    
    
    
    
    49
    
    
    
    
    
    
    
    42,502Selling, general and administrative
    
    
    19,328
    
    
    
    
    
    
    
    2,969
    
    
    
    
    
    
    
    22,297Amortization of intangible assets
    
    
    508
    
    
    
    3,861
    
    
    
    244
    
    
    
    
    
    
    
    4,613Asset impairments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Special charges
    
    
    1,141
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,141Total operating expenses
    
    
    63,430
    
    
    
    3,861
    
    
    
    3,263
    
    
    
    
    
    
    
    70,554Operating income (loss)
    
    
    (9,456
    )
    
    
    2,410
    
    
    
    198
    
    
    
    
    
    
    
    (6,848
    )Equity in income (loss) of subsidiaries
    
    
    (2,918
    )
    
    
    643
    
    
    
    
    
    
    
    2,275
    
    
    
    Interest expense
    
    
    (7,547
    )
    
    
    
    
    
    
    (1,648
    )
    
    
    
    
    
    
    (9,195
    )Other income (expense), net
    
    
    (1,963
    )
    
    
    
    
    
    
    5,619
    
    
    
    
    
    
    
    3,656Income (loss) before income taxes and
gain on equity method investments
    
    
    (21,883
    )
    
    
    3,053
    
    
    
    4,168
    
    
    
    2,275
    
    
    
    (12,387
    )Provision for income taxes
    
    
    296
    
    
    
    
    
    
    
    234
    
    
    
    
    
    
    
    530Income (loss) before gain on equity
method investments
    
    
    (22,179
    )
    
    
    3,053
    
    
    
    3,934
    
    
    
    2,275
    
    
    
    (12,917
    )Gain on equity method investments
    
    
    179
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    179Loss from continuing operations
    
    
    (22,000
    )
    
    
    3,053
    
    
    
    3,934
    
    
    
    2,275
    
    
    
    (12,738
    )Loss from discontinued operations
    
    
    (21,904
    )
    
    
    
    
    
    
    (585
    )
    
    
    
    
    
    
    (22,489
    )Net income (loss)
    
    $
    (43,904
    )
    
    $
    3,053
    
    
    $
    3,349
    
    
    $
    2,275
    
    
    $
    (35,227
    )
 29




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
  Nine Months Ended June 27, 2008Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    339,861
    
    
    $
    26,587
    
    
    $
    40,184
    
    
    $
    (26,587
    )
    
    $
    380,045Cost of goods sold
    
    
    167,908
    
    
    
    
    
    
    
    36,158
    
    
    
    (26,587
    )
    
    
    177,479Gross margin
    
    
    171,953
    
    
    
    26,587
    
    
    
    4,026
    
    
    
    
    
    
    
    202,566Operating expenses:Research and development
    
    
    96,241
    
    
    
    
    
    
    
    (358
    )
    
    
    
    
    
    
    95,883Selling, general and administrative
    
    
    58,776
    
    
    
    
    
    
    
    6,362
    
    
    
    
    
    
    
    65,138Amortization of intangible assets
    
    
    1,312
    
    
    
    9,016
    
    
    
    731
    
    
    
    
    
    
    
    11,059Asset impairments
    
    
    28,017
    
    
    
    92,730
    
    
    
    
    
    
    
    
    
    
    
    120,747Special charges
    
    
    14,194
    
    
    
    
    
    
    
    1,044
    
    
    
    
    
    
    
    15,238Total operating expenses
    
    
    198,540
    
    
    
    101,746
    
    
    
    7,779
    
    
    
    
    
    
    
    308,065Operating loss
    
    
    (26,587
    )
    
    
    (75,159
    )
    
    
    (3,753
    )
    
    
    
    
    
    
    (105,499
    )Equity in income (loss) of subsidiaries
    
    
    4,211
    
    
    
    6,564
    
    
    
    
    
    
    
    (10,775
    )
    
    
    Interest expense
    
    
    (21,223
    )
    
    
    
    
    
    
    (3,523
    )
    
    
    
    
    
    
    (24,746
    )Other income, net
    
    
    (20,996
    )
    
    
    
    
    
    
    20,539
    
    
    
    
    
    
    
    (457
    )Income (loss) before income taxes and
gain on equity method investments
    
    
    (64,595
    )
    
    
    (68,595
    )
    
    
    13,263
    
    
    
    (10,775
    )
    
    
    (130,702
    )Provision for income taxes
    
    
    941
    
    
    
    
    
    
    
    3,104
    
    
    
    
    
    
    
    4,045Income (loss) before gain on equity
method investments
    
    
    (65,536
    )
    
    
    (68,595
    )
    
    
    10,159
    
    
    
    (10,775
    )
    
    
    (134,747
    )Gain on equity method investments
    
    
    3,612
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,612Loss from continuing operations
    
    
    (61,924
    )
    
    
    (68,595
    )
    
    
    10,159
    
    
    
    (10,775
    )
    
    
    (131,135
    )Loss from discontinued operations
    
    
    (48,896
    )
    
    
    (119,600
    )
    
    
    (1,462
    )
    
    
    
    
    
    
    (169,958
    )Net income (loss)
    
    $
    (110,820
    )
    
    $
    (188,195
    )
    
    $
    8,697
    
    
    $
    (10,775
    )
    
    $
    (301,093
    )
 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
    
    $
    337,929
    
    
    $
    19,374
    
    
    $
    96,714
    
    
    $
    (19,374
    )
    
    $
    434,643Cost of goods sold
    
    
    152,988
    
    
    
    
    
    
    
    89,014
    
    
    
    (19,374
    )
    
    
    222,628Gross margin
    
    
    184,941
    
    
    
    19,374
    
    
    
    7,700
    
    
    
    
    
    
    
    212,015Operating expenses:Research and development
    
    
    130,947
    
    
    
    
    
    
    
    204
    
    
    
    
    
    
    
    131,151Selling, general and administrative
    
    
    58,820
    
    
    
    
    
    
    
    9,668
    
    
    
    
    
    
    
    68,488Amortization of intangible assets
    
    
    1,569
    
    
    
    14,373
    
    
    
    743
    
    
    
    
    
    
    
    16,685Asset impairments
    
    
    
    
    
    
    155,000
    
    
    
    
    
    
    
    
    
    
    
    155,000Special charges
    
    
    8,510
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,510Total operating expenses
    
    
    199,846
    
    
    
    169,373
    
    
    
    10,615
    
    
    
    
    
    
    
    379,834Operating loss
    
    
    (14,905
    )
    
    
    (149,999
    )
    
    
    (2,915
    )
    
    
    
    
    
    
    (167,819
    )Equity in income (loss) of subsidiaries
    
    
    (120,622
    )
    
    
    1,850
    
    
    
    
    
    
    
    118,772
    
    
    
    Interest expense
    
    
    (26,607
    )
    
    
    
    
    
    
    (4,971
    )
    
    
    
    
    
    
    (31,578
    )Other income, net
    
    
    9,880
    
    
    
    
    
    
    
    16,497
    
    
    
    
    
    
    
    26,377Income (loss) before income taxes and
gain on equity method investments
    
    
    (152,254
    )
    
    
    (148,149
    )
    
    
    8,611
    
    
    
    118,772
    
    
    
    (173,020
    )Provision for income taxes
    
    
    1,589
    
    
    
    
    
    
    
    159
    
    
    
    
    
    
    
    1,748Income (loss) before gain on equity
method investments
    
    
    (153,843
    )
    
    
    (148,149
    )
    
    
    8,452
    
    
    
    118,772
    
    
    
    (174,768
    )Gain on equity method investments
    
    
    44,194
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,194Loss from continuing operations
    
    
    (109,649
    )
    
    
    (148,149
    )
    
    
    8,452
    
    
    
    118,772
    
    
    
    (130,574
    )Loss from discontinued operations
    
    
    (35,559
    )
    
    
    
    
    
    
    (1,564
    )
    
    
    
    
    
    
    (37,123
    )Net (loss) income
    
    $
    (145,208
    )
    
    $
    (148,149
    )
    
    $
    6,888
    
    
    $
    118,772
    
    
    $
    (167,697
    )
 31




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
  Nine Months Ended June 27, 2008Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedNet cash (used in) provided by
operating activities
    
    $
    (19,540
    )
    
    $
    
    
    
    $
    (3,984
    )
    
    $
    8,987
    
    
    $
    (14,537
    )Cash flows from investing activities:Proceeds from sale of fixed assets
    
    
    574
    
    
    
    
    
    
    
    8,375
    
    
    
    
    
    
    
    8,949Purchases of accounts receivable
    
    
    
    
    
    
    
    
    
    
    (404,533
    )
    
    
    404,533
    
    
    
    Proceeds from collection of
purchased accts receivable
    
    
    
    
    
    
    
    
    
    
    413,520
    
    
    
    (413,520
    )
    
    
    Purchases of equity securities and
other assets
    
    
    (755
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (755
    )Purchases of property plant and
equipment
    
    
    (2,437
    )
    
    
    
    
    
    
    (1,803
    )
    
    
    
    
    
    
    (4,240
    )Increase in restricted cash
    
    
    (29,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,000
    )Net cash (used in) provided by
investing activities
    
    
    (31,618
    )
    
    
    
    
    
    
    15,559
    
    
    
    (8,987
    )
    
    
    (25,046
    )Cash flows from financing activities:Proceeds from / (repayments of)
short-term debt, net of expense
    
    
    
    
    
    
    
    
    
    
    (2,823
    )
    
    
    
    
    
    
    (2,823
    )Repayment of long-term debt, net of
expenses
    
    
    (53,600
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (53,600
    )Proceeds from issuance of common
stock
    
    
    710
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    710Proceeds from shareholder loans
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25Collateral deposit related to interest rate swap
    
    
    (4,250
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,250
    )Net cash used in
financing activities
    
    
    (57,115
    )
    
    
    
    
    
    
    (2,823
    )
    
    
    
    
    
    
    (59,938
    )Net (decrease) increase in cash and cash
equivalents
    
    
    (108,273
    )
    
    
    
    
    
    
    8,752
    
    
    
    
    
    
    
    (99,521
    )Cash and cash equivalents at
beginning of period
    
    
    199,263
    
    
    
    
    
    
    
    34,884
    
    
    
    
    
    
    
    234,147Cash and cash equivalents at end of
period
    
    $
    90,990
    
    
    $
    
    
    
    $
    43,636
    
    
    $
    
    
    
    $
    134,626
 32




---



##### 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
 33




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
     34




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Critical Accounting Policies
  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
our three 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
  35




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Gross Margin
     36




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Excess and Obsolete Inventory
  Three Months Ended
    
    
    Nine Months EndedJune 27,
    
    
    June 29,
    
    
    June 27,
    
    
    June 29,(in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007E&O reserves, beginning of
period
    
    $
    18,986
    
    
    $
    23,931
    
    
    $
    17,139
    
    
    $
    32,245Additions
    
    
    1,699
    
    
    
    840
    
    
    
    6,507
    
    
    
    3,619Release upon sales of product
    
    
    (526
    )
    
    
    (2,659
    )
    
    
    (2,084
    )
    
    
    (8,561
    )Scrap
    
    
    (2,297
    )
    
    
    (4,171
    )
    
    
    (3,686
    )
    
    
    (9,826
    )Standards adjustments and other
    
    
    (1,055
    )
    
    
    608
    
    
    
    (1,069
    )
    
    
    1,072E&O reserves, end of period
    
    $
    16,807
    
    
    $
    18,549
    
    
    $
    16,807
    
    
    $
    18,549
   Research and Development
    37




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Selling, General and Administrative
    Amortization of Intangible Assets
   Special Charges
   Asset Impairments
   38




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Interest Expense
  Other Income (Expense), Net
  Three Months Ended
    
    
    Nine Months EndedJune 27,
    
    
    June 29,
    
    
    June 27,
    
    
    June 29,2008
    
    
    2007
    
    
    2008
    
    
    2007Investment and interest income
    
    $
    1,315
    
    
    $
    2,110
    
    
    $
    6,855
    
    
    $
    11,299Unrealized gain (loss) in fair value of
Mindspeed warrants
    
    
    1,881
    
    
    
    944
    
    
    
    (12,662
    )
    
    
    7,868Gains on investments in equity securities
    
    
    
    
    
    
    101
    
    
    
    
    
    
    
    6,570Gain on sale of building
    
    
    6,567
    
    
    
    
    
    
    
    6,567
    
    
    
    Other
    
    
    (727
    )
    
    
    501
    
    
    
    (1,217
    )
    
    
    640Other income (expense), net
    
    $
    9,036
    
    
    $
    3,656
    
    
    $
    (457
    )
    
    $
    26,377
   Provision for Income Taxes
  39




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Liquidity and Capital Resources
        40




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##### Table of Contents



Nine Months EndedJune 27,
    
    
    June 29,(in thousands)
    
    2008
    
    
    2007Net cash used in operating activities
    
    $
    (14,537
    )
    
    $
    (17,948
    )Net cash (used in) provided by investing activities
    
    
    (25,046
    )
    
    
    135,518Net cash used in financing activities
    
    
    (59,938
    )
    
    
    (185,034
    )Net decrease in cash and cash equivalents
    
    $
    (99,521
    )
    
    $
    (67,464
    )
    Off-Balance Sheet Arrangements
   Special Purpose Entities
  41




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##### Table of Contents



Recent Accounting Pronouncements
       42




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.
 43




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
       (in thousands)
    
    Carrying Value
    
    Fair ValueCash and cash equivalents
    
    $
    132,379
    
    
    $
    132,379Mindspeed warrant
    
    
    2,857
    
    
    
    2,857Short-term debt
    
    
    77,177
    
    
    
    77,177Long-term debt: senior secured notes
    
    
    221,400
    
    
    
    219,740Long-term debt: convertible subordinated notes
    
    
    250,000
    
    
    
    188,750
  44




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ITEM 4. CONTROLS AND PROCEDURES
   45




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 IPO Litigation 
 Class Action Suit  Graden v. Conexant, et al.
 46




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##### Table of Contents



ITEM 1A. RISK FACTORS
  47




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##### Table of Contents



ITEM 6. EXHIBITS
 Exhibit No.
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation of Conexant Systems, Inc., as amended10.1
    
    Amendment dated as of May 29, 2008 to Employment Agreement dated as of August 24, 2007
by and between Karen Roscher (incorporated by reference to the Current Report on Form
8-K filed by the Company on June 2, 2008)10.2
    
    Amendment dated as of May 29, 2008 to Employment Agreement dated as of February 18,
2008 by and between Mark D. Peterson (incorporated by reference to the Current Report
on Form 8-K filed by the Company on June 2, 2008)10.3
    
    Asset Purchase Agreement entered into on April 29, 2008 by and between the Company and
NXP B. V.10.4
    
    IP License Agreement entered into on April 29, 2008 by and between the Company and NXP
B.V.10.5*
    
    Summary of Non-Employee Director
Compensation and Benefits31.1
    
    Certification of Periodic
Report by Chief Executive Officer Pursuant to Rule
13a-15(e) or 15d-15(e).31.2
    
    Certification of Periodic
Report by Chief Financial Officer Pursuant to Rule
13a-15(e) or 15d-15(e).32
    
    Certification of Periodic Report by Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.
 
  48




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##### Table of Contents



SIGNATURE
  CONEXANT SYSTEMS, INC.
(Registrant)Date: August 6, 2008
    By
    /s/ Karen RoscherKaren RoscherSenior Vice President and Chief Financial Officer
(principal financial officer) 49




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation of Conexant Systems, Inc., as amended10.1
    
    Amendment dated as of May 29, 2008 to Employment Agreement dated as of August 24, 2007
by and between Karen Roscher (incorporated by reference to the Current Report on Form
8-K filed by the Company on June 2, 2008)10.2
    
    Amendment dated as of May 29, 2008 to Employment Agreement dated as of February 18,
2008 by and between Mark D. Peterson (incorporated by reference to the Current Report
on Form 8-K filed by the Company on June 2, 2008)10.3
    
    Asset Purchase Agreement entered into on April 29, 2008 by and between the Company and
NXP B. V.10.4
    
    IP License Agreement entered into on April 29, 2008 by and between the Company and NXP
B.V.10.5*
    
    Summary of Non-Employee Director
Compensation and Benefits31.1
    
    Certification of Periodic
Report by Chief Executive Officer Pursuant to Rule
13a-15(e) or 15d-15(e).31.2
    
    Certification of Periodic
Report by Chief Financial Officer Pursuant to Rule
13a-15(e) or 15d-15(e).32
    
    Certification of Periodic Report by Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.
 
  50