##### 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, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number: 000-24923
 CONEXANT SYSTEMS, INC.
  Delaware
    
    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 o
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##### Table of Contents



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




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##### 



CONEXANT SYSTEMS, INC.
 INDEX
 PAGEPART I. FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited):Condensed Consolidated Balance Sheets  June 30, 2006 and September 30, 2005
    
    3Condensed Consolidated Statements of Operations  Three and Nine Months Ended June 30, 2006 and 2005
    
    4Condensed Consolidated Statements of Cash Flows  Nine Months Ended June 30, 2006 and 2005
    
    5Notes to Condensed Consolidated Financial Statements
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    29Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    54Item 4. Controls and Procedures
    
    55PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    56Item 6. Exhibits
    
    58Signature
    
    59Exhibit Index
    
    60Exhibit 31.1Exhibit 31.2Exhibit 32
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 CONEXANT SYSTEMS, INC.
 
 Condensed Consolidated Balance Sheets
 (unaudited, in thousands, except par value)
 June 30,
    
    
    September 30,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    225,461
    
    
    $
    202,704Marketable securities
    
    
    140,360
    
    
    
    139,306Restricted cash
    
    
    8,800
    
    
    
    Receivables, net of allowances of $774 and $3,803
    
    
    145,412
    
    
    
    87,240Inventories
    
    
    83,476
    
    
    
    95,329Other current assets
    
    
    19,665
    
    
    
    14,701Total current assets
    
    
    623,174
    
    
    
    539,280Property, plant and equipment, net
    
    
    60,949
    
    
    
    50,700Goodwill
    
    
    711,645
    
    
    
    717,013Intangible assets, net
    
    
    83,527
    
    
    
    106,709Mindspeed warrant
    
    
    29,337
    
    
    
    33,137Marketable securities  long-term
    
    
    
    
    
    
    38,485Other assets
    
    
    121,051
    
    
    
    96,200Total assets
    
    $
    1,629,683
    
    
    $
    1,581,524LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    456,500
    
    
    $
    196,825Short-term debt
    
    
    80,000
    
    
    
    Accounts payable
    
    
    135,969
    
    
    
    108,957Accrued compensation and benefits
    
    
    34,181
    
    
    
    27,505Other current liabilities
    
    
    65,461
    
    
    
    63,197Total current liabilities
    
    
    772,111
    
    
    
    396,484Long-term debt
    
    
    250,000
    
    
    
    515,000Other liabilities
    
    
    89,112
    
    
    
    100,947Total liabilities
    
    
    1,111,223
    
    
    
    1,012,431Commitments and contingencies (Note 5)Shareholders equity:Preferred and junior preferred stock
    
    
    
    
    
    
    Common stock, $0.01 par value: 1,000,000 shares authorized; 483,820
and 474,683 shares issued; and 482,538 and 473,500 shares
outstanding
    
    
    4,838
    
    
    
    4,747Treasury stock: 1,282 and 1,184 shares, at cost
    
    
    (5,823
    )
    
    
    (5,584
    )Additional paid-in capital
    
    
    4,687,421
    
    
    
    4,657,901Accumulated deficit
    
    
    (4,154,659
    )
    
    
    (4,053,166
    )Accumulated other comprehensive loss
    
    
    (13,169
    )
    
    
    (22,012
    )Notes receivable from stock sales
    
    
    (148
    )
    
    
    (304
    )Unearned compensation
    
    
    
    
    
    
    (12,489
    )Total shareholders equity
    
    
    518,460
    
    
    
    569,093Total liabilities and shareholders equity
    
    $
    1,629,683
    
    
    $
    1,581,524
  3




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CONEXANT SYSTEMS, INC.
 
 Condensed Consolidated Statements of Operations
 (unaudited, in thousands, except per share amounts)
 Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net revenues
    
    $
    251,635
    
    
    $
    197,464
    
    
    $
    724,924
    
    
    $
    507,823Cost of goods sold (1)
    
    
    137,598
    
    
    
    122,430
    
    
    
    408,924
    
    
    
    365,661Gain on cancellation of supply agreement
    
    
    (17,500
    )
    
    
    
    
    
    
    (17,500
    )
    
    
    Gross margin
    
    
    131,537
    
    
    
    75,034
    
    
    
    333,500
    
    
    
    142,162Operating expenses:Research and development (1)
    
    
    70,096
    
    
    
    66,282
    
    
    
    199,286
    
    
    
    209,362Selling, general and administrative (1)
    
    
    27,037
    
    
    
    31,081
    
    
    
    101,958
    
    
    
    89,449Amortization of intangible assets
    
    
    7,520
    
    
    
    7,969
    
    
    
    23,185
    
    
    
    24,402Special charges
    
    
    32,610
    
    
    
    8,409
    
    
    
    72,379
    
    
    
    41,262Total operating expenses
    
    
    137,263
    
    
    
    113,741
    
    
    
    396,808
    
    
    
    364,475Operating loss
    
    
    (5,726
    )
    
    
    (38,707
    )
    
    
    (63,308
    )
    
    
    (222,313
    )Interest expense
    
    
    10,426
    
    
    
    8,396
    
    
    
    29,280
    
    
    
    25,290Other expense (income), net
    
    
    49,907
    
    
    
    (15,610
    )
    
    
    6,423
    
    
    
    (23,367
    )Loss before income taxes
    
    
    (66,059
    )
    
    
    (31,493
    )
    
    
    (99,011
    )
    
    
    (224,236
    )Provision for income taxes
    
    
    1,031
    
    
    
    673
    
    
    
    2,482
    
    
    
    1,835Net loss
    
    $
    (67,090
    )
    
    $
    (32,166
    )
    
    $
    (101,493
    )
    
    $
    (226,071
    )Net loss per share  basic and diluted
    
    $
    (0.14
    )
    
    $
    (0.07
    )
    
    $
    (0.21
    )
    
    $
    (0.48
    )Shares used in basic and diluted per-share
computation
    
    
    481,626
    
    
    
    471,247
    
    
    
    477,716
    
    
    
    469,935
 
 (1)
    
    These captions include non-cash employee stock-based compensation expense as follows
(see Note 1): Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Cost of goods sold
    
    $
    31
    
    
    $
    
    
    
    $
    460
    
    
    $
    Research and development
    
    
    6,643
    
    
    
    2,275
    
    
    
    17,791
    
    
    
    6,795Selling, general and administrative
    
    
    3,502
    
    
    
    744
    
    
    
    18,993
    
    
    
    2,232Total
    
    $
    10,176
    
    
    $
    3,019
    
    
    $
    37,244
    
    
    $
    9,027
  4




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CONEXANT SYSTEMS, INC.
 
 Condensed Consolidated Statements of Cash Flows
 (unaudited, in thousands)
 Nine Months EndedJune 30,2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (101,493
    )
    
    $
    (226,071
    )Adjustments to reconcile net loss to net cash used in
operating activities, net of effects of acquisitions:Depreciation
    
    
    14,167
    
    
    
    14,054Amortization of intangible assets
    
    
    23,185
    
    
    
    24,402Reduction of provision for bad debts
    
    
    (2,243
    )
    
    
    (1,543
    )Inventory provisions
    
    
    1,594
    
    
    
    50,150Decrease in fair value of Mindspeed warrant
    
    
    3,800
    
    
    
    14,804Losses of equity method investments
    
    
    3,303
    
    
    
    8,587Gains on sales of equity securities
    
    
    (4,414
    )
    
    
    (42,310
    )Gain on cancellation of supply agreement
    
    
    (17,500
    )
    
    
    Impairment loss of Skyworks shares
    
    
    18,456
    
    
    
    Stock-based compensation
    
    
    37,244
    
    
    
    9,027Other non-cash items, net
    
    
    (2,098
    )
    
    
    (299
    )Changes in assets and liabilities:Receivables
    
    
    (55,929
    )
    
    
    104,386Inventories
    
    
    10,063
    
    
    
    43,324Accounts payable
    
    
    22,610
    
    
    
    (47,535
    )Agere patent litigation settlement
    
    
    
    
    
    
    (8,000
    )Special charges and other restructuring related items
    
    
    (15,371
    )
    
    
    (4,241
    )Accrued expenses and other current liabilities
    
    
    13,276
    
    
    
    7,947Other
    
    
    (2,913
    )
    
    
    (5,348
    )Net cash used in operating activities
    
    
    (54,263
    )
    
    
    (58,666
    )Cash flows from investing activities:Payments for acquisitions, net of cash acquired
    
    
    (6,900
    )
    
    
    (18,817
    )Restricted cash
    
    
    (8,800
    )
    
    
    Proceeds from sales of equity securities
    
    
    5,200
    
    
    
    44,360Purchases of marketable securities
    
    
    (62,796
    )
    
    
    (45,244
    )Sales and maturities of marketable securities
    
    
    89,862
    
    
    
    68,831Net proceeds from purchase and sale-leaseback
    
    
    
    
    
    
    49,071Purchases of property, plant and equipment
    
    
    (23,500
    )
    
    
    (16,426
    )Investments in businesses
    
    
    (705
    )
    
    
    (2,580
    )Net cash (used in) provided by investing activities
    
    
    (7,639
    )
    
    
    79,195Cash flows from financing activities:Proceeds from short-term debt, net of expenses of $1,541
    
    
    78,459
    
    
    
    Proceeds from long-term debt, net of expenses of $6,391
    
    
    243,609
    
    
    
    Repurchases and retirements of long-term debt
    
    
    (254,684
    )
    
    
    Proceeds from issuance of common stock
    
    
    17,112
    
    
    
    740Repayment of notes receivable from stock sales
    
    
    163
    
    
    
    196Net cash provided by financing activities
    
    
    84,659
    
    
    
    936Net increase in cash and cash equivalents
    
    
    22,757
    
    
    
    21,465Cash and cash equivalents at beginning of period
    
    
    202,704
    
    
    
    139,031Cash and cash equivalents at end of period
    
    $
    225,461
    
    
    $
    160,496
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CONEXANT SYSTEMS, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 1. Basis of Presentation and Significant Accounting Policies
  Liquidity
    6




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CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Interim Reporting 
 Fiscal Periods
 Supplemental Cash Flow Information
 Revenue Recognition
  7




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CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Shipping and Handling 
 Cash and Cash Equivalents 
 Marketable Securities 
  Restricted Cash
 Stock-Based Compensation
  8




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CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Three Months Ended
    
    
    Nine Months EndedJune 30, 2005
    
    
    June 30, 2005Net loss, as reported
    
    $
    (32,166
    )
    
    $
    (226,071
    )Add: stock-based compensation expense included in reported net loss,
net of tax
    
    
    3,019
    
    
    
    9,027Deduct: stock-based compensation expense determined under fair
value method, net of tax
    
    
    (14,952
    )
    
    
    (49,494
    )Net loss, pro forma
    
    $
    (44,099
    )
    
    $
    (266,538
    )Net loss per share:Basic  as reported
    
    $
    (0.07
    )
    
    $
    (0.48
    )Basic  pro forma
    
    $
    (0.09
    )
    
    $
    (0.57
    )Diluted  as reported
    
    $
    (0.07
    )
    
    $
    (0.48
    )Diluted  pro forma
    
    $
    (0.09
    )
    
    $
    (0.57
    )
   9




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Stock option plans:Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected stock price volatility
    
    
    74
    %
    
    
    86
    %
    
    
    76
    %
    
    
    86
    %Risk-free interest rate
    
    
    4.9
    %
    
    
    3.8
    %
    
    
    4.5
    %
    
    
    3.9
    %Average expected life (in years)
    
    
    5.2
    5
    
    
    5.0
    0
    
    
    5.2
    5
    
    
    4.9
    0Stock purchase plan:Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected stock price volatility
    
    
    76
    %
    
    
    79
    %
    
    
    76
    %
    
    
    89
    %Risk-free interest rate
    
    
    4.4
    %
    
    
    4.0
    %
    
    
    4.4
    %
    
    
    4.1
    %Average expected life (in years)
    
    
    0.5
    0
    
    
    0.5
    0
    
    
    0.5
    0
    
    
    0.5
    0
  Derivative Financial Instruments
    Net Income (Loss) Per Share
 10




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CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
   Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Stock options and warrants
    
    
    20,971
    
    
    
    484
    
    
    
    13,636
    
    
    
    1,2905.25% convertible subordinated notes due May 2006
    
    
    2,824
    
    
    
    5,840
    
    
    
    4,835
    
    
    
    5,8404.25% convertible subordinated notes due May 2006
    
    
    2,428
    
    
    
    7,364
    
    
    
    5,718
    
    
    
    7,3644.00% convertible subordinated notes due February 2007
    
    
    10,758
    
    
    
    12,137
    
    
    
    11,564
    
    
    
    12,1374.00% convertible subordinated notes due March 2026
    
    
    46,457
    
    
    
    
    
    
    
    19,209
    
    
    
    Total
    
    
    83,438
    
    
    
    25,825
    
    
    
    54,962
    
    
    
    26,631
 Recent Accounting Pronouncements 
   Reclassification 
 11




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  2. Business Combination
 Paxonet Communications, Inc.
   3. Supplemental Financial Information
 Marketable Securities
  Gross
    
    
    GrossCost or
    
    
    Unrealized
    
    
    UnrealizedAmortized
    
    
    Holding
    
    
    Holding
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueJune 30, 2006:Corporate debt securities
    
    $
    26,506
    
    
    $
    
    
    
    $
    (192
    )
    
    $
    26,314U.S. government agency securities
    
    
    80,042
    
    
    
    
    
    
    
    (64
    )
    
    
    79,978Equity securities
    
    
    34,068
    
    
    
    
    
    
    
    
    
    
    
    34,068$
    140,616
    
    
    $
    
    
    
    $
    (256
    )
    
    $
    140,360September 30, 2005:Corporate debt securities
    
    $
    37,974
    
    
    $
    
    
    
    $
    (40
    )
    
    $
    37,934U.S. government agency securities
    
    
    58,137
    
    
    
    2
    
    
    
    (171
    )
    
    
    57,968Equity securities
    
    
    52,524
    
    
    
    
    
    
    
    (9,120
    )
    
    
    43,404$
    148,635
    
    
    $
    2
    
    
    $
    (9,331
    )
    
    $
    139,306
  Gross
    
    
    GrossCost or
    
    
    Unrealized
    
    
    UnrealizedAmortized
    
    
    Holding
    
    
    Holding
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueSeptember 30, 2005:U.S. government agency securities
    
    $
    15,964
    
    
    $
    
    
    
    $
    (102
    )
    
    $
    15,862Corporate debt securities
    
    
    22,910
    
    
    
    
    
    
    
    (287
    )
    
    
    22,623$
    38,874
    
    
    $
    
    
    
    $
    (389
    )
    
    $
    38,485
  12




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
   Inventories
  June 30,
    
    
    September 30,2006
    
    
    2005Work-in-process
    
    $
    43,543
    
    
    $
    61,535Finished goods
    
    
    39,933
    
    
    
    33,794$
    83,476
    
    
    $
    95,329
  Goodwill
  Goodwill at September 30, 2005
    
    $
    717,013Additions
    
    
    3,000Adjustments
    
    
    (8,368
    )Goodwill at June 30, 2006
    
    $
    711,645
  13




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Intangible Assets
  June 30, 2006
    
    
    September 30, 2005Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    Book
    
    
    Carrying
    
    
    Accumulated
    
    
    BookAmount
    
    
    Amortization
    
    
    Value
    
    
    Amount
    
    
    Amortization
    
    
    ValueDeveloped technology
    
    $
    138,883
    
    
    $
    (67,636
    )
    
    $
    71,247
    
    
    $
    146,146
    
    
    $
    (54,133
    )
    
    $
    92,013Customer base
    
    
    4,660
    
    
    
    (2,433
    )
    
    
    2,227
    
    
    
    4,660
    
    
    
    (1,781
    )
    
    
    2,879Other intangible assets
    
    
    15,724
    
    
    
    (5,671
    )
    
    
    10,053
    
    
    
    21,888
    
    
    
    (10,071
    )
    
    
    11,817$
    159,267
    
    
    $
    (75,740
    )
    
    $
    83,527
    
    
    $
    172,694
    
    
    $
    (65,985
    )
    
    $
    106,709
  Remainderof 2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    ThereafterAmortization expense
    
    $
    7,521
    
    
    $
    29,801
    
    
    $
    29,333
    
    
    $
    13,831
    
    
    $
    2,079
    
    
    $
    962
 Mindspeed Warrant
   Short-Term Debt
  14




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Long-Term Debt
    June 30,
    
    
    September 30,2006
    
    
    20055.25% convertible subordinated notes due May 2006 with a conversion price of $22.26
    
    $
    
    
    
    $
    130,0004.25% convertible subordinated notes due May 2006 with a conversion price of $9.08
    
    
    
    
    
    
    66,8254.00% convertible subordinated notes due February 2007 with a conversion price of $42.43
    
    
    456,500
    
    
    
    515,0004.00% convertible subordinated notes due March 2026 with a conversion price of $4.92
    
    
    250,000
    
    
    
    Total
    
    
    706,500
    
    
    
    711,825Less: current portion of long-term debt
    
    
    (456,500
    )
    
    
    (196,825
    )Long-term debt
    
    $
    250,000
    
    
    $
    515,000
 Other Expense (Income), Net
  Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Investment and interest income
    
    $
    (4,518
    )
    
    $
    (2,182
    )
    
    $
    (14,415
    )
    
    $
    (3,956
    )Decrease in fair value of the Mindspeed
warrant
    
    
    35,131
    
    
    
    16,085
    
    
    
    3,800
    
    
    
    14,804Impairment loss of Skyworks shares
    
    
    18,456
    
    
    
    
    
    
    
    18,456
    
    
    
    Losses of equity method investments
    
    
    648
    
    
    
    2,127
    
    
    
    3,303
    
    
    
    8,587Realized gains on sales of equity securities
    
    
    
    
    
    
    (31,198
    )
    
    
    (4,414
    )
    
    
    (42,310
    )Other
    
    
    190
    
    
    
    (442
    )
    
    
    (307
    )
    
    
    (492
    )$
    49,907
    
    
    $
    (15,610
    )
    
    $
    6,423
    
    
    $
    (23,367
    )
 4. Shareholders Equity
   15




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 th th
 Stock Option Plans
   WeightedAverage
    
    
    AggregateWeighted
    
    
    Remaining
    
    
    IntrinsicShares
    
    
    Average Exercise
    
    
    Contractual
    
    
    Value(in thousands)
    
    
    Price Per Share
    
    
    Term (in years)
    
    
    (in thousands)Outstanding, September 30, 2005
    
    
    111,195
    
    
    $
    2.81Granted
    
    
    14,390
    
    
    
    2.72Exercised
    
    
    (7,130
    )
    
    
    2.01Canceled
    
    
    (11,470
    )
    
    
    4.10Outstanding, June 30, 2006
    
    
    106,985
    
    
    
    2.71
    
    
    
    4.75
    
    
    $
    39,159Exercisable, June 30, 2006
    
    
    74,078
    
    
    $
    2.97
    
    
    
    3.72
    
    
    $
    20,910
   Directors Stock Plan
  Employee Stock Purchase Plan
  16




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
   Performance Share Plan
  5. Commitments and Contingencies
 Lease Commitments
   Fiscal Year
    
    Lease Payments
    
    
    Sublease Income
    
    
    Net ObligationRemainder of 2006
    
    $
    8,353
    
    
    $
    (1,978
    )
    
    $
    6,3752007
    
    
    29,963
    
    
    
    (8,081
    )
    
    
    21,8822008
    
    
    24,232
    
    
    
    (6,753
    )
    
    
    17,4792009
    
    
    16,485
    
    
    
    (3,096
    )
    
    
    13,3892010
    
    
    16,073
    
    
    
    (3,125
    )
    
    
    12,948Thereafter
    
    
    77,530
    
    
    
    (8,862
    )
    
    
    68,668Total future minimum lease payments
    
    $
    172,636
    
    
    $
    (31,895
    )
    
    $
    140,741
   Legal Matters
  17




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  IPO Litigation 
 Texas Instruments, Inc. 
  18




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
    Class Action Suits  Witriol
v. Conexant, et al. (Witriol)
 Graden v. Conexant, et al.
 Shareholder Derivative Suits Witriol
 19




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Witriol
 Guarantees and Indemnifications
    Other
   20




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 6. Comprehensive Income (Loss)
  Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net loss
    
    $
    (67,090
    )
    
    $
    (32,166
    )
    
    $
    (101,493
    )
    
    $
    (226,071
    )Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    (226
    )
    
    
    (481
    )
    
    
    (933
    )
    
    
    398Unrealized gains on cash flow hedge contracts
    
    
    82
    
    
    
    
    
    
    
    82
    
    
    
    Unrealized gains (losses) on
available-for-sale securities
    
    
    (7,703
    )
    
    
    29,387
    
    
    
    (8,994
    )
    
    
    (13,964
    )Reclassification adjustment for realized
losses (gains) on available-for-sale
securities
    
    
    18,456
    
    
    
    (26,987
    )
    
    
    18,456
    
    
    
    (38,247
    )Minimum pension liability adjustments
    
    
    80
    
    
    
    69
    
    
    
    232
    
    
    
    207Other comprehensive income (loss)
    
    
    10,689
    
    
    
    1,988
    
    
    
    8,843
    
    
    
    (51,606
    )Comprehensive loss
    
    $
    (56,401
    )
    
    $
    (30,178
    )
    
    $
    (92,650
    )
    
    $
    (277,677
    )
  June 30,
    
    
    September 30,2006
    
    
    2005Foreign currency translation adjustments
    
    $
    (4,353
    )
    
    $
    (3,420
    )Unrealized gains on cash flow hedge contracts
    
    
    82
    
    
    
    Unrealized losses on available-for-sale securities
    
    
    (256
    )
    
    
    (9,718
    )Minimum pension liability adjustments
    
    
    (8,642
    )
    
    
    (8,874
    )Accumulated other comprehensive loss
    
    $
    (13,169
    )
    
    $
    (22,012
    )
 7. Special Charges
  Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Litigation charge
    
    $
    30,000
    
    
    $
    
    
    
    $
    70,000
    
    
    $
    Restructuring charges
    
    
    2,610
    
    
    
    6,731
    
    
    
    2,394
    
    
    
    24,470Integration charges (credits)
    
    
    
    
    
    
    1,649
    
    
    
    (400
    )
    
    
    6,760Asset impairments
    
    
    
    
    
    
    29
    
    
    
    85
    
    
    
    3,492Other special charges
    
    
    
    
    
    
    
    
    
    
    300
    
    
    
    6,540$
    32,610
    
    
    $
    8,409
    
    
    $
    72,379
    
    
    $
    41,262
 Litigation Charge
  21




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Restructuring Charges
  2006 Restructuring Action
  Workforce
    
    
    FacilityReductions
    
    
    and Other
    
    
    TotalRestructuring balance, September 30, 2005
    
    $
    
    
    
    $
    
    
    
    $
    Charged to costs and expenses
    
    
    278
    
    
    
    
    
    
    
    278Cash payments
    
    
    (5
    )
    
    
    
    
    
    
    (5
    )Restructuring balance, December 31, 2005
    
    
    273
    
    
    
    
    
    
    
    273Charged to costs and expenses
    
    
    1,220
    
    
    
    
    
    
    
    1,220Cash payments
    
    
    (227
    )
    
    
    
    
    
    
    (227
    )Restructuring balance, March 31, 2006
    
    
    1,266
    
    
    
    
    
    
    
    1,266Charged to costs and expenses
    
    
    1,925
    
    
    
    373
    
    
    
    2,298Cash payments
    
    
    (1,386
    )
    
    
    (23
    )
    
    
    (1,409
    )Restructuring balance, June 30, 2006
    
    $
    1,805
    
    
    $
    350
    
    
    $
    2,155
 2005 Restructuring Action
 22




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
   Workforce
    
    
    FacilityReductions
    
    
    and Other
    
    
    TotalRestructuring balance, September 30, 2005
    
    $
    3,544
    
    
    $
    19,338
    
    
    $
    22,882Charged to costs and expenses
    
    
    191
    
    
    
    346
    
    
    
    537Reclassification to accrued compensation and benefits
    
    
    1,899
    
    
    
    
    
    
    
    1,899Cash payments
    
    
    (1,626
    )
    
    
    (1,675
    )
    
    
    (3,301
    )Restructuring balance, December 31, 2005
    
    
    4,008
    
    
    
    18,009
    
    
    
    22,017Charged (credited) to costs and expenses
    
    
    (2,720
    )
    
    
    321
    
    
    
    (2,399
    )Reclassifications
    
    
    (55
    )
    
    
    55
    
    
    
    Cash payments
    
    
    (561
    )
    
    
    (1,070
    )
    
    
    (1,631
    )Restructuring balance, March 31, 2006
    
    
    672
    
    
    
    17,315
    
    
    
    17,987Charged to costs and expenses
    
    
    
    
    
    
    302
    
    
    
    302Cash payments
    
    
    (155
    )
    
    
    (1,281
    )
    
    
    (1,436
    )Restructuring balance, June 30, 2006
    
    $
    517
    
    
    $
    16,336
    
    
    $
    16,853
 2004 Restructuring Actions
  23




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Workforce
    
    
    FacilityReductions
    
    
    and Other
    
    
    TotalRestructuring balance, September 30, 2005
    
    $
    
    
    
    $
    3,345
    
    
    $
    3,345Credited to costs and expenses
    
    
    
    
    
    
    (55
    )
    
    
    (55
    )Cash payments
    
    
    
    
    
    
    (141
    )
    
    
    (141
    )Restructuring balance, December 31, 2005
    
    
    
    
    
    
    3,149
    
    
    
    3,149Cash payments
    
    
    
    
    
    
    (154
    )
    
    
    (154
    )Restructuring balance, March 31, 2006
    
    
    
    
    
    
    2,995
    
    
    
    2,995Cash payments
    
    
    
    
    
    
    (154
    )
    
    
    (154
    )Restructuring balance, June 30, 2006
    
    $
    
    
    
    $
    2,841
    
    
    $
    2,841
    Workforce
    
    
    FacilityReductions
    
    
    and Other
    
    
    TotalRestructuring balance, September 30, 2005
    
    $
    65
    
    
    $
    831
    
    
    $
    896Charged to costs and expenses
    
    
    170
    
    
    
    
    
    
    
    170Cash payments
    
    
    (224
    )
    
    
    (183
    )
    
    
    (407
    )Restructuring balance, December 31, 2005
    
    
    11
    
    
    
    648
    
    
    
    659Charged to costs and expenses
    
    
    33
    
    
    
    
    
    
    
    33Cash payments
    
    
    (42
    )
    
    
    (167
    )
    
    
    (209
    )Restructuring balance, March 31, 2006
    
    
    2
    
    
    
    481
    
    
    
    483Charged to costs and expenses
    
    
    10
    
    
    
    
    
    
    
    10Cash payments
    
    
    (10
    )
    
    
    (174
    )
    
    
    (184
    )Restructuring balance, June 30, 2006
    
    $
    2
    
    
    $
    307
    
    
    $
    309
 2003 Corporate Restructuring Plan 
 24




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Workforce
    
    
    FacilityReductions
    
    
    and Other
    
    
    TotalRestructuring balance, September 30, 2005
    
    $
    
    
    
    $
    716
    
    
    $
    716Cash payments
    
    
    
    
    
    
    (144
    )
    
    
    (144
    )Restructuring balance, December 31, 2005
    
    
    
    
    
    
    572
    
    
    
    572Cash payments
    
    
    
    
    
    
    (143
    )
    
    
    (143
    )Restructuring balance, March 31, 2006
    
    
    
    
    
    
    429
    
    
    
    429Cash payments
    
    
    
    
    
    
    (171
    )
    
    
    (171
    )Restructuring balance, June 30, 2006
    
    $
    
    
    
    $
    258
    
    
    $
    258
 2002 Corporate and Manufacturing Restructuring Plan
   Workforce
    
    
    FacilityReductions
    
    
    and Other
    
    
    TotalRestructuring balance, September 30, 2005
    
    $
    
    
    
    $
    990
    
    
    $
    990Cash payments
    
    
    
    
    
    
    (489
    )
    
    
    (489
    )Restructuring balance, December 31, 2005
    
    
    
    
    
    
    501
    
    
    
    501Cash payments
    
    
    
    
    
    
    (183
    )
    
    
    (183
    )Restructuring balance, March 31, 2006
    
    
    
    
    
    
    318
    
    
    
    318Cash payments
    
    
    
    
    
    
    (83
    )
    
    
    (83
    )Restructuring balance, June 30, 2006
    
    $
    
    
    
    $
    235
    
    
    $
    235
  25




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 Integration Charges (Credits)
   Asset Impairments
   Other Special Charges
  8. Segment and Geographic Information
   
    
    the nature of products and services;
    
    the nature of the production processes;
    
    the type or class of customer for their products and services; and
    
    the methods used to distribute their products or provide their services.
  
    
    the sale of semiconductor products is the only material source of revenue for each
of the Companys four operating segments;
    
    the products sold by each of the Companys operating segments use the same standard
manufacturing process;
    
    the products marketed by each of the Companys operating segments are sold to
similar customers; and
    
    all of the Companys products are sold through its internal sales force and common
distributors.
  26




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Americas
    
    $
    32,346
    
    
    $
    24,490
    
    
    $
    75,405
    
    
    $
    64,196Asia-Pacific
    
    
    196,627
    
    
    
    160,989
    
    
    
    596,723
    
    
    
    399,046Europe, Middle East and Africa
    
    
    22,662
    
    
    
    11,985
    
    
    
    52,796
    
    
    
    44,581$
    251,635
    
    
    $
    197,464
    
    
    $
    724,924
    
    
    $
    507,823
   June 30,
    
    
    September 30,2006
    
    
    2005Americas
    
    $
    89,725
    
    
    $
    76,270Asia-Pacific
    
    
    14,781
    
    
    
    6,845Europe, Middle East and Africa
    
    
    2,158
    
    
    
    2,702$
    106,664
    
    
    $
    85,817
 9. Related Party Transactions
 Jazz
Semiconductor, Inc.
  Wafer
and Probe Services Purchases
 27




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##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
   Lease
Agreement
 Mindspeed Technologies, Inc.
  Lease
Agreement
 28




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  Overview
    29




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##### Table of Contents



Results of Operations
 Net Revenues
 Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,(in thousands)
    
    2006
    
    2005
    
    2006
    
    2005Net revenues
    
    $
    251,635
    
    
    $
    197,464
    
    
    $
    724,924
    
    
    $
    507,823
    Gross Margin
 Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,(in thousands)
    
    2006
    
    2005
    
    2006
    
    2005Gross margin
    
    $
    131,537
    
    
    $
    75,034
    
    
    $
    333,500
    
    
    $
    142,162Percent of net revenues
    
    
    52
    %
    
    
    38
    %
    
    
    46
    %
    
    
    28
    %
    30




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005E&O reserves at beginning of period
    
    $
    39,793
    
    
    $
    53,302
    
    
    $
    44,833
    
    
    $
    23,319Additions
    
    
    4,949
    
    
    
    2,131
    
    
    
    12,123
    
    
    
    31,296Release upon sales of product
    
    
    (2,175
    )
    
    
    (1,298
    )
    
    
    (8,826
    )
    
    
    (2,299
    )Scrap
    
    
    (2,503
    )
    
    
    (3,460
    )
    
    
    (5,345
    )
    
    
    (5,502
    )Standards adjustments and other
    
    
    (1,168
    )
    
    
    (864
    )
    
    
    (3,889
    )
    
    
    2,997E&O reserves at end of period
    
    $
    38,896
    
    
    $
    49,811
    
    
    $
    38,896
    
    
    $
    49,811
    31




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005LCM reserves at beginning of period
    
    $
    6,228
    
    
    $
    11,093
    
    
    $
    6,739
    
    
    $
    Additions
    
    
    288
    
    
    
    
    
    
    
    3,609
    
    
    
    18,854Release upon sales of product
    
    
    (1,526
    )
    
    
    (1,488
    )
    
    
    (5,312
    )
    
    
    (5,370
    )Standards adjustments and other
    
    
    
    
    
    
    (2,588
    )
    
    
    (46
    )
    
    
    (6,467
    )LCM reserves at end of period
    
    $
    4,990
    
    
    $
    7,017
    
    
    $
    4,990
    
    
    $
    7,017
 Research and Development
 Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,(in thousands)
    
    2006
    
    2005
    
    2006
    
    2005Research and development
    
    $
    70,096
    
    
    $
    66,282
    
    
    $
    199,286
    
    
    $
    209,362Percent of net revenues
    
    
    28
    %
    
    
    34
    %
    
    
    27
    %
    
    
    41
    %
    Selling, General and Administrative
 Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,(in thousands)
    
    2006
    
    2005
    
    2006
    
    2005Selling, general and administrative
    
    $
    27,037
    
    
    $
    31,081
    
    
    $
    101,958
    
    
    $
    89,449Percent of net revenues
    
    
    11
    %
    
    
    16
    %
    
    
    14
    %
    
    
    18
    %
    32




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Amortization of Intangible Assets
 Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,(in thousands)
    
    2006
    
    2005
    
    2006
    
    2005Amortization of intangible assets
    
    $
    7,520
    
    
    $
    7,969
    
    
    $
    23,185
    
    
    $
    24,402
   Special Charges
 Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Litigation charge
    
    $
    30,000
    
    
    $
    
    
    
    $
    70,000
    
    
    $
    Restructuring charges
    
    
    2,610
    
    
    
    6,731
    
    
    
    2,394
    
    
    
    24,470Integration charges (credits)
    
    
    
    
    
    
    1,649
    
    
    
    (400
    )
    
    
    6,760Asset impairments
    
    
    
    
    
    
    29
    
    
    
    85
    
    
    
    3,492Other special charges
    
    
    
    
    
    
    
    
    
    
    300
    
    
    
    6,540$
    32,610
    
    
    $
    8,409
    
    
    $
    72,379
    
    
    $
    41,262
   33




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Interest Expense
 Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,(in thousands)
    
    2006
    
    2005
    
    2006
    
    2005Interest expense
    
    $
    10,426
    
    
    $
    8,396
    
    
    $
    29,280
    
    
    $
    25,290
   Other Expense (Income), Net
 Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Investment and interest income
    
    $
    (4,518
    )
    
    $
    (2,182
    )
    
    $
    (14,415
    )
    
    $
    (3,956
    )Decrease in fair value of the Mindspeed
warrant
    
    
    35,131
    
    
    
    16,085
    
    
    
    3,800
    
    
    
    14,804Impairment loss of Skyworks shares
    
    
    18,456
    
    
    
    
    
    
    
    18,456
    
    
    
    Losses of equity method investments
    
    
    648
    
    
    
    2,127
    
    
    
    3,303
    
    
    
    8,587Realized gains on sales of equity securities
    
    
    
    
    
    
    (31,198
    )
    
    
    (4,414
    )
    
    
    (42,310
    )Other
    
    
    190
    
    
    
    (442
    )
    
    
    (307
    )
    
    
    (492
    )$
    49,907
    
    
    $
    (15,610
    )
    
    $
    6,423
    
    
    $
    (23,367
    )
   Provision for Income Taxes
  34




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Liquidity and Capital Resources
     35




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June 30,
    
    
    September 30,(in thousands)
    
    2006
    
    
    2005Cash and cash equivalents
    
    $
    225,461
    
    
    $
    202,704Short-term marketable debt securities (primarily U.S. government agency and
corporate debt securities)
    
    
    106,292
    
    
    
    95,902Long-term marketable debt securities (primarily U.S. government agency and
corporate debt securities)
    
    
    
    
    
    
    38,485Subtotal
    
    
    331,753
    
    
    
    337,091Marketable equity securities (6.2 million shares of Skyworks Solutions, Inc.)
    
    
    34,068
    
    
    
    43,404Total cash, cash equivalents and marketable securities
    
    $
    365,821
    
    
    $
    380,495
     36




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Nine Months EndedJune 30,
    
    
    June 30,(in thousands)
    
    2006
    
    
    2005Net cash (used in) operating activities
    
    $
    (54,263
    )
    
    $
    (58,666
    )Net cash (used in) provided by investing activities
    
    
    (7,639
    )
    
    
    79,195Net cash provided by financing activities
    
    
    84,659
    
    
    
    936Net increase in cash and cash equivalents
    
    $
    22,757
    
    
    $
    21,465
     37




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Payments due by periodMore than 5(in millions)
    
    Total
    
    
    Less than 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    yearsLong-term debt
    
    $
    706.5
    
    
    $
    456.5
    
    
    $
    
    
    
    $
    
    
    
    $
    250.0Short-term debt
    
    
    80.0
    
    
    
    80.0
    
    
    
    
    
    
    
    
    
    
    
    Interest on debt
    
    
    220.1
    
    
    
    30.1
    
    
    
    20.0
    
    
    
    20.0
    
    
    
    150.0Operating leases
    
    
    172.6
    
    
    
    31.2
    
    
    
    35.4
    
    
    
    28.5
    
    
    
    77.5Assigned leases
    
    
    5.5
    
    
    
    2.2
    
    
    
    1.4
    
    
    
    1.3
    
    
    
    0.6Capital commitments
    
    
    4.9
    
    
    
    4.9
    
    
    
    
    
    
    
    
    
    
    
    $
    1,189.6
    
    
    $
    604.9
    
    
    $
    56.8
    
    
    $
    49.8
    
    
    $
    478.1
  Off-Balance Sheet Arrangements
   Special Purpose Entities
   Recent Accounting Pronouncements
  38




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Critical Accounting Policies
  Business combinations
  Revenue recognition
  39




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Allowance for doubtful accounts
  Inventories
  Long-lived assets
  40




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Deferred income taxes
  Valuation of warrants
  Non-marketable equity securities
  Stock-based compensation
  41




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Restructuring charges
  42




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Employee benefit plans
  Risk Factors
   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 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.
  43




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
    
    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.
 The value of our common stock may be adversely affected by market volatility.
  
    
    our operating and financial performance and prospects;
    
    our ability to repay our debt;
    
    the depth and liquidity of the market for our common stock;
    
    investor perception of us and the industry and markets in which we operate;
    
    our inclusion in, or removal from, any equity market indices;
    
    the level of research coverage of our common stock;
    
    changes in earnings estimates or buy/sell recommendations by analysts;
    
    general financial, domestic, international, economic and other market conditions; and
    
    judgments favorable or adverse to us.
  We have recently incurred substantial losses and we anticipate additional future losses.
  We operate in the highly cyclical semiconductor industry, which is subject to significant
downturns.
  44




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Our operating results may be negatively affected by substantial quarterly and annual fluctuations
and market downturns.
  
    
    changes in end-user demand for the products manufactured and sold by our customers;
    
    the timing of receipt, reduction or cancellation of significant orders by customers;
    
    seasonal customer demand;
    
    the gain or loss of significant customers;
    
    market acceptance of our products and our customers products;
    
    our ability to develop, introduce and market new products and technologies on a timely basis;
    
    the timing and extent of product development costs;
    
    new product and technology introductions by competitors;
    
    changes in the mix of products we develop and sell;
    
    fluctuations in manufacturing yields;
    
    availability and cost of products from our suppliers;
    
    intellectual property disputes; and
    
    the effects of competitive pricing pressures, including decreases in average selling
prices of our products.
  We are subject to intense competition.
   
    
    time-to-market;
    
    product quality, reliability and performance;
    
    level of integration;
    
    price and total system cost;
    
    compliance with industry standards;
    
    design and engineering capabilities;
    
    strategic relationships with customers;
    
    customer support;
    
    new product innovation; and
    
    access to manufacturing capacity.
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The loss of a key customer could seriously impact our revenue levels and harm our business. In
addition, if we are unable to continue to sell existing and new products to our key customers in
significant quantities or to attract new significant customers, our future operating results could
be adversely affected.
   
    
    most of our customers can stop incorporating our products into their own products
with limited notice to us and suffer little or no penalty;
    
    our agreements with our customers typically do not require them to purchase a
minimum quantity of our products;
    
    many of our customers have pre-existing or concurrent relationships with our current
or potential competitors that may affect the customers decisions to purchase our
products;
    
    our customers face intense competition from other manufacturers that do not use our products; and
    
    some of our customers offer or may offer products that compete with our products.
  Our success depends on our ability to timely develop competitive new products and reduce costs.
  
    
    our ability to anticipate customer and market requirements and changes in technology
and industry standards;
    
    our ability to accurately define new products;
    
    our ability to timely complete development of new products and bring our products to
market on a timely basis;
    
    our ability to differentiate our products from offerings of our competitors;
    
    overall market acceptance of our products;
    
    our ability to invest in significant amounts of research and development; and
    
    our ability to transition product development efforts between and among our sites,
particularly into India and China.
 
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Our success depends, in part, on our ability to effect suitable investments, alliances and
acquisitions.
   
    
    issuances of equity securities dilutive to our existing shareholders;
    
    large initial one-time write-offs of in-process research and development;
    
    the incurrence of substantial debt and assumption of unknown liabilities;
    
    the potential loss of key employees from the acquired company;
    
    amortization expenses related to intangible assets; and
    
    the diversion of managements attention from other business concerns.
   47




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We are subject to the risks of doing business internationally.
  
    
    currency exchange rate fluctuations;
    
    local economic and political conditions;
    
    disruptions of commerce and capital or trading markets due to or related to
terrorist activity or armed conflict;
    
    restrictive governmental actions, such as restrictions on the transfer or
repatriation of funds and trade protection measures, including export duties and quotas
and customs duties and tariffs;
    
    changes in legal or regulatory requirements;
    
    difficulty in obtaining distribution and support;
    
    the laws and policies of the United States and other countries affecting trade,
foreign investment and loans, and import or export licensing requirements;
    
    tax laws, including the cost of services provided and products sold between us and
our subsidiaries which are subject to review by taxing authorities; and
    
    limitations on our ability under local laws to protect our intellectual property.
    We may not be able to keep abreast of the rapid technological changes in our markets.
  
    
    rapid technological developments;
    
    rapid changes in customer requirements;
    
    frequent new product introductions and enhancements;
 48




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
    
    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.
  Uncertainties involving the ordering and shipment of our products could adversely affect our
business.
  49




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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.
      50




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##### Table of Contents



We may experience difficulties in transitioning to smaller geometry process technologies or in
achieving higher levels of design integration, which may result in reduced manufacturing yields,
delays in product deliveries and increased expenses.
  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.
  51




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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;
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
    
    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.
   53




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
         (in millions)
    
    Carrying Value
    
    Fair ValueCash and cash equivalents
    
    $
    225.5
    
    
    $
    225.5Marketable debt securities
    
    
    106.3
    
    
    
    106.3Marketable equity securities
    
    
    34.1
    
    
    
    34.1Mindspeed warrant
    
    
    29.3
    
    
    
    29.3Short-term debt
    
    
    80.0
    
    
    
    80.0Current portion of long-term debt
    
    
    456.5
    
    
    
    449.7Long-term debt
    
    
    250.0
    
    
    
    227.5
  54




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ITEM 4. CONTROLS AND PROCEDURES
   55




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PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 Texas Instruments, Inc. 
     56




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Class Action Suits  Witriol
v. Conexant, et al.
 57




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ITEM 6. EXHIBITS
 Exhibit No.
    
    Description10.1
    
    Separation and Release Agreement, dated as of July 5, 2006, by
and between the Company and F. Matthew Rhodes, filed as
Exhibit 99.1 to the Companys Current Report on Form 8-K filed
on July 7, 2006, is incorporated 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.
 58




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SIGNATURE
  CONEXANT SYSTEMS, INC.
(Registrant)Date: August 9, 2006
    By
    
    /s/ J. Scott BlouinJ. Scott BlouinSenior Vice President and
Chief Financial Officer
(principal financial officer) 59




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EXHIBIT INDEX
 Exhibit No.
    
    Description10.1
    
    Separation and Release Agreement, dated as of July 5, 2006, by
and between the Company and F. Matthew Rhodes, filed as
Exhibit 99.1 to the Companys Current Report on Form 8-K filed
on July 7, 2006, is incorporated 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.
 60