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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended December 29, 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
  o þ




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FORWARD-LOOKING STATEMENTS
  
    
    the cyclical nature of the semiconductor industry and the markets addressed by our
products and our customers products;
    
    the risk that the value of our common stock may be adversely affected by market volatility;
    
    the substantial losses we have incurred recently;
    
    general economic and political conditions and conditions in the markets we address;
    
    continuing volatility in the technology sector and the semiconductor industry;
    
    demand for and market acceptance of new and existing products;
    
    successful development of new products;
    
    the timing of our new product introductions and 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 product mix;
    
    the risk that capital needed for our business and to repay our indebtedness will not be
available when needed;
    
    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  December 29, 2006 and September 29, 2006
    
    
    3Condensed Consolidated Statements of Operations  Fiscal Quarters Ended December 29, 2006 and December 30, 2005
    
    
    4Condensed Consolidated Statements of Cash Flows  Fiscal Quarters Ended December 29, 2006 and December 30, 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    31Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    46Item 4. Controls and Procedures
    
    
    47PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    48Item 1A. Risk Factors
    
    
    50Item 6. Exhibits
    
    
    60Signature
    
    
    61EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
  2




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Balance Sheets
 (unaudited, in thousands, except par value)
 December 29,
    
    
    September 29,2006
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    506,925
    
    
    $
    225,626Marketable securities
    
    
    110,909
    
    
    
    115,709Restricted cash
    
    
    8,800
    
    
    
    8,800Receivables, net of allowances of $635 and $842
    
    
    129,539
    
    
    
    123,025Inventories
    
    
    84,063
    
    
    
    97,460Other current assets
    
    
    27,640
    
    
    
    19,353Total current assets
    
    
    867,876
    
    
    
    589,973Property, plant and equipment, net
    
    
    67,010
    
    
    
    65,405Goodwill
    
    
    712,612
    
    
    
    710,790Intangible assets, net
    
    
    72,219
    
    
    
    76,008Other assets
    
    
    142,186
    
    
    
    131,449Total assets
    
    $
    1,861,903
    
    
    $
    1,573,625LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    456,500
    
    
    $
    188,375Short-term debt
    
    
    80,000
    
    
    
    80,000Accounts payable
    
    
    106,432
    
    
    
    113,690Accrued compensation and benefits
    
    
    29,028
    
    
    
    28,307Other current liabilities
    
    
    55,656
    
    
    
    51,966Total current liabilities
    
    
    727,616
    
    
    
    462,338Long-term debt
    
    
    525,000
    
    
    
    518,125Other liabilities
    
    
    77,940
    
    
    
    83,064Total liabilities
    
    
    1,330,556
    
    
    
    1,063,527Commitments and contingencies (Note 4)Shareholders equity:Preferred and junior preferred stock
    
    
    
    
    
    
    Common stock, $0.01 par value: 1,000,000 shares authorized; 488,872
and 486,482 shares issued; and 487,590 and 485,200 shares
outstanding
    
    
    4,889
    
    
    
    4,866Treasury stock: 1,282 shares, at cost
    
    
    (5,823
    )
    
    
    (5,823
    )Additional paid-in capital
    
    
    4,706,178
    
    
    
    4,699,029Accumulated deficit
    
    
    (4,174,781
    )
    
    
    (4,175,757
    )Accumulated other comprehensive income (loss)
    
    
    984
    
    
    
    (12,096
    )Shareholder notes receivable
    
    
    (100
    )
    
    
    (121
    )Total shareholders equity
    
    
    531,347
    
    
    
    510,098Total liabilities and shareholders equity
    
    $
    1,861,903
    
    
    $
    1,573,625
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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Operations
 (unaudited, in thousands, except per share amounts)
 Fiscal Quarter EndedDecember 29,
    
    
    December 30,2006
    
    
    2005Net revenues
    
    $
    245,534
    
    
    $
    230,706Cost of goods sold (1)
    
    
    136,045
    
    
    
    134,953Gross margin
    
    
    109,489
    
    
    
    95,753Operating expenses:Research and development (1)
    
    
    71,450
    
    
    
    64,359Selling, general and administrative (1)
    
    
    27,476
    
    
    
    38,601Amortization of intangible assets
    
    
    6,238
    
    
    
    7,907Special charges
    
    
    2,898
    
    
    
    915Total operating expenses
    
    
    108,062
    
    
    
    111,782Operating income (loss)
    
    
    1,427
    
    
    
    (16,029
    )Interest expense
    
    
    (13,036
    )
    
    
    (8,802
    )Other income, net
    
    
    13,056
    
    
    
    1,276Income (loss) before income taxes
    
    
    1,447
    
    
    
    (23,555
    )Provision for income taxes
    
    
    471
    
    
    
    716Net income (loss)
    
    $
    976
    
    
    $
    (24,271
    )Net income (loss) per share  basic
    
    $
    
    
    
    $
    (0.05
    )Net income (loss) per share  diluted
    
    $
    
    
    
    $
    (0.05
    )Shares used in computing basic net income (loss) per share
    
    
    485,957
    
    
    
    474,043Shares used in computing diluted net income (loss) per share
    
    
    492,583
    
    
    
    474,043
 
 (1)
    
    These captions include non-cash employee stock-based compensation expense as follows
(see Note 1): Fiscal Quarter EndedDecember 29,
    
    December 30,2006
    
    2005Cost of goods sold
    
    $
    103
    
    
    $
    298Research and development
    
    
    2,367
    
    
    
    5,290Selling, general and administrative
    
    
    1,867
    
    
    
    8,728
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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Cash Flows
 (unaudited, in thousands)
 Fiscal Quarter EndedDecember 29,
    
    
    December 30,2006
    
    
    2005Cash flows from operating activities:Net income (loss)
    
    $
    976
    
    
    $
    (24,271
    )Adjustments to reconcile net income (loss) to net cash provided
by operating activities, net of effects of acquisitions:Depreciation
    
    
    5,846
    
    
    
    4,433Amortization of intangible assets
    
    
    6,238
    
    
    
    7,907Credits for provision for bad debts, net
    
    
    (237
    )
    
    
    (1,010
    )(Credits) charges for inventory provisions, net
    
    
    (2,274
    )
    
    
    1,724Stock-based compensation
    
    
    4,337
    
    
    
    14,316(Increase) decrease in fair value of derivative instruments
    
    
    (3,042
    )
    
    
    4,311Losses of equity method investments
    
    
    5
    
    
    
    2,071Gains on equity securities and other assets
    
    
    (4,853
    )
    
    
    (3,837
    )Other items, net
    
    
    (86
    )
    
    
    188Changes in assets and liabilities:Receivables
    
    
    (6,277
    )
    
    
    3,664Inventories
    
    
    16,441
    
    
    
    14,734Accounts payable
    
    
    (8,559
    )
    
    
    (916
    )Accrued expenses and other current liabilities
    
    
    2,191
    
    
    
    5,572Other, net
    
    
    (2,832
    )
    
    
    1,134Net cash provided by operating activities
    
    
    7,874
    
    
    
    30,020Cash flows from investing activities:Restricted cash
    
    
    
    
    
    
    (7,500
    )Purchases of marketable debt securities
    
    
    (12,094
    )
    
    
    (3,539
    )Proceeds from sales and maturities of marketable debt securities
    
    
    28,688
    
    
    
    2,455Purchases of equity securities
    
    
    
    
    
    
    (984
    )Proceeds from equity securities and other assets
    
    
    436
    
    
    
    4,664Purchases of property, plant and equipment
    
    
    (7,216
    )
    
    
    (5,780
    )Payments for acquisitions
    
    
    (5,029
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    4,785
    
    
    
    (10,684
    )Cash flows from financing activities:Proceeds from short-term debt, net of expenses of $845 and $1,044
    
    
    (845
    )
    
    
    75,524Proceeds from long-term debt, net of expenses of $7,779
    
    
    267,221
    
    
    
    Proceeds from issuance of common stock
    
    
    2,243
    
    
    
    1,664Repayment of shareholder notes receivable
    
    
    21
    
    
    
    Net cash provided by financing activities
    
    
    268,640
    
    
    
    77,188Net increase in cash and cash equivalents
    
    
    281,299
    
    
    
    96,524Cash and cash equivalents at beginning of period
    
    
    225,626
    
    
    
    202,704Cash and cash equivalents at end of period
    
    $
    506,925
    
    
    $
    299,228
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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
 
 Notes to Condensed Consolidated Financial Statements
 (unaudited)
 1. Basis of Presentation and Significant Accounting Policies
  Liquidity
   Interim Reporting 
 Fiscal Periods
 Supplemental Cash Flow Information
 6




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 Revenue Recognition
  Shipping and Handling 
 Cash and Cash Equivalents 
 Marketable Securities 
  7




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 Restricted Cash
 Stock-Based Compensation
    8




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
  Fiscal Quarter EndedDecember 29,
    
    December 30,2006
    
    2005Stock option plans:Expected dividend yield
    
    
    0
    %
    
    
    0
    %Expected stock price volatility
    
    
    71
    %
    
    
    75
    %Risk free interest rate
    
    
    4.6
    %
    
    
    4.4
    %Average expected life (in years)
    
    
    5.25
    
    
    
    5.25
  Derivative Financial Instruments
    9




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 Net Income (Loss) Per Share
  Fiscal Quarter EndedDecember 29,
    
    December 30,2006
    
    2005Stock options and warrants
    
    
    70,236
    
    
    
    8,6475.25% convertible subordinated notes due May 2006
    
    
    
    
    
    
    5,8404.25% convertible subordinated notes due May 2006
    
    
    
    
    
    
    7,3644.00% convertible subordinated notes due February 2007
    
    
    10,758
    
    
    
    12,1374.00% convertible subordinated notes due March 2026
    
    
    50,813
    
    
    
    131,807
    
    
    
    33,988
 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 four operating segments;
    
    the products sold by each of our operating segments use the same standard manufacturing process;
    
    the products marketed by each of our operating segments are sold to similar customers; and
    
    all of our products are sold through our internal sales force and common distributors.
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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 Recent Accounting Pronouncements 
    2. Business Combination
   11




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 3. Supplemental Financial Information
 Marketable Securities
  Gross
    
    
    GrossCost or
    
    
    Unrealized
    
    
    UnrealizedAmortized
    
    
    Holding
    
    
    Holding
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 29, 2006:Corporate debt securities
    
    $
    15,539
    
    
    $
    54
    
    
    $
    (17
    )
    
    $
    15,576U.S. government agency securities
    
    
    51,361
    
    
    
    197
    
    
    
    
    
    
    
    51,558Equity securities
    
    
    34,068
    
    
    
    9,707
    
    
    
    
    
    
    
    43,775$
    100,968
    
    
    $
    9,958
    
    
    $
    (17
    )
    
    $
    110,909September 29, 2006:Corporate debt securities
    
    $
    22,719
    
    
    $
    30
    
    
    $
    (29
    )
    
    $
    22,720U.S. government agency securities
    
    
    60,777
    
    
    
    134
    
    
    
    (11
    )
    
    
    60,900Equity securities
    
    
    34,068
    
    
    
    
    
    
    
    (1,979
    )
    
    
    32,089$
    117,564
    
    
    $
    164
    
    
    $
    (2,019
    )
    
    $
    115,709
   Inventories
  December 29,
    
    
    September 29,2006
    
    
    2006Work-in-process
    
    $
    41,311
    
    
    $
    53,884Finished goods
    
    
    42,752
    
    
    
    43,576$
    84,063
    
    
    $
    97,460
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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
  Goodwill
  Goodwill at September 29, 2006
    
    $
    710,790Additions
    
    
    1,822Goodwill at December 29, 2006
    
    $
    712,612
  Intangible Assets
  December 29, 2006
    
    
    September 29, 2006Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    Book
    
    
    Carrying
    
    
    Accumulated
    
    
    BookAmount
    
    
    Amortization
    
    
    Value
    
    
    Amount
    
    
    Amortization
    
    
    ValueDeveloped technology
    
    $
    140,473
    
    
    $
    (79,797
    )
    
    $
    60,676
    
    
    $
    138,883
    
    
    $
    (74,350
    )
    
    $
    64,533Customer base
    
    
    5,507
    
    
    
    (2,861
    )
    
    
    2,646
    
    
    
    4,660
    
    
    
    (2,651
    )
    
    
    2,009Other intangible assets
    
    
    15,737
    
    
    
    (6,840
    )
    
    
    8,897
    
    
    
    15,724
    
    
    
    (6,258
    )
    
    
    9,466$
    161,717
    
    
    $
    (89,498
    )
    
    $
    72,219
    
    
    $
    159,267
    
    
    $
    (83,259
    )
    
    $
    76,008
  Remainderof 2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    ThereafterAmortization expense
    
    $
    18,646
    
    
    $
    24,438
    
    
    $
    16,708
    
    
    $
    10,222
    
    
    $
    1,154
    
    
    $
    1,051
 Mindspeed Warrant
   13




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 Short-Term Debt
    Long-Term Debt
  December 29,
    
    
    September 29,2006
    
    
    20064.00% convertible subordinated notes due February 2007 with a conversion price of
$42.43
    
    $
    456,500
    
    
    $
    456,5004.00% convertible subordinated notes due March 2026 with a conversion price of $4.92
    
    
    250,000
    
    
    
    250,000Floating rate senior secured notes due November 2010
    
    
    275,000
    
    
    
    Total
    
    
    981,500
    
    
    
    706,500Less: current portion of long-term debt
    
    
    (456,500
    )
    
    
    (188,375
    )Long-term debt
    
    $
    525,000
    
    
    $
    518,125
 Floating rate senior secured notes due November 2010
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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
    4.00% convertible subordinated notes due March 2026
 4.00% convertible subordinated notes due February 2007
 15




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
  4. Commitments and Contingencies
 Lease Commitments
   Fiscal Year Ending
    
    Lease Payments
    
    
    Sublease Income
    
    
    Net ObligationRemainder of 2007
    
    $
    22,624
    
    
    $
    (6,282
    )
    
    $
    16,3422008
    
    
    25,393
    
    
    
    (6,529
    )
    
    
    18,8642009
    
    
    17,874
    
    
    
    (2,730
    )
    
    
    15,1442010
    
    
    16,264
    
    
    
    (2,762
    )
    
    
    13,5022011
    
    
    14,088
    
    
    
    (2,021
    )
    
    
    12,067Thereafter
    
    
    63,035
    
    
    
    (5,489
    )
    
    
    57,546Total future minimum lease payments
    
    $
    159,278
    
    
    $
    (25,813
    )
    
    $
    133,465
   Legal Matters
  16




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 IPO Litigation 
 Class Action Suits  Witriol v. Conexant, et al. (Witriol)
 Graden v. Conexant, et al.
 17




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 Shareholder Derivative Suits Witriol Witriol
 Guarantees and Indemnifications
   Other
   18




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 5. Shareholders Equity
  th th
 Stock Option Plans
   WeightedAverageExerciseShares
    
    PriceOutstanding, September 29, 2006
    
    
    103,782
    
    
    $
    2.65Granted
    
    
    867
    
    
    
    2.01Exercised
    
    
    (2,241
    )
    
    
    1.43Canceled
    
    
    (3,685
    )
    
    
    2.82Outstanding, December 29, 2006
    
    
    98,723
    
    
    
    2.67Exercisable, December 29, 2006
    
    
    70,189
    
    
    
    2.88
   19




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




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 6. Comprehensive Income (Loss)
  Fiscal Quarter EndedDecember 29,
    
    
    December 30,2006
    
    
    2005Net income (loss)
    
    $
    976
    
    
    $
    (24,271
    )Other comprehensive income (loss):Currency translation adjustments
    
    
    981
    
    
    
    (901
    )Unrealized gains (losses) on marketable securities
    
    
    11,796
    
    
    
    (11,967
    )Unrealized gains on foreign currency forward
hedge contracts
    
    
    249
    
    
    
    Minimum pension liability adjustments
    
    
    54
    
    
    
    73Other comprehensive income (loss)
    
    
    13,080
    
    
    
    (12,795
    )Comprehensive income (loss)
    
    $
    14,056
    
    
    $
    (37,066
    )
  December 29,
    
    
    September 29,2006
    
    
    2006Currency translation adjustments
    
    $
    (2,815
    )
    
    $
    (3,796
    )Unrealized gains (losses) on marketable securities
    
    
    9,941
    
    
    
    (1,855
    )Unrealized gains on foreign currency forward hedge contracts
    
    
    429
    
    
    
    180Minimum pension liability adjustments
    
    
    (6,571
    )
    
    
    (6,625
    )Accumulated other comprehensive income (loss)
    
    $
    984
    
    
    $
    (12,096
    )
 7. Special Charges
  Fiscal Quarter EndedDecember 29,
    
    
    December 30,2006
    
    
    2005Restructuring charges
    
    $
    2,898
    
    
    $
    930Integration credits
    
    
    
    
    
    
    (400
    )Asset impairments
    
    
    
    
    
    
    85Other special charges
    
    
    
    
    
    
    300$
    2,898
    
    
    $
    915
 Restructuring Charges
  21




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 Fiscal 2007 Restructuring Action
  Workforce
    
    
    FacilityReductions
    
    
    and Other
    
    
    TotalCharged to costs and expenses
    
    $
    2,027
    
    
    $
    
    
    
    $
    2,027Cash payments
    
    
    (214
    )
    
    
    
    
    
    
    (214
    )Restructuring balance, December 29, 2006
    
    $
    1,813
    
    
    $
    
    
    
    $
    1,813
  Fiscal 2006 Restructuring Action
  Workforce
    
    
    FacilityReductions
    
    
    and Other
    
    
    TotalCharged to costs and expenses
    
    $
    4,396
    
    
    $
    468
    
    
    $
    4,864Cash payments
    
    
    (3,180
    )
    
    
    (76
    )
    
    
    (3,256
    )Restructuring balance, September 29, 2006
    
    
    1,216
    
    
    
    392
    
    
    
    1,608Charged to costs and expenses
    
    
    533
    
    
    
    5
    
    
    
    538Cash payments
    
    
    (951
    )
    
    
    (48
    )
    
    
    (999
    )Restructuring balance, December 29, 2006
    
    $
    798
    
    
    $
    349
    
    
    $
    1,147
 Fiscal 2005 Restructuring Action
 22




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
   Workforce
    
    
    FacilityReductions
    
    
    and Other
    
    
    TotalCharged to costs and expenses
    
    $
    19,708
    
    
    $
    7,244
    
    
    $
    26,952Non-cash items
    
    
    (46
    )
    
    
    13,629
    
    
    
    13,583Cash payments
    
    
    (16,118
    )
    
    
    (1,535
    )
    
    
    (17,653
    )Restructuring balance, September 30, 2005
    
    
    3,544
    
    
    
    19,338
    
    
    
    22,882Charged (credited) to costs and expenses
    
    
    (2,760
    )
    
    
    1,030
    
    
    
    (1,730
    )Reclassification to accrued compensation
and benefits and other
    
    
    1,844
    
    
    
    55
    
    
    
    1,899Cash payments
    
    
    (2,432
    )
    
    
    (5,135
    )
    
    
    (7,567
    )Restructuring balance, September 29, 2006
    
    
    196
    
    
    
    15,288
    
    
    
    15,484Charged to costs and expenses
    
    
    
    
    
    
    311
    
    
    
    311Cash payments
    
    
    (141
    )
    
    
    (1,190
    )
    
    
    (1,331
    )Restructuring balance, December 29, 2006
    
    $
    55
    
    
    $
    14,409
    
    
    $
    14,464
 Fiscal 2004 and Prior Years Restructuring Actions
  Workforce
    
    
    FacilityReductions
    
    
    and Other
    
    
    TotalRestructuring balance, October 1, 2004
    
    $
    5,672
    
    
    $
    16,755
    
    
    $
    22,427Adjusted to purchase price allocation
    
    
    12
    
    
    
    (4,967
    )
    
    
    (4,955
    )Charged (credited) to costs and expenses
    
    
    1,504
    
    
    
    (407
    )
    
    
    1,097Cash payments
    
    
    (7,123
    )
    
    
    (5,499
    )
    
    
    (12,622
    )Restructuring balance, September 30, 2005
    
    
    65
    
    
    
    5,882
    
    
    
    5,947Charged (credited) to costs and expenses
    
    
    216
    
    
    
    (91
    )
    
    
    125Cash payments
    
    
    (281
    )
    
    
    (2,820
    )
    
    
    (3,101
    )Restructuring balance, September 29, 2006
    
    $
    
    
    
    $
    2,971
    
    
    $
    2,971Charged to costs and expenses
    
    
    
    
    
    
    22
    
    
    
    22Reclassification to other current liabilities and other liabilities
    
    
    
    
    
    
    (2,687
    )
    
    
    (2,687
    )Cash payments
    
    
    
    
    
    
    (296
    )
    
    
    (296
    )Restructuring balance, December 29, 2006
    
    $
    
    
    
    $
    10
    
    
    $
    10
  23




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 8. Other Income, Net
  Fiscal Quarter EndedDecember 29,
    
    
    December 30,2006
    
    
    2005Investment and interest income
    
    $
    5,389
    
    
    $
    3,265Increase (decrease) in the fair value of derivative instruments
    
    
    3,042
    
    
    
    (4,311
    )Losses of equity method investments
    
    
    (5
    )
    
    
    (2,071
    )Gains on investments in equity securities
    
    
    5,132
    
    
    
    3,837Other
    
    
    (502
    )
    
    
    556$
    13,056
    
    
    $
    1,276
   9. Related Party Transactions
 Jazz Semiconductor, Inc.
  Merger Agreement
  Wafer and Probe Services Purchases
 24




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
   Lease Agreement 
 Royalty Agreement
 Services Agreements
 Mindspeed Technologies, Inc.
  Lease Agreement
 25




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 Skyworks Solutions, Inc.
  Inventory and Assembly and Test Services Purchases
 Sublease Rent Share Agreement
 10. Geographic Information
  Fiscal Quarter EndedDecember 29,
    
    
    December 30,2006
    
    
    2005United States
    
    $
    26,902
    
    
    $
    14,551Other Americas
    
    
    10,872
    
    
    
    4,659Total Americas
    
    
    37,774
    
    
    
    19,210China
    
    
    129,493
    
    
    
    111,679South Korea
    
    
    21,395
    
    
    
    28,568Taiwan
    
    
    11,645
    
    
    
    24,048Other Asia-Pacific
    
    
    32,224
    
    
    
    32,569Total Asia-Pacific
    
    
    194,757
    
    
    
    196,864Europe, Middle East and Africa
    
    
    13,003
    
    
    
    14,632$
    245,534
    
    
    $
    230,706
   December 29,
    
    
    September 29,2006
    
    
    2006United States
    
    $
    96,524
    
    
    $
    90,095India
    
    
    13,105
    
    
    
    10,826Other Asia-Pacific
    
    
    7,818
    
    
    
    7,117Europe, Middle East and Africa
    
    
    2,208
    
    
    
    2,201$
    119,655
    
    
    $
    110,239
 26




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 11. Supplemental Guarantor Financial Information
    December 29, 2006Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedCurrent assets:Cash and cash equivalents
    
    $
    446,633
    
    
    $
    
    
    
    $
    60,292
    
    
    $
    
    
    
    $
    506,925Marketable securities
    
    
    110,909
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110,909Restricted cash
    
    
    
    
    
    
    
    
    
    
    8,800
    
    
    
    
    
    
    
    8,800Receivables, net
    
    
    21,840
    
    
    
    
    
    
    
    107,699
    
    
    
    
    
    
    
    129,539Inventories
    
    
    84,063
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84,063Other current assets
    
    
    19,807
    
    
    
    3
    
    
    
    7,830
    
    
    
    
    
    
    
    27,640Total current assets
    
    
    683,252
    
    
    
    3
    
    
    
    184,621
    
    
    
    
    
    
    
    867,876Property and equipment, net
    
    
    44,153
    
    
    
    
    
    
    
    22,857
    
    
    
    
    
    
    
    67,010Goodwill
    
    
    56,934
    
    
    
    616,659
    
    
    
    39,019
    
    
    
    
    
    
    
    712,612Intangible assets, net
    
    
    7,935
    
    
    
    61,495
    
    
    
    2,789
    
    
    
    
    
    
    
    72,219Other assets
    
    
    141,674
    
    
    
    
    
    
    
    512
    
    
    
    
    
    
    
    142,186Investments in subsidiaries
    
    
    865,575
    
    
    
    (38,225
    )
    
    
    
    
    
    
    (827,350
    )
    
    
    Total assets
    
    $
    1,799,523
    
    
    $
    639,932
    
    
    $
    249,798
    
    
    $
    (827,350
    )
    
    $
    1,861,903Current liabilities:Current portion of long-term debt
    
    $
    456,500
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    456,500Short-term debt
    
    
    
    
    
    
    
    
    
    
    80,000
    
    
    
    
    
    
    
    80,000Accounts payable
    
    
    103,159
    
    
    
    
    
    
    
    3,273
    
    
    
    
    
    
    
    106,432Accrued compensation and benefits
    
    
    21,226
    
    
    
    
    
    
    
    7,802
    
    
    
    
    
    
    
    29,028Intercompany payable (receivable)
    
    
    44,106
    
    
    
    (124,495
    )
    
    
    80,389
    
    
    
    
    
    
    
    Other current liabilities
    
    
    54,071
    
    
    
    
    
    
    
    1,585
    
    
    
    
    
    
    
    55,656Total current liabilities
    
    
    679,062
    
    
    
    (124,495
    )
    
    
    173,049
    
    
    
    
    
    
    
    727,616Long-term debt
    
    
    525,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    525,000Other liabilities
    
    
    76,600
    
    
    
    
    
    
    
    1,340
    
    
    
    
    
    
    
    77,940Total liabilities
    
    
    1,280,662
    
    
    
    (124,495
    )
    
    
    174,389
    
    
    
    
    
    
    
    1,330,556Shareholders equity
    
    
    518,861
    
    
    
    764,427
    
    
    
    75,409
    
    
    
    (827,350
    )
    
    
    531,347Total liabilities and equity
    
    $
    1,799,523
    
    
    $
    639,932
    
    
    $
    249,798
    
    
    $
    (827,350
    )
    
    $
    1,861,903
 27




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 September 29, 2006Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedCurrent assets:Cash and cash equivalents
    
    $
    175,398
    
    
    $
    
    
    
    $
    50,228
    
    
    $
    
    
    
    $
    225,626Marketable securities
    
    
    115,709
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115,709Restricted cash
    
    
    
    
    
    
    
    
    
    
    8,800
    
    
    
    
    
    
    
    8,800Receivables, net
    
    
    19,140
    
    
    
    
    
    
    
    103,885
    
    
    
    
    
    
    
    123,025Inventories
    
    
    97,460
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97,460Other current assets
    
    
    13,480
    
    
    
    3
    
    
    
    5,870
    
    
    
    
    
    
    
    19,353Total current assets
    
    
    421,187
    
    
    
    3
    
    
    
    168,783
    
    
    
    
    
    
    
    589,973Property and equipment, net
    
    
    45,430
    
    
    
    
    
    
    
    19,975
    
    
    
    
    
    
    
    65,405Goodwill
    
    
    54,914
    
    
    
    616,659
    
    
    
    39,217
    
    
    
    
    
    
    
    710,790Intangible assets, net
    
    
    6,213
    
    
    
    66,751
    
    
    
    3,044
    
    
    
    
    
    
    
    76,008Other assets
    
    
    131,037
    
    
    
    
    
    
    
    412
    
    
    
    
    
    
    
    131,449Investments in subsidiaries
    
    
    862,726
    
    
    
    (37,902
    )
    
    
    
    
    
    
    (824,824
    )
    
    
    Total assets
    
    $
    1,521,507
    
    
    $
    645,511
    
    
    $
    231,431
    
    
    $
    (824,824
    )
    
    $
    1,573,625Current liabilities:Current portion of long-term debt
    
    $
    188,375
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    188,375Short-term debt
    
    
    
    
    
    
    
    
    
    
    80,000
    
    
    
    
    
    
    
    80,000Accounts payable
    
    
    111,516
    
    
    
    
    
    
    
    2,174
    
    
    
    
    
    
    
    113,690Accrued compensation and benefits
    
    
    22,824
    
    
    
    
    
    
    
    5,483
    
    
    
    
    
    
    
    28,307Intercompany payable (receivable)
    
    
    50,218
    
    
    
    (117,590
    )
    
    
    67,372
    
    
    
    
    
    
    
    Other current liabilities
    
    
    51,109
    
    
    
    
    
    
    
    857
    
    
    
    
    
    
    
    51,966Total current liabilities
    
    
    424,042
    
    
    
    (117,590
    )
    
    
    155,886
    
    
    
    
    
    
    
    462,338Long-term debt
    
    
    518,125
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    518,125Other liabilities
    
    
    81,823
    
    
    
    
    
    
    
    1,241
    
    
    
    
    
    
    
    83,064Total liabilities
    
    
    1,023,990
    
    
    
    (117,590
    )
    
    
    157,127
    
    
    
    
    
    
    
    1,063,527Shareholders equity
    
    
    497,517
    
    
    
    763,101
    
    
    
    74,304
    
    
    
    (824,824
    )
    
    
    510,098Total liabilities and equity
    
    $
    1,521,507
    
    
    $
    645,511
    
    
    $
    231,431
    
    
    $
    (824,824
    )
    
    $
    1,573,625
  Fiscal Quarter Ended December 29, 2006Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    208,474
    
    
    $
    6,905
    
    
    $
    37,060
    
    
    $
    (6,905
    )
    
    $
    245,534Cost of goods sold
    
    
    108,205
    
    
    
    
    
    
    
    34,745
    
    
    
    (6,905
    )
    
    
    136,045Gross margin
    
    
    100,269
    
    
    
    6,905
    
    
    
    2,315
    
    
    
    
    
    
    
    109,489Operating expenses:Research and development
    
    
    70,487
    
    
    
    
    
    
    
    963
    
    
    
    
    
    
    
    71,450Selling, general and administrative
    
    
    23,613
    
    
    
    
    
    
    
    3,863
    
    
    
    
    
    
    
    27,476Amortization of intangible assets
    
    
    727
    
    
    
    5,256
    
    
    
    255
    
    
    
    
    
    
    
    6,238Special charges
    
    
    2,898
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,898Total operating expenses
    
    
    97,725
    
    
    
    5,256
    
    
    
    5,081
    
    
    
    
    
    
    
    108,062Operating income (loss)
    
    
    2,544
    
    
    
    1,649
    
    
    
    (2,766
    )
    
    
    
    
    
    
    1,427Equity in income (loss) of subsidiaries
    
    
    2,421
    
    
    
    465
    
    
    
    
    
    
    
    (2,886
    )
    
    
    Interest expense
    
    
    (11,342
    )
    
    
    
    
    
    
    (1,694
    )
    
    
    
    
    
    
    (13,036
    )Other income (expense), net
    
    
    7,743
    
    
    
    
    
    
    
    5,313
    
    
    
    
    
    
    
    13,056Income (loss) before income taxes
    
    
    1,366
    
    
    
    2,114
    
    
    
    853
    
    
    
    (2,886
    )
    
    
    1,447Provision for income taxes
    
    
    390
    
    
    
    
    
    
    
    81
    
    
    
    
    
    
    
    471Net income (loss)
    
    $
    976
    
    
    $
    2,114
    
    
    $
    772
    
    
    $
    (2,886
    )
    
    $
    976
 28




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##### Table of Contents



CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 Fiscal Quarter Ended December 30, 2005Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    136,799
    
    
    $
    97,790
    
    
    $
    27,788
    
    
    $
    (31,671
    )
    
    $
    230,706Cost of goods sold
    
    
    51,868
    
    
    
    67,282
    
    
    
    25,207
    
    
    
    (9,404
    )
    
    
    134,953Gross margin
    
    
    84,931
    
    
    
    30,508
    
    
    
    2,581
    
    
    
    (22,267
    )
    
    
    95,753Operating expenses:Research and development
    
    
    64,280
    
    
    
    18,987
    
    
    
    831
    
    
    
    (19,739
    )
    
    
    64,359Selling, general and administrative
    
    
    29,804
    
    
    
    8,088
    
    
    
    3,237
    
    
    
    (2,528
    )
    
    
    38,601Amortization of intangible assets
    
    
    662
    
    
    
    6,943
    
    
    
    302
    
    
    
    
    
    
    
    7,907Special charges
    
    
    915
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    915Total operating expenses
    
    
    95,661
    
    
    
    34,018
    
    
    
    4,370
    
    
    
    (22,267
    )
    
    
    111,782Operating income (loss)
    
    
    (10,730
    )
    
    
    (3,510
    )
    
    
    (1,789
    )
    
    
    
    
    
    
    (16,029
    )Equity in income (loss) of subsidiaries
    
    
    (5,690
    )
    
    
    234
    
    
    
    
    
    
    
    5,456
    
    
    
    Interest expense
    
    
    (6,668
    )
    
    
    (1,706
    )
    
    
    (428
    )
    
    
    
    
    
    
    (8,802
    )Other income (expense), net
    
    
    (560
    )
    
    
    
    
    
    
    1,836
    
    
    
    
    
    
    
    1,276Income (loss) before income taxes
    
    
    (23,648
    )
    
    
    (4,982
    )
    
    
    (381
    )
    
    
    5,456
    
    
    
    (23,555
    )Provision for income taxes
    
    
    623
    
    
    
    
    
    
    
    93
    
    
    
    
    
    
    
    716Net income (loss)
    
    $
    (24,271
    )
    
    $
    (4,982
    )
    
    $
    (474
    )
    
    $
    5,456
    
    
    $
    (24,271
    )
  Fiscal Quarter Ended December 29, 2006Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by (used in)
operating activities
    
    $
    (7,186
    )
    
    $
    
    
    
    $
    14,161
    
    
    $
    899
    
    
    $
    7,874Cash flows from investing activities:Purchases of marketable debt securities
    
    
    (12,094
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,094
    )Proceeds from sales and maturities of
marketable debt securities
    
    
    28,688
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,688Purchases of accounts receivable
    
    
    
    
    
    
    
    
    
    
    (168,825
    )
    
    
    168,825
    
    
    
    Collections of accounts receivable
    
    
    
    
    
    
    
    
    
    
    169,724
    
    
    
    (169,724
    )
    
    
    Proceeds from equity securities and
other assets
    
    
    436
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    436Purchases of property and equipment
    
    
    (3,065
    )
    
    
    
    
    
    
    (4,151
    )
    
    
    
    
    
    
    (7,216
    )Payments for acquisitions
    
    
    (5,029
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,029
    )Net cash provided by (used in)
investing activities
    
    
    8,936
    
    
    
    
    
    
    
    (3,252
    )
    
    
    (899
    )
    
    
    4,785Cash flows from financing activities:Proceeds from short-term debt, net
    
    
    
    
    
    
    
    
    
    
    (845
    )
    
    
    
    
    
    
    (845
    )Proceeds from long-term debt, net
    
    
    267,221
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    267,221Proceeds from common stock
    
    
    2,243
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,243Repayment of shareholder notes
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21Net cash provided by (used in)
financing activities
    
    
    269,485
    
    
    
    
    
    
    
    (845
    )
    
    
    
    
    
    
    268,640Net increase in cash and cash
equivalents
    
    
    271,235
    
    
    
    
    
    
    
    10,064
    
    
    
    
    
    
    
    281,299Cash and cash equivalents at beginning
of period
    
    
    175,398
    
    
    
    
    
    
    
    50,228
    
    
    
    
    
    
    
    225,626Cash and cash equivalents at end of
period
    
    $
    446,633
    
    
    $
    
    
    
    $
    60,292
    
    
    $
    
    
    
    $
    506,925
 29




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CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
 Fiscal Quarter Ended December 30, 2005Non-Parent
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by (used in)
operating activities
    
    $
    109,427
    
    
    $
    
    
    
    $
    (2,278
    )
    
    $
    (77,129
    )
    
    $
    30,020Cash flows from investing activities:Restricted cash
    
    
    
    
    
    
    
    
    
    
    (7,500
    )
    
    
    
    
    
    
    (7,500
    )Purchases of marketable debt securities
    
    
    (3,539
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,539
    )Proceeds from sales and maturities of
marketable debt securities
    
    
    2,455
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,455Purchases of accounts receivable
    
    
    
    
    
    
    
    
    
    
    (80,712
    )
    
    
    80,712
    
    
    
    Collections of accounts receivable
    
    
    
    
    
    
    
    
    
    
    3,583
    
    
    
    (3,583
    )
    
    
    Purchases of equity securities
    
    
    (984
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (984
    )Proceeds from equity securities and
other assets
    
    
    4,664
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,664Purchases of property and equipment
    
    
    (3,395
    )
    
    
    
    
    
    
    (2,385
    )
    
    
    
    
    
    
    (5,780
    )Net cash used in investing activities
    
    
    (799
    )
    
    
    
    
    
    
    (87,014
    )
    
    
    77,129
    
    
    
    (10,684
    )Cash flows from financing activities:Proceeds from short-term debt, net
    
    
    
    
    
    
    
    
    
    
    75,524
    
    
    
    
    
    
    
    75,524Proceeds from common stock
    
    
    1,664
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,664Net cash provided by financing
activities
    
    
    1,664
    
    
    
    
    
    
    
    75,524
    
    
    
    
    
    
    
    77,188Net increase (decrease) in cash and
cash equivalents
    
    
    110,292
    
    
    
    
    
    
    
    (13,768
    )
    
    
    
    
    
    
    96,524Cash and cash equivalents at beginning
of period
    
    
    170,793
    
    
    
    
    
    
    
    31,911
    
    
    
    
    
    
    
    202,704Cash and cash equivalents at end of
period
    
    $
    281,085
    
    
    $
    
    
    
    $
    18,143
    
    
    $
    
    
    
    $
    299,228
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
   Business Enterprise Segments
  31




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
    
    the nature of products and services;
    
    the nature of the production processes;
    
    the type or class of customer for their products and services; and
    
    the methods used to distribute their products or provide their services.
  
    
    the sale of semiconductor products is the only material source of revenue for each of
our four operating segments;
    
    the products sold by each of our operating segments use the same standard manufacturing process;
    
    the products marketed by each of our operating segments are sold to similar customers; and
    
    all of our products are sold through our internal sales force and common distributors.
  Results of Operations
 Net Revenues
 Fiscal Quarter EndedDecember 29,
    
    December 30,(in thousands)
    
    2006
    
    2005Net revenues
    
    $
    245,534
    
    
    $
    230,706
   32




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Gross Margin
 Fiscal Quarter EndedDecember 29,
    
    December 30,(in thousands)
    
    2006
    
    2005Gross margin
    
    $
    109,489
    
    
    $
    95,753Percent of net revenues
    
    
    45
    %
    
    
    42
    %
    33




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Fiscal Quarter EndedDecember 29,
    
    
    December 30,(in thousands)
    
    2006
    
    
    2005E&O reserves at beginning of period
    
    $
    36,632
    
    
    $
    44,833Additions
    
    
    1,570
    
    
    
    2,596Release upon sales of product
    
    
    (2,650
    )
    
    
    (3,043
    )Scrap
    
    
    (4,672
    )
    
    
    (1,645
    )Standards adjustments and other
    
    
    (87
    )
    
    
    (584
    )E&O reserves at end of period
    
    $
    30,793
    
    
    $
    42,157
    Fiscal Quarter EndedDecember 29,
    
    
    December 30,(in thousands)
    
    2006
    
    
    2005LCM reserves at beginning of period
    
    $
    1,761
    
    
    $
    6,739Additions
    
    
    
    
    
    
    2,950Release upon sales of product
    
    
    (1,194
    )
    
    
    (779
    )Standards adjustments and other
    
    
    (76
    )
    
    
    (46
    )LCM reserves at end of period
    
    $
    491
    
    
    $
    8,864
 Research and Development
 Fiscal Quarter EndedDecember 29,
    
    December 30,(in thousands)
    
    2006
    
    2005Research and development
    
    $
    71,450
    
    
    $
    64,359Percent of net revenues
    
    
    29
    %
    
    
    28
    %
 34




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Selling, General and Administrative
 Fiscal Quarter EndedDecember 29,
    
    December 30,(in thousands)
    
    2006
    
    2005Selling, general and administrative
    
    $
    27,476
    
    
    $
    38,601Percent of net revenues
    
    
    11
    %
    
    
    17
    %
   Amortization of Intangible Assets
 Fiscal Quarter EndedDecember 29,
    
    December 30,(in thousands)
    
    2006
    
    2005Amortization of intangible assets
    
    $
    6,238
    
    
    $
    7,907
  35




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Special Charges
 Fiscal Quarter EndedDecember 29,
    
    
    December 30,(in thousands)
    
    2006
    
    
    2005Restructuring charges
    
    $
    2,898
    
    
    $
    930Integration credits
    
    
    
    
    
    
    (400
    )Asset impairments
    
    
    
    
    
    
    85Other special charges
    
    
    
    
    
    
    300$
    2,898
    
    
    $
    915
   Interest Expense
 Fiscal Quarter EndedDecember 29,
    
    December 30,(in thousands)
    
    2006
    
    2005Interest expense
    
    $
    13,036
    
    
    $
    8,802
  Other Income, Net
 Fiscal Quarter EndedDecember 29,
    
    
    December 30,(in thousands)
    
    2006
    
    
    2005Investment and interest income
    
    $
    5,389
    
    
    $
    3,265Increase (decrease) in the fair value of derivative instruments
    
    
    3,042
    
    
    
    (4,311
    )Losses of equity method investments
    
    
    (5
    )
    
    
    (2,071
    )Gains on investments in equity securities
    
    
    5,132
    
    
    
    3,837Other
    
    
    (502
    )
    
    
    556$
    13,056
    
    
    $
    1,276
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Provision for Income Taxes
    Liquidity and Capital Resources
  December 29,
    
    
    September 29,(in thousands)
    
    2006
    
    
    2006Cash and cash equivalents
    
    $
    506,925
    
    
    $
    225,626Marketable debt securities
    
    
    67,134
    
    
    
    83,620Subtotal
    
    
    574,059
    
    
    
    309,246Marketable equity securities (6.2 million shares of
Skyworks Solutions, Inc.)
    
    
    43,775
    
    
    
    32,089Total cash, cash equivalents and marketable securities
    
    $
    617,834
    
    
    $
    341,335
  37




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Fiscal Quarter EndedDecember 29,
    
    
    December 30,(in thousands)
    
    2006
    
    
    2005Net cash provided by operating activities
    
    $
    7,874
    
    
    $
    30,020Net cash provided by (used in) investing activities
    
    
    4,785
    
    
    
    (10,684
    )Net cash provided by financing activities
    
    
    268,640
    
    
    
    77,188Net increase in cash and cash equivalents
    
    $
    281,299
    
    
    $
    96,524
 38




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Payments due by periodLess than 1
    
    
    
    
    
    
    
    
    
    
    More than 5(in thousands)
    
    Total
    
    
    year
    
    
    1-3 years
    
    
    3-5 years
    
    
    yearsLong-term debt
    
    $
    981,500
    
    
    $
    456,500
    
    
    $
    
    
    
    $
    275,000
    
    
    $
    250,000Short-term debt
    
    
    80,000
    
    
    
    80,000
    
    
    
    
    
    
    
    
    
    
    
    Interest on debt
    
    
    308,897
    
    
    
    48,605
    
    
    
    70,195
    
    
    
    45,097
    
    
    
    145,000Operating leases
    
    
    159,278
    
    
    
    28,972
    
    
    
    40,984
    
    
    
    26,286
    
    
    
    63,036Capital leases
    
    
    463
    
    
    
    463
    
    
    
    
    
    
    
    
    
    
    
    Assigned leases
    
    
    4,196
    
    
    
    1,345
    
    
    
    1,302
    
    
    
    1,282
    
    
    
    267Purchase commitments
    
    
    63,766
    
    
    
    48,826
    
    
    
    14,277
    
    
    
    663
    
    
    
    Capital commitments
    
    
    4,211
    
    
    
    4,211
    
    
    
    
    
    
    
    
    
    
    
    $
    1,602,311
    
    
    $
    668,922
    
    
    $
    126,758
    
    
    $
    348,328
    
    
    $
    458,303
 39




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Off-Balance Sheet Arrangements
    Special Purpose Entities
   Recent Accounting Pronouncements
  40




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Critical Accounting Policies
  Business combinations
  41




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Revenue recognition
    Allowance for doubtful accounts
  Inventories
  42




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Long-lived assets
   Deferred income taxes
  Valuation of warrants
  43




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Valuation of equity securities
  Stock-based compensation
    44




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Restructuring charges
  45




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
        (in thousands)
    
    Carrying Value
    
    Fair ValueCash and cash equivalents
    
    $
    506,925
    
    
    $
    506,925Marketable debt securities
    
    
    67,134
    
    
    
    67,134Marketable equity securities
    
    
    43,775
    
    
    
    43,775Mindspeed warrant
    
    
    19,513
    
    
    
    19,513Short-term debt
    
    
    80,000
    
    
    
    80,000Current portion of long-term debt
    
    
    456,500
    
    
    
    454,218Long-term debt
    
    
    525,000
    
    
    
    508,031
  46




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ITEM 4. CONTROLS AND PROCEDURES
   47




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PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 IPO Litigation 
 Class Action Suits  Witriol v. Conexant, et al. (Witriol)
 48




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##### Table of Contents



Graden v. Conexant, et al.
 49




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ITEM 1A. RISK FACTORS
  We operate in the highly cyclical semiconductor industry, which is subject to significant downturns
that may negatively impact our business, financial condition and results of operations.
  Our operating results may be negatively affected by substantial quarterly and annual fluctuations
and market downturns.
  
    
    changes in end-user demand for the products manufactured and sold by our customers;
    
    the timing of receipt, reduction or cancellation of significant orders by customers;
    
    seasonal customer demand;
    
    the gain or loss of significant customers;
    
    market acceptance of our products and our customers products;
    
    our ability to develop, introduce and market new products and technologies on a timely basis;
    
    the timing and extent of product development costs;
    
    new product and technology introductions by competitors;
    
    changes in the mix of products we develop and sell;
    
    fluctuations in manufacturing yields;
    
    availability and cost of products from our suppliers;
    
    intellectual property disputes; and
    
    the effects of competitive pricing pressures, including decreases in average selling
prices of our products.
  We may be subject to claims of infringement of third-party intellectual property rights or demands
that we license third-party technology, which could result in significant expense and loss of our
ability to use, make, sell, export or import our products or one or more components comprising our
products.
  50




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
    
    pay substantial damages;
    
    cease the manufacture, use or sale of infringing products, processes or technologies;
    
    discontinue the use of infringing technology;
    
    expend significant resources to develop non-infringing technology; or
    
    license technology from the third party claiming infringement, which license may not be
available on commercially reasonable terms, or at all.
 The value of our common stock may be adversely affected by market volatility.
  
    
    our operating and financial performance and prospects;
    
    our ability to repay our debt;
    
    the depth and liquidity of the market for our common stock;
    
    investor perception of us and the industry and markets in which we operate;
    
    our inclusion in, or removal from, any equity market indices;
    
    the level of research coverage of our common stock;
    
    changes in earnings estimates or buy/sell recommendations by analysts;
    
    general financial, domestic, international, economic and other market conditions; and
    
    judgments favorable or adverse to us.
  We have recently incurred substantial losses and may incur additional future losses.
  We are subject to intense competition.
  51




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
    
    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.
  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.
  52




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Our success depends on our ability to timely develop competitive new products and reduce costs.
  
    
    our ability to anticipate customer and market requirements and changes in technology and
industry standards;
    
    our ability to accurately define new products;
    
    our ability to timely complete development of new products and bring our products to
market on a timely basis;
    
    our ability to differentiate our products from offerings of our competitors;
    
    overall market acceptance of our products;
    
    our ability to invest in significant amounts of research and development; and
    
    our ability to transition product development efforts between and among our sites,
particularly in India and China.
    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;
 53




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
    
    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;
    
    short product life cycles with declining prices over the life cycle of the products; and
    
    evolving industry standards.
  We face a risk that capital needed for our business and to repay our debt obligations will not be
available when we need it.
   54




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We may not be able to attract and retain qualified management, technical and other personnel
necessary for the design, development and sale of our products. Our success could be negatively
affected if key personnel leave.
  If OEMs of communications electronics products do not design our products into their equipment, we
will be unable to sell those products. Moreover, a design win from a customer does not guarantee
future sales to that customer.
  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.
  55




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##### Table of Contents



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.
      56




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We may experience difficulties in transitioning to smaller geometry process technologies or in
achieving higher levels of design integration, which may result in reduced manufacturing yields,
delays in product deliveries, increased expenses and loss of design wins to our competitors.
  If we are not successful in protecting our intellectual property rights, it may harm our ability to
compete.
  
    
    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.
  57




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Our success depends, in part, on our ability to effect suitable investments, alliances and acquisitions.
   
    
    large initial one-time write-offs of in-process research and development;
    
    the incurrence of substantial debt and assumption of unknown liabilities;
    
    the potential loss of key employees from the acquired company;
    
    amortization expenses related to intangible assets; and
    
    the diversion of managements attention from other business concerns.
  We have significant goodwill and intangible assets, and future impairment of our goodwill and
intangible assets could have a material negative impact on our financial condition and results of
operations.
  We may be liable for penalties under environmental laws, rules and regulations, which could
adversely impact our business.
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We may be limited in the future in the amount of net operating losses that we can use to offset taxable income.
  Provisions in our organizational documents and rights agreement and Delaware law may make it
difficult for someone to acquire control of us.
  
    
    the division of our board of directors into three classes to be elected on a staggered
basis, one class each year;
    
    the ability of our board of directors to issue shares of our preferred stock in one or
more series without further authorization of our shareholders;
    
    a prohibition on shareholder action by written consent;
    
    a requirement that shareholders provide advance notice of any shareholder nominations of
directors or any proposal of new business to be considered at any meeting of shareholders;
    
    a requirement that a supermajority vote be obtained to remove a director for cause or to
amend or repeal certain provisions of our restated certificate of incorporation or by-laws;
    
    elimination of the right of shareholders to call a special meeting of shareholders; and
    
    a fair price provision.
   59




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ITEM 6. EXHIBITS
 Exhibit No.
    
    Description4
    
    Indenture dated as of November 13, 2006 among the
Company, the subsidiary guarantors party thereto and The
Bank of New York Trust Company, N.A., as trustee, including
the form of the Companys Floating Rate Senior Secured Note
due 2010 attached as Exhibit A thereto, filed as Exhibit 4.1
to the Companys Current Report on Form 8-K dated November
16, 2006, is incorporated herein by reference.10.1
    
    Agreement and Plan of Merger dated as of September 26,
2006 by and among Acquicor Technology Inc., Joy Acquisition
Corp., Jazz Semiconductor, Inc. and T.C. Group, L.L.C., as
the stockholders representative, filed as Exhibit 10.1 to
the Companys Current Report on Form 8-K dated October 2,
2006, is incorporated herein by reference.10.2
    
    Stockholder Support Agreement dated as of September 26,
2006 by and among Acquicor Technology Inc., the Company, RF
Micro Devices, Inc., Carlyle Partners III, L.P., CP III
Coinvestment, L.P. and Carlyle High Yield Partners, L.P.,
filed as Exhibit 10.2 to the Companys Current Report on
Form 8-K dated October 2, 2006, is incorporated herein by
reference.10.3
    
    Registration Rights Agreement dated as of November 13,
2006 by and among the Company, the subsidiary guarantors
party thereto and J.P. Morgan Securities, Inc., on behalf of
the initial purchasers, filed as Exhibit 4.3 to the
Companys Current Report on Form 8-K dated November 16,
2006, is incorporated herein by reference.10.4
    
    The Companys 2007 Peak Performance Incentive Plan,
filed as Exhibit 99.1 to the Companys Current Report on
Form 8-K dated November 20, 2006, is incorporated herein by
reference.10.5
    
    Extension Letter Agreement dated November 22, 2006 by
and among Wachovia Bank, National Association, the Company
and Conexant USA, LLC with respect to the Receivables
Purchase Agreement dated as of November 29, 2005 by and
between Conexant USA, LLC and the Company, the Credit and
Security Agreement dated as of November 29, 2005 by and
between Conexant USA, LLC and Wachovia Bank, National
Association and the Servicing Agreement dated as of November
29, 2005 by and between the Company and Conexant USA, LLC,
filed as Exhibit 10-r-4 to the Companys Annual Report on
Form 10-K for the year ended September 29, 2006, is
incorporated herein by reference.31.1
    
    Certification of the Chief Executive Officer of Periodic
Report Pursuant to Rule 13a-15(e) or 15d-15(e).31.2
    
    Certification of the Chief Financial Officer of Periodic
Report Pursuant to Rule 13a-15(e) or 15d-15(e).32
    
    Certification by Chief Executive Officer and Chief Financial
Officer of Periodic Report Pursuant to 18 U.S.C. Section
1350.
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##### Table of Contents



SIGNATURE
  CONEXANT SYSTEMS, INC.(Registrant)Date: February 7, 2007
    
    By
    
    /s/ J. Scott BlouinJ. Scott BlouinSenior Vice President and Chief Financial Officer(principal financial officer)
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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description4
    
    Indenture dated as of November 13, 2006 among the
Company, the subsidiary guarantors party thereto and The
Bank of New York Trust Company, N.A., as trustee, including
the form of the Companys Floating Rate Senior Secured Note
due 2010 attached as Exhibit A thereto, filed as Exhibit 4.1
to the Companys Current Report on Form 8-K dated November
16, 2006, is incorporated herein by reference.10.1
    
    Agreement and Plan of Merger dated as of September 26,
2006 by and among Acquicor Technology Inc., Joy Acquisition
Corp., Jazz Semiconductor, Inc. and T.C. Group, L.L.C., as
the stockholders representative, filed as Exhibit 10.1 to
the Companys Current Report on Form 8-K dated October 2,
2006, is incorporated herein by reference.10.2
    
    Stockholder Support Agreement dated as of September 26,
2006 by and among Acquicor Technology Inc., the Company, RF
Micro Devices, Inc., Carlyle Partners III, L.P., CP III
Coinvestment, L.P. and Carlyle High Yield Partners, L.P.,
filed as Exhibit 10.2 to the Companys Current Report on
Form 8-K dated October 2, 2006, is incorporated herein by
reference.10.3
    
    Registration Rights Agreement dated as of November 13,
2006 by and among the Company, the subsidiary guarantors
party thereto and J.P. Morgan Securities, Inc., on behalf of
the initial purchasers, filed as Exhibit 4.3 to the
Companys Current Report on Form 8-K dated November 16,
2006, is incorporated herein by reference.10.4
    
    The Companys 2007 Peak Performance Incentive Plan,
filed as Exhibit 99.1 to the Companys Current Report on
Form 8-K dated November 20, 2006, is incorporated herein by
reference.10.5
    
    Extension Letter Agreement dated November 22, 2006 by
and among Wachovia Bank, National Association, the Company
and Conexant USA, LLC with respect to the Receivables
Purchase Agreement dated as of November 29, 2005 by and
between Conexant USA, LLC and the Company, the Credit and
Security Agreement dated as of November 29, 2005 by and
between Conexant USA, LLC and Wachovia Bank, National
Association and the Servicing Agreement dated as of November
29, 2005 by and between the Company and Conexant USA, LLC,
filed as Exhibit 10-r-4 to the Companys Annual Report on
Form 10-K for the year ended September 29, 2006, is
incorporated herein by reference.31.1
    
    Certification of the Chief Executive Officer of Periodic
Report Pursuant to Rule 13a-15(e) or 15d-15(e).31.2
    
    Certification of the Chief Financial Officer of Periodic
Report Pursuant to Rule 13a-15(e) or 15d-15(e).32
    
    Certification by Chief Executive Officer and Chief Financial
Officer of Periodic Report Pursuant to 18 U.S.C. Section
1350.
 62