Edgar Filing: CONEXANT SYSTEMS INC

Conexant Systems, Inc.

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 28, 2007


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.

(Exact name of registrant as specified in its charter)


Delaware (State of incorporation)		25-1799439 (I.R.S. Employer Identification No.)

4000 MacArthur Boulevard
Newport Beach, California 92660-3095
(Address of principal executive offices) (Zip code)

(949) 483-4600
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ

As of January 23, 2008, there were 492,367,135 shares of the registrant’s common stock outstanding.

FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q contains statements relating to future results of Conexant Systems, Inc. (including certain projections and business trends) that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the “safe harbor” created by those sections. Our actual results may differ materially from those projected as a result of certain risks and uncertainties. These risks and uncertainties include, but are not limited to:

	•		pricing pressures and other competitive factors;

	•		our ability to anticipate trends and successfully develop products for which there will be market demand;

	•		the market acceptance and timing of our new product introductions, demand for existing products and product quality;

	•		the cyclical nature of the semiconductor industry and the markets addressed by our products and our customers’ products;

	•		continuing volatility in the technology sector and the semiconductor industry;

	•		the uncertainties of litigation, including claims of infringement of third-party intellectual property rights or demands that we license third-party technology, and the demands it may place on the time and attention of our management and the expense it may place on our company;

	•		our ability to develop and implement new technologies and to obtain protection for the related intellectual property;

	•		the risk that the value of our common stock may be adversely affected by market volatility;

	•		the substantial losses we have incurred recently;

	•		changes in product mix and product obsolescence;

	•		general economic and political conditions and conditions in the markets we address;

	•		the ability of our customers to manage inventory;

	•		the availability of manufacturing capacity;

	•		the risk that capital needed for our business and to repay our indebtedness will not be available when needed;

	•		the ability of management to structure and execute on new restructuring plans;

	•		possible disruptions in commerce related to terrorist activity or armed conflict,

as well as other risks and uncertainties, including those set forth herein and those detailed from time to time in our other Securities and Exchange Commission filings. These forward-looking statements are made only as of the date hereof, and we undertake no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by law.

CONEXANT SYSTEMS, INC.

INDEX


		PAGE

PART I. FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (unaudited):
	Condensed Consolidated Balance Sheets — December 28, 2007 and September 28, 2007		3
	Condensed Consolidated Statements of Operations — Fiscal Quarters Ended December 28, 2007 and December 29, 2006		4
	Condensed Consolidated Statements of Cash Flows — Fiscal Quarters Ended December 28, 2007 and December 29, 2006		5
	Notes to Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		36
Item 4.	Controls and Procedures		37

PART II. OTHER INFORMATION			38
Item 1.	Legal Proceedings		38
Item 6.	Exhibits		39

SIGNATURE			40
EXHIBIT 10.2
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited, in thousands, except par value)


	December 28,			September 28,
	2007			2007
ASSETS
Current assets:
Cash and cash equivalents	$	232,141		$	235,605
Restricted cash		8,800			8,800
Receivables, net of allowances of $1,561 and $1,659		71,727			80,906
Inventories		60,899			63,174
Other current assets		23,917			20,361

Total current assets		397,484			408,846

Property, plant and equipment, net		58,222			67,967
Goodwill		405,737			406,323
Intangible assets, net		21,531			26,067
Other assets		66,634			76,766

Total assets	$	949,608		$	985,969


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	54,900		$	58,000
Short-term debt		70,973			80,000
Accounts payable		75,613			80,667
Accrued compensation and benefits		25,716			26,154
Other current liabilities		49,886			70,631

Total current liabilities		277,088			315,452

Long-term debt		470,100			467,000
Other liabilities		62,391			57,002

Total liabilities		809,579			839,454


Commitments and contingencies (Note 4)

Shareholders’ equity:
Preferred and junior preferred stock		—			—
Common stock, $0.01 par value: 1,000,000 shares authorized; 492,367 and 492,362 shares issued; and 492,367 and 492,362 shares outstanding		4,924			4,924
Additional paid-in capital		4,726,044			4,721,298
Accumulated deficit		(4,588,261	)		(4,578,219	)
Accumulated other comprehensive loss		(2,574	)		(1,385	)
Shareholder notes receivable		(104	)		(103	)

Total shareholders’ equity		140,029			146,515

Total liabilities and shareholders’ equity	$	949,608		$	985,969

See accompanying notes to consolidated financial statements.

CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited, in thousands, except per share amounts)


	Fiscal Quarter Ended
	December 28,			December 29,
	2007			2006

Net revenues	$	196,958		$	245,534
Cost of goods sold ⁽¹⁾		97,687			136,045

Gross margin		99,271			109,489

Operating expenses:
Research and development ⁽¹⁾		60,390			71,450
Selling, general and administrative ⁽¹⁾		23,101			27,476
Amortization of intangible assets		4,781			6,238
Asset impairments		130			—
Special charges		5,784			2,898


Total operating expenses		94,186			108,062


Operating income		5,085			1,427

Interest expense		(11,563	)		(13,036	)
Other (expense) income, net		(5,345	)		8,360


(Loss) before income taxes and gain on equity method investments		(11,823	)		(3,249	)

Provision for income taxes		1,168			471


(Loss) before gain on equity method investments		(12,991	)		(3,720	)
Gain on equity method investments		3,773			4,696


Net (loss) income	$	(9,218	)	$	976


Net (loss) per share — basic	$	(0.02	)	$	—


Net (loss) per share — diluted	$	(0.02	)	$	—


Shares used in computing basic net (loss) per share		492,363			485,957


Shares used in computing diluted net (loss) per share		492,363			492,583


⁽¹⁾		These captions include non-cash employee stock-based compensation expense as follows (see Note 5):


	Fiscal Quarter Ended
	December 28,		December 29,
	2007		2006

Cost of goods sold	$	114	$	103
Research and development		2,160		2,367
Selling, general and administrative		1,010		1,867

See accompanying notes to consolidated financial statements.

CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)


	Fiscal Quarter Ended
	December 28,			December 29,
	2007			2006
Cash flows from operating activities:
Net (loss) income	$	(9,218	)	$	976
Adjustments to reconcile net (loss) income to net cash provided by operating activities, net of effects of acquisitions:
Depreciation		5,709			5,846
Amortization of intangible assets		4,781			6,238
Asset impairments		130			—
Reversals of provision for bad debts, net		(95	)		(237	)
Charges (reversals) for inventory provisions, net		2,598			(2,274	)
Deferred income taxes		5,593			2
Stock-based compensation		3,284			4,337
Decrease (increase) in fair value of derivative instruments		8,160			(3,042	)
(Gains) losses of equity method investments		(542	)		5
Losses (gains) on equity securities and other assets		—			(4,853	)
Other items, net		32			(88	)
Changes in assets and liabilities:
Receivables		9,274			(6,277	)
Inventories		(323	)		16,441
Accounts payable		(5,054	)		(8,559	)
Accrued expenses and other current liabilities		(18,970	)		2,191
Other, net		2,569			(2,832	)


Net cash provided by operating activities		7,928			7,874


Cash flows from investing activities:
Purchases of marketable debt securities		—			(12,094	)
Proceeds from sales and maturities of marketable debt securities		—			28,688
Purchases of equity securities		(755	)		—
Proceeds from equity securities and other assets		—			436
Purchases of property, plant and equipment		(1,614	)		(7,216	)
Payments for acquisitions		—			(5,029	)


Net cash (used in) provided by investing activities		(2,369	)		4,785


Cash flows from financing activities:
Proceeds from short-term debt		18,664			—
Repayments of short-term debt, net of expenses of $1,074 and $845		(27,691	)		(845	)
Proceeds from long-term debt, net of expenses of $7,779		—			267,221
Proceeds from issuance of common stock		4			2,243
Repayment of shareholder notes receivable		—			21


Net cash (used in) provided by financing activities		(9,023	)		268,640


Net (decrease) increase in cash and cash equivalents		(3,464	)		281,299

Cash and cash equivalents at beginning of period		235,605			225,626


Cash and cash equivalents at end of period	$	232,141		$	506,925

See accompanying notes to consolidated financial statements.

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

1. Description of Business

Conexant Systems, Inc. (Conexant or the Company) designs, develops and sells semiconductor system solutions, comprised of semiconductor devices, software and reference designs for use in broadband communications applications that enable high-speed transmission, processing and distribution of audio, video, voice and data to and throughout homes and business enterprises worldwide. The Company’s access solutions connect people through personal communications access products, such as personal computers (PCs) and television set-top boxes (STBs), to audio, video, voice and data services over wireless and wire line broadband connections as well as over dial-up Internet connections. The Company’s central office solutions are used by service providers to deliver high-speed audio, video, voice and data services over copper telephone lines and optical fiber networks to homes and businesses around the globe. In addition, media processing products enable the capture, display, storage, playback and transfer of audio and video content in applications throughout home and small office environments. These solutions enable broadband connections and network content to be shared throughout a home or small office-home office environment using a variety of communications devices.

2. Basis of Presentation and Significant Accounting Policies

Interim Reporting — The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 28, 2007. The financial information presented in the accompanying statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the periods indicated. All such adjustments are of a normal recurring nature. The year-end condensed balance sheet data was derived from the audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Fiscal Periods — The Company’s fiscal year is the 52- or 53-week period ending on the Friday closest to September 30. In a 52-week year, each fiscal quarter consists of 13 weeks. The additional week in a 53-week year is added to the fourth quarter, making such quarter consist of 14 weeks. Fiscal 2007 was a 52-week year, and fiscal 2008 will consist of 53 weeks.

Revenue Recognition — The Company recognizes revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the sales price and terms are fixed and determinable, and (iv) the collection of the receivable is reasonably assured. These terms are typically met upon shipment of product to the customer, except for certain distributors who have unlimited contractual rights of return or for whom the contractual terms were not enforced, or when significant vendor obligations exist. Revenue with respect to sales to distributors with unlimited rights of return or for who contractual terms were not enforced is deferred until the products are sold by the distributors to third parties. At December 28, 2007 and September 28, 2007, deferred revenue related to sales to these distributors was $6.5 million and $5.5 million, respectively. Revenue with respect to sales to customers to whom the Company has significant obligations after delivery is deferred until all significant obligations have been completed. At December 28, 2007 and September 28, 2007, deferred revenue related to shipments of products for which the Company has on-going performance obligations was $5.1 million and $3.0 million, respectively. The majority of the Company’s distributors have limited stock rotation rights, which allow them to rotate up to 10% of product in their inventory two times a year. The Company recognizes revenue to these distributors upon shipment of product to the distributor, as the stock rotation rights are limited and the Company believes that it has the ability to reasonably estimate and establish allowances for expected product returns in accordance with Statement of Financial Accounting Standards (SFAS) No. 48, “Revenue Recognition When Right of Return Exists.” Development revenue is recognized when services are performed and was not significant for any periods presented.

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

Deferred revenue is included in other current liabilities on the accompanying condensed consolidated balance sheets.

Uncertain Tax Positions — On September 29, 2007, the Company adopted the provisions of the Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109”, or FIN 48, which provides a financial statement recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. Under FIN 48, a company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures. Upon adoption, the Company recognized a $0.8 million charge to our beginning retained deficit as a cumulative effect of a change in accounting principle. See Note 9 — Income Taxes.

Liquidity — The Company has an $80.0 million credit facility with a bank, under which it had borrowed $71.0 million as of December 28, 2007. The term of this credit facility has been extended through November 28, 2008 and the facility remains subject to additional 364-day extensions at the discretion of the bank.

The Company believes that its existing sources of liquidity, together with cash expected to be generated from product sales, will be sufficient to fund its operations, research and development, anticipated capital expenditures and working capital for at least the next twelve months.

Reclassifications — The Company has reclassified asset impairments from special charges to a separate line item in operating expenses and its share of the earnings and losses of its equity method investments from other income, net to a separate line item between provision for income taxes and net loss on its condensed consolidated statements of operations for the three months ended December 29, 2006 to conform to the current period presentation. These reclassifications on the condensed consolidated statements of operations did not affect the Company’s reported revenues, gross margins, operating loss, or net loss for the period.

The Company has reclassified its share of the earnings and losses of its equity method investments from other income, net to a separate line item between provision for income taxes and net (loss) income on its statements of operations for the three ended December 29, 2006 to conform to the current period presentation. This reclassification on the statement of operations did not affect the Company’s reported revenues, gross margin, operating loss or net loss for either period. The following is a reconciliation of other income, net before and after the reclassification (in thousands):


	Three Months
	Ended
	December 29, 2006
Other income, net, before reclassification	$	13,056
Gain on equity method investments		(4,696	)

Other income, net, after reclassification	$	8,360

Review of Accounting for Research and Development Costs — During the quarter ended December 28, 2007, the Company reviewed its methodology of capitalizing photo mask costs used in product development. Photo mask designs are subject to significant verification and uncertainty regarding the final performance of the related part. Due to these uncertainties, the Company reevaluated its prior practice of capitalizing such costs and concluded that these costs should have been expensed as research and development costs as incurred. As a result, in the quarter ended December 28, 2007, the Company recorded a correcting adjustment of $5.3 million, representing the unamortized portion of the capitalized photo mask costs as of September 29, 2007. Based upon an evaluation of all relevant quantitative and qualitative factors, and after considering the provisions of Accounting Principles Board Opinion No. 28 “Interim Financial Reporting,” (“APB 28”), paragraph 29, and SEC Staff Accounting Bulletin Nos. 99 “Materiality” (“SAB 99”) and 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), the Company believes that this correcting adjustment will not be material to

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

its estimated full year results for 2008. In addition, the Company does not believe the correcting adjustment is material to the amounts reported in previous periods.

Derivative Financial Instruments — The Company’s derivative financial instruments as of December 28, 2007 principally consist of (i) the Company’s warrant to purchase 30 million shares of Mindspeed Technologies, Inc. (Mindspeed) common stock and (ii) foreign currency forward exchange contracts. See Note 3 for further information regarding the Mindspeed warrant.

The Company’s foreign currency forward exchange contracts are used to hedge certain Indian Rupee-denominated forecasted transactions related to its research and development efforts in India. The foreign currency forward contracts used to hedge these exposures are reflected at their fair values on the accompanying condensed consolidated balance sheets and meet the criteria for designation as foreign currency cash flow hedges. The criteria for designating a derivative as a hedge include that the hedging instrument should be highly effective in offsetting changes in the designated hedged item. The Company has determined that its non-deliverable foreign currency forward contracts to purchase Indian Rupees are highly effective in offsetting the variability in the U.S. Dollar forecasted cash transactions resulting from changes in the U.S. Dollar to Indian Rupee spot foreign exchange rate. For these derivatives, the gain or loss from the effective portion of the hedge is reported as a component of accumulated other comprehensive loss on the accompanying condensed consolidated balance sheets and is recognized in the consolidated statements of operations in the periods in which the hedged transaction affects operations, and within the same consolidated statement of operations line item as the impact of the hedged transaction. The gain or loss is recognized immediately in other expense (income), net in the consolidated statements of operations when a designated hedging instrument is either terminated early or an improbable or ineffective portion of the hedge is identified.

At December 28, 2007, the Company had outstanding foreign currency forward exchange contracts with a notional amount of 668.0 million Indian Rupees, approximately $16.5 million, maturing at various dates through May 2008. At December 29, 2006, the Company had outstanding foreign currency forward exchange contracts with a notional amount of 639.0 million Indian Rupees, approximately $13.8 million, maturing at various dates through July 2007. Based on the fair values of these contracts, the Company recorded a derivative asset of $0.2 million and $0.5 million at December 28, 2007 and December 29, 2006, respectively. During the fiscal quarter ended December 28, 2007 the Company recorded a gain of $0.2 million for hedge ineffectiveness.

The Company may use other derivatives from time to time to manage its exposure to changes in interest rates, equity prices or other risks. The Company does not enter into derivative financial instruments for speculative or trading purposes.

Supplemental Cash Flow Information — Cash paid for interest was $6.5 million and $1.2 million for the fiscal quarters ended December 28, 2007 and December 29, 2006, respectively. Cash paid for income taxes for the fiscal quarters ended December 28, 2007 and December 29, 2006 was $1.6 million and $0.6 million, respectively.

Net Loss Per Share — Net loss per share is computed in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings Per Share.” Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding and potentially dilutive securities outstanding during the period. Potentially dilutive securities include stock options and warrants and shares of stock issuable upon conversion of the Company’s convertible subordinated notes. The dilutive effect of stock options and warrants is computed under the treasury stock method, and the dilutive effect of convertible subordinated notes is computed using the if-converted method. Potentially dilutive securities are excluded from the computations of diluted net loss per share if their effect would be antidilutive.

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

The following potentially dilutive securities have been excluded from the diluted net income (loss) per share calculations because their effect would have been antidilutive (in thousands):


	Fiscal Quarter Ended
	December 28,		December 29,
	2007		2006
Stock options and warrants		94,723		70,236
4.00% convertible subordinated notes due February 2007		—		10,758
4.00% convertible subordinated notes due March 2026		50,813		50,813

		145,536		131,807

Business Enterprise Segments — The Company operates in one reportable segment, broadband communications. Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for the way that public business enterprises report information about operating segments in annual consolidated financial statements. Although the Company had three operating segments at December 28, 2007, under the aggregation criteria set forth in SFAS No. 131, it only operates in one reportable segment, broadband communications.

Under SFAS No. 131, two or more operating segments may be aggregated into a single operating segment for financial reporting purposes if aggregation is consistent with the objective and basic principles of SFAS No. 131, if the segments have similar economic characteristics, and if the segments are similar in each of the following areas:

•		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 Company meets each of the aggregation criteria for the following reasons:

•		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.

Because the Company meets each of the criteria set forth above and each of its operating segments has similar economic characteristics, the Company aggregates its results of operations in one reportable segment.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 establishes a framework for measuring fair value in generally accepted accounting principles, clarifies the definition of fair value and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements. However, the application of SFAS No. 157 may change current practice for some entities. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company will adopt SFAS No. 157 in the first quarter of fiscal 2009. The Company is currently assessing the impact the adoption of SFAS No. 157 will have on its financial position and results of operations.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment to FASB Statements No. 87, 88, 106, and 132(R).” SFAS No. 158 requires company plan sponsors to display the net over- or under- funded position of a defined benefit postretirement plan as an asset or a liability, with any unrecognized prior service costs, transition obligations or actuarial gains/losses reported as a component of other comprehensive income in shareholders’ equity. The

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

Company adopted the recognition provisions of SFAS No. 158 as of the end of fiscal year 2007 and will adopt the measurement provisions as of the end of fiscal year 2008. The Company is currently assessing the impact adopting the measurement provisions of SFAS No. 158 will have on its financial position and results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which permits entities to choose to measure at fair value eligible financial instruments and certain other items that are not currently required to be measured at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company will adopt SFAS No. 159 no later than the first quarter of fiscal 2009. The Company is currently assessing the impact the adoption of SFAS No. 159 will have on its financial position and results of operations.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS No. 141R”), which replaces SFAS No 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. The Company will adopt SFAS No. 141R no later than the first quarter of fiscal 2009 and will apply prospectively to business combinations completed on or after that date.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51, which changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. The Company will adopt SFAS No. 160 no later than the first quarter of fiscal 2009 and will apply prospectively, except for the presentation and disclosure requirements, which will apply retrospectively. The Company is currently assessing the potential impact that adoption of SFAS No. 160 would have on its financial position and results of operations.

In December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB 110”). SAB 110 expresses the views of the staff regarding the use of a “simplified” method, as discussed in SAB No. 107, “Share-Based Payment”, in developing an estimate of the expected term of “plain vanilla” share options in accordance with SFAS No. 123 (R). The Company does not expect SAB 110 to have a material impact on its results of operations or financial condition.

3. Supplemental Financial Information

Inventories

Inventories consist of the following (in thousands):


	December 28,		September 28,
	2007		2007
Work-in-process	$	25,656	$	24,219
Finished goods		35,243		38,955

	$	60,899	$	63,174

At December 28, 2007 and September 28, 2007, inventories were net of excess and obsolete (E&O) inventory reserves of $23.3 million and $22.2 million, respectively.

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

Intangible Assets

Intangible assets consist of the following (in thousands):


	December 28, 2007							September 28, 2007
	Gross							Gross
	Carrying		Accumulated			Book		Carrying		Accumulated			Book
	Amount		Amortization			Value		Amount		Amortization			Value
Developed technology	$	76,109	$	(58,908	)	$	17,201	$	75,865	$	(54,605	)	$	21,260
Product licenses		9,327		(6,795	)		2,532		9,327		(6,547	)		2,780
Other intangible assets		6,015		(4,217	)		1,798		6,015		(3,988	)		2,027

	$	91,451	$	(69,920	)	$	21,531	$	91,207	$	(65,140	)	$	26,067

Intangible assets are amortized over a weighted-average period of approximately five years. Annual amortization expense is expected to be as follows (in thousands):


	Remainder of 2008		2009		2010		2011		2012		Thereafter
Amortization expense	$	11,808	$	7,781	$	1,018	$	484	$	206	$	234

Mindspeed Warrant

The Company has a warrant to purchase 30 million shares of Mindspeed common stock at an exercise price of $3.408 per share through June 2013. At December 28, 2007 and September 28, 2007, the market value of Mindspeed’s common stock was $1.16 and $1.73 per share, respectively. The Company accounts for the Mindspeed warrant as a derivative instrument, and changes in the fair value of the warrant are included in other (income) expense, net each period. At December 28, 2007 and September 28, 2007, the aggregate fair value of the Mindspeed warrant included on the accompanying condensed consolidated balance sheets was $7.2 million and $15.5 million, respectively. At December 28, 2007, the warrant was valued using the Black-Scholes-Merton model with expected terms for portions of the warrant varying from 1 to 5 years, expected volatility of 74%, a weighted average risk-free interest rate of 3.4% and no dividend yield. The aggregate fair value of the warrant is reflected as a long-term asset on the accompanying condensed consolidated balance sheets because the Company does not intend to liquidate any portion of the warrant in the next twelve months.

The valuation of this derivative instrument is subjective, and option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Changes in these assumptions can materially affect the fair value estimate. The Company could, at any point in time, ultimately realize amounts significantly different than the carrying value.

Short-Term Debt

On November 29, 2005, the Company established an accounts receivable financing facility whereby it sells, from time to time, certain accounts receivable to Conexant USA, LLC (Conexant USA), a special purpose entity which is a consolidated subsidiary of the Company. Under the terms of the Company’s agreements with Conexant USA, the Company retains the responsibility to service and collect accounts receivable sold to Conexant USA and receives a weekly fee from Conexant USA for handling administrative matters which is equal to 1.0%, on a per annum basis, of the uncollected value of the accounts receivable.

Concurrent with the Company’s agreements with Conexant USA, Conexant USA entered into an $80.0 million revolving credit agreement with a bank which is secured by the assets of Conexant USA. The credit agreement was renewed effective November 2007 and remains subject to additional 364-day renewal periods at the discretion of the bank. Conexant USA is required to maintain certain minimum amounts on deposit (restricted cash) with the bank

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

during the term of the credit agreement. Borrowings under the credit agreement, which cannot exceed the lesser of $80.0 million and 85% of the uncollected value of purchased accounts receivable that are eligible for coverage under an insurance policy for the receivables, will bear interest equal to 7-day LIBOR (reset quarterly) plus 0.6%. Additionally, Conexant USA will pay a fee of 0.2% per annum for the unused portion of the line of credit.

The credit agreement requires the Company and its consolidated subsidiaries to maintain minimum levels of shareholders’ equity and cash and cash equivalents. Further, any failure by the Company or Conexant USA to pay their respective debts as they become due would allow the bank to terminate the credit agreement and cause all borrowings under the credit agreement to immediately become due and payable. At December 28, 2007, Conexant USA had borrowed $71.0 million under this credit agreement and was in compliance with all of the credit agreement requirements.

Long-Term Debt

Long-term debt consists of the following (in thousands):


	December 28,			September 28,
	2007			2007
Floating rate senior secured notes due November 2010	$	275,000		$	275,000
4.00% convertible subordinated notes due March 2026 with a conversion price of $4.92		250,000			250,000

Total		525,000			525,000
Less: current portion of long-term debt		(54,900	)		(58,000	)

Long-term debt	$	470,100		$	467,000

Floating rate senior secured notes due November 2010 — In November 2006, the Company issued $275.0 million aggregate principal amount of floating rate senior secured notes due November 2010. Proceeds from this issuance, net of fees paid or payable, were approximately $264.8 million. The senior secured notes bear interest at three-month LIBOR (reset quarterly) plus 3.75%, and interest is payable in arrears quarterly on each February 15, May 15, August 15 and November 15, beginning on February 15, 2007. The senior secured notes are redeemable in whole or in part, at the option of the Company, at any time on or after November 15, 2008 at varying redemption prices that generally include premiums, which are defined in the indenture for the notes, plus accrued and unpaid interest. At any time prior to November 15, 2008, the Company may redeem up to 35% of the senior secured notes with proceeds of one or more offerings of the Company’s common stock at a redemption price equal to 100% of the aggregate principal amount thereof plus accrued and unpaid interest. In addition, upon a change of control, the Company is required to make an offer to redeem all of the senior secured notes at a redemption price equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest. The floating rate senior secured notes rank equally in right of payment with all of the Company’s existing and future senior debt and senior to all of its existing and future subordinated debt. The notes are guaranteed by certain of the Company’s U.S. subsidiaries (the Subsidiary Guarantors). The guarantees rank equally in right of payment with all of the Subsidiary Guarantors’ existing and future senior debt and senior to all of the Subsidiary Guarantors’ existing and future subordinated debt. The notes and guarantees (and certain hedging obligations that may be entered into with respect thereto) are secured by first-priority liens, subject to permitted liens, on substantially all of the Company’s and the Subsidiary Guarantors’ assets (other than accounts receivable and proceeds there from and subject to certain exceptions), including, but not limited to, the intellectual property, owned real property, plant and equipment now owned or hereafter acquired by the Company and the Subsidiary Guarantors. See Note 11 for condensed financial information regarding the Subsidiary Guarantors.

The indenture governing the senior secured notes contains a number of covenants that restrict, subject to certain exceptions, the Company’s ability and the ability of its restricted subsidiaries to: incur or guarantee additional indebtedness or issue certain redeemable or preferred stock; repurchase capital stock; pay dividends on or make other distributions in respect of its capital stock or make other restricted payments; make certain investments; create liens; redeem junior debt; sell certain assets; consolidate, merge, sell or otherwise dispose of all or substantially all of its assets; enter into certain types of transactions with affiliates; and enter into sale-leaseback transactions.

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

The sale of the Company’s investment in Jazz Semiconductor, Inc. (Jazz) in February 2007 and the sale of two other equity investments in January 2007 qualify as asset dispositions requiring the Company to make offers to repurchase a portion of the notes no later than 361 days following the February 2007 asset dispositions. Based on the proceeds received from these asset dispositions and the Company’s estimates of cash investments in assets (other than current assets) related to the Company’s business to be made within 360 days following the asset dispositions, the Company estimates that it will be required to make an offer to repurchase approximately $54.9 million of the senior secured notes, at 100% of the principal amount plus any accrued and unpaid interest, in the second quarter of fiscal 2008. As a result, $54.9 million of the senior secured notes have been classified as current liabilities on the accompanying condensed consolidated balance sheet at December 28, 2007.

At December 28, 2007, the fair value of the senior secured notes, based on quoted market prices, was approximately $274.3 million compared to their carrying value of $275.0 million.

4.00% convertible subordinated notes due March 2026 — In March 2006, the Company issued $200.0 million aggregate principal amount of 4.00% convertible subordinated notes due March 2026 and, in May 2006, the initial purchaser of the notes exercised its option to purchase an additional $50.0 million principal amount of the 4.00% convertible subordinated notes due March 2026. Total proceeds from these issuances, net of issuance costs, were $243.6 million. The notes are general unsecured obligations of the Company. Interest on the notes is payable in arrears semiannually on each March 1 and September 1, beginning on September 1, 2006. The notes are convertible, at the option of the holder upon satisfaction of certain conditions, into shares of the Company’s common stock at a conversion price of $4.92 per share, subject to adjustment for certain events. Upon conversion, the Company has the right to deliver, in lieu of common stock, cash or a combination of cash and common stock. Beginning on March 1, 2011, the notes may be redeemed at the Company’s option at a price equal to 100% of the principal amount, plus any accrued and unpaid interest. Holders may require the Company to repurchase, for cash, all or part of their notes on March 1, 2011, March 1, 2016 and March 1, 2021 at a price of 100% of the principal amount, plus any accrued and unpaid interest.

At December 28, 2007, the fair value of the convertible notes, based on quoted market prices, was approximately $197.5 million compared to their carrying value of $250.0 million.

4. Commitments and Contingencies

Legal Matters

Certain claims have been asserted against the Company, including claims alleging the use of the intellectual property rights of others in certain of the Company’s products. The resolution of these matters may entail the negotiation of a license agreement, a settlement, or the adjudication of such claims through arbitration or litigation. The outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably for the Company. Many intellectual property disputes have a risk of injunctive relief and there can be no assurance that a license will be granted. Injunctive relief could have a material adverse effect on the financial condition or results of operations of the Company. Based on its evaluation of matters which are pending or asserted and taking into account the Company’s reserves for such matters, management believes the disposition of such matters will not have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.

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

class actions against approximately 300 other companies making similar allegations regarding the public offerings of those companies during 1998 through 2000. In June 2003, Conexant, Inc. and the named officers and directors entered into a memorandum of understanding outlining a settlement agreement with the plaintiffs that would, among other things, result in the dismissal with prejudice of all the claims against the former GlobeSpan, Inc. officers and directors. The final settlement was executed in June 2004. On February 15, 2005, the Court issued a decision certifying a class action for settlement purposes and granting preliminary approval of the settlement, subject to modification of certain bar orders contemplated by the settlement, which bar orders have since been modified. On December 5, 2006, the United States Court of Appeals for the Second Circuit reversed the lower court ruling that no class was properly certified. It is not yet clear what impact this decision will have on the issuers’ settlement. The settlement remains subject to a number of conditions and final approval. It is possible that the settlement will not be approved.

Class Action Suit — In February 2005, the Company and certain of its current and former officers and the Company’s Employee Benefits Plan Committee were named as defendants in Graden v. Conexant, et al., a lawsuit filed on behalf of all persons who were participants in the Company’s 401(k) Plan (Plan) during a specified class period. This suit was filed in the U.S. District Court for New Jersey and alleges that the defendants breached their fiduciary duties under the Employee Retirement Income Security Act, as amended, to the Plan and the participants in the Plan. The plaintiff filed an amended complaint on August 11, 2005. On October 12, 2005, the defendants filed a motion to dismiss this case. The plaintiff responded to the motion to dismiss on December 30, 2005, and the defendants’ reply was filed on February 17, 2006. On March 31, 2006, the judge dismissed this case and ordered it closed. Plaintiff filed a notice of appeal on April 17, 2006. The appellate argument was held on April 19, 2007. On July 31, 2007 the United States Court of Appeals for the Third Circuit vacated the District Court’s order dismissing Graden’s complaint and remanded the case for further proceedings. On November 17, 2007, defendants filed a Renewed Motion to Dismiss in the U.S. District Court for New Jersey. On December 4, 2007 defendants also filed a petition for certiorari in the U.S. Supreme Court with respect to the Third Circuit Court of Apeals ruling.

Based on its evaluation of legal matters which are pending or asserted, management believes the disposition of such matters will not have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.

Guarantees and Indemnifications

The Company has made guarantees and indemnities, under which it may be required to make payments to a guaranteed or indemnified party, in relation to certain transactions. In connection with the Company’s spin-off from Rockwell International Corporation, the Company assumed responsibility for all contingent liabilities and then-current and future litigation (including environmental and intellectual property proceedings) against Rockwell or its subsidiaries in respect of the operations of the semiconductor systems business of Rockwell. In connection with the Company’s contribution of certain of its manufacturing operations to Jazz, the Company agreed to indemnify Jazz for certain environmental matters and other customary divestiture-related matters. In connection with the sales of its products, the Company provides intellectual property indemnities to its customers. In connection with certain facility leases, the Company has indemnified its lessors for certain claims arising from the facility or the lease. The Company indemnifies its directors and officers to the maximum extent permitted under the laws of the State of Delaware.

The durations of the Company’s guarantees and indemnities vary, and in many cases are indefinite. The guarantees and indemnities to customers in connection with product sales generally are subject to limits based upon the amount of the related product sales. The majority of other guarantees and indemnities do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. The Company has not recorded any liability for these guarantees and indemnities in the accompanying condensed consolidated balance sheets. Product warranty costs are not significant.

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

Other

Tax Matter - During the quarter, the Company settled certain proposed tax assessments related to an acquired foreign subsidiary. The final settlement related to preacquisition tax periods and the Company was fully indemnified for the amount due. The settlement resulted in a reversal of $1.4 million of reserves, of which $0.5 million was recorded as a reduction to Goodwill and $0.9 million as a reduction to Special charges.

Capital Investments — In connection with certain non-marketable equity investments, with carrying values totaling $8.3 million, the Company may be required to invest up to an additional $2.3 million as of September 28, 2007. These additional investments are subject to capital calls, and a decision by the Company not to participate could result in an impairment of the existing investments.

5. Stock Option Plans

The Company has stock option plans and long-term incentive plans under which employees and directors may be granted options to purchase shares of the Company’s common stock. As of December 28, 2007, approximately 59.7 million shares of the Company’s common stock are available for grant under the stock option and long-term incentive plans. Stock options are generally granted with exercise prices of not less than the fair market value at grant date, generally vest over four years and expire eight or ten years after the grant date. The Company settles stock option exercises with newly issued shares of common stock. The Company has also assumed stock option plans in connection with business combinations.

The Company accounts for its stock option plans in accordance with SFAS No. 123(R), “Share-Based Payment.” Under SFAS No. 123(R), the Company is required to measure compensation cost for all stock-based awards at fair value on the date of grant and recognize compensation expense in its consolidated statements of operations over the service period that the awards are expected to vest. The Company measures the fair value of service-based awards and performance-based awards on the date of grant. Performance-based awards are evaluated for vesting probability each reporting period. Awards with market conditions are valued on the date of grant using the Monte Carlo Simulation Method giving consideration to the range of various vesting probabilities.

The following weighted average assumptions were used in the estimated grant date fair value calculations for share-based payments:


	Fiscal Quarter Ended
	December 28, 2007			December 29, 2006
Stock option plans:
Expected dividend yield	$	—		$	—
Expected stock price volatility		66	%		71	%
Risk free interest rate		4.0	%		4.6	%
Average expected life (in years)		4.88			5.25

Stock purchase plan:
Expected dividend yield	$	—		$	—
Expected stock price volatility		42	%		67	%
Risk free interest rate		4.8	%		5.0	%
Average expected life (in years)		0.5			0.5

The expected stock price volatility rates are based on the historical volatility of the Company’s common stock. The risk free interest rates are based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option or award. The average expected life represents the weighted average period of time that options or awards granted are expected to be outstanding, as calculated using the simplified method described in the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107.

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

A summary of stock option activity is as follows (shares in thousands):


				Weighted
				Average
	Shares			Exercise Price
Outstanding, September 28, 2007		100,812		$	2.39
Granted		1,115			1.19
Exercised		(5	)		1.05
Forfeited		(11,170	)		2.25

Outstanding, December 28, 2007		90,752			2.40


Exercisable, December 28, 2007		58,474			2.73

At December 28, 2007, of the 90.8 million stock options outstanding, approximately 71.8 million options were held by current employees and directors of the Company, and approximately 19.0 million options were held by employees of Rockwell, a former Rockwell business, or a former business of the Company (i.e., Mindspeed, Skyworks, Jazz) who remain employed by one of these businesses. At December 28, 2007, stock options outstanding had an aggregate intrinsic value of $0.03 million and a weighted-average remaining contractual term of 4.5 years. At December 28, 2007, exercisable stock options had an aggregate intrinsic value of $0.02 million and a weighted-average remaining contractual term of 3.3 years. The total intrinsic value of options exercised and total cash received from employees as a result of stock option exercises during the fiscal quarter ended December 28, 2007 was immaterial. During the fiscal quarter ended December 29, 2006, 0.9 million stock options were granted with a weighted average exercise price of $2.01.

Directors Stock Plan

The Company has a Directors Stock Plan (DSP) which provides for each non-employee director to receive specified levels of stock option grants upon election to the Board of Directors and periodically thereafter. Under the DSP, each non-employee director may elect to receive all or a portion of the cash retainer to which the director is entitled through the issuance of common stock. During the fiscal quarter ended December 28, 2007, no stock options or shares of common stock were issued under the DSP. At December 28, 2007, approximately 1.0 million shares of the Company’s common stock are available for grant under the DSP.

Employee Stock Purchase Plan

The Company has an employee stock purchase plan (ESPP) which allows eligible employees to purchase shares of the Company’s common stock at six-month intervals during an offering period at 85% of the lower of the fair market value on the first day of the offering period or on the purchase date. Under the ESPP, employees may authorize the Company to withhold up to 15% of their compensation for each pay period to purchase shares under the plan, subject to certain limitations, and employees are limited to the purchase of 2,000 shares per offering period. Offering periods generally commence on the first trading day of February and August of each year and are generally 6 months in duration, but may be terminated earlier under certain circumstances. No shares were issued under the ESPP during the fiscal quarter ended December 28, 2007. At December 28, 2007, approximately 22.0 million shares of the Company’s common stock are reserved for future issuance under the ESPP, of which 12.5 million shares will become available in 2.5 million share annual increases, subject to the Board of Directors selecting a lower amount.

During the fiscal quarters ended December 28, 2007 and December 29, 2006, the Company recognized compensation expense of $3.8 million and $3.1 million, respectively, related to the stock option and stock purchase plans. At December 28, 2007, the total unrecognized fair value compensation cost related to non-vested stock options and employee stock purchase plan awards was $12.6 million, which is expected to be recognized over a remaining weighted average period of approximately 2.6 years.

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

2001 Performance Share Plan and 2004 New Hire Equity Incentive Plan

The Company’s long-term incentive plans also provide for the issuance of share-based awards to officers and other employees and certain non-employees of the Company. These awards are subject to forfeiture if employment terminates during the prescribed vesting period (generally within four years of the date of award) or, in certain cases, if prescribed performance criteria are not met. The Company has the 2001 Performance Share Plan (Performance Plan) under which it originally reserved 4.0 million shares for issuance as well as the 2004 New Hire Equity Incentive Plan (New Hire Plan) under which it originally reserved 12.0 million shares for issuance.

Performance Plan

The performance-based awards may be settled, at the Company’s election at the time of payment, in cash, shares of common stock or any combination of cash and common stock. A summary of share-based award activity under the Performance Plan is as follows (shares in thousands):


				Weighted
				Average Grant
	Shares			Date Fair Value
Outstanding, September 28, 2007		900		$	2.29
Granted		750			1.24
Forfeited		(700	)		2.29

Outstanding, December 28, 2007		950			1.46


				Weighted
				Average Grant
	Shares			Date Fair Value
Outstanding, September 29, 2006		275		$	2.90
Granted		900			2.29
Vested		(275	)		2.90

Outstanding, December 29, 2006		900			2.29

During the fiscal quarter ended December 28, 2007, the Company recorded a reversal of previously recognized stock based compensation expense of $1.1 million related to the non-achievement of certain performance criteria and stock based compensation expense of $0.1 million related to award grants that are still outstanding. During the fiscal quarter ended December 29, 2006, the Company recorded stock based compensation expense of $0.3 million, related to these awards. At December 28, 2007, the total unrecognized fair value compensation cost related to non-vested Performance Plan share awards $0.9 million, which is expected to be recognized over a remaining weighted average period of approximately 1.8 years. At December 28, 2007, approximately 2.2 million shares of the Company’s common stock are available for issuance under this plan.

2004 New Hire Plan

As of December 28, 2007, Company had approximately 2.0 million shares of service-based awards granted under the New Hire Plan and 1.3 million shares of awards with market conditions. Of the service-based awards granted, 0.5 million shares have a vesting period of one year and 1.4 million shares have a three year vesting period. The Company measures service-based awards at fair value on the grant-date. The stock compensation cost of $2.8 million associated with these awards will be expensed ratably over the vesting periods of one to three years.

The share awards with market conditions will vest at a rate of one-third if the Company’s common stock sustains an average closing price of $3.00 over a 60 calendar day period, one-third if the Company’s common stock sustains an

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

average closing price of $4.50 over a 60 calendar day period and one-third if the Company’s common stock sustains an average closing price of $6.00 over a 60 calendar day period. Any unvested portion of the performance restricted stock units will be forfeited five years after grant. In the event of a change of control of the Company (as defined in the employment agreement), the vesting stock awards described above that are not vested will vest and, if not already vested, one-third of the performance restricted stock units described above will vest if the closing price of the Company’s common stock (or the price per share in the transaction that constitutes the change of control) on the date of the change of control is at least $3.00, an additional one-third will vest if such price is at least $4.50 and an additional one-third will vest if such price is at least $6.00. The Company measures share awards with market conditions at fair value on the grant-date using valuation techniques in accordance with SFAS No. 123R, which gives consideration to the range of various vesting probabilities.

During the fiscal quarters ended December 28, 2007 and December 29, 2006, no shares were issued, vested or forfeited under the New Hire Plan. At December 27, 2007 and September 28, 2007, there were 3.1 million shares outstanding under the New Hire Plan. At December 29, 2006 and September 29, 2006, there were no shares outstanding under the New Hire Plan. During the fiscal quarters ended December 28, 2007 and December 29, 2006, the Company expensed $0.5 million, and zero, respectively, related to these awards. At December 28, 2007, the total unrecognized fair value compensation cost related to non-vested New Hire Plan was $2.7 million, which is expected to be recognized over a remaining weighted average period of approximately 1.9 years.

6. Comprehensive (Loss) Income

Comprehensive (loss) income consists of the following (in thousands):


	Fiscal Quarter Ended
	December 28,			December 29,
	2007			2006
Net (loss) income	$	(9,218	)	$	976

Other comprehensive (loss) income:
Foreign currency translation adjustments		299			981
Unrealized gains (losses) on marketable securities		—			11,796
Unrealized (losses) gains on foreign currency forward hedge contracts		(377	)		249
Minimum pension liability adjustments		(1,110	)		54

Other comprehensive (loss) income		(1,189	)		13,080


Comprehensive (loss) income	$	(10,407	)	$	14,056

Accumulated other comprehensive loss consists of the following (in thousands):


	December 28,			September 28,
	2007			2007
Foreign currency translation adjustments	$	2,292		$	1,994
Unrealized gains on foreign currency forward hedge contracts		3			380
Minimum pension liability adjustments		(4,869	)		(3,759	)

Accumulated other comprehensive loss	$	(2,574	)	$	(1,385	)

7. Special Charges

Special charges primarily consist of $6.8 and $2.9 million of Restructuring Charges for the fiscal quarters ended December 28, 2007 and December 29, 2006, respectively. Special charges during the three months ended December 28, 2007 were offset by the reversal of a $0.9 million reserve related to the settlement of a proposed tax assessment related to an acquired foreign subsidiary.

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

Restructuring Charges

The Company has implemented a number of cost reduction initiatives since fiscal 2005 to improve its operating cost structure. The cost reduction initiatives included workforce reductions and the closure or consolidation of certain facilities, among other actions.

As of December 28, 2007, the Company has remaining restructuring accruals of $25.7 million, of which $4.3 million relates to workforce reductions and $21.4 million relates to facility and other costs. Of the $25.7 million of restructuring accruals at December 28, 2007, $19.7 million is included in other current liabilities and $9.1 million is included in other non-current liabilities in the accompanying condensed consolidated balance sheet as of December 28, 2007. The Company expects to pay the amounts accrued for the workforce reductions through fiscal 2008 and expects to pay the obligations for the non-cancelable lease and other commitments over their respective terms, which expire at various dates through fiscal 2021. The facility charges were determined in accordance with the provisions of SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS No. 146). As a result, the Company recorded the net present value of the future lease obligations and will accrete the remaining amounts into expense over the remaining terms of the lease non-cancellable leases. Cash payments to complete the restructuring actions will be funded from available cash reserves and funds from product sales, and are not expected to significantly impact the Company’s liquidity.

Fiscal 2008 Restructuring Actions — During the three months ended December 28, 2007, the Company announced its decision to discontinue investments in standalone wireless networking solutions and other product areas. In relation to this announcement the Company has recorded $3.0 million of total charges for the cost of severance benefits for the affected employees. Additionally, the Company recorded charges of $1.1 million relating to the consolidation of certain facilities under non-cancelable leases which were vacated.

Activity and liability balances recorded as part of the Fiscal 2008 Restructuring Actions through December 28, 2007 were as follows (in thousands):


	Workforce			Facility
	Reductions			And Other			Total
Restructuring balance, September 28, 2007	$	—		$	—		$	—
Charged to costs and expenses		3,042			1,145			4,187
Non-cash items		—			—			—
Cash payments		(1,756	)		(53	)		(1,809	)

Restructuring balance, December 28, 2007	$	1,286		$	1,092		$	2,378

Fiscal 2007 Restructuring Actions — During fiscal 2007, the Company announced several facility closures and workforce reductions. In total, the Company notified approximately 670 employees of their involuntary termination and recorded $9.5 million of total charges for the cost of severance benefits for the affected employees. Additionally, the Company recorded charges of $2.0 million relating to the consolidation of certain facilities under non-cancelable leases which were vacated.

Activity and liability balances recorded as part of the Fiscal 2007 Restructuring Actions through December 28, 2007 were as follows (in thousands):


	Workforce			Facility
	Reductions			And Other			Total
Restructuring balance, September 28, 2007	$	3,636		$	6,640		$	10,276
Charged to costs and expenses		373			2,086			2,459
Non-cash items		—			(70	)		(70	)
Cash payments		(1,071	)		(632	)		(1,703	)

Restructuring balance, December 28, 2007	$	2,938		$	8,024		$	10,962

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

Fiscal 2006 and 2005 Restructuring Actions — During fiscal years 2006 and 2005, the Company announced operating site closures and workforce reductions. In total, the Company notified approximately 385 employees of their involuntary termination. During fiscal 2006 and 2005, the Company recorded total charges of $24.1 million based on the estimates of the cost of severance benefits for the affected employees and the estimated relocation benefits for those employees who were offered and accepted relocation assistance. Additionally, the Company recorded charges of $21.3 million relating to the consolidation of certain facilities under non-cancelable leases which were vacated. The facility charges were determined in accordance with the provisions of SFAS No. 146. As a result, the Company recorded the net present value of the future lease obligations, in excess of the expected future sublease income and will accrete the remaining amounts into expense over the remaining term of the lease through fiscal 2008.

Activity and liability balances recorded as part of the Fiscal 2006 Restructuring Action through December 28, 2007 were as follows (in thousands):


	Workforce			Facility
	Reductions			And Other			Total
Restructuring balance, September 28, 2007	$	131		$	12,516		$	12,647
Charged to costs and expenses		—			244			244
Cash payments		(1	)		(588	)		(589	)
Non-cash items		—			82			82

Restructuring balance, December 28, 2007	$	130		$	12,254		$	12,385

8. Other (expense) income, net

Other (expense) income, net consists of the following (in thousands):


	Fiscal Quarter Ended
	December 28,			December 29,
	2007			2006
Investment and interest income	$	2,771		$	5,389
Increase (decrease) in the fair value of derivative instruments		(8,364	)		3,042
Other		248			(71	)

Other (expense) income, net	$	(5,345	)	$	8,360

Other (expense) income, net in the fiscal quarter ended December 28, 2007 was primarily comprised of $2.8 million of investment and interest income on invested cash balances offset by an $8.3 million decrease in the fair value of the Company’s warrant to purchase 30 million shares of Mindspeed common stock mainly due to a decrease in Mindspeed’s stock price during the period.

Other (expense) income, net in the fiscal quarter ended December 29, 2006 was primarily comprised of $5.4 million of investment and interest income on invested cash balances and a $3.0 million increase in the fair value of the Company’s warrant to purchase 30 million shares of Mindspeed common stock mainly due to an increase in Mindspeed’s stock price during the period.

9. Income Taxes

The Company recorded a tax provision of $1.2 million for the quarter ended December 28, 2007 as compared to $0.5 million for the quarter ended December 29, 2006, All of the Company’s U.S. Federal income taxes and the majority of its state income taxes are offset by fully reserved deferred tax assets.

The Company utilizes the liability method of accounting for income taxes as set forth in SFAS 109. The Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial

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

performance. SFAS 109 further states that forming a conclusion that a valuation allowance is not required is difficult when there is negative evidence such as cumulative losses in recent years. As a result of the Company’s recent cumulative losses in the U.S. and certain foreign jurisdictions, and the full utilization of its loss carryback opportunities, the Company has concluded that a full valuation allowance should be recorded in such jurisdictions.

As of December 28, 2007, the Company had approximately $1.2 billion of net deferred income tax assets, which are primarily related to U.S. Federal income tax NOL carryforwards and capitalized R&D expenses and which can be used to offset taxable income in subsequent years. Approximately $386 million of the deferred tax assets were acquired in business combinations, and if the Company receives a tax benefit from their utilization, the benefit will be recorded as a reduction to goodwill. The deferred tax assets acquired in business combinations are subject to limitations imposed by section 382 of the Internal Revenue Code. Such limitations are not expected to impair the Company’s ability to utilize these deferred tax assets. As of December 28, 2007, the Company has a valuation allowance recorded against the majority of its deferred tax assets, resulting in net deferred tax assets of $0.3 million. The Company does not expect to recognize any income tax benefits relating to future operating losses until it believes that such tax benefits are more likely than not to be realized.

Adopting FIN 48 had the following impact on the Company’s financial statements: increased long-term liabilities by $5.9 million and retained deficit by $0.8 million and decreased its long-term assets by $0.3 million and current income taxes payable by $5.3 million. As of September 29, 2007, the Company had $74.4 million of unrecognized tax benefits of which $5.2 million, if recognized, would affect its effective tax rate and $1.7 million, if recognized, would reduce goodwill. The Company’s policy is to include interest and penalties related to unrecognized tax benefits in provision for income taxes. As of September 29, 2007, the Company had accrued interest related to uncertain tax positions of $0.9 million, net of income tax benefit, on its balance sheet.

In the quarter ended December 28, 2007, the Company concluded certain foreign income tax audits that resulted in a decrease in uncertain tax positions of $1.2 million. In addition, due to the expected expiration of certain acquired net operating loss carryovers, the Company expects its unrecognized tax benefits to decrease by an additional $3.5 million over the next 12 months. The Company does not expect its uncertain tax positions to otherwise change materially over the next 12 months.

The Company is subject to income taxes in both the United States and numerous foreign jurisdictions and has also acquired and divested certain businesses for which it has retained certain tax liabilities. In the ordinary course of our business, there are many transactions and calculations in which the ultimate tax determination is uncertain and significant judgment is required in determining our worldwide provision for income taxes. The Company and its acquired and divested businesses are regularly under audit by tax authorities. Although the Company believes its tax estimates are reasonable, the final determination of tax audits could be different than that which is reflected in historical income tax provisions and accruals. Based on the results of an audit, a material effect on the Company’s income tax provision, net income, or cash flows in the period or periods for which that determination is made could result. The Company files U.S. and state income returns in jurisdictions with varying statutes of limitation. The fiscal years 2004 through 2007 generally remain subject to examination by federal and most state tax authorities. The Company is subject to income tax in many jurisdictions outside the U.S., none of which are individually material to its financial position, statement of cash flows, or results of operations.

10. Related Party Transactions

Mindspeed Technologies, Inc.

As of December 28, 2007, the Company holds a warrant to purchase 30 million shares of Mindspeed common stock at an exercise price of $3.408 per share exercisable through June 2013. In addition, two members of the Company’s Board of Directors, including its Chairman, also serve on the Board of Mindspeed. No significant amounts were due to or receivable from Mindspeed at December 28 and September 28, 2007.

Lease Agreement — The Company subleases an office building to Mindspeed. Under the sublease agreement, Mindspeed pays amounts for rental expense and operating expenses, which include utilities, common area maintenance, and security services. During each of the fiscal quarters ended December 28, 2007, and December 29, 2006, the Company recorded income related to the Mindspeed sublease agreement of $0.6 million. Additionally, Mindspeed made payments directly to the Company’s landlord totaling $1.0 million during each of the fiscal quarters ended December 28, 2007 and December 29, 2006.

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

11. Geographic Information

Net revenues by geographic area, based upon country of destination, were as follows (in thousands):


	Fiscal Quarter Ended
	December 28,		December 29,
	2007		2006
United States	$	7,905	$	26,902
Other Americas		6,842		10,872

Total Americas		14,747		37,774

China		117,305		129,493
South Korea		13,073		21,395
Taiwan		10,537		11,645
Other Asia-Pacific		31,276		32,224

Total Asia-Pacific		172, 191		194,757

Europe, Middle East and Africa		10,020		13,003

	$	196,958	$	245,534

The Company believes a portion of the products sold to original equipment manufacturers (OEMs) and third-party manufacturing service providers in the Asia-Pacific region are ultimately shipped to end-markets in the Americas and Europe. One distributor accounted for 10% and 11% of net revenues for the fiscal quarters ended December 28, 2007 and December 29, 2006, respectively. Sales to the Company’s twenty largest customers represented approximately 69% and 75% of net revenues for the fiscal quarters ended December 28, 2007 and December 29, 2006, respectively.

Long-lived assets consist of property, plant and equipment and certain other long-term assets. Long-lived assets by geographic area were as follows (in thousands):


	December 28,		September 28,
	2007		2007
United States	$	88,837	$	84,267
India		16,225		17,377
Other Asia-Pacific		10,968		10,934
Europe, Middle East and Africa		1,669		1,831

	$	117,699	$	114,409

12. Supplemental Guarantor Financial Information

In November 2006, the Company issued $275.0 million of floating rate senior secured notes due November 2010. The floating rate senior secured notes rank equally in right of payment with all of Conexant Systems, Inc.’s (the Parent’s) existing and future senior debt and senior to all of its existing and future subordinated debt. The notes are also jointly, severally and unconditionally guaranteed, on a senior basis, by three of the Parent’s wholly owned U.S. subsidiaries: Conexant, Inc., Brooktree Broadband Holding, Inc., and Ficon Technology, Inc. (collectively, the Subsidiary Guarantors). The guarantees rank equally in right of payment with all of the Subsidiary Guarantors’ existing and future senior debt and senior to all of the Subsidiary Guarantors’ existing and future subordinated debt. The notes and guarantees (and certain hedging obligations that may be entered into with respect thereto) are secured by first-priority liens, subject to permitted liens, on substantially all of the Parent’s and the Subsidiary Guarantors’ assets (other than accounts receivable and proceeds therefrom and subject to certain exceptions), including, but not limited to, the intellectual property, owned real property, plant and equipment now owned or hereafter acquired by the Parent and the Subsidiary Guarantors.

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

In lieu of providing separate financial statements for the Subsidiary Guarantors, the Company has included the accompanying condensed consolidating financial statements. These condensed consolidating financial statements are presented on the equity method of accounting. Under this method, the Parent’s and Subsidiary Guarantors’ investments in their subsidiaries are recorded at cost and adjusted for their share of the subsidiaries’ cumulative results of operations, capital contributions and distributions and other equity changes. The financial information of the three Subsidiary Guarantors has been combined in the condensed consolidating financial statements.

The following tables present the Company’s condensed consolidating balance sheets as of December 28, 2007 and September 28, 2007 (in thousands):


	December 28, 2007
							Non-
	Parent			Guarantors			Guarantors		Eliminations			Consolidated
Current assets:
Cash and cash equivalents	$	203,522		$	—		$	28,619	$	—		$	232,141
Restricted cash		—			—			8,800		—			8,800
Receivables, net		(25,327	)		—			97,054		—			71,727
Inventories		60,899			—			—		—			60,899
Other current assets		10,650			3			13,264		—			23,917

Total current assets		249,744			3			147,737		—			397,484

Property and equipment, net		30,971			—			27,251		—			58,222
Goodwill		68,748			30,835			306,154		—			405,737
Intangible assets, net		(4,939	)		1,815			24,655		—			21,531
Other assets		64,217			—			2,417		—			66,634
Investments in subsidiaries		521,123			13,206			—		(534,329	)		—

Total assets	$	929,864		$	45,859		$	508,214	$	(534,329	)	$	949,608


Current liabilities:
Current portion of long-term debt	$	54,900		$	—		$	—	$	—		$	54,900
Short-term debt		—			—			70,973		—			70,973
Accounts payable		71,992			—			3,621		—			75,613
Accrued compensation and benefits		18,266			—			7,450		—			25,716
Intercompany payable (receivable)		91,122			(169,158	)		78,036		—			—
Other current liabilities		41,092			932			7,862		—			49,886

Total current liabilities		277,372			(168,226	)		167,942					277,088

Long-term debt		470,100			—			—		—			470,100
Other liabilities		59,375			—			3,016		—			62,391

Total liabilities		806,847			(168,226	)		170,958		—			809,579


Shareholders’ equity		123,017			214,085			337,256		(534,329	)		140,029

Total liabilities and equity	$	929,864		$	45,859		$	508,214	$	(534,329	)	$	949,608

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


	September 28, 2007
							Non-
	Parent			Guarantors			Guarantors		Eliminations			Consolidated
Current assets:
Cash and cash equivalents	$	199,263		$	—		$	36,342	$	—		$	235,605
Restricted cash		—			—			8,800		—			8,800
Receivables		(10,071	)		—			90,977		—			80,906
Inventories		63,174			—			—		—			63,174
Other current assets		13,028			2			7,331		—			20,361

Total current assets		265,934			2			143,450		—			408,846

Property and equipment, net		39,543			—			28,424		—			67,967
Goodwill		68,834			307,051			30,438		—			406,323
Intangible assets, net		5,764			18,244			2,059		—			26,067
Other assets		73,635			—			3,131		—			76,766
Investments in subsidiaries		513,340			11,563			—		(524,903	)		—

Total assets	$	966,510		$	336,860		$	207,502	$	(524,903	)	$	985,969


Current liabilities:
Current portion of long-term debt	$	58,000		$	—		$	—	$	—		$	58,000
Short-term debt		—			—			80,000		—			80,000
Accounts payable		77,581			—			3,086		—			80,667
Accrued compensation and benefits		18,478			—			7,676		—			26,154
Intercompany payable (receivable)		96,258			(169,158	)		72,900		—			—
Other current liabilities		66,035			931			3,665		—			70,631

Total current liabilities		316,352			(168,227	)		167,327		—			315,452

Long-term debt		467,000			—			—		—			467,000
Other liabilities		53,410			—			3,592		—			57,002

Total liabilities		836,762			(168,227	)		170,919		—			839,454


Shareholders’ equity		129,748			505,087			36,583		(524,903	)		146,515

Total liabilities and equity	$	966,510		$	336,860		$	207,502	$	(524,903	)	$	985,969

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

The following tables present the Company’s condensed consolidating statements of operations for the fiscal quarters ended December 28, 2007 and December 29, 2006 (in thousands):


	Fiscal Quarter Ended December 28, 2007
						Non-
	Parent			Guarantors		Guarantors			Eliminations			Consolidated
Net revenues	$	170,994		$	11,196	$	25,964		$	(11,196	)	$	196,958
Cost of goods sold		85,294			—		23,589			(11,196	)		97,687

Gross margin		85,700			11,196		2,375			—			99,271

Operating expenses:
Research and development		60,215			—		175			—			60,390
Selling, general and administrative		19,603			—		3,498			—			23,101
Amortization of intangible assets		676			244		3,861			—			4,781
Asset impairments		130			—		—			—			130
Special charges		5,412			—		372			—			5,784

Total operating expenses		86,036			244		7,906			—			94,186


Operating income (loss)		(336	)		10,952		(5,531	)		—			5,085

Equity in income (loss) of subsidiaries		9,081			1,641		—			(10,722	)		—
Interest expense		(9,773	)		—		(1,790	)		—			(11,563	)
Other income (expense), net		(11,183	)		—		5,838			—			(5,345	)


Income (loss) before income taxes and gain (loss) on equity method investments		(12,211	)		12,593		(1,483	)		(10,722	)		(11,823	)
Provision for income taxes		780			—		388			—			1,168

Income (loss) before gain (loss) on equity method investments		(12,991	)		12,593		(1,871	)		—			(10,722	)
Gain on equity method investments		3,773			—		—			—			3,773

Net (loss) income	$	(9,218	)	$	12,593	$	(1,871	)	$	(10,722	)	$	(9,218	)


	Fiscal Quarter Ended December 29, 2006
						Non-
	Parent			Guarantors		Guarantors			Eliminations			Consolidated
Net revenues	$	208,474		$	6,905	$	37,060		$	(6,905	)	$	245,534
Cost of goods sold		108,205			—		34,745			(6,905	)		136,045

Gross margin		100,269			6,905		2,315			—			109,489

Operating expenses:
Research and development		70,487			—		963			—			71,450
Selling, general and administrative		23,613			—		3,863			—			27,476
Amortization of intangible assets		727			5,256		255			—			6,238
Special charges		2,898			—		—			—			2,898


Total operating expenses		97,725			5,256		5,081			—			108,062


Operating income (loss)		2,544			1,649		(2,766	)		—			1,427

Equity in income (loss) of subsidiaries		2,421			465		—			(2,886	)		—
Interest expense		(11,342	)		—		(1,694	)		—			(13,036	)
Other income (expense), net		7,748			—		5,313			—			13,061


Income (loss) before income taxes and gain (loss) on equity method investments		1,371			2,114		853			(2,886	)		1,452
Provision for income taxes		390			—		81			—			471


Income (loss) before gain (loss) on equity method investments		981			2,114		772			(2,886	)		981
Loss on equity method investments		(5	)		—		—			—			(5	)

Net income (loss)	$	976		$	2,114	$	772		$	(2,886	)	$	976

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

The following tables present the Company’s condensed consolidating statements of cash flows for the fiscal quarters ended December 28, 2007 and December 29, 2006 (in thousands):


	Fiscal Quarter Ended December 28, 2007
						Non-
	Parent			Guarantors		Guarantors			Eliminations			Consolidated
Net cash provided by (used in) operating activities	$	5,576		$	—	$	(3,480	)	$	5,832		$	7,928

Cash flows from investing activities:
Purchases of accounts receivable		—			—		(145,848	)		145,848			—
Collections of accounts receivable		—			—		151,680			(151,680	)		—
Purchases of equity securities and other assets		(755	)		—		—			—			(755	)
Purchases of property and equipment		(566	)		—		(1,048	)		—			(1,614	)


Net cash (used in) provided by investing activities		(1,321	)		—		4,784			(5,832	)		(2,369	)


Cash flows from financing activities:
Repayment of short-term debt, net		—			—		(9,027	)		—			(9,027	)
Proceeds from common stock		4			—		—			—			4


Net cash provided by (used in) financing activities		4			—		(9,027	)		—			(9,023	)

Net increase (decrease) in cash and cash equivalents		4,259			—		(7,723	)		—			(3,464	)
Cash and cash equivalents at beginning of period		199,263			—		36,342			—			235,605

Cash and cash equivalents at end of period	$	203,522		$	—	$	28,619		$	—		$	232,141

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


	Fiscal Quarter Ended December 29, 2006
						Non-
	Parent			Guarantors		Guarantors			Eliminations			Consolidated
Net cash provided by (used in) operating activities	$	(7,186	)	$	—	$	14,161		$	899		$	7,874

Cash flows from investing activities:
Purchases of marketable debt securities		(12,094	)		—		—			—			(12,094	)
Proceeds from sales and maturities of marketable debt securities		28,688			—		—			—			28,688
Purchases of accounts receivable		—			—		(168,825	)		168,825			—
Collections of accounts receivable		—			—		169,724			(169,724	)		—
Proceeds from equity securities and other assets		436			—		—			—			436
Purchases 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	)		4,785


Cash flows from financing activities:
Proceeds from short-term debt, net		—			—		(845	)		—			(845	)
Proceeds from long-term debt, net		267,221			—		—			—			267,221
Proceeds from common stock		2,243			—		—			—			2,243
Repayment of shareholder notes		21			—		—			—			21


Net cash provided by (used in) financing activities		269,485			—		(845	)		—			268,640


Net increase in cash and cash equivalents		271,235			—		10,064			—			281,299

Cash and cash equivalents at beginning of period		175,398			—		50,228			—			225,626


Cash and cash equivalents at end of period	$	446,633		$	—	$	60,292		$	—		$	506,925

13. Subsequent Events

On January 30, 2008, the Company received a letter from The Nasdaq Stock Market notifying it that for the 30 consecutive business days preceding the date of the letter the bid price of the Company’s common stock had closed below the $1.00 per share minimum bid price required for continued inclusion on The Nasdaq Global Market pursuant to Nasdaq Marketplace Rule 4450(a)(5). This notification has no effect on the listing of the Company’s common stock at this time.

Nasdaq stated in its letter that in accordance with Nasdaq Marketplace Rule 4450(e)(2), the Company has 180 calendar days from the date of the Nasdaq letter, or until July 28, 2008, to regain compliance with the minimum bid price rule. To regain compliance, the closing bid price of the Company’s common stock must meet or exceed $1.00 per share for a minimum of 10 consecutive business days. Nasdaq may, in its discretion, require the Company to maintain a bid price of at least $1.00 per share for a period in excess of 10 consecutive business days, but generally no more than 20 consecutive business days, before determining that the Company has demonstrated an ability to maintain long-term compliance. If compliance is not regained, Nasdaq will notify the Company of its determination to delist the Company’s common stock, which determination may be appealed to a Nasdaq Listings Qualification Panel.]

On February 1, 2008, Conexant entered into three interest rate swap agreements with Bear Stearns Capital Markets Inc (counterparty) for a combined notional amount of $200,000,000 to eliminate interest rate risk on $200,000,000 of its Floating Rate Senior Secured Notes due 2010. Under the terms of the swaps, the Company will pay a fixed rate of 2.98% and receive a floating rate equal to three-month LIBOR, which will offset the floating rate paid on the Notes. The swap agreements require the Company to post cash collateral with the counterparty in a minimum amount of $4,250,000. The amount of collateral will adjust monthly based on a mark-to-market of the swaps.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included in Part I and Item 1 of this Quarterly Report, as well as other cautionary statements and risks described elsewhere in this Quarterly Report, and our audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended September 28, 2007.

Overview

We design, develop and sell semiconductor system solutions, comprised of semiconductor devices, software and reference designs, for use in broadband communications applications that enable high-speed transmission, processing and distribution of audio, video, voice and data to and throughout homes and business enterprises worldwide. Our access solutions connect people through personal communications access products, such as personal computers (PCs) and television set-top boxes (STBs), to audio, video, voice and data services over wireless and wire line broadband connections as well as over dial-up Internet connections. Our central office solutions are used by service providers to deliver high-speed audio, video, voice and data services over copper telephone lines and optical fiber networks to homes and businesses around the globe. In addition, our media processing products enable the capture, display, storage, playback and transfer of audio and video content in applications throughout home and small office environments. These solutions enable broadband connections and network content to be shared throughout a home or small office-home office environment using a variety of communications devices.

We market and sell our semiconductor products and system solutions directly to leading original equipment manufacturers (OEMs) of communication electronics products, and indirectly through electronic components distributors. We also sell our products to third-party electronic manufacturing service providers, who manufacture products incorporating our semiconductor products for OEMs. Sales to distributors and other resellers accounted for approximately 25% of our net revenues in the fiscal quarter ended December 28, 2007, compared to 34% of our net revenues in the fiscal quarter ended December 29, 2006. One distributor accounted for 10% and 11% of net revenues for the three months ended December 28, 2007 and December 29, 2006, respectively. Our top 20 customers accounted for approximately 69% and 75% of net revenues for the fiscal quarters ended December 28, 2007 and December 29, 2006, respectively. Revenues derived from customers located in the Americas, the Asia-Pacific region and Europe (including the Middle East and Africa) were 8%, 87% and 5%, respectively, of our net revenues for the fiscal quarter ended December 28, 2007 and were 16%, 79% and 5%, respectively, of our net revenues for the fiscal quarter ended December 29, 2006. We believe a portion of the products we sell to OEMs and third-party manufacturing service providers in the Asia-Pacific region are ultimately shipped to end-markets in the Americas and Europe.

Critical Accounting Policies

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, revenues and expenses during the periods reported and related disclosures. Actual results could differ from those estimates. Information with respect to our critical accounting policies which we believe have the most significant effect on our reported results and require subjective or complex judgments of management is contained on pages 40-43 in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended September 28, 2007. Management believes that at December 28, 2007, there has been no material change to this information.

Business Enterprise Segments

We operate in one reportable segment, broadband communications. Statement of Financial Accounting Standards (SFAS) No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for the way that public business enterprises report information about operating segments in consolidated financial statements. Although we had four operating segments at December 28, 2007, under the aggregation criteria set forth in SFAS No. 131, we only operate in one reportable segment, broadband communications.

	•		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.

We meet each of the aggregation criteria for the following reasons:

	•		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.

Because we meet each of the criteria set forth above and each of our operating segments has similar economic characteristics, we aggregate our results of operations in one reportable segment.

Results of Operations

Net Revenues

Our net revenues decreased 19.8% in the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007. This decrease was driven by overall revenue declines with the most significant being Broadband Media products. These declines were partially offset by approximately $14.7 million of non-recurring revenue from the buyout of a future royalty stream.

We recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the sales price and terms are fixed and determinable, and (iv) the collection of the receivable is reasonably assured. These terms are typically met upon shipment of product to the customer, except for certain distributors who have unlimited contractual rights of return or for whom the contractual terms were not enforced, or when significant vendor obligations exist. Revenue with respect to sales to distributors with unlimited rights of return or for whom contractual terms were not enforced is deferred until the purchased products are sold by the distributors to third parties. At December 28, 2007 and September 28, 2007, deferred revenue related to sales to these distributors was $6.5 million and $5.5 million, respectively. Revenue with respect to sales to customers to whom we have significant obligations after delivery is deferred until all significant obligations have been completed. At December 28, 2007 and September 28, 2006, deferred revenue related to shipments of products for which we have on-going performance obligations was $5.1 million and $3.0 million, respectively. The majority of our distributors have limited stock rotation rights, which allow them to rotate up to 10% of product in their inventory two times a year. We recognize revenue to these distributors upon shipment of product to the distributor, as the stock rotation rights are limited and we believe that we have the ability to reasonably estimate and establish allowances for expected product returns in accordance with SFAS No. 48, “Revenue Recognition When Right of Return Exists.” Development revenue is recognized when services are performed and was not significant for any periods presented.

Gross Margin

Gross margin represents net revenues less cost of goods sold. As a fabless semiconductor company, we use third parties for wafer production and assembly and test services. Our cost of goods sold consists predominantly of purchased finished wafers, assembly and test services, royalties, amortization of production photo mask costs, other intellectual property costs, labor and overhead associated with product procurement, and non-cash stock-based compensation charges for procurement personnel.

Our gross margin percentage for the first quarter of fiscal 2008 was 50% compared with 45% for the first quarter of fiscal 2007. Excluding the $14.7 million the royalty buy-out in the first fiscal quarter of 2008, our gross margin percentage would have been 46% for the first quarter of fiscal 2008 compared to 45% for the first quarter of fiscal 2007. The higher gross margin percentage in the first quarter of fiscal 2008 is primarily attributable to a shift in product mix.

We assess the recoverability of our inventories on a quarterly basis through a review of inventory levels in relation to foreseeable demand, generally over the following twelve months. Foreseeable demand is based upon available information, including sales backlog and forecasts, product marketing plans and product life cycle information. When the inventory on hand exceeds the foreseeable demand, we write down the value of those inventories which, at the time of our review, we expect to be unable to sell. The amount of the inventory write-down is the excess of historical cost over estimated realizable value. Once established, these write-downs are considered permanent adjustments to the cost basis of the excess inventory. Demand for our products may fluctuate significantly over time, and actual demand and market conditions may be more or less favorable than those projected by management. In the event that actual demand is lower than originally projected, additional inventory write-downs may be required. Similarly, in the event that actual demand exceeds original projections, gross margins may be favorably impacted in future periods. It is possible that some of these reserved products will be sold which will benefit our gross margin in the period sold.

Excess and Obsolete Inventory

During the fiscal quarters ended December 28, 2007 and December 29, 2006, we recorded $3.9 million and $1.6 million, respectively, in inventory charges for excess and obsolete (E&O) inventory. Activity in our E&O inventory reserves for the fiscal quarters ended December 28, 2007 and December 29, 2006 was as follows:


	Fiscal Quarter Ended
	December 28,			December 29,
*(in thousands)*	2007			2006
E&O reserves at beginning of period	$	22,181		$	36,632
Additions		3,895			1,570
Release upon sales of product		(1,238	)		(2,650	)
Scrap		(1,611	)		(4,672	)
Standards adjustments and other		72			(87	)

E&O reserves at end of period	$	23,299		$	30,793

Our products are used by communications electronics OEMs that have designed our products into communications equipment. For many of our products, we gain these design wins through a lengthy sales cycle, which often includes providing technical support to the OEM customer. Moreover, once a customer has designed a particular supplier’s components into a product, substituting another supplier’s components often requires substantial design changes which involve significant cost, time, effort and risk. In the event of the loss of business from existing OEM customers, we may be unable to secure new customers for our existing products without first achieving new design wins. When the quantities of inventory on hand exceed foreseeable demand from existing OEM customers into whose products our products have been designed, we generally will be unable to sell our excess inventories to others, and the estimated realizable value of such inventories to us is generally zero.

On a quarterly basis, we also assess the net realizable value of our inventories. When the estimated ASP, plus costs to sell our inventory, falls below our inventory cost, we adjust our inventory to its current estimated market value. Increases to the lower of cost or market (LCM) inventory reserves may be required based upon actual ASPs and

changes to our current estimates, which would impact our gross margin percentage in future periods. Activity in our LCM inventory reserves for the three months ended December 28, 2007 and December 29, 2006 were immaterial.

Research and Development

Our research and development (R&D) expenses consist principally of direct personnel costs to develop new semiconductor products, allocated indirect costs of the R&D function, photo mask and other costs for pre-production evaluation and testing of new devices and design and test tool costs. Our R&D expenses also include the costs for design automation advanced package development and non-cash stock-based compensation charges for R&D personnel.

R&D expense decreased $11.1 million in the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007 primarily due to expense reductions resulting from restructuring initiatives implemented during fiscal 2007 and 2008. R&D expense for the first quarter of fiscal 2008 also included a correcting adjustment of $5.3 million, representing the unamortized portion of the capitalized photo mask costs as of September 29, 2007. Based upon an evaluation of all relevant quantitative and qualitative factors, and after considering the provisions of APB 28, paragraph 29, and SAB Nos. 99 and 108, we believe that this correcting adjustment will not be material to our estimated full year results for 2008. In addition, we do not believe the correcting adjustment is material to the amounts reported in previous periods.

Selling, General and Administrative

Our selling, general and administrative (SG&A) expenses include personnel costs, sales representative commissions, advertising and other marketing costs. Our SG&A expenses also include costs of corporate functions including legal, accounting, treasury, human resources, customer service, sales, marketing, field application engineering, allocated indirect costs of the SG&A function, and non-cash stock-based compensation charges for SG&A personnel.

SG&A expense decreased $4.4 million in the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007 primarily due to expense restructuring initiatives implemented during fiscal 2007.

Amortization of Intangible Assets

Amortization of intangible assets consists of amortization expense for intangible assets acquired in various business combinations. Our intangible assets are being amortized over a weighted-average period of approximately five years.

Amortization expense decreased $1.5 million in the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007 due to the impairment of intangible assets recognized in fiscal 2007.

Special Charges

Special charges in the first quarter of fiscal 2008 were comprised of $3.4 million of restructuring charges that were attributable to employee severance and termination benefit costs related to our fiscal 2008, 2007 and 2006 restructuring actions and $3.4 million of facilities related charges resulting from the accretion of rent expense related to our fiscal 2008 and 2005 restructuring actions. These special charges were offset by the reversal of a $0.9 million reserve related to the settlement of a proposed tax assessment related to an acquired foreign subsidiary

Special charges in the first quarter of fiscal 2007 were comprised of $2.6 million of restructuring charges that were attributable to employee severance and termination benefit costs related to our fiscal 2007 and 2006 restructuring actions and $0.3 million of facilities related charges resulting from the accretion of rent expense related to our fiscal 2005 restructuring action.

Interest Expense

Interest expense decreased $1.5 million in the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007. The decrease is primarily attributable to debt refinancing activities implemented in fiscal 2007.

Other (expense) income, net


	Fiscal Quarter Ended
	December 28,			December 29,
*(in thousands)*	2007			2006
Investment and interest income	$	2,771		$	5,389
(Decrease) increase in the fair value of derivative instruments		(8,364	)		3,042
Other		248			(71	)

Other (expense) income, net	$	(5,345	)	$	8,360

Other (expense) income, net in the fiscal quarter ended December 28, 2007 was primarily comprised of $2.8 million of investment and interest income on invested cash balances, offset by a $8.4 million decrease in the fair value of the Company’s warrant to purchase 30 million shares of Mindspeed Technologies, Inc. (Mindspeed) common stock mainly due to a decrease in Mindspeed’s stock price during the period.

Other (expense) income, net for the first quarter of fiscal 2007 was primarily comprised of $5.4 million of investment and interest income on invested cash balances and a $3.0 million increase in the fair value of our warrant to purchase 30 million shares of Mindspeed common stock mainly due to an increase in Mindspeed’s stock price during the first quarter of fiscal 2007.

Provision for Income Taxes

We recorded a tax provision of $1.2 million for the quarter ended December 28, 2007 as compared to $0.5 million for the quarter ended December 29, 2006, primarily reflecting income taxes imposed on our foreign subsidiaries. All of our U.S. Federal income taxes and the majority of our state income taxes are offset by fully reserved deferred tax assets.

Liquidity and Capital Resources

Our principal sources of liquidity are our cash and cash equivalents.

Our cash and cash equivalents decreased $3.5 million between December 28, 2007 and September 28, 2007. The decrease was primarily due to the payment of an $18.5 million litigation settlement and a net repayment of $9.0 million on our revolving line of credit offset by a decrease in our Days Sales Outstanding (“DSO”) from 48 days in the fourth quarter of fiscal 2007 to 35 days in the first quarter of fiscal 2008 and the receipt of $14.7 million related to the buyout of a future royalty stream.

We also have other assets, including real estate in Newport Beach, California and a warrant to purchase 30 million shares of Mindspeed common stock. The value of the Mindspeed warrant of $7.2 million is reflected as a long-term asset on our condensed consolidated balance sheet as of December 28, 2007. The valuation of this derivative instrument is subjective, and at any point in time could ultimately result in the realization of amounts significantly different than the carrying value. Further, there is no assurance that the equity markets would allow us to liquidate a substantial portion of this warrant within a short time period without significantly impacting the market value of Mindspeed’s common stock and the warrant.

At December 28, 2007, we had a total of $250.0 million aggregate principal amount of 4.00% convertible subordinated notes outstanding. These notes are due in March 2026, but the holders may require us to repurchase, for cash, all or part of their notes on March 1, 2011, March 1, 2016 and March 1, 2021 at a price of 100% of the principal amount, plus any accrued and unpaid interest.

At December 28, 2007, we also had a total of $275.0 million aggregate principal amount of floating rate senior secured notes outstanding. These notes are due in November 2010, but we are required to offer to repurchase, for cash, notes at a price of 100% of the principal amount, plus any accrued and unpaid interest, with the net proceeds of certain asset dispositions if such proceeds are not used within 360 days to invest in assets (other than current assets) related to our business. The sale of our investment in Jazz in February 2007 and the sale of two other equity

investments in January 2007 qualify as asset dispositions requiring us to make offers to repurchase a portion of the notes no later than 361 days following the February 2007 asset dispositions. Based on the proceeds received from these asset dispositions and our estimates of cash investments in assets (other than current assets) related to our business to be made within 360 days following the asset dispositions, we estimate that we will be required to make an offer to repurchase approximately $54.9 million of the senior secured notes, at 100% of the principal amount plus any accrued and unpaid interest, in the second quarter of fiscal 2008.

We also have an $80.0 million credit facility with a bank, under which we had borrowed $71.0 million as of December 28, 2007. The term of this credit facility has been extended through November 28, 2008, and the facility remains subject to additional 364-day extensions at the discretion of the bank.

We believe that our existing sources of liquidity, together with cash expected to be generated from product sales, will be sufficient to fund our operations, research and development, anticipated capital expenditures and working capital for at least the next twelve months, including the portion of our floating rate senior subordinated notes which we are required to make an offer to repurchase due to the asset sales we made in January and February 2007.

Cash flows were as follows:


	Fiscal Quarter Ended
	December 28,			December 29,
*(in thousands)*	2007			2006
Net cash provided by operating activities	$	7,928		$	7,874
Net cash (used in) provided by investing activities		(2,369	)		4,785
Net cash (used in) provided by financing activities		(9,023	)		268,640

Net (decrease) increase in cash and cash equivalents	$	(3,464	)	$	281,299

Cash provided by operating activities was $7.9 million in the first quarter of fiscal 2008. In the first quarter of fiscal 2008, we generated $26.4 million of cash from operations and used $18.5 million from net changes in our working capital (accounts receivable, inventories and accounts payable). These cash inflows were partially offset by $4.1 million of payments for restructuring related items. The changes in working capital were primarily driven by a decrease in days sales outstanding (DSO) from 48 days in the first quarter of fiscal 2007 to 33 days in the first quarter of fiscal 2008 and a decrease in accounts payable due to the payment of a litigation settlement in the first quarter of fiscal 2008 of $18.5 million.

Cash provided by operating activities was $7.9 million in the first quarter of fiscal 2007. In the first quarter of fiscal 2007, we generated $11.8 million of cash from operations and $1.6 million from net favorable changes in our working capital (accounts receivable, inventories and accounts payable). These cash inflows were partially offset by $5.5 million of payments for restructuring related items. The favorable changes in working capital were driven by improved inventory turns from 5.5 turns in the fourth quarter of fiscal 2006 to 6.5 turns in the first quarter of fiscal 2007, which was partly offset by the impact of an increase in days sales outstanding (DSO) from 46 days in the fourth quarter of fiscal 2006 to 48 days in the first quarter of fiscal 2007 and a decrease in accounts payable due to the timing of payments.

Cash used in investing activities was $2.4 million in the first quarter of fiscal 2008. Cash used in investing activities in the first quarter of fiscal 2008 was primarily attributable to capital expenditures of $1.6 million and $0.8 million in payments related to our equity investments.

Cash provided by investing activities was $4.8 million in the first quarter of fiscal 2007 compared to cash used in investing activities of $10.7 million of the first quarter of fiscal 2006. Cash provided by investing activities in the first quarter of fiscal 2007 was primarily attributable to $16.6 million of net proceeds from sales and maturities of marketable debt securities, offset by capital expenditures of $7.2 million, primarily due to our expansion efforts in India and China, and a $5.0 million payment for the acquisition of Zarlink Semiconductor Inc.’s packet switching business.

Cash used in financing activities was $9.0 million in the first quarter of fiscal 2008. Cash used in financing activities in the first quarter of fiscal 2008 primarily consisted of a decrease in amounts payable under our line of

credit which is supported by our accounts receivable which decreased as mentioned in the above discussion of the cash provided by operations.

Cash provided by financing activities was $268.6 million in the first quarter of fiscal 2007 compared to $77.2 million in the first quarter of fiscal 2006. Cash provided by financing activities in the first quarter of fiscal 2007 primarily consisted of net proceeds of $267.2 million from the issuance of the floating rate senior secured notes due November 2010. We also received $2.2 million of proceeds from the issuance of common stock under our stock-based employee benefit plans.

Off-Balance Sheet Arrangements

We have made guarantees and indemnities, under which we may be required to make payments to a guaranteed or indemnified party, in relation to certain transactions. In connection with our spin-off from Rockwell International Corporation, we assumed responsibility for all contingent liabilities and then-current and future litigation (including environmental and intellectual property proceedings) against Rockwell or its subsidiaries in respect of the operations of the semiconductor systems business of Rockwell. In connection with our contribution of certain of our manufacturing operations to Jazz, we agreed to indemnify Jazz for certain environmental matters and other customary divestiture-related matters. In connection with the sales of our products, we provide intellectual property indemnities to our customers. In connection with certain facility leases, we have indemnified our lessors for certain claims arising from the facility or the lease. We indemnify our directors and officers to the maximum extent permitted under the laws of the State of Delaware.

The durations of our guarantees and indemnities vary, and in many cases are indefinite. The guarantees and indemnities to customers in connection with product sales generally are subject to limits based upon the amount of the related product sales. The majority of other guarantees and indemnities do not provide for any limitation of the maximum potential future payments we could be obligated to make. We have not recorded any liability for these guarantees and indemnities in our condensed consolidated balance sheets. Product warranty costs are not significant.

Special Purpose Entities

We have one special purpose entity, Conexant USA, LLC, which was formed in September 2005 in anticipation of establishing an accounts receivable financing facility. This special purpose entity is a wholly-owned, consolidated subsidiary of ours. Conexant USA, LLC is not permitted, nor may its assets be used, to guarantee or satisfy obligations of Conexant Systems, Inc. or any subsidiary of Conexant Systems, Inc.

On November 29, 2005, we established an accounts receivable financing facility whereby we will sell, from time to time, certain insured accounts receivable to Conexant USA, LLC, and Conexant USA, LLC entered into an $80.0 million revolving credit agreement with a bank which is secured by the assets of the special purpose entity.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 establishes a framework for measuring fair value in generally accepted accounting principles, clarifies the definition of fair value and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements. However, the application of SFAS No. 157 may change current practice for some entities. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We will adopt SFAS No. 157 in the first quarter of fiscal 2009. We are currently assessing the impact the adoption of SFAS No. 157 will have on our financial position and results of operations.

the recognition provisions of SFAS No. 158 as of the end of fiscal year 2007 and we will adopt the measurement provisions as of the end of fiscal year 2008. We are currently assessing the impact adopting the measurement provisions of SFAS No. 158 will have on its financial position and results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which permits entities to choose to measure at fair value eligible financial instruments and certain other items that are not currently required to be measured at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We will adopt SFAS No. 159 no later than the first quarter of fiscal 2009. We are currently assessing the impact the adoption of SFAS No. 159 will have on its financial position and results of operations.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS No. 141R”), which replaces SFAS No 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. We will adopt SFAS No. 141R no later than the first quarter of fiscal 2010 and will apply prospectively to business combinations completed on or after that date.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51, which changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. We will adopt SFAS No. 160 no later than the first quarter of fiscal 2010 and will apply prospectively, except for the presentation and disclosure requirements, which will apply retrospectively. We are currently assessing the potential impact that adoption of SFAS No. 160 would have on its financial position and results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our financial instruments include cash and cash equivalents, marketable debt securities, marketable equity securities, the Mindspeed warrant, short-term debt and long-term debt. Our main investment objectives are the preservation of investment capital and the maximization of after tax returns on our investment portfolio. Consequently, we invest with only high credit quality issuers, and we limit the amount of our credit exposure to any one issuer. See also “Part I, Item 7A, Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended September 28, 2007.

Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. As of December 28, 2007, the carrying value of our cash and cash equivalents approximates fair value.

We hold a warrant to purchase 30 million shares of Mindspeed common stock. For financial accounting purposes, this is a derivative instrument and the fair value of the warrant is subject to significant risk related to changes in the market price of Mindspeed’s common stock. As of December 28, 2007, a 10% decrease in the market price of Mindspeed’s common stock would result in an immaterial decrease in the fair value of this warrant. At December 28, 2007, the market price of Mindspeed’s common stock was $1.16 per share. During the fiscal quarter ended December 28, 2007, the market price of Mindspeed’s common stock ranged from a low of $1.10 per share to a high of $1.86 per share.

Our short-term debt consists of borrowings under a 364-day credit facility. Interest related to our short-term debt is at 7-day LIBOR plus 0.6%, which is reset quarterly and was approximately 5.69% at December 28, 2007. We do not believe our short-term debt is subject to significant market risk.

Our long-term debt consists of convertible subordinated notes with interest at fixed rates and floating rate senior secured notes. Interest related to our floating rate senior secured notes is at three-month LIBOR plus 3.75%, which is reset quarterly and was approximately 8.62% at December 28, 2007. The fair value of our convertible subordinated notes is subject to significant fluctuation due to their convertibility into shares of our common stock.

The following table shows the fair values of our financial instruments as of December 28, 2007:


*(in thousands)*	Carrying Value		Fair Value
Cash and cash equivalents	$	232,141	$	232,141
Mindspeed warrant		7,155		7,155
Short-term debt		70,973		70,973
Long-term debt: senior secured notes		275,000		274,313
Long-term debt: convertible subordinated notes		250,000		197,500

We transact business in various foreign currencies, and we have established a foreign currency hedging program utilizing foreign currency forward exchange contracts to hedge certain foreign currency transaction exposures. Under this program, from time to time, we offset foreign currency transaction gains and losses with gains and losses on the forward contracts, so as to mitigate our overall risk of foreign transaction gains and losses. We do not enter into forward contracts for speculative or trading purposes. At December 28, 2007, we had outstanding foreign currency forward exchange contracts with a notional amount of 668 million Indian Rupees, approximately $16.5 million, maturing at various dates through May 2008. Based on the fair values of these contracts, we recorded a derivative asset of $0.2 million at December 28, 2007. Based on our overall currency rate exposure at December 28, 2007, a 10% change in the currency rates would not have a material effect on our financial position, results of operations or cash flows.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective.

There were no changes in our internal control over financial reporting during the quarter ended December 28, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

IPO Litigation — In November 2001, Collegeware Asset Management, LP, on behalf of itself and a putative class of persons who purchased the common stock of GlobeSpan, Inc. (GlobeSpan, Inc. later became GlobespanVirata, Inc., and is now our Conexant, Inc. subsidiary) between June 23, 1999 and December 6, 2000, filed a complaint in the U.S. District Court for the Southern District of New York alleging violations of federal securities laws by the underwriters of GlobeSpan, Inc.’s initial and secondary public offerings as well as by certain GlobeSpan, Inc. officers and directors. The complaint alleges that the defendants violated federal securities laws by issuing and selling GlobeSpan, Inc.’s common stock in the initial and secondary offerings without disclosing to investors that the underwriters had (1) solicited and received undisclosed and excessive commissions or other compensation and (2) entered into agreements requiring certain of their customers to purchase the stock in the aftermarket at escalating prices. The complaint seeks unspecified damages. The complaint was consolidated with class actions against approximately 300 other companies making similar allegations regarding the public offerings of those companies during 1998 through 2000. In June 2003, we and the named officers and directors entered into a memorandum of understanding outlining a settlement agreement with the plaintiffs that would, among other things, result in the dismissal with prejudice of all the claims against the former GlobeSpan, Inc. officers and directors. The final settlement was executed in June 2004. On February 15, 2005, the Court issued a decision certifying a class action for settlement purposes and granting preliminary approval of the settlement, subject to modification of certain bar orders contemplated by the settlement, which bar orders have since been modified. On December 5, 2006, the United States Court of Appeals for the Second Circuit reversed the lower court, ruling that no class was properly certified. It is not yet clear what impact this decision will have on the issuers’ settlement. The settlement remains subject to a number of conditions and final approval. It is possible that the settlement will not be approved. In either event, we do not believe the ultimate outcome of this litigation will have a material adverse impact on our financial condition, results of operations, or cash flows.

Class Action Suit — In February 2005, we and certain of our current and former officers and our Employee Benefits Plan Committee were named as defendants in Graden v. Conexant, et al., a lawsuit filed on behalf of all persons who were participants in our 401(k) Plan (Plan) during a specified class period. This suit was filed in the U.S. District Court for New Jersey and alleges that the defendants breached their fiduciary duties under the Employee Retirement Income Security Act, as amended, to the Plan and the participants in the Plan. The plaintiff filed an amended complaint on August 11, 2005. On October 12, 2005, the defendants filed a motion to dismiss this case. The plaintiff responded to the motion to dismiss on December 30, 2005, and the defendants’ reply was filed on February 17, 2006. On March 31, 2006, the judge dismissed this case and ordered it closed. Plaintiff filed a notice of appeal on April 17, 2006. The appellate argument was held on April 19, 2007. On July 31, 2007 the United States Court of Appeals for the Third Circuit vacated the District Court’s order dismissing Graden’s complaint and remanded the case for further proceedings. On November 17, 2007, defendants filed a Renewed Motion to Dismiss in the U.S. District Court for New Jersey. On December 4, 2007, defendants also filed a petition for certiorari in the U.S. Supreme Court with respect to the Third Circuit Court of Appeals ruling.

ITEM 6. EXHIBITS


Exhibit No.		Description

10.1		Amendment to Employment Agreement and Separation and Release Agreement dated as of October 2, 2007 between the Company and Dennis E. O’Reilly, filed as Exhibit 10-k-14 to the Company’s Annual Report on Form 10-K for the year ended September 28, 2007, is incorporated herein by reference.

10.2		The Company’s 2008 Peak Performance Incentive Plan.

10.3		Extension Letter Agreement dated October 11, 2007 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-5 to the Company’s Annual Report on Form 10-K for the year ended September 28, 2007, 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.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	CONEXANT SYSTEMS, INC. (Registrant)
Date: February 5, 2008	By	/s/ KAREN ROSCHER
		Karen Roscher
		Senior Vice President and Chief Financial Officer (principal financial officer)

EXHIBIT INDEX


Exhibit No.		Description

10.1		Amendment to Employment Agreement and Separation and Release Agreement dated as of October 2, 2007 between the Company and Dennis E. O’Reilly, filed as Exhibit 10-k-14 to the Company’s Annual Report on Form 10-K for the year ended September 28, 2007, is incorporated herein by reference.

10.2		The Company’s 2008 Peak Performance Incentive Plan.

10.3		Extension Letter Agreement dated October 11, 2007 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 28, 2007, 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.