UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 28, 2007

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

CONEXANT SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Delaware		25-1799439
(State of incorporation)		(I.R.S. Employer Identification No.)
4000 MacArthur Boulevard
Newport Beach, California		92660-3095
(Address of principal executive offices)		(Zip code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:		Name of each exchange on which registered:
Common Stock, $0.01 Par Value Per Share		The Nasdaq Stock Market, LLC
(including associated Preferred Share Purchase Rights)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o No þ

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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 Act).  Yes o No þ

The aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant (based on the closing price as reported on the Nasdaq Global Select Market on March 30, 2007) was approximately $0.8 billion. Shares of voting stock held by each officer and director and by each shareowner affiliated with a director have been excluded from this calculation because such persons may be deemed to be affiliates. This determination of officer or affiliate status is not necessarily a conclusive determination for other purposes. The number of outstanding shares of the registrant’s Common Stock as of November 9, 2007 was 492,363,721.

Documents Incorporated by Reference

Portions of the registrant’s Proxy Statement for the 2008 Annual Meeting of Shareowners to be held on February 20, 2008 are incorporated by reference into Part III of this Form 10-K.

 

 

FORWARD-LOOKING STATEMENTS

In addition to historical information, this Annual Report on Form 10-K 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;
	•		the timing of our new product introductions and product quality;
	•		our ability to anticipate trends and develop products for which there will be market demand;
	•		successful development of new products;
	•		the substantial losses we have incurred recently;
	•		the ability of management to structure and execute on new restructuring plans;
	•		the risk that capital needed for our business and to repay our indebtedness will not be available when needed;
	•		changes in product mix and product obsolescence;
	•		our ability to develop and implement new technologies and to obtain protection for the related intellectual property;
	•		the uncertainties of litigation, including claims of infringement of third-party intellectual property rights or demands that we license third-party technology, and the demands it may place on the time and attention of our management and the expense it may place on our company;
	•		continuing volatility in the technology sector and the semiconductor industry;
	•		the cyclical nature of the semiconductor industry and the markets addressed by our products and our customers’ products;
	•		the risk that the value of our common stock may be adversely affected by market volatility;
	•		the availability of manufacturing capacity;
	•		the ability of our customers to manage inventory;
	•		demand for and market acceptance of new and existing products;
	•		general economic and political conditions and conditions in the markets we address;
	•		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.

TABLE OF CONTENTS

				PAGE
		PART I
Item 1.		Business			3
Item 1A.		Risk Factors			12
Item 1B.		Unresolved Staff Comments			20
Item 2.		Properties			20
Item 3.		Legal Proceedings			21
Item 4.		Submission of Matters to a Vote of Security Holders			22
		PART II
Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			23
Item 6.		Selected Financial Data			25
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk			44
Item 8.		Financial Statements and Supplementary Data			45
Item 9.		Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			89
Item 9A.		Controls and Procedures			89
Item 9B.		Other Information			91
		PART III
Item 10.		Directors, Executive Officers and Corporate Governance			92
Item 11.		Executive Compensation			92
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			92
Item 13.		Certain Relationships and Related Transactions, and Director Independence			92
Item 14.		Principal Accountant Fees and Services			92
		PART IV
Item 15.		Exhibits and Financial Statement Schedules			93
Exhibit 10-e-1
EXHIBIT 10-k-2
Exhibit 10-k-12
Exhibit 10-k-13
Exhibit 10-k-14
EXHIBIT 10-p-2
Exhibit 10-q-1
EXHIBIT 10-r-5
EXHIBIT 12
EXHIBIT 21
EXHIBIT 23
Exhibit 24
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

PART I

Item 1. Business

General

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, which we describe as the broadband digital home.

Our principal corporate office is located at 4000 MacArthur Boulevard, Newport Beach, CA 92660, and our main telephone number at that location is 949-483-4600. Our common stock trades on the Nasdaq Global Select Market^sm under the symbol CNXT.

We have many years of operating history in the communications semiconductor business, including as part of the semiconductor systems business of Rockwell International Corporation (now Rockwell Automation, Inc.), and have been an independent public company since January 1999, following our spin-off from Rockwell. Since then, we have completed the following series of transactions which transformed our company from a broad-based communications semiconductor supplier into a fabless communications semiconductor supplier focused on delivering the technology and products that are driving the broadband digital home:

Acquisitions:

•

On February 27, 2004, we completed a merger with GlobespanVirata, Inc. (GlobespanVirata) with GlobespanVirata becoming a wholly-owned subsidiary of Conexant Systems, Inc. In exchange for 100% of the outstanding shares of common stock of GlobespanVirata (approximately 150.7 million shares), we issued 1.198 shares of Conexant common stock for each share of GlobespanVirata common stock outstanding (or approximately 180.6 million shares of Conexant common stock) and each outstanding option and warrant to purchase GlobespanVirata common stock was adjusted and converted into an option or warrant to purchase Conexant common stock-based on the 1.198 merger ratio (or approximately 43.6 million options and warrants to purchase shares of Conexant common stock). In May 2004, the GlobespanVirata, Inc. subsidiary was renamed Conexant, Inc., and hereinafter will be referred to as Conexant, Inc. Except where otherwise noted, the financial information contained herein represents our continuing operations including the results of GlobespanVirata since February 28, 2004, following the completion of the merger.

Divestitures:

•

On June 27, 2003, we completed the distribution to our shareholders of all outstanding shares of our wholly owned subsidiary Mindspeed Technologies, Inc. (Mindspeed), to which we contributed our Internet infrastructure business, including the stock of certain subsidiaries, and certain other assets and liabilities, including $100.0 million in cash. In the Mindspeed spin-off, Conexant shareholders received one share of Mindspeed common stock for every three Conexant shares held and the Conexant shareholders continued to hold their Conexant shares. Mindspeed issued us a warrant to purchase 30 million shares of Mindspeed common stock, representing approximately 20 percent of Mindspeed’s outstanding common stock on a

			diluted basis. The warrant is exercisable until June 27, 2013 at an exercise price of $3.408 per share. The fair value of the warrant is recorded as an asset on our consolidated balance sheet.
	•		In March 2002, we and The Carlyle Group formed a new specialty foundry company named Jazz Semiconductor, Inc. (Jazz). We contributed our Newport Beach, California wafer fabrication operations and related assets and liabilities and certain intellectual property to Jazz in exchange for $19.3 million in cash and an equity interest in Jazz, having an estimated fair value of $42.5 million. In February 2007, the Company sold its ownership interest in Jazz. During fiscal 2007, the Company received proceeds of $105.6 million as a result this sale. Additionally, immediately prior to the closing of the sale, the Company made an equity investment of $10.0 million in stock of Jazz which the Company sold in the fourth quarter of fiscal 2007 for cash proceeds of $4.2 million.
	•		On June 25, 2002, we completed the distribution to our shareholders of all outstanding shares of our wholly-owned subsidiary Washington Sub, Inc. (Washington), to which we contributed our wireless communications business, other than certain assets and liabilities which we retained. Immediately thereafter, Washington merged with and into Alpha Industries, Inc. (Alpha), with Alpha the surviving corporation. As a result of these transactions, Conexant shareholders received 0.351 of a share of Alpha common stock for each Conexant share held and the Conexant shareholders continued to hold their Conexant shares. Upon completion of these events, Alpha and its subsidiaries purchased our semiconductor assembly and test facility located in Mexicali, Mexico and our package design team that supports the Mexicali facility (together, the Mexicali Operations) for $150.0 million. Effective June 26, 2002, Alpha changed its name to Skyworks Solutions, Inc. (Skyworks). In fiscal 2007, we sold our remaining investment in Skyworks which was comprised of 6.2 million shares of Skyworks common stock for an average price per share of $8.14 and received $50.4 million on the sale of the shares.

Strategy

Our objective is to become a leading supplier of semiconductor solutions and Application Specific Standard Products (ASSPs) to leading global original equipment manufacturer (OEM) and original design manufacturer (ODM) customers in consumer, communications and PC markets. To achieve our objectives, we are pursuing the following strategies:

	•		Employ a market-focused business model allowing us to concentrate our resources on large and growing targeted markets;
	•		Expand strategic relationships with industry-leading OEMs/ODMs and maximize design wins and share-of-wallet (SOW);
	•		Focus our product portfolio on our key technologies and competencies which include digital signal processing (DSP), analog mixed-signal (AMS), radio frequency integrated circuits (RFICs), system-on-a-chip (SoC) and support software to enable our customers’ applications;
	•		Capitalize on the depth of our global engineering talent to create complete system solutions that provide enhanced functionality and accelerate the adoption of our products by being in close geographic proximity to our customers;
	•		Operate as a fabless semiconductor company, which allows us to focus our resources on designing, developing and marketing our products, while minimizing operating infrastructure costs and capital expenditures; and
	•		Enter targeted markets with compelling solutions combining silicon and software that will reduce the time-to-market for our customers.

Market Focused Product Lines

Our expertise in mixed-signal processing, digital signal processing (DSP) and standards-based communications protocol implementation allows us to deliver semiconductor devices and integrated systems for client, or end-customer, personal communications access products. We organize our product lines to address the three primary communications markets targeted at the broadband digital home as more fully described below. For purposes of the following description, references to “market share” refer to our share of the total addressable market. Future

products are expected to focus on delivering modular, combination products that leverage our digital subscriber line (DSL) and media processing product portfolios in order to address converged voice, video, and data “triple play” broadband market opportunities as well as other technology convergence opportunities within the markets we address.

Following is a brief description of each of our target markets and the solutions we provide for each market.

Imaging and PC Media Products

Dial-up or analog modem technology converts digital data to analog signals for transmission over ordinary twisted pair copper telephone wire on the sending end of a connection and converts analog signals back to the original digital data sequence on the receiving end of a connection. This data transfer technology connects many business and home personal computers (PCs) to the telephone company, continues to be the world’s most ubiquitous Internet connectivity option and is a practical choice for applications where high-speed connectivity is not available or is not a necessity.

Conexant has a long history of technological innovation and leadership in modem technology, including the development of the world’s first analog modem chip. Our Imaging and PC Media products include analog modem chipsets that connect hundreds of millions of users worldwide to the Internet through their desktop and notebook PCs, and are also embedded in a host of products including facsimile (fax) machines, multi-function printers (MFPs), point-of-sale (POS) terminals, television set-top boxes (STBs), and Internet appliances, such as Internet-connected televisions, digital picture frames and web phones. Our Imaging and PC Media products also include audio and video products designed for the rapid convergence of multimedia and entertainment applications in today’s PCs.

Our dial-up modem chipset offering encompasses all major industry standards established by the International Telecommunication Union (ITU) including V.22, V.22 bis, V.32, V.34, V.44 and the two 56 Kbps standards, V.90 and V.92. We supply mixed-signal intensive, controllerless modem chipsets and software modem solutions that take advantage of the increasing power of PC central processors and use software to perform functions traditionally enabled by semiconductor components. Data bus architectures supported include the HD audio bus, PCI bus, PCIe bus, USB, RS-232, and audio/modem chipsets that support audio codec (AC)-Link and HD Audio. Building on our expertise in modem technology, we believe we were the first supplier shipping integrated modem and audio combination solutions to meet the broader needs of our customers and the industry. Through our long history in voice band processing, we have assembled an extensive intellectual property portfolio in voice processing and coding technology.

We believe our products have established and retained the leading market share in each of the three primary segments of analog modem technology—PC modems, facsimile modems and embedded modems. In the PC modem market, our unit growth continues to benefit from the increasing popularity of notebook PCs as the penetration rate of analog modems in notebook PCs is greater than in desktop PCs. In the fax modem market, our significant market share lead has been enhanced by the addition of fax, copy and scan functionality to home printer products. In order to expand our total addressable market opportunity beyond the stand-alone fax machine, we have developed a new document imaging SoC for MFPs with complete imaging and communications capabilities. According to market research firm IDC, the move by consumers and businesses from stand-alone printers to MFPs is expected to drive the expansion of the market for MFPs from 63 million units in 2006 to 93 million units in 2011. In the embedded modem market, which includes end-products that do not contain PC-type central processing units (CPUs), we believe that we have a leadership position in products such as STBs, POS terminals, vending machines, gasoline pumps and other applications in which an analog modem is used to transmit and receive data.

From a historical perspective, our cumulative shipments of analog modems surpassed 1 billion units in 2007.

In our video product family, our video encoders and decoders provide a combination of performance, features, and flexibility demanded by today’s popular multimedia PC platforms. Our line of stand-alone video decoders, integrated PCI video decoders, PCIe video decoders and USB video decoders combine worldwide video standard support, integration and software support. Our analog video decoders are designed to convert analog signals received from a PC video system or other consumer electronic analog video device, such as a video camcorder, into

digital streams that can be displayed by a digital video monitor or saved using a form of digital recording media, such as a hard drive, CD or DVD.

In March 2007, we announced our first product specifically developed for the rapidly growing digital video surveillance market. This highly integrated multi-port video decoder was the world’s first eight-channel device and can be used in PC-based or stand alone digital voice recorder (DVR) applications. According to market research firm iSuppli, the market for chips used in video surveillance applications is expected to grow from $525 million in 2006 to $1.25 billion in 2011.

Broadband Access Products

Digital subscriber line (DSL) technologies enable broadband data traffic over twisted pair copper telephone lines to enable such activities as efficient Internet web browsing, the rapid transfer of large data files and the real-time transfer of streamed audio and video media content. Actual DSL speeds realized by the consumer range between 128 kilobits per second (kbps) and 100 megabits per second (Mbps). Faster data rates allow local exchange carriers to provide their customers with an array of new broadband services, including the transport of high definition video content in real time. Industry analyst firm Dell’Oro expects very-high-speed DSL (VDSL) integrated circuit port shipments to increase to 25.5 million ports in 2008 from 5.1 million ports in 2003, a 38% compound annual growth rate.

Our Broadband Access products form a comprehensive portfolio of standards-based DSL products, including asymmetric DSL (ADSL), symmetric DSL (SDSL), ADSL2, ADSL2plus and both versions of very-high-speed DSL (VDSL and VDSL2), including the unique configurations of DSL for North America, Europe, Japan and China. We have shipped in excess of 200 million DSL ports to customers around the globe.

Our DSL product portfolio is comprised of a family of System-on-Chip (SoC) integrated circuits for use in home and business DSL products that incorporate a combination of multiple system functions. Our DSL product offerings include various combinations of digital signal processors, network or communication processors, integrated software on silicon, and analog front-end chips, line drivers and reference design guides to help our customers deploy DSL modems, routers, gateways, and digital subscriber line access multiplexers (DSLAMs) located in telephone service providers’ central offices.

Our DSL customer support includes our advanced software-based development tools which allow ODMs, service providers and telecom companies to analyze, configure and troubleshoot their DSL networks remotely, saving time and expense. Our system software works in combination with our semiconductor devices to manage data, routing, bridging, switching and protocol conversions needed to encapsulate and route information packets. This system software is available on a variety of our platforms, and facilitates the rapid integration of new features, which enables manufacturers to streamline the product development process and improve time-to-market. Additional features of these products include system management, firewall security, embedded web server, auto-configuration of DSL services and Universal Plug-and-Play. We also offer customers a full set of software development tools including compilers, linkers and other special-purpose tools to enable the customer to design additional applications.

Our gateway devices possess integrated wireless local area network (WLAN or Wi-Fi), ADSL2plus and voice-over-Internet protocol (VoIP) functionality. These devices are targeted at products including DSL bridge/routers, wireless DSL routers and DSL VoIP integrated access devices (IADs) and deliver the processing power required for advanced triple-play applications.

Our family of highly integrated VDSL and VDSL2 central office (CO) and customer premises equipment (CPE) semiconductor solutions for asynchronous transfer mode (ATM) and packet-based DSLAMs and client-side terminals are targeted at voice, video and data “triple-play” broadband service deployments, remote terminal and fiber extension applications. VDSL2 technology provides higher downstream and upstream data rates than ADSL and ADSL2plus, and longer reach connectivity than VDSL. This chipset family is based on industry-standard discrete multi-tone (DMT) line code technology and is compliant with the ratified VDSL2/G.993.2 standard.

Our integrated passive optical network (PON) solutions are targeted at the fiber access market. These devices for optical network terminals (ONTs) on the client-side of broadband optical networks, provide cost-effective, high-speed “last mile” broadband connections to homes and businesses over fiber optic cable at significantly higher data speeds than are possible over coaxial cable or copper-based connections. Our PON solutions can also be used in conjunction with our VDSL and VDSL2 products to provide fiber-to-the-neighborhood (FTTN) connections, enabling the cost-effective delivery of “triple-play” voice, video and data services.

Subsequent to the end of fiscal 2007, we announced our intent to discontinue investments in stand-alone wireless networking products and technologies. As a result, we have moved gateway-oriented WLAN products and technologies, which enable and support our DSL gateway solutions, into our Broadband Access product line.

Broadband Media Processing Products

Digital set-top boxes (STBs) for televisions facilitate high-speed communications between television service providers’ networks and subscribers’ televisions. These set-top boxes employ advanced Moving Picture Experts Group (MPEG) compression technology, which has gained wide support in satellite and cable television, Internet protocol (IP) video, video telephony, high definition DVD and wireless consumer electronics applications as the demand for high definition television (HDTV) services and content rapidly increases. In addition, the worldwide market for digital STB products is also expected to see continued growth as operators strive to expand average revenue per user (ARPU) thru the sales of other advanced services such as personal video recorder (PVR), connected home applications, advanced electronic program guides, and services requiring advanced technologies such as 3D graphics. We expect substantial growth in the worldwide STB market for Internet protocol television (IPTV) over the next few years as telephone operators aggressively upgrade their networks to FTTx (Fiber to Home/Curb/Node) in order to offer consumers an alternative to cable and satellite television service.

A typical STB architecture is comprised of front-end and back-end components. Among the front-end components, sometimes referred to as the communications portion of the design, tuners and demodulators are employed to receive and prepare audio and video signals from a satellite, cable or terrestrial network. In the back-end, integrated MPEG SoCs are designed to interface with the broadband front-end components and process the audio and video signals while controlling the STB application environment.

Our Broadband Media Processing products form a portfolio of components and system level solutions to address a wide variety of STB requirements including basic standard definition (SD), high definition (HD) and media server applications for digital cable, satellite, terrestrial and IP networks. These product offerings include high performance silicon tuners, demodulators, MPEG SoC solutions, and Data Over Cable Service Interface Specification (DOCSIS) cable modems. Our products are bundled with a range of operating systems, middleware, drivers and development tools and are customizable to meet the individual needs of our customers.

Our MPEG SoC product offerings include video decoders for all levels of end-product sophistication including HD PVR-enabled STBs employing advanced coding technologies. Our newest video decoder family provides manufacturers and operators worldwide with cost-effective solutions for both single and dual output HDTV STBs. This HD MPEG decoder family of products easily interfaces to a variety of broadband front-ends, allowing the decoders to serve as a common back-end platform for satellite, cable, IPTV and terrestrial services. This flexibility provides manufacturers with economies of scale as they can leverage a single device across multiple product offerings.

We also offer a broad line of front-end components for STB applications. Our low-power, direct down conversion radio frequency (RF) satellite tuners support a wide range of end-products including single-channel low-cost STB receivers and high-volume HD STB receivers used for PVR/DVR applications that enable simultaneous watch and record capabilities. Our portfolio of demodulator products also spans a variety of customer end products and includes our dual DVB-S2 satellite STB demodulators and forward error correction (FEC) decoders. These highly integrated tuner and demodulator devices support 8PSK and DVB-S2 advanced modulation and coding specifications, which provide satellite operators with higher data rates and increased capacity to deliver additional HDTV channels and services using existing bandwidth and infrastructure. In 2007, cumulative shipments of our satellite tuners and demodulators surpassed the 190 million unit level.

We provide leading edge technologies for the standard definition market targeting operator and mass market free-to-air (FTA) satellite STBs. These products offer higher levels of integration and performance, and include options for both basic and advanced functionality which allow manufacturers and broadcasters to address a wider range of markets and end-user demands. Our single-chip solution incorporating demodulation, MPEG processing, audio and video outputs, graphic processing, back-channel communications capability and a control processor, offers a complete cost-effective STB solution for satellite, cable and terrestrial networks when combined with one of our silicon tuner devices.

Our cable modem product portfolio includes our single-package cable modem solution containing an embedded microprocessor-based media access controller for North American DOCSIS, European DOCSIS and digital video broadcasting (DVB) applications. Our cable modem products are DOCSIS 1.0, DOCSIS 1.1, and DOCSIS 2.0 compliant. In 2007 we introduced a new family of DOCSIS 2.0/EuroDOCSIS 2.0 cable modem integrated circuits (ICs) for traditional broadcast and next-generation IP-based broadband video services. The newly introduced cable modem chips are targeted at advanced cable STBs with PVR capabilities, basic two-way digital STBs, and DOCSIS cable modems used in bi-directional networks.

Research and Development

We have significant research, development, engineering and product design capabilities. As of September 28, 2007, we had approximately 2,190 employees engaged in research and development activities at multiple design centers worldwide as compared to approximately 2,410 employees as of September 29, 2006 and 1,780 employees as of September 30, 2005. Our focus on driving cost effective engineering has resulted in a significant percentage of our engineering resources deployed in the Asia-Pacific region growing from 38% at the end of fiscal 2005 to 63% at the end of fiscal 2007.

Our design centers provide design engineering and product application support as well as after-sales customer service. The design centers are strategically located around the world to be in close proximity to our OEM customers and to take advantage of key technical and engineering talent. Our major design centers are located in Austin, TX, Newport Beach, CA, Red Bank, NJ and San Diego, CA in the United States, in Bangalore, Hyderabad, Noida and Pune in India and in Beijing, Chengdu, Shanghai and Shenzhen in China.

We incurred research and development expenses of $278.7 million, $269.7 million and $268.0 million during fiscal 2007, 2006 and 2005, respectively.

Manufacturing

We are a fabless semiconductor company, which means that we do not own or operate any wafer fabrication or assembly and test sites. We use several leading-edge wafer fabrication subcontractors, such as Taiwan Semiconductor Manufacturing Corporation (TSMC), to meet our typical planned production requirements. We have also qualified additional suppliers to meet short-term upside requirements as necessary during periods of tight capacity. We primarily use complementary metal-oxide semiconductor (CMOS) process technologies. On a very limited basis, we also use bipolar and bipolar CMOS (BiCMOS) process technology for certain mixed-signal devices, and silicon germanium (SiGe) for certain product-specific applications. Our products are manufactured in a variety of process technologies ranging from 0.8 micron technology, which is our most mature technology, to 90 nanometer, which is the most advanced production technology. We currently have product development efforts underway at the 65 nanometer process technology node.

Our wafer probe testing is conducted by either our wafer fabrication subcontractors or other independent wafer probe test subcontractors. Following completion of the wafer probe tests, the die are assembled into packages and the finished products are tested by subcontractors. Our primary wafer assembly and test subcontractors include Amkor Technology, Advanced Semiconductor Engineering, Inc. (ASE), and STATSChipPAC Ltd. These vendors are located in Taiwan, Korea, Singapore, China, the Philippines and Malaysia. We use several different package types, tester platforms and handler configurations to fulfill our product needs at the key supplier sites.

Capacity is primarily obtained using a process of short- and long-term forecasting for suppliers to assess our demand, and committing supply to meet the forecasts. We maintain a strong presence at supplier sites to ensure our capacity needs are fulfilled adequately.

Quality and Reliability

Our quality and reliability assurance systems ensure that our products meet our customers’ and our internal product performance goals. Our quality management system maintained ISO 9001-2000 certification at our Newport Beach, San Diego, Red Bank and Noida, India facilities. During fiscal 2006, our Melbourne site achieved ISO 9001 certification. Since we are a fabless semiconductor company, we extended the ISO 9001 certification to our key suppliers through our Quality Supplier Agreements. Our key suppliers are either already certified to ISO 9001 or have provided us with plans to achieve certification.

Our quality and reliability assurance department performs extensive environmental tests demonstrating that our products meet the reliability performance goals. We use industry accepted environmental tests and test methods wherever practical during product qualification.

In addition, each business unit exercises extensive control during the definition, development and release to production of new products. We have a comprehensive set of design control procedures that:

	•		determine the quality, reliability and performance objectives for new products;
	•		provide program/project management, resource identification and facilities;
	•		ensure verification and validation activities;
	•		provide criteria for acceptability; and
	•		clearly define records that are necessary to provide confidence of conformity of the processes and resulting product.

We qualify all key suppliers (wafer foundries and assembly subcontractors) and their manufacturing processes. Our key suppliers must agree to our quality system requirements, pass a quality management system audit, and successfully complete a rigorous reliability test plan. We design these qualification requirements as preventive actions to eliminate the causes and occurrence of potential nonconformities. These qualification requirements, reliability test plans, and quality system audits are appropriate to the impact of the potential problems.

Customers, Marketing and Sales

We market and sell our semiconductor products and system solutions directly to leading 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 resellers accounted for approximately 34%, 35% and 28% of our net revenues in fiscal 2007, 2006 and 2005, respectively. In fiscal 2007, there was one distributor that accounted for 11% of our net revenues. In fiscal 2006 and 2005, no customers accounted for 10% or more of our net revenues. Sales to our twenty largest customers accounted for approximately 68%, 67% and 64% of our net revenues in fiscal 2007, 2006 and 2005, respectively.

Revenues derived from customers located in the Americas, the Asia-Pacific region and in Europe, the Middle East and Africa, as a percentage of total net revenues, were as follows:

		Fiscal Year Ended
		2007				2006				2005
Americas			11	%			10	%			12	%
Asia-Pacific			83	%			82	%			80	%
Europe, Middle East and Africa			6	%			8	%			8	%
			100	%			100	%			100	%

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.

We have a worldwide sales and marketing organization comprised of approximately 315 employees as of September 28, 2007 in various domestic and international locations. To complement our direct sales and customer support efforts, we also sell our products through independent manufacturers’ representatives, distributors and dealers. In addition, our design and applications engineering staff is actively involved with customers during all phases of design and production and provides customer support through our worldwide sales offices, which are generally in close proximity to customers’ facilities.

Backlog

Our sales are made primarily pursuant to standard purchase orders for delivery of products, with such purchase orders officially acknowledged by us according to our own terms and conditions. Because industry practice allows customers to cancel orders with limited advance notice to us prior to shipment, we believe that backlog as of any particular date may not be indicative of our future revenue levels.

Competition

The communications semiconductor industry in general, and the markets in which we compete in particular, are intensely competitive. We compete worldwide with a number of U.S. and international suppliers that are both larger and smaller than us in terms of resources and market share. We anticipate that additional competitors will enter our markets and expect intense price and product competition to continue.

We compete primarily with Analog Devices, Inc., Broadcom Corporation, Centillium Communications, Inc., Infineon Technologies AG, Ikanos Communications, Inc., Integrated Device Technology, Inc., LSI Logic Corporation, NEC Corporation, NXP Semiconductors Group, Realtek Semiconductor Corporation, Sigma Designs, Inc., Silicon Laboratories, Inc., STMicroelectronics N.V. and TrendChip Technologies Corporation.

Intellectual Property and Proprietary Rights

We own or license a number of United States and foreign patents and patent applications related to our products, processes and technologies. We also cross-license portions of our intellectual property and are also cross-licensed under a number of intellectual property portfolios in the industry that are relevant to our technologies and products. We have filed and received federal and international trademark registrations of our Conexant trademarks. In addition, we have registered or applied to register a number of additional trademarks applicable to our products. We believe that intellectual property, including patents, patent applications, licenses and trademarks are of material importance to our business. In addition to protecting our proprietary technologies and processes, we constantly strive to strengthen and enhance our intellectual property portfolio. We use the portfolio to seek licensing opportunities, to negotiate cross-licenses with other intellectual property portfolios, to gain access to intellectual property of others and to avoid, defend against, or settle litigation. While in the aggregate our patents, patent applications, licenses and trademarks are considered important to our operations, they are not considered of such importance that the loss or termination of any one of them would materially affect our business or financial condition.

Environmental Regulation

Federal, state and local requirements relating to the discharge of substances into the environment, the disposal of hazardous wastes, and other activities affecting the environment have had, and will continue to have, an impact on our former manufacturing operations. To date, compliance with environmental requirements and resolution of environmental claims have been accomplished without material effect on our liquidity and capital resources, competitive position or financial condition. We believe that any expenditures necessary for the resolution of environmental claims will not have a material adverse effect on our liquidity and capital resources, competitive position or financial condition. We cannot assess the possible effect of compliance with future requirements.

Employees

As of September 28, 2007, we had approximately 2,890 employees. None of our employees are covered by collective bargaining agreements. We believe our future success will depend in large part upon our continued ability to attract, motivate, develop and retain highly skilled and dedicated employees.

Available Information

We maintain an Internet website at www.conexant.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, along with our annual report to shareowners and other information related to our company, are available free of charge on this site as soon as reasonably practicable after we electronically file or furnish these reports with the Securities and Exchange Commission. Our Internet website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.

Item 1A. Risk Factors

Our business, financial condition and results of operations can be impacted by a number of risk factors, any one of which could cause our actual results to vary materially from recent results or from our anticipated future results. Any of these risks could materially and adversely affect our business, financial condition and results of operations, which in turn could materially and adversely affect the price of our common stock or other securities.

References in this section to our fiscal year refer to the fiscal year ending on the Friday nearest September 30 of each year.

We are subject to intense competition.

The communications semiconductor industry in general and the markets in which we compete in particular are intensely competitive. We compete worldwide with a number of United States and international semiconductor providers that are both larger and smaller than us in terms of resources and market share. We continually face significant competition in our markets. This competition results in declining average selling prices for our products. We also anticipate that additional competitors will enter our markets as a result of expected growth opportunities, technological and public policy changes and relatively low barriers to entry in certain markets of the industry. Moreover, as with many companies in the semiconductor industry, customers also compete with us in certain product lines. Many of our competitors have certain advantages over us, such as significantly greater sales and marketing, manufacturing, distribution, technical, financial and other resources.

We believe that the principal competitive factors for semiconductor suppliers in our addressed markets are:

	•		time-to-market;
	•		product quality, reliability and performance;
	•		level of integration;
	•		price and total system cost;
	•		compliance with industry standards;
	•		design and engineering capabilities;
	•		strategic relationships with customers;
	•		customer support;
	•		new product innovation; and
	•		access to manufacturing capacity.

Current and potential competitors also have established or may establish financial or strategic relationships among themselves or with our existing or potential customers, resellers or other third parties. These relationships may affect customers’ purchasing decisions. Accordingly, it is possible that new competitors or alliances could emerge and rapidly acquire significant market share. We cannot assure you that we will be able to compete successfully against current and potential competitors.

Our success depends on our ability to timely develop competitive new products and reduce costs.

Our operating results depend largely on our ability to introduce new and enhanced semiconductor products on a timely basis. Successful product development and introduction depends on numerous factors, including, among others our ability to:

	•		anticipate customer and market requirements and changes in technology and industry standards;
	•		accurately define new products;
	•		timely complete development of new products and bring our products to market on a timely basis;
	•		differentiate our products from offerings of our competitors;
	•		achieve overall market acceptance of our products;
	•		invest in significant amounts of research and development; and

•

coordinate product development efforts between and among our sites, particularly in India and China, to manage the development of products at remote geographic locations.

We may not have sufficient resources to make the substantial investment in research and development in order to develop and bring to market new and enhanced products. We cannot assure you that we will be able to develop and introduce new or enhanced products in a timely and cost-effective manner, that our products will satisfy customer requirements or achieve market acceptance, or that we will be able to anticipate new industry standards and technological changes. We also cannot assure you that we will be able to respond successfully to new product announcements and introductions by competitors.

In addition, prices of established products may decline, sometimes significantly and rapidly, over time. We believe that in order to remain competitive we must continue to reduce the cost of producing and delivering existing products at the same time that we develop and introduce new or enhanced products. We cannot assure you that we will be successful and as a result gross margins may decline in future periods.

We operate in the highly cyclical semiconductor industry, which is subject to significant downturns that may negatively impact our business, financial condition and results of operations.

The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving technical standards, short product life cycles (for semiconductors and for the end-user products in which they are used) and wide fluctuations in product supply and demand. From time to time these and other factors cause significant upturns and downturns in the industry, and in our business in particular. These factors have caused substantial fluctuations in our revenues and results of operations. We have experienced these cyclical fluctuations in our business in the past and may experience them in the future.

Our operating results may be negatively affected by substantial quarterly and annual fluctuations and market downturns.

Our revenues, earnings and other operating results have fluctuated in the past and may fluctuate in the future. These fluctuations are due to a number of factors, many of which are beyond our control. These factors include, among others:

	•		changes in end-user demand for the products manufactured and sold by our customers;
	•		the timing of receipt, reduction or cancellation of significant orders by customers;
	•		seasonal customer demand;
	•		the gain or loss of significant customers;
	•		market acceptance of our products and our customers’ products;
	•		our ability to develop, introduce and market new products and technologies on a timely basis;
	•		the timing and extent of product development costs;
	•		new product and technology introductions by competitors;
	•		changes in the mix of products we develop and sell;
	•		fluctuations in manufacturing yields;
	•		availability and cost of products from our suppliers;
	•		intellectual property disputes; and
	•		the effect of competitive pricing pressures, including decreases in average selling prices of our products.

The foregoing factors are difficult to forecast, and these as well as other factors could materially adversely affect our quarterly or annual operating results.

We may be subject to claims of infringement of third-party intellectual property rights or demands that we license third-party technology, which could result in significant expense and loss of our ability to use, make, sell, export or import our products or one or more components comprising our products.

The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights. From time to time, third parties have asserted and may in the future assert patent, copyright, trademark and other intellectual property rights to technologies that are important to our business and have demanded and may in the future demand that we license their patents and technology. Any litigation to determine the validity of claims that our products infringe or may infringe these rights, including claims arising through our contractual indemnification of our customers, regardless of their merit or resolution, could be costly and divert the efforts and attention of our management and technical personnel. We cannot assure you that we would prevail in litigation given the complex technical issues and inherent uncertainties in intellectual property litigation. We have incurred substantial expense settling certain intellectual property litigation in the past such as our $70.0 million charge in fiscal 2006 related to the settlement of our patent infringement litigation with Texas Instruments Incorporated. If litigation results in an adverse ruling we could be required to:

	•		pay substantial damages;
	•		cease the manufacture, use or sale of infringing products, processes or technologies;
	•		discontinue the use of infringing technology;
	•		expend significant resources to develop non-infringing technology; or
	•		license technology from the third party claiming infringement, which license may not be available on commercially reasonable terms, or at all.

The value of our common stock may be adversely affected by market volatility.

The trading price of our common stock fluctuates significantly and may be influenced by many factors, including:

	•		our operating and financial performance and prospects;
	•		our ability to repay our debt;
	•		the depth and liquidity of the market for our common stock;
	•		investor perception of us and the industry and markets in which we operate;
	•		our inclusion in, or removal from, any equity market indices;
	•		the level of research coverage of our common stock;
	•		changes in earnings estimates or buy/sell recommendations by analysts;
	•		judgments favorable or adverse to us; and
	•		general financial, domestic, international, economic and other market conditions

We have recently incurred substantial losses and may incur additional future losses.

Our net losses for fiscal 2007, 2006 and 2005 were $402.5 million, $122.6 million and $176.0 million respectively. We have previously initiated several restructuring activities to improve our operating cost structure, and our new President and Chief Executive Officer has initiated further changes. These restructuring activities include a refocusing of our business, changes in product lines and workforce reductions and will have the near-term effect of increasing our operating expenses as a result of special charges we have recorded and will record to implement these actions. Additionally, as the result of previous business combinations, we have significant amounts of intangible assets for which we record amortization expense each period. Finally, any further decline in revenue would significantly affect our results. We cannot assure you that we will be able to achieve profitability, and we may incur additional substantial losses in the future.

We have significant goodwill and intangible assets, and future impairment of our goodwill and intangible assets could have a material negative impact on our financial condition and results of operations.

At September 28, 2007, we had $406.3 million of goodwill and $26.1 million of intangible assets, net, which together represented approximately 44% of our total assets. In periods subsequent to an acquisition, at least on an annual basis or when indicators of impairment exist, we must evaluate goodwill and acquisition-related intangible assets for impairment. When such assets are found to be impaired, they will be written down to estimated fair value,

with a charge against earnings. If our market capitalization drops below our book value for a prolonged period of time, if our assumptions regarding our future operating performance change or if other indicators of impairment are present, we may be required to write-down the value of our goodwill and acquisition-related intangible assets by taking a non-cash charge against earnings. During fiscal 2007, we recorded goodwill and intangible asset impairment charges of $309.5 million and $30.3 million, respectively, which had a material negative impact on our results of operations. Because of the significance of our remaining goodwill and intangible asset balances, any future impairment of these assets could also have a material adverse effect on our financial condition and results of operations, although, as a non-cash charge, it would have no effect on our cash flow. Significant impairments may also impact shareholder equity.

The loss of a key customer could seriously impact our revenue levels and harm our business. In addition, if we are unable to continue to sell existing and new products to our key customers in significant quantities or to attract new significant customers, our future operating results could be adversely affected.

We have derived a substantial portion of our past revenue from sales to a relatively small number of customers. As a result, the loss of any significant customer could materially and adversely affect our financial condition and results of operations.

Sales to our twenty largest customers, including distributors, represented approximately 68%, 67% and 64% of our net revenues in fiscal 2007, 2006, and 2005, respectively. We expect that our largest customers will continue to account for a substantial portion of our net revenue in future periods. The identities of our largest customers and their respective contributions to our net revenue have varied and will likely continue to vary from period to period. We may not be able to maintain or increase sales to certain of our key customers for a variety of reasons, including the following:

	•		most of our customers can stop incorporating our products into their own products with limited notice to us and suffer little or no penalty;
	•		our agreements with our customers typically do not require them to purchase a minimum quantity of our products;
	•		many of our customers have pre-existing or concurrent relationships with our current or potential competitors that may affect the customers’ decisions to purchase our products;
	•		our customers face intense competition from other manufacturers that do not use our products; and
	•		some of our customers offer or may offer products that compete with our products.

In addition, our longstanding relationships with some larger customers may also deter other potential customers who compete with these customers from buying our products. To attract new customers or retain existing customers, we may offer certain customers favorable prices on our products. The loss of a key customer, a reduction in sales to any key customer or our inability to attract new significant customers could seriously impact our revenue and materially and adversely affect our results of operations.

We are subject to the risks of doing business internationally.

For fiscal 2007, 2006 and 2005 approximately 93%, 92% and 90%, respectively, of our net revenues were from customers located outside of the United States, primarily in the Asia-Pacific region. In addition, a significant portion of our workforce and many of our key suppliers are located outside of the United States. Our international operations consist of research and development, sales offices, and other general and administrative functions. Our international operations are subject to a number of risks inherent in operating abroad. These include, but are not limited to, risks regarding:

	•		difficulty in obtaining distribution and support;
	•		limitations on our ability under local laws to protect our intellectual property;
	•		currency exchange rate fluctuations;
	•		local economic and political conditions;
	•		disruptions of commerce and capital or trading markets due to or related to terrorist activity or armed conflict;

	•		restrictive governmental actions, such as restrictions on the transfer or repatriation of funds and trade protection measures, including export duties and quotas and customs duties and tariffs;
	•		changes in legal or regulatory requirements;
	•		the laws and policies of the United States and other countries affecting trade, foreign investment and loans, and import or export licensing requirements; and
	•		tax laws, including the cost of services provided and products sold between us and our subsidiaries which are subject to review by taxing authorities.

Because most of our international sales are currently denominated in U.S. dollars, our products could become less competitive in international markets if the value of the U.S. dollar increases relative to foreign currencies.

From time to time, we may enter into foreign currency forward exchange contracts to minimize risk of loss from currency exchange rate fluctuations for foreign currency commitments entered into in the ordinary course of business. We have not entered into foreign currency forward exchange contracts for other purposes. Our financial condition and results of operations could be affected (adversely or favorably) by currency fluctuations.

We also conduct a significant portion of our international sales through distributors. Sales to distributors and other resellers accounted for approximately 34%, 35% and 28% of our net revenues in fiscal 2007, 2006 and 2005, respectively. Our arrangements with these distributors are terminable at any time, and the loss of these arrangements could have an adverse effect on our operating results. For those international distributors that we account for under a deferred revenue recognition model, we rely on the distributor to provide us timely and accurate product sell through information, without which the accuracy of amounts recorded in our consolidated financial statements may be affected and, therefore, have an adverse effect on our operating results.

We may not be able to keep abreast of the rapid technological changes in our markets.

The demand for our products can change quickly and in ways we may not anticipate because our markets generally exhibit the following characteristics:

	•		rapid technological developments;
	•		rapid changes in customer requirements;
	•		frequent new product introductions and enhancements;
	•		short product life cycles with declining prices over the life cycle of the products; and
	•		evolving industry standards.

For example, a portion of our analog modem business which is bundled into PCs is becoming debundled as broadband communications become more ubiquitous. Several of our PC OEM customers have indicated that the trend toward debundling may become more significant, which may have an adverse effect on both our revenues and profitability. Further, our products could become obsolete sooner than anticipated because of a faster than anticipated change in one or more of the technologies related to our products or in market demand for products based on a particular technology, particularly due to the introduction of new technology that represents a substantial advance over current technology. Currently accepted industry standards are also subject to change, which may contribute to the obsolescence of our products.

We face a risk that capital needed for our business and to repay our debt obligations will not be available when we need it.

At September 28, 2007, we 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 respective 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 offers to repurchase approximately $58.0 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.

At September 28, 2007, we also had a total of $250.0 million aggregate principal amount of 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.

We also have an $80.0 million credit facility with a bank, under which we had borrowed $80.0 million as of September 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 may not have access to sufficient capital to repay amounts due under (i) our credit facility expiring November 2008 if it is not renewed, (ii) our floating rate senior secured notes when they become due in November 2010 or earlier as a result of a mandatory offer to repurchase, and (iii) our convertible subordinated notes when they become due in March 2026 or earlier as a result of the mandatory repurchase requirements. Further, we may not be able to refinance any portion of this debt on favorable terms or at all.

In the future, we may need to make strategic investments and acquisitions to help us grow our business, which may require additional capital resources. We cannot assure you that the capital required to fund these investments and acquisitions will be available in the future.

We may not be able to attract and retain qualified management, technical and other personnel necessary for the design, development and sale of our products. Our success could be negatively affected if key personnel leave.

Our future success depends on our ability to attract and to retain the continued service and availability of skilled personnel at all levels of our business. As the source of our technological and product innovations, our key technical personnel represent a significant asset. The competition for such personnel can be intense. While we have entered into employment agreements with some of our key personnel, we cannot assure you that we will be able to attract and retain qualified management and other personnel necessary for the design, development and sale of our products.

If OEMs of communications electronics products do not design our products into their equipment, we will be unable to sell those products. Moreover, a design win from a customer does not guarantee future sales to that customer.

Our products are components of other products. As a result, we rely on OEMs of communications electronics products to select our products from among alternative offerings to be designed into their equipment. We may be unable to achieve these “design wins”. Without design wins from OEMs, we would be unable to sell our products. Once an OEM designs another supplier’s semiconductors into one of its product platforms, it will be more difficult for us to achieve future design wins with that OEM’s product platform because changing suppliers involves significant cost, time, effort and risk. Achieving a design win with a customer does not ensure that we will receive significant revenues from that customer and we may be unable to convert design wins into actual sales. Even after a design win, the customer is not obligated to purchase our products and can choose at any time to stop using our products if, for example, it or its own products are not commercially successful.

Because of the lengthy sales cycles of many of our products, we may incur significant expenses before we generate any revenues related to those products.

Our customers may need six months or longer to test and evaluate our products and an additional six months or more to begin volume production of equipment that incorporates our products. The lengthy period of time required also increases the possibility that a customer may decide to cancel or change product plans, which could reduce or eliminate sales to that customer. Thus, we may incur significant research and development, and selling, general and administrative expenses before we generate the related revenues for these products, and we may never generate the anticipated revenues if our customer cancels or changes its product plans.

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

Our sales are typically made pursuant to individual purchase orders and we generally do not have long-term supply arrangements with our customers. Generally, our customers may cancel orders until 30 days prior to shipment. In addition, we sell a portion of our products through distributors and other resellers, some of whom have a right to return unsold products to us. Sales to distributors and other resellers accounted for approximately 34%, 35% and 28% of our net revenues in fiscal 2007, 2006 and 2005, respectively. Our distributors may offer products of several different suppliers, including products that may be competitive with ours. Accordingly, there is a risk that the distributors may give priority to other supplier products and may not sell our products as quickly as forecasted, which may impact their future order levels. We routinely purchase inventory based on estimates of end-market demand for our customers’ products, which is difficult to predict. This difficulty may be compounded when we sell to OEMs indirectly through distributors and other resellers or contract manufacturers, or both, as our forecasts of demand are then based on estimates provided by multiple parties. In addition, our customers may change their inventory practices on short notice for any reason. The cancellation or deferral of product orders, the return of previously sold products or overproduction due to the failure of anticipated orders to materialize could result in our holding excess or obsolete inventory, which could result in write-downs of inventory.

We are dependent upon third parties for the manufacture, assembly and test of our products.

We are entirely dependent upon outside wafer fabrication facilities (known as foundries or fabs). Therefore, our revenue growth is dependent on our ability to obtain sufficient external manufacturing capacity, including wafer production capacity. If the semiconductor industry experiences a shortage of wafer fabrication capacity in the future, we risk experiencing delays in access to key process technologies, production or shipments and increased manufacturing costs.

The foundries we use may allocate their limited capacity to fulfill the production requirements of other customers that are larger and better financed than us. If we choose to use a new foundry, it typically takes several months to redesign our products for the process technology and intellectual property cores of the new foundry and to complete the qualification process before we can begin shipping products from the new foundry.

We are also dependent upon third parties for the assembly and test of our products. Our reliance on others to assemble and test our products subjects us to many of the same risks that we have with respect to our reliance on outside wafer fabrication facilities.

Wafer fabrication processes are subject to obsolescence, and foundries may discontinue a wafer fabrication process used for certain of our products. In such event, we generally offer our customers a “last time buy” program to satisfy their anticipated requirements for our products. The unanticipated discontinuation of wafer fabrication processes on which we rely may adversely affect our revenues and our customer relationships.

In the event of a disruption of the operations of one or more of our suppliers, we may not have a second manufacturing source immediately available. Such an event could cause significant delays in shipments until we could shift the products from an affected facility or supplier to another facility or supplier. The manufacturing processes we rely on are specialized and are available from a limited number of suppliers. Alternate sources of manufacturing capacity, particularly wafer production capacity, may not be available to us on a timely basis. Even if alternate wafer production capacity is available, we may not be able to obtain it on favorable terms, or at all. All

such delays or disruptions could impair our ability to meet our customers’ requirements and have a material adverse effect on our operating results.

In addition, the highly complex and technologically demanding nature of semiconductor manufacturing has caused foundries from time to time to experience lower than anticipated manufacturing yields, particularly in connection with the introduction of new products and the installation and start-up of new process technologies. Lower than anticipated manufacturing yields may affect our ability to fulfill our customers’ demands for our products on a timely basis and may adversely affect our cost of goods sold and our results of operations.

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

To remain competitive, we expect to continue to transition our semiconductor products to increasingly smaller line width geometries. This transition requires us to modify the manufacturing processes for our products and to redesign some products as well as standard cells and other integrated circuit designs that we may use in multiple products. We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies to reduce our costs. In the past, we have experienced some difficulties in shifting to smaller geometry process technologies or new manufacturing processes, which resulted in reduced manufacturing yields, delays in product deliveries and increased expenses. We may face similar difficulties, delays and expenses as we continue to transition our products to smaller geometry processes. We are dependent on our relationships with our foundries to transition to smaller geometry processes successfully. We cannot assure you that our foundries will be able to effectively manage the transition or that we will be able to maintain our existing foundry relationships or develop new ones. If our foundries or we experience significant delays in this transition or fail to implement this transition efficiently, we could experience reduced manufacturing yields, delays in product deliveries and increased expenses, all of which could negatively affect our relationships with our customers and result in the loss of design wins to our competitors, which in turn would adversely affect our results of operations. As smaller geometry processes become more prevalent, we expect to continue to integrate greater levels of functionality, as well as customer and third party intellectual property, into our products. However, we may not be able to achieve higher levels of design integration or deliver new integrated products on a timely basis, or at all. Moreover, even if we are able to achieve higher levels of design integration, such integration may have a short-term adverse impact on our operating results, as we may reduce our revenue by integrating the functionality of multiple chips into a single chip.

If we are not successful in protecting our intellectual property rights, it may harm our ability to compete.

We use a significant amount of intellectual property in our business. We rely primarily on patent, copyright, trademark and trade secret laws, as well as nondisclosure and confidentiality agreements and other methods, to protect our proprietary technologies and processes. At times we incorporate the intellectual property of our customers into our designs, and we have obligations with respect to the non-use and non-disclosure of their intellectual property. In the past, we have engaged in litigation to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of proprietary rights of others, including our customers. We may engage in future litigation on similar grounds, which may require us to expend significant resources and to divert the efforts and attention of our management from our business operations. We cannot assure you that:

	•		the steps we take to prevent misappropriation or infringement of our intellectual property or the intellectual property of our customers will be successful;
	•		any existing or future patents will not be challenged, invalidated or circumvented; or
	•		any of the measures described above would provide meaningful protection.

Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our technology without authorization, develop similar technology independently or design around our patents. If any of our patents fails to protect our technology it would make it easier for our competitors to offer similar products. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited in certain countries.

Uncertainties involving litigation could adversely affect our business.

We and certain of our current and former officers and our Employee Benefits Plan Committee have been named as defendants in a purported breach of fiduciary duties class action lawsuit.  Although we believe that this lawsuit is without merit, an adverse determination could have a negative impact on our results of operation and the price of our stock. Moreover, regardless of the ultimate result, this or other lawsuits may divert management’s attention and resources from other matters, which could also adversely affect our business, financial position and results of operations.

Our success depends, in part, on our ability to effect suitable investments, alliances and acquisitions.

Although we invest significant resources in research and development activities, the complexity and speed of technological changes make it impractical for us to pursue development of all technological solutions on our own. On an ongoing basis, we review investment, alliance and acquisition prospects that would complement our existing product offerings, augment our market coverage or enhance our technological capabilities. However, we cannot assure you that we will be able to identify and consummate suitable investment, alliance or acquisition transactions in the future.

Moreover, if we consummate such transactions, they could result in:

	•		large initial one-time write-offs of in-process research and development;
	•		the incurrence of substantial debt and assumption of unknown liabilities;
	•		the potential loss of key employees from the acquired company;
	•		amortization expenses related to intangible assets; and
	•		the diversion of management’s attention from other business concerns.

Integrating acquired organizations and their products and services may be expensive, time-consuming and a strain on our resources and our relationships with employees and customers, and ultimately may not be successful. The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of one or more of our product lines and the loss of key personnel. The diversion of management’s attention and any delays or difficulties encountered in connection with acquisitions and the integration of multiple operations could have an adverse effect on our business, results of operations or financial condition.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

Our corporate headquarters is located in Newport Beach, California. Our other principal facilities in the United States are located in San Diego, California and Red Bank, New Jersey. Activities at these locations include administration, sales and marketing, research and development (including design centers) and operations functions. We also have significant facilities in India and China, where a large portion of our research and development employees are located. The following table summarizes the locations and respective square footage of the facilities in which we operated at September 28, 2007 (square footage in thousands):

		Leased Square				Owned Square
		Footage				Footage				Total
United States:
Newport Beach, California			142				67				209
Red Bank, New Jersey			100				—				100
San Diego, California			99				—				99
Other			108				—				108
			449				67				516
India			218				23				241
China			116				—				116
Other Asia			45				—				45
Europe			30				—				30
			858				90				948

As a result of our various reorganization and restructuring related activities, we also lease or own a number of facilities in which we do not operate. At September 28, 2007, we had an additional 575,000 square feet of leased space and 399,000 square feet of owned space, of which approximately 78% is being sub-leased to third parties. Included in these amounts are 386,000 square feet of owned space in Newport Beach that we have leased to Jazz, 176,000 square feet of leased space in Newport Beach that we have sub-leased to Mindspeed, and 3,000 square feet of owned space in Newport Beach that we have leased to Skyworks.

We own approximately 25 acres of land in Newport Beach, California, including the land on which our 456,000 square feet of owned space is located (56,000 square feet occupied by us, 386,000 square feet leased to Jazz, 3,000 square feet leased to Skyworks, and 11,000 square feet leased to various others). We have determined that approximately 17 acres of this property currently zoned for light industrial use could be sold and/or re-developed under the current provisions of our lease agreement with Jazz. Under the passage of a new general plan for the City of Newport Beach in November 2006, we commenced working to re-zone the property for mixed use (e.g., residential, retail, etc.) and secure entitlements to maximize the value of this land. Our continuing efforts with the entitlement process are impacted by changes in the local real estate market causing an inability to reasonably estimate the timeframe in which we can monetize this investment.

We believe our properties have been well-maintained, are in sound operating condition and contain all the equipment and facilities necessary to operate at present levels. Our California facilities, including one of our design centers, are located near major earthquake fault lines. We maintain no earthquake insurance with respect to these facilities. Certain of our facilities are located in countries that may experience civil unrest.

Item 3. 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 of 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 Third Circuit Court of Appeals vacated the District Court’s order dismissing Graden’s complaint and remanded the case for further proceedings.

Orckit – On August 13, 2007, we filed a current report on Form 8-K disclosing that on August 7, 2007 an arbitration panel had issued an interim ruling granting $12.0 million damages award to Orckit Communications Ltd. in a contract dispute and that the arbitration panel also had the discretion to award Orckit attorneys fees and costs. Effective October 12, 2007, we settled and resolved our dispute with Orckit, including coverage of attorney fees, for $18.6 million paid by us.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of our shareholders during the quarter ended September 28, 2007.

PART II

Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the Nasdaq Global Select Market (formerly the Nasdaq National Market) under the symbol “CNXT”. The following table lists the high and low intra-day sale prices for our common stock as reported by the Nasdaq Global Select Market for the periods indicated:

		High				Low
Fiscal year ended September 28, 2007:
Fourth quarter		$	1.57			$	1.05
Third quarter			1.68				1.23
Second quarter			2.20				1.61
First quarter			2.36				1.71
Fiscal year ended September 29, 2006:
Fourth quarter		$	2.47			$	1.60
Third quarter			3.90				2.14
Second quarter			3.60				2.28
First quarter			2.72				1.70

At November 9, 2007, there were approximately 42,128 holders of record of our common stock.

We have never paid cash dividends on our common stock. We currently intend to retain any earnings for use in our business and to repay our indebtedness, and do not anticipate paying cash dividends in the foreseeable future.

Shareowner Return Performance Graph

Set forth below is a line graph comparing the cumulative total shareowner return on Conexant common stock against the cumulative total return of the Standard & Poor’s 500 Stock Index and the Nasdaq Electronic Components Index for the period beginning September 30, 2002 and ending September 28, 2007. The graph assumes that $100 was invested on September 30, 2002, in each of Conexant common stock, the Standard & Poor’s 500 Stock Index and the Nasdaq Electronic Components Index at the respective closing prices on September 30, 2002 and that all dividends were reinvested. No cash dividends have been paid or declared on Conexant common stock. For purposes of the graph, the 2002 distribution of the Skyworks Solutions, Inc. (Skyworks) shares to holders of Conexant common stock as part of the spin-off and merger of Conexant’s wireless communication business with Alpha Industries, Inc. to form Skyworks, and the 2003 spin-off of Mindspeed Technologies, Inc. are treated as non-taxable cash dividends that were reinvested in additional shares of Conexant common stock at the closing price on June 26, 2002 and June 30, 2003, respectively.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Conexant Systems, Inc., The S&P 500 Index
And The NASDAQ Electronic Components Index

Item 6. Selected Financial Data

The following selected financial data for the five fiscal years ended September 28, 2007 were derived from the audited consolidated financial statements of Conexant and its subsidiaries. In June 2003, Conexant completed the spin-off of its Mindspeed Technologies Internet infrastructure business. The selected financial data for all periods have been restated to reflect this business as a discontinued operation. In February 2004, Conexant completed the merger with GlobespanVirata, Inc. The results of GlobespanVirata, Inc. have been included in the consolidated results since February 28, 2004.

The selected financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto appearing elsewhere in this report.

		Fiscal Year Ended
		2007				2006				2005				2004				2003
		(in thousands, except per share amounts)
Statement of Operations Data:
Net revenues		$	808,869			$	970,787			$	722,739			$	901,854			$	599,977
Cost of goods sold (1)(2)			450,537				542,309				493,973				523,129				338,161
Gain on cancellation of supply agreement (3)			—				(17,500	)			—				—				—
Gross margin			358,332				445,978				228,766				378,725				261,816
Operating expenses:
Research and development (2)			278,685				269,736				267,996				239,971				159,354
Selling, general and administrative (2)			107,030				131,226				117,861				125,474				93,426
Amortization of intangible assets			22,099				30,705				32,322				20,769				3,437
In-process research and development (4)			—				—				—				160,818				—
Asset impairments (5)			350,913				85				3,761				—				—
Special charges (6)			36,034				73,159				42,216				32,801				18,379
Total operating expenses			794,761				504,911				464,156				579,833				274,596
Operating loss			(436,429	)			(58,933	)			(235,390	)			(201,108	)			(12,780	)
Interest expense			(48,986	)			(38,130	)			(33,691	)			(30,708	)			(28,120	)
Other income (expense), net			36,148				(14,472	)			106,055				(83,522	)			25,431
Gain on extinguishment of debt			—				—				—				—				42,021
Income (loss) before income taxes and gain (loss) on equity method investments			(449,267	)			(111,535	)			(163,026	)			(315,338	)			26,552
Provision (benefit) for income taxes (7)			4,377				2,892				2,322				243,733				(129	)
Income (loss) from continuing operations before gain (loss) on equity method investments			(453,644	)			(114,427	)			(165,348	)			(559,071	)			26,681
Gain (loss) on equity method investments			51,182				(8,164	)			(10,642	)			14,422				(3,119	)
Income (loss) from continuing operations			(402,462	)			(122,591	)			(175,990	)			(544,649	)			23,562
Loss from discontinued operations (8)			—				—				—				—				(728,877	)
Net loss		$	(402,462	)		$	(122,591	)		$	(175,990	)		$	(544,649	)		$	(705,315	)
Income (loss) from continuing operations per share – basic and diluted		$	(0.82	)		$	(0.26	)		$	(0.37	)		$	(1.40	)		$	0.09
Balance Sheet Data at Fiscal Year End:
Working capital (9)		$	93,394			$	127,635			$	142,796			$	444,272			$	239,009
Total assets			985,969				1,573,625				1,581,524				1,880,522				931,707
Short-term debt			80,000				80,000				—				—				—
Current portion of long-term debt (10)			58,000				188,375				196,825				—				—
Long-term obligations (10)			524,002				601,189				615,947				790,178				649,252
Shareholders’ equity			146,515				510,098				569,093				828,387				166,766

		Fiscal Year Ended
		2007				2006				2005				2004				2003
Cost of goods sold		$	473			$	494			$	—			$	—			$	—
Research and development			10,386				21,110				9,074				5,370				477
Selling, general and administrative			8,892				23,971				2,976				1,773				1,272

		Fiscal Year Ended
		2007				2006				2005				2004				2003
Legal settlements		$	20,047			$	70,000			$	3,255			$	3,000			$	—
Restructuring charges			12,131				3,259				28,049				9,264				5,215

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with our Consolidated Financial Statements and related Notes thereto included in Part II, Item 8 of this Report and the Risk Factors included in Part I, Item 1A of this report, as well as other cautionary statements and risks described elsewhere in this report.

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, which we describe as the broadband digital home.

Our fiscal year is the 52- or 53-week period ending on the Friday closest to September 30. Fiscal years 2007, 2006 and 2005 were 52-week years and ended on September 28, 2007, September 29, 2006, and September 30, 2005, respectively.

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 annual consolidated financial statements. Although we had four operating segments at September 28, 2007, under the aggregation criteria set forth in SFAS No. 131, we only operate 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.

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.

Beginning in fiscal 2007, we changed the organizational structure of two of our product lines. Our convergence video products were realigned into the newly named Imaging and PC Media unit (previously named Universal Access) from our Broadband Media Processing unit. Net revenues by product line have been restated for all periods in order to conform to the new groupings.

Net revenues by product line are as follows (in thousands):

		Fiscal Year Ended
		2007				2006				2005
Imaging and PC Media		$	311,275			$	397,635			$	332,141
Broadband Access Products			212,953				267,847				192,038
Broadband Media Processing Products			235,284				217,565				102,413
Embedded Wireless Networking Products			49,357				87,740				96,147
		$	808,869			$	970,787			$	722,739

Subsequent to fiscal 2007 year-end, we decided to discontinue investments in stand-alone wireless networking products and technologies. As a result, we have moved gateway-oriented wireless LAN products and technologies, which enable and support our DSL gateway solutions, into our Broadband Access product line beginning in fiscal 2008. Net revenues by product line after giving effect to the change in product line groups are as follows (in thousands):

		Fiscal Year Ended
		2007				2006				2005
Imaging and PC Media		$	311,275			$	397,635			$	332,141
Broadband Access Products			262,310				355,587				288,185
Broadband Media Processing Products			235,284				217,565				102,413
		$	808,869			$	970,787			$	722,739

Results of Operations

Net Revenues

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 September 28, 2007 and September 29, 2006, deferred revenue related to sales to these distributors was $5.5 million and $6.7 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 September 28, 2007 and September 29, 2006, deferred revenue related to shipments of products for which we have on-going performance obligations was $3.0 million and $6.6 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.

Our net revenues decreased 17% to $808.9 million in fiscal 2007 from $970.8 million in fiscal 2006. This decrease was primarily driven by a 13% decrease in average selling prices (ASPs) and, to a lesser extent, a 4% decrease in unit volume shipments. During fiscal 2007, we experienced revenue decreases in a majority of our product lines, with the exception of our Broadband Media Processing products which experienced a $17.7 million increase in net

revenues resulting from a cable set-top box program and a full system solution satellite set-top box product ramping into production in the latter part of calendar 2006.

Our net revenues increased 34% to $970.8 million in fiscal 2006 from $722.7 million in fiscal 2005. This increase was driven by a 39% increase in unit volume shipments, which was partially offset by a 3% decrease in ASPs. The unit volume shipments increased in fiscal 2006 compared to fiscal 2005 as a result of (i) the approximate $60.0 million channel inventory reduction at our distributors and estimated $10.0 million inventory reduction at our direct customers in the first half of fiscal 2005 and (ii) increased demand for our Broadband Media Processing products as satellite set-top box design wins began to ramp into production and, to a lesser extent, for our Broadband Access central office products due to market share gains.

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 fiscal 2007 was 44% compared with 46% for fiscal 2006. During fiscal 2006, we recorded a $17.5 million gain related to the cancellation of a wafer supply and services agreement with Jazz Semiconductor (Jazz), which was recorded as a reduction of cost of sales. Excluding this gain, the impact of changes to our inventory reserves and the impact of changes to revenue reserves that we maintain to estimate customer pricing adjustments, our gross margin percentage for 2006 would have been 43% resulting in the gross margin in 2007 remaining relatively stable compared to 2006 because of manufacturing cost reductions offsetting the 13% reduction in ASPs for fiscal 2007.

Our gross margin percentage for fiscal 2006 was 46% compared with 32% for fiscal 2005. During fiscal 2006, we recorded a $17.5 million gain related to the cancellation of a wafer supply and services agreement with Jazz, which was recorded as a reduction of cost of goods sold. Excluding the wafer supply termination agreement gain, the impact of changes to our inventory reserves, and the impact of changes to revenue reserves that we maintain to estimate customer pricing adjustments in both fiscal 2006 and 2005, our gross margin percentage would have been 43% for fiscal 2006 compared to 39% for fiscal 2005.  The higher gross margin percentage in fiscal 2006 can be attributed to the benefits of our product cost-reduction initiatives, as well as more stable product pricing.

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. During fiscal 2007 and 2006, we recorded $0.6 million and $3.0 million, respectively, of net charges for excess and obsolete (E&O) inventory. Activity in our E&O inventory reserves for fiscal 2007 and 2006 was as follows (in thousands):

		Fiscal Year Ended
		2007				2006
E&O reserves, beginning of period		$	36,632			$	44,833
Additions			10,589				14,766
Release upon sales of product			(10,036	)			(11,718	)
Scrap			(12,937	)			(7,082	)
Standards adjustments and other			(2,067	)			(4,167	)
E&O reserves, end of period		$	22,181			$	36,632

We review our E&O inventory balances at the product line level on a quarterly basis. We plan to scrap approximately 25% of the E&O inventory balances which existed as of September 28, 2007, and regularly evaluate the disposition of all E&O inventory products. It is possible that some of these reserved products will be sold which will benefit our gross margin in the period sold. During fiscal 2007 and 2006, we sold $10.0 million and $11.7 million, respectively, of reserved products.

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. During fiscal 2007 and 2006, we recorded $0.8 million and $4.1 million, respectively, of inventory charges to adjust certain products to their estimated market values. 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 fiscal 2007 and 2006 was as follows (in thousands):

		Fiscal Year Ended
		2007				2006
LCM reserves, beginning of period		$	1,761			$	6,739
Additions			783				4,093
Release upon sales of product			(1,942	)			(9,025	)
Standards adjustments and other			(223	)			(46	)
LCM reserves, end of period		$	379			$	1,761

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 increased $8.9 million in fiscal 2007 compared to fiscal 2006. The increase is the result of increased product development costs, a $3.6 million increase in depreciation expense due to our expansion in the Asia Pacific region and the impact of $4.3 million of credits related to property tax settlements that were recorded in fiscal 2006. These increases were partially offset by a $10.7 million decrease in stock-based compensation expense resulting from declines in the expense related to the stock options assumed in the merger with GlobespanVirata, Inc. in 2004 which are reaching the end of their three year vesting period.

R&D expense increased $1.7 million in fiscal 2006 compared to fiscal 2005 primarily due to a $12.0 million increase in stock-based compensation expense as a result of our adoption of SFAS No. 123(R), “Share-Based Payment,” in the first quarter of fiscal 2006. This increase was partially offset by $4.3 million of credits related to favorable property tax settlements, as well as overall cost reductions resulting from our restructuring actions which streamlined R&D projects and shifted resources to lower cost regions.

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 $24.2 million in fiscal 2007 compared to fiscal 2006. This decrease is primarily attributable to a $15.1 million decrease in stock based compensation expense, a $10.1 million decrease in legal fees primarily due to the settlement of our litigation with Texas Instruments in the third quarter of fiscal 2006 and a $4.1 million decrease in payroll expense as a result of our restructuring efforts. These decreases were partially offset by the impact of $3.9 million of credits related to property tax settlements that were recorded in fiscal 2006. The decrease in stock-based compensation expense resulted from declines in the expense related to the stock options assumed in the merger with GlobespanVirata, Inc. in 2004 reaching the end of their three year vesting period.

SG&A expense increased $13.4 million in fiscal 2006 compared to fiscal 2005. This increase is primarily attributable to a $20.4 million increase in stock-based compensation expense as a result of our adoption of SFAS No. 123(R) in the first quarter of fiscal 2006. This increase was partially offset by $3.9 million of credits related to favorable property tax settlements and a $2.0 million decrease in legal fees.

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 $8.6 million in fiscal 2007 compared to the fiscal 2006. These decreases were due to the $20.0 million impairment charge and write-down of certain intangible assets in the second quarter of fiscal 2007, the modification of the useful lives of some of the intangible assets acquired in the merger with GlobespanVirata, Inc. and some intangible assets becoming fully amortized during fiscal 2006.

Amortization expense decreased $1.6 million in fiscal 2006 compared to fiscal 2005 due to several intangible assets becoming fully amortized during fiscal 2005 and 2006.

Asset Impairments

Asset impairment charges for fiscal 2007 of $350.9 million consisted primarily of goodwill impairment charges of $309.5 million, intangible impairment charges of $30.3 million and property, plant and equipment charges of $6.1 million resulting from declines in the performance of certain broadband media products and declines in the embedded wireless network product lines coupled with our decision to discontinue further investment in stand alone wireless networking product lines.

Impairment charges for fiscal 2005 of $3.8 million were primarily associated with leasehold improvements in facilities that were vacated as part or our restructuring activities in fiscal 2005.

Special Charges

		Fiscal Year Ended
(in thousands)		2007				2006				2005
Litigation charges		$	20,047			$	70,000			$	3,255
Restructuring charges			12,131				3,259				28,049
Integration charges (credits)			—				(400	)			7,748
Other special charges			3,856				300				3,164
		$	36,034			$	73,159			$	42,216

Special charges for fiscal 2007 consist primarily of an $18.6 million charge for the settlement of our litigation with Orckit Communications Ltd. and restructuring charges of $12.1 million that were primarily comprised of employee severance and termination benefit costs related to our fiscal 2007 restructuring actions and, to a lesser extent, facilities related charges mainly resulting from the accretion of rent expense related to our fiscal 2005 restructuring action.

Special charges for fiscal 2006 consisted primarily of a $70.0 million charge related to the settlement of our patent infringement litigation with Texas Instruments Incorporated (Texas Instruments) in May 2006 and $3.3 million of net restructuring charges. The restructuring charges were primarily comprised of employee severance and other termination benefit costs and facilities closure costs mainly for our fiscal 2006 restructuring action, partially offset by a net reduction of the accrual relating to our fiscal 2005 restructuring action due to revised estimates of the remaining employee severance and termination benefit costs to be paid.

Special charges for fiscal 2005 were comprised of $28.0 million of restructuring charges, consisting of $21.2 million for employee severance and termination benefit costs and $6.8 of facilities charges primarily related to our fiscal 2005 restructuring action, $7.7 million of integration charges related to the merger with GlobespanVirata, $3.3 million for the settlement of a legal matter, and $3.2 million of other special charges, including $2.3 million of stock option and warrant modification charges.

Interest Expense

Interest expense increased $10.9 million during fiscal 2007 compared to fiscal 2006. The average interest rate that we pay on our outstanding debt and our average debt balances during fiscal 2007 was higher than in fiscal 2006 due to the timing of the our debt issuances and retirements during fiscal 2007 and 2006.

Interest expense increased $4.4 million in fiscal 2006 compared to fiscal 2005 primarily as a result of an $80.0 million short-term credit facility we established in November 2005. The increase in interest expense as a result of the $250.0 million principal amount of 4.00% convertible subordinated notes issued in March 2006 and May 2006 was substantially offset by a decrease in interest expense as a result of the retirement of $130.0 million principal amount of 5.25% convertible subordinated notes and $66.8 million principal amount of 4.25% convertible subordinated notes in May 2006, as well as the repurchase of $58.5 million principal amount of 4.00% convertible subordinated notes due February 2007.

Other Income (Expense), Net

		Fiscal Year Ended
(in thousands)		2007				2006				2005
Investment and interest income		$	13,833			$	17,921			$	6,457
Increase (decrease) in the fair value of derivative instruments			(952	)			(16,666	)			7,147
Impairment of equity securities			—				(19,872	)			—
Gains on investments in equity securities			17,016				4,414				91,285
Other			6,251				(269	)			1,166
		$	36,148			$	(14,472	)		$	106,055

Other income, net for fiscal 2007 was primarily comprised of $13.8 million of investment and interest income on invested cash balances, $17.0 million of gains on investments in equity securities, primarily the gain of $16.3 million on the sale of the Skyworks shares and investment credits realized on asset disposals.

Other expense, net for fiscal 2006 was comprised of a $19.9 million charge for the other-than-temporary impairment of equity securities (including an $18.5 million charge related to our 6.2 million shares of Skyworks common stock) and a $16.7 million decrease in the fair value of our warrant to purchase 30 million shares of Mindspeed common stock mainly due to a decline in Mindspeed’s stock price during fiscal 2006, partially offset by $17.9 million of investment and interest income on invested cash balances and $4.4 million of gains on investments in equity securities.

Other income, net for fiscal 2005 was primarily comprised of $91.3 million of gains on sales of equity securities (primarily from sales of approximately 5.9 million shares of SiRF Technologies Holdings, Inc.), a $7.1 million increase in the fair value of derivative instruments (primarily our Mindspeed warrant due to an increase in Mindspeed’s stock price during fiscal 2005), and $6.5 million of investment and interest income on invested cash balances.

Provision for Income Taxes

In fiscal 2007, 2006 and 2005, we recorded income tax provisions of $4.4 million, $2.9 million and $2.3 million, respectively, 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. Except to the extent of the Federal and state alternative minimum tax (AMT), we expect this to continue for the foreseeable future. However, we also expect our tax provision to increase in future years due to our continued expansion in low-cost regions outside of the U.S., primarily in India and China, and due to the scheduled expiration of certain tax holidays in India in fiscal 2009.

As of September 28, 2007, we had approximately $1.3 billion of net deferred income tax assets, which are primarily related to U.S. Federal income tax net operating loss (NOL) carryforwards and capitalized R&D expenses and which can be used to offset taxable income in subsequent years. Approximately $749.9 million of the NOL carryforwards were acquired in business combinations, and if we receive a tax benefit from their utilization, the benefit will be recorded as a reduction to goodwill. The deferred tax assets acquired in the merger with GlobespanVirata are subject to limitations imposed by section 382 of the Internal Revenue Code. Such limitations are not expected to impair our ability to utilize these deferred tax assets. As of September 28, 2007, we have a valuation allowance recorded against the majority of our deferred tax assets, resulting in net deferred tax assets of $0.6 million. We do not expect to recognize any domestic income tax benefits relating to future operating losses until we believe that such tax benefits are more likely than not to be realized.

We are subject to income taxes in the United States and numerous foreign jurisdictions and have also acquired and divested certain businesses for which we have 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. We and our acquired and divested businesses are regularly under audit by tax authorities. Although we believe our 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 our income tax provision, net income, or cash flows in the period or periods for which that determination is made could result.

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (FIN 48). This interpretation clarifies the application of SFAS No. 109, “Accounting for Income Taxes,” by defining a criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements and also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006, but earlier adoption is permitted. The Company will adopt FIN 48 no later than the first quarter of fiscal 2008. The Company is currently assessing the impact the adoption of FIN 48 will have on its financial position and results of operations.

Gain (Loss) on Equity Method Investments

Gain (loss) on equity method investments includes our share of the earnings or losses of the investments that are recorded under the equity method of accounting, as well as the gains and losses recognized on the sale of our equity method investments.

Gain on equity method investments for fiscal 2007 primarily consisted of a $50.3 million gain from the sale of our investment in Jazz.

Loss on equity method investments for fiscal 2006 primarily consisted of a $7.9 million loss from our investment in Jazz including our share of Jazz’s expense related to the cancellation of the wafer supply and services agreement.

Loss on equity method investments for fiscal 2005 primarily consisted of a $7.8 million loss from our investment in Jazz and $2.8 million of losses from our other equity method investments.

Liquidity and Capital Resources

Our principal sources of liquidity are our cash, cash equivalents and marketable securities. Total cash, cash equivalents and marketable securities were as follows:

		September 28,				September 29,
(in thousands)		2007				2006
Cash and cash equivalents		$	235,605			$	225,626
Marketable debt securities			—				83,620
Subtotal			235,605				309,246
Marketable equity securities – Skyworks (6.2 million shares at September 29, 2006)			—				32,089
Total cash, cash equivalents and marketable securities		$	235,605			$	341,335

Our cash, cash equivalents and marketable securities decreased $105.7 million between September 29, 2006 and September 28, 2007. The decrease was primarily due to the retirement of the remaining $456.5 million principal amount of our 4.00% convertible subordinated notes at maturity in February 2007, capital expenditures of $30.3 million, and cash used in operating activities of $11.9 million, which were partially offset by net proceeds of $264.8 million received upon issuance of our floating rate senior secured notes in November 2006 and $105.6 million of proceeds received for the sale of our investment in Jazz in fiscal 2007.

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 $15.5 million is reflected as a long-term asset on our consolidated balance sheet as of September 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 September 28, 2007, we had a total of $250.0 million aggregate principal amount of 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 September 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 respective 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 offers to repurchase approximately $58.0 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 $80.0 million as of September 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 had in early calendar 2007.

Cash flows are as follows (in thousands):

		Fiscal Year Ended
		2007				2006				2005
Net cash used in operating activities		$	(11,851	)		$	(68,325	)		$	(59,758	)
Net cash provided by investing activities			205,179				2,647				122,190
Net cash (used in) provided by financing activities			(183,349	)			88,600				1,241
Net increase in cash and cash equivalents		$	9,979			$	22,922			$	63,673

Cash used in operating activities was $11.9 million for fiscal 2007 compared to $68.3 million for fiscal 2006. During fiscal 2007 we used $37.1 million of cash from operations and made payments totaling $22.2 million for restructuring related items. These cash outflows were partially offset by $47.5 million of net favorable changes in our working capital (accounts receivable, inventories and accounts payable). The net favorable working capital change was mainly caused by a decrease in days sales outstanding (DSO) from 46 days in the September 2006 quarter to 40 days in the September 2007 quarter as a result of improved collections and sales linearity and decreased inventory levels resulting from reductions in channel inventory and revenue declines.

Cash used in operating activities was $68.3 million for fiscal 2006 compared to $59.8 million for fiscal 2005. Cash generated from operations during fiscal 2006 was $69.2 million, which was more than offset by $31.4 million of net unfavorable changes in our working capital (accounts receivable, inventories and accounts payable), a $70.0 million payment related to the settlement of our litigation with Texas Instruments, $12.5 million of legal costs associated with the Texas Instruments litigation, and $23.6 million of payments related to other special charges and restructuring related items. The net unfavorable working capital change was mainly caused by an increase in days sales outstanding (DSO) from 37 days in the September 2005 quarter to 46 days in the September 2006 quarter. This DSO increase was primarily the result of sales linearity in the fourth quarter of fiscal 2006 as compared to the fourth quarter of fiscal 2005.

Cash used in operations during fiscal 2005 was $105.3 million, before $124.1 million of net favorable changes in accounts receivable, inventories and accounts payable, an $8.0 million payment to Agere Systems, Inc. for the settlement of patent litigation, $12.0 million of legal costs associated with the Texas Instruments litigation and $58.6 million of payments related to special charges and other restructuring related items. The net favorable working capital change was driven by (i) improved DSO primarily the result of increased cash collections, from 79 days in the September 2004 quarter to 37 days in the September 2005 quarter, and (ii) improved inventory turns from 2.6 turns in the September 2004 quarter to 5.4 turns in the September 2005 quarter.

Cash provided by investing activities was $205.2 million for fiscal 2007 compared to $2.6 million for fiscal 2006. The increase is the result of cash proceeds generated on the fiscal 2007 sales of our equity investment in Jazz of $105.6 million, our stock ownership interest in Jazz of $4.2 million, our stock ownership in Skyworks of $50.4 million and the liquidation of our marketable security investments of $100.6 million.

Cash provided by investing activities was $2.6 million for fiscal 2006 compared to $122.2 million for fiscal 2005. The cash provided by investing activities in fiscal 2006 was primarily attributable to $52.6 million net proceeds from sales and maturities of marketable debt securities and $3.9 million of net proceeds from sales of non-marketable equity securities. These cash inflows from investing activities were substantially offset by capital expenditures of $33.5 million partially due to our expansion efforts in India and China, $11.5 million of payments related to previous business combinations, and $8.8 million of restricted cash as required under our credit facility.

Cash provided by investing activities of $122.2 million for fiscal 2005 included net proceeds of $49.0 million received from the purchase and sale-leaseback of our headquarters facility in Newport Beach, California, $97.2 million of proceeds from the sales of equity securities, primarily in SiRF Technology Holdings, Inc., and net proceeds from sales and maturities of marketable debt securities of $19.4 million. These cash inflows from investing activities were partially offset by payments for business combinations of $18.8 million, capital expenditures of $21.8 million, and purchases of non-marketable equity securities of $2.8 million.

Cash used in financing activities was $183.3 million for fiscal 2007 compared to cash provided by financing activities of $88.6 million for fiscal 2006. The increased use of cash in financing activities is the net result of our retirement of $456.5 million aggregate principal amount of 4.00% convertible subordinated notes due February 2007 offset by the issuance of $275.0 million aggregate principal amount of floating rate senior secured notes in November 2006.

Cash provided by financing activities was $88.6 million for fiscal 2006 compared to $1.2 million for fiscal 2005. The cash provided by financing activities during fiscal 2006 consisted of net proceeds of $243.6 from the issuance of convertible subordinated notes due March 2026, $78.5 million of net proceeds from a credit facility and $21.1 million of proceeds from the issuance of common stock under our stock-based employee benefit plans. These cash inflows from financing activities were partially offset by the retirement of $196.8 million of our convertible subordinated notes due May 2006 and $57.9 million of repurchases and retirements of a portion of our convertible subordinated notes due February 2007.

Cash provided by financing activities of $1.2 million for fiscal 2005 consisted primarily of $1.0 million of proceeds from the issuance of common stock under our stock-based employee benefit plans. The low level of proceeds from the exercise of stock options in fiscal 2005 reflects the depressed state of our stock price during fiscal 2005 and the impact of our option exchange program beginning in November 2004.

Contractual obligations at September 28, 2007 were as follows:

		Payments due by period
						Less than 1												More than 5
(in thousands)		Total				year				1-3 years				3-5 years				years
Long-term debt		$	525,000			$	58,000			$	—			$	467,000			$	—
Short-term debt			80,000				80,000				—				—				—
Interest on debt			107,303				36,988				60,364				9,951				—
Operating leases			144,123				27,737				42,307				25,768				48,311
Capital leases			48				48				—				—				—
Assigned leases			3,068				717				1,282				1,069				—
Purchase commitments			56,007				35,017				15,540				5,450				—
Capital commitments			3,011				3,011				—				—				—
		$	918,560			$	241,518			$	119,493			$	509,238			$	48,311

(1) The above table excludes the impact of the October 2007 extension of the $80.0 million credit facility. The credit facility was extended to November 28, 2008.

As discussed above, the holders of the $250.0 million convertible subordinated notes due March 2026 could require us to repurchase all or part of their notes as early as March 1, 2011. As a result, the convertible subordinated notes are presented as being due in 3-5 years in the table above. Also as discussed above, we are required to offer to repurchase all or part of the $275.0 million senior secured notes due November 2010 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 respective 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 offers to repurchase approximately $58.0 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 such, $58.0 million of the senior secured notes are presented as being due in less than one year in the table above.

At September 28, 2007, the Company had many sublease arrangements on operating leases for terms ranging from near term to approximately eight years. Aggregate scheduled sublease income based on current terms is approximately $27.2 million and is not reflected in the table above.

In October 2006, we acquired the assets of Zarlink Semiconductor Inc.’s packet switching business for $5.0 million. Under the terms of the Zarlink acquisition, we may be required to pay additional amounts based upon the achievement of certain revenue targets. As of September 28, 2007, we estimated an additional and final purchase payment of $0.8 million to be paid in December 2007.

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 (Rockwell), 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 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 February 2007, the Financial Accounting Standards Board (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 our 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 of 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 liability, with any unrecognized prior service costs, transition obligations or actuarial gains/losses reported as a component of other comprehensive income in shareholders’ equity. We adopted SFAS No. 158 as of the end of fiscal 2007. The adoption of SFAS No. 158 did not have a material effect on our financial position or results of operations.

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.

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (FIN 48). This interpretation clarifies the application of SFAS No. 109, “Accounting for Income Taxes,” by defining a criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in an enterprise’s financial statements and also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006, but earlier adoption is permitted. We will adopt FIN 48 no later than the first quarter of fiscal 2008. We are currently assessing the impact the adoption of FIN 48 will have on our financial position and results of operations.

Critical Accounting Policies

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among the significant estimates affecting our consolidated financial statements are those relating to business combinations, revenue recognition, allowances for doubtful accounts, inventories, long-lived assets, deferred income taxes, valuation of warrants, valuation of equity securities, stock-based compensation and restructuring charges. We regularly evaluate our estimates and assumptions based upon historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. To the extent actual results differ from those estimates, our future results of operations may be affected.

Business combinations

We account for acquired businesses using the purchase method of accounting which requires that the assets and liabilities assumed be recorded at the date of acquisition at their respective fair values. Because of the expertise required to value intangible assets and in-process research and development (IPR&D), we typically engage a third party valuation firm to assist management in determining those values. Valuation of intangible assets and IPR&D entails significant estimates and assumptions including, but not limited to: determining the timing and expected costs to complete projects, estimating future cash flows from product sales, and developing appropriate discount rates and probability rates by project. We believe that the fair values assigned to the assets acquired and liabilities assumed are based on reasonable assumptions. To the extent actual results differ from those estimates, our future results of operations may be affected by incurring charges to our statements of operations. Additionally, estimates for purchase price allocations may change as subsequent information becomes available.

Revenue recognition

Revenue is recognized 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 products are sold by the distributors to third parties. At September 28, 2007 and September 29, 2006, deferred revenue related to sales to these distributors was $5.5 million and $6.7 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 September 28, 2007 and September 29, 2006, deferred revenue related to shipments of products for which we have on-going performance obligations was $3.0 million and $6.6 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. Development revenue is recognized when services are performed and was not significant for any periods presented.

Our revenue recognition policy is significant because our revenue is a key component of our operations and the timing of revenue recognition determines the timing of certain expenses, such as sales commissions. Revenue results are difficult to predict, and any shortfall in revenues could cause our operating results to vary significantly from period to period.

Allowance for doubtful accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We use a specific identification method for some items, and a percentage of aged receivables for others. The percentages are determined based on our past experience. If the financial condition of our

customers were to deteriorate, our actual losses may exceed our estimates, and additional allowances would be required. At September 28, 2007 and September 29, 2006, our allowances for doubtful accounts were $1.7 million and $0.8 million, respectively.

Inventories

We assess the recoverability of our inventories at least quarterly through a review of inventory levels in relation to foreseeable demand, generally over twelve months. Foreseeable demand is based upon all 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 or product pricing is lower than originally projected, additional inventory write-downs may be required. Further, on a quarterly basis, we assess the net realizable value of our inventories. When the estimated average selling price of our inventory net of selling expenses falls below our inventory cost, we adjust our inventory to its current estimated market value. At September 28, 2007 and September 29, 2006, our inventory reserves were $22.6 million and $38.4 million, respectively.

Long-lived assets

Long-lived assets, including fixed assets and intangible assets (other than goodwill), are continually monitored and are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. The determination of recoverability is based on an estimate of undiscounted cash flows expected to result from the use of an asset and its eventual disposition. The estimate of cash flows is based upon, among other things, certain assumptions about expected future operating performance, growth rates and other factors. Estimates of undiscounted cash flows may differ from actual cash flows due to, among other things, technological changes, economic conditions, changes to our business model or changes in operating performance. If the sum of the undiscounted cash flows (excluding interest) is less than the carrying value, an impairment loss will be recognized, measured as the amount by which the carrying value exceeds the fair value of the asset. Fair value is determined using available market data, comparable asset quotes and/or discounted cash flow models.

Goodwill is tested for impairment on an annual basis and between annual tests whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” Under SFAS No. 142, goodwill is tested at the reporting unit level, which is defined as an operating segment or one level below the operating segment. Goodwill impairment testing is a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill.  If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, and the second step of the impairment test would be unnecessary.  If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test must be performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill.  If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss must be recognized in an amount equal to that excess. Goodwill impairment testing requires significant judgment and management estimates, including, but not limited to, the determination of (i) the number of reporting units, (ii) the goodwill and other assets and liabilities to be allocated to the reporting units and (iii) the fair values of the reporting units. The estimates and assumptions described above, along with other factors such as discount rates, will significantly affect the outcome of the impairment tests and the amounts of any resulting impairment losses.

Deferred income taxes

We evaluate our deferred income tax assets and assess the need for a valuation allowance quarterly. We record a valuation allowance to reduce our deferred income tax assets to the net amount that is more likely than not to be realized. Our assessment of the need for a valuation allowance is based upon our history of operating results,

expectations of future taxable income and the ongoing prudent and feasible tax planning strategies available to us. In the event that we determine that we will not be able to realize all or part of our deferred income tax assets in the future, an adjustment to the deferred income tax assets would be charged against income in the period such determination is made. Likewise, in the event we were to determine that we will more likely than not be able to realize our deferred income tax assets in the future in excess of the net recorded amount, an adjustment to the deferred income tax assets would increase income in the period such determination is made. To the extent that we realize a benefit from reducing the valuation allowance on acquired deferred income tax assets, the benefit will be credited to goodwill.

Valuation of warrants

We have a warrant to purchase 30 million shares of Mindspeed common stock. The fair value of this warrant is determined using a standard Black-Scholes-Merton valuation model with assumptions consistent with current market conditions and our intent to liquidate the warrant over a specified time period. The Black-Scholes-Merton valuation model requires the input of highly subjective assumptions, including expected stock price volatility. Changes in these assumptions, or in the underlying valuation model, could cause the fair value of the Mindspeed warrant to vary significantly from period to period.

Valuation of equity securities

We have a portfolio of strategic investments in non-marketable equity securities and also hold certain marketable equity securities. We review equity securities periodically for other-than-temporary impairments, which requires significant judgment. In determining whether a decline in value is other-than-temporary, we evaluate, among other factors, (i) the duration and extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer and (iii) our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. These reviews may include assessments of each investee’s financial condition, its business outlook for its products and technology, its projected results and cash flows, the likelihood of obtaining subsequent rounds of financing and the impact of any relevant contractual equity preferences held by us or by others. We have experienced substantial impairments in the value of our equity securities over the past few years. Future adverse changes in market conditions or poor operating results of underlying investments could result in our inability to recover the carrying amounts of our investments, which could require additional impairment charges to write-down the carrying amounts of such investments.

Stock-based compensation

In December 2004, the FASB issued SFAS No. 123(R). This pronouncement amends SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123(R) requires that companies account for awards of equity instruments issued to employees under the fair value method of accounting and recognize such amounts in their statements of operations. We adopted SFAS No. 123(R) on October 1, 2005. Under SFAS No. 123(R), we are required to measure compensation cost for all stock-based awards at fair value on the date of grant and recognize compensation expense in our consolidated statements of operations over the service period that the awards are expected to vest.

As permitted under SFAS No. 123(R), we elected to recognize compensation cost for all options with graded vesting granted on or after October 1, 2005 on a straight-line basis over the vesting period of the entire option. For options with graded vesting granted prior to October 1, 2005, we will continue to recognize compensation cost over the vesting period following the accelerated recognition method described in FASB Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans,” as if each underlying vesting date represented a separate option grant. Under SFAS No. 123(R), we record in our consolidated statements of operations (i) compensation cost for options granted, modified, repurchased or cancelled on or after October 1, 2005 under the provisions of SFAS No. 123(R) and (ii) compensation cost for the unvested portion of options granted prior to October 1, 2005 over their remaining vesting periods using the fair value amounts previously measured under SFAS No. 123(R) for pro forma disclosure purposes.

Consistent with the valuation method for the disclosure-only provisions of SFAS No. 123(R), we use the Black-Scholes-Merton model to value the compensation expense associated with stock options under SFAS No. 123(R). In

addition, forfeitures are estimated when recognizing compensation expense, and the estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of compensation expense to be recognized in future periods.

The Black-Scholes-Merton model requires certain assumptions to determine an option fair value, including expected stock price volatility, risk-free interest rate, and expected life of the option. The expected stock price volatility rates are based on the historical volatility of our 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 SAB No. 107.

Consistent with the provisions of SFAS No. 123(R), we measure service based awards at the stock price on the grant-date, performance based awards at the stock price on the grant-date effected for performance conditions which we believe may impact vesting or exercisability and market performance based awards using the Monte Carlo Simulation Method giving consideration to the range of various vesting probabilities.

Restructuring charges

Restructuring activities and related charges have related primarily to reductions in our workforce and related impact on the use of facilities. The estimated charges contain estimates and assumptions made by management about matters that are uncertain at the time that the assumptions are made (for example, the timing and amount of sublease income that will be achieved on vacated property and the operating costs to be paid until lease termination, and the discount rates used in determining the present value (fair value) of remaining minimum lease payments on vacated properties). While we have used our best estimates based on facts and circumstances available at the time, different estimates reasonably could have been used in the relevant periods, the actual results may be different, and those differences could have a material impact on the presentation of our financial position or results of operations. Our policies require us to review the estimates and assumptions periodically and to reflect the effects of any revisions in the period in which they are determined to be necessary. Such amounts also contain estimates and assumptions made by management, and are reviewed periodically and adjusted accordingly.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Our financial instruments include cash and cash equivalents, 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.

Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. As of September 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 at an exercise price of $3.408 per share through June 2013. 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 September 28, 2007, a 10% decrease in the market price of Mindspeed’s common stock would result in a decrease in the fair value of this warrant of approximately $2.4 million. At September 28, 2007, the market price of Mindspeed’s common stock was $1.73 per share. During fiscal 2007, the market price of Mindspeed’s common stock ranged from a low of $1.55 per share to a high of $2.56 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 5.67% at September 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 9.31% at September 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 September 28, 2007 (in thousands):

(in thousands)		Carrying Value				Fair Value
Cash and cash equivalents		$	235,605			$	235,605
Mindspeed warrant			15,519				15,519
Short-term debt			80,000				80,000
Long-term debt: senior secured notes			275,000				276,375
Long-term debt: convertible subordinated notes			250,000				207,969

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 September 28, 2007, we had outstanding foreign currency forward exchange contracts with a notional amount of 807 million Indian Rupees, approximately $19.5 million, maturing at various dates through February 2008. Based on the fair values of these contracts at September 28, 2007, we recorded a derivative asset of $0.8 million at September 28, 2007. Based on our overall currency rate exposure at September 28, 2007, a 10% change in the currency rates would not have a material effect on our consolidated financial position, results of operations or cash flows.

Item 8. Financial Statements and Supplementary Data

CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)

		September 28,				September 29,
		2007				2006
ASSETS
Current assets:
Cash and cash equivalents		$	235,605			$	225,626
Marketable securities			—				115,709
Restricted cash			8,800				8,800
Receivables, net of allowances of $1,659 and $842, respectively			80,906				123,025
Inventories, net			63,174				97,460
Other current assets			20,361				19,353
Total current assets			408,846				589,973
Property, plant and equipment, net			67,967				65,405
Goodwill			406,323				710,790
Intangible assets, net			26,067				76,008
Other assets			76,766				131,449
Total assets		$	985,969			$	1,573,625
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	58,000			$	188,375
Short-term debt			80,000				80,000
Accounts payable			80,667				113,690
Accrued compensation and benefits			26,154				28,307
Other current liabilities			70,631				51,966
Total current liabilities			315,452				462,338
Long-term debt			467,000				518,125
Other liabilities			57,002				83,064
Total liabilities			839,454				1,063,527
Commitments and contingencies (Note 8)
Shareholders’ equity:
Preferred and junior preferred stock			—				—
Common stock, $0.01 par value: 1,000,000 shares authorized; 492,362 and 486,482 shares issued; and 492,362 and 485,200 shares outstanding			4,924				4,866
Treasury stock: zero and 1,282 shares, at cost			—				(5,823	)
Additional paid-in capital			4,721,298				4,699,029
Accumulated deficit			(4,578,219	)			(4,175,757	)
Accumulated other comprehensive loss			(1,385	)			(12,096	)
Shareholder notes receivable			(103	)			(121	)
Total shareholders’ equity			146,515				510,098
Total liabilities and shareholders’ equity		$	985,969			$	1,573,625

See accompanying notes to consolidated financial statements.

CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

		Fiscal Year Ended
		September 28,				September 29,				September 30,
		2007				2006				2005
Net revenues		$	808,869			$	970,787			$	722,739
Cost of goods sold (1)			450,537				542,309				493,973
Gain on cancellation of supply agreement			—				(17,500	)			—
Gross margin			358,332				445,978				228,766
Operating expenses:
Research and development (1)			278,685				269,736				267,996
Selling, general and administrative (1)			107,030				131,226				117,861
Amortization of intangible assets			22,099				30,705				32,322
Asset impairments			350,913				85				3,761
Special charges			36,034				73,159				42,216
Total operating expenses			794,761				504,911				464,156
Operating loss			(436,429	)			(58,933	)			(235,390	)
Interest expense			(48,986	)			(38,130	)			(33,691	)
Other income (expense), net			36,148				(14,472	)			106,055
Loss before income taxes and gain (loss) on equity method investments			(449,267	)			(111,535	)			(163,026	)
Provision for income taxes			4,377				2,892				2,322
Loss before gain (loss) on equity method investments			(453,644	)			(114,427	)			(165,348	)
Gain (loss) on equity method investments			51,182				(8,164	)			(10,642	)
Net loss		$	(402,462	)		$	(122,591	)		$	(175,990	)
Net loss per share — basic and diluted		$	(0.82	)		$	(0.26	)		$	(0.37	)
Shares used in basic and diluted per-share computations			489,402				479,325				470,658

		Fiscal Year Ended
		September 28,				September 29,				September 30,
		2007				2006				2005
Cost of goods sold		$	473			$	494			$	—
Research and development			10,386				21,110				9,074
Selling, general and administrative			8,892				23,971				2,976

See accompanying notes to consolidated financial statements.

CONEXANT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

		Fiscal Year Ended
		September 28,				September 29,				September 30,
		2007				2006				2005
Cash flows from operating activities
Net loss		$	(402,462	)		$	(122,591	)		$	(175,990	)
Adjustments to reconcile net loss to net cash used in operating activities, net of effects of acquisitions:
Depreciation			25,091				19,670				18,594
Amortization of intangible assets			22,099				30,705				32,322
Asset impairments			350,913				—				—
Impairment of marketable and non-marketable securities			—				20,286				—
Provision for (reversal of) bad debts, net			20				(2,192	)			(1,587	)
(Reversal of) charges for inventory provisions, net			(606	)			(1,884	)			44,084
Deferred income taxes			231				(792	)			—
Stock-based compensation			19,751				44,945				14,340
Decrease (increase) in fair value of derivative instruments			952				16,666				(7,147	)
(Gains) losses on equity method investments			(51,182	)			8,164				10,642
Gain on cancellation of supply agreement			—				(17,500	)			—
Gain on sales of equity securities, investments and other assets			(17,016	)			(5,659	)			(91,264	)
Other items, net			(4,920	)			(2,813	)			(1,229	)
Changes in assets and liabilities:
Receivables			42,099				(33,593	)			99,535
Inventories			36,131				(576	)			57,786
Accounts payable			(30,732	)			2,774				(33,249	)
Agere patent litigation settlement			—				—				(8,000	)
Accrued expenses and other current liabilities			3,710				(15,795	)			(23,285	)
Other, net			(5,930	)			(8,140	)			4,690
Net cash used in operating activities			(11,851	)			(68,325	)			(59,758	)
Cash flows from investing activities
Proceeds from sale of equity securities and other assets			168,186				6,870				97,244
Proceeds from sales and maturities of marketable debt securities			100,573				146,219				68,985
Purchases of marketable securities			(27,029	)			(93,646	)			(49,628	)
Purchases of property, plant and equipment			(30,322	)			(34,011	)			(21,791	)
Payments for acquisitions, net of cash acquired			(5,029	)			(11,531	)			(18,817	)
Purchases of equity securities			(1,200	)			(2,454	)			(2,817	)
Restricted cash			—				(8,800	)			—
Net proceeds from purchase and sale-leaseback of facility			—				—				49,014
Net cash provided by investing activities			205,179				2,647				122,190
Cash flows from financing activities
Proceeds from short-term debt, net of expenses of $1,198 and $1,541			(1,198	)			78,459				—
Proceeds from long-term debt, net of expenses of $10,240 and $6,417			264,760				243,583				—
Repurchases and retirements of long-term debt			(456,500	)			(254,684	)			—
Proceeds from issuance of common stock			9,568				21,050				1,045
Repayment of shareholder notes receivable			21				192				196
Net cash (used in) provided by financing activities			(183,349	)			88,600				1,241
Net increase in cash and cash equivalents			9,979				22,922				63,673
Cash and cash equivalents at beginning of year			225,626				202,704				139,031
Cash and cash equivalents at end of year		$	235,605			$	225,626			$	202,704