Conexant's ( CNXT) third-quarter revenue will fall about $40 million short of estimates because of a price war breaking out among Wi-Fi chip suppliers.

Red Bank, N.J.-based Conexant expects to earn an adjusted 2 cents a share on revenue of $265 million to $270 million in the three months to July 2. Analysts surveyed by Thomson First Call were forecasting earnings of 5 cents a share on revenue of $313 million. The stock, which fetched as much as $6.50 as recently as April, was getting crushed Tuesday, recently down $1.76, or 43%, to $2.32.

Pint-sized peer Atheros ( ATHR) was also hit especially hard by the news, dropping 95 cents or 8.8% to $9.86.

But the big, diversified Wi-Fi players withstood the warning better: Broadcom ( BRCM) was off $2.16 or 5% to $40.99 and Texas Instruments ( TXN) was down 62 cents or 2.7% to $22.40.

Conexant cited poor results in its wireless networking division for the shortfall, saying an influx of cheap chipsets from Taiwanese exporters allowed resellers of competing products to lower prices dramatically. The Asian onslaught was profound enough essentially to wipe out the price difference between the old 11-megabit-per-second 802.11b Wi-Fi standard and the new 54-megabit-per-second 802.11g standard, according to Conexant.

The news underscores how Taiwanese players like Realtek and Mediatek have caught up to U.S. players and are able to deliver the more advanced 802.11g technology, putting heavy price pressure on the chipsets, said Legg Mason's Cody Acree. Taiwanese rivals also have an edge because many modems are actually built on their home turf. "Maybe there are some historic relationships and incentives to use local sourcing as well," said Acree.

"Wireless LAN as a standalone business will continue to be challenging, but we plan on protecting and expanding our position as we see an outstanding growth opportunity moving forward with wireless connectivity becoming ubiquitous in various devices and appliances," Conexant said in a statement. "We remain committed to participating and continuing to lead in this important market segment."

Conexant, which boasts top-tier customers like Dell ( DELL) and IBM ( IBM), sells chips that go into digital televisions, set top boxes and PCs, along with silicon for WLAN and DSL. In the most recent quarter ended in March, WLAN accounted for only 20% of sales, with broadband chips accounting for the biggest chunk of revenue, at 35%.

Conexant still relies more heavily on Wi-Fi than its giant rivals, however. For example, Broadcom draws only about 20% of its business from wireless chips, and of that sum, probably less than 20% is from wireless LAN silicon, estimated Acree. Texas Instruments likewise draws only a small portion of revenue from WLAN.

The difficulty for WLAN vendors, Acree pointed out, is that the industry shifted relatively rapidly from the flavor known as 802.11b to 802.11g, but now must wait several more years before the next wireless LAN technology becomes available. Known as WiMax, it will be able to transmit data over distances measured in miles rather than feet.