##### Table of Contents



---

---

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

|    |  |                                                                                        
|--- |  | ---------------------------------------------------------------------------------------
|[X] |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003*

OR

|      |  |                                                                                         
|----- |  | ----------------------------------------------------------------------------------------
|[   ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-24923

CONEXANT SYSTEMS, INC.

(Exact name of registrant as specified in its charter)


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

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

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

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act).
Yes  [X] No  [   ]

Number of shares of registrants common stock outstanding as of July 25, 2003
was 271,966,166.



---

|* |  | For presentation purposes of this Form 10-Q, references made to the
June 30, 2003 period relate to the actual fiscal third quarter ended June
27, 2003.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



---

---





---



##### Table of Contents



CAUTIONARY STATEMENT

This Quarterly Report 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: the cyclical nature of the semiconductor
industry and the markets addressed by our products and our customers products;
demand for and market acceptance of new and existing products; successful
development of new products; the timing of new product introductions; the
availability of manufacturing capacity; pricing pressures and other competitive
factors; changes in our product mix; fluctuations in manufacturing yields;
product obsolescence; our ability to develop and implement new technologies and
to obtain protection of the related intellectual property; our ability to
attract and retain qualified personnel; and the uncertainties of litigation, as
well as other risks and uncertainties, including those set forth herein and
those detailed from time to time in our filings with the Securities and
Exchange Commission. 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.

2



---

TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                              |                                                                                               | Consolidated Condensed Balance Sheets               
|                              |                                                                                               | Consolidated Condensed Statements of Operations     
|                              |                                                                                               | Consolidated Condensed Statements of Cash Flows     
|                              |                                                                                               | Notes To Consolidated Condensed Financial Statements
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                              | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II. OTHER INFORMATION   
|                              | ITEM 5. OTHER INFORMATION                                                                    
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURE                    
|CERTIFICATIONS               
|EXHIBIT INDEX                
|EXHIBIT 99                   



---



##### Table of Contents



CONEXANT SYSTEMS, INC.

INDEX

|                              |  |                                                                                                             |  |     
|----------------------------- |  | ----------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                             |  | PAGE
|                              |  |                                                                                                             |  |     
|PART I. FINANCIAL INFORMATION |  |                                                                                                            
|Item 1.                       |  | Financial Statements (unaudited):                                                                           |  |     
|                              |  | Consolidated Condensed Balance Sheets  June 30, 2003 and September 30,
2002                                |  | 4   
|                              |  | Consolidated Condensed Statements of Operations  Three Months and Nine
Months Ended June 30, 2003 and 2002 |  | 5   
|                              |  | Consolidated Condensed Statements of Cash Flows  Nine Months Ended June
30, 2003 and 2002                  |  | 6   
|                              |  | Notes to Consolidated Condensed Financial Statements                                                        |  | 7   
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                       |  | 19  
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                  |  | 34  
|Item 4.                       |  | Controls and Procedures                                                                                     |  | 35  
|PART II. OTHER INFORMATION    |  |                                                                                                            
|Item 5.                       |  | Other Information                                                                                           |  | 36  
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                            |  | 36  
|                              |  | Signature                                                                                                   |  | 37  
|                              |  | Certifications                                                                                              |  | 38  

3



---



##### Table of Contents









PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS




CONEXANT SYSTEMS, INC.
Consolidated Condensed Balance Sheets
(unaudited, in thousands, except per share amounts)

|                                                   |                                                                                                                                                     |  |                                            |            |   |          |         |               |   |           |  | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------ | ---------- | - | -------- | ------- | ------------- | - | --------- |  | 
|                                                   |                                                                                                                                                     |  |                                            |            |   | June 30, |         | September 30,
|                                                   |                                                                                                                                                     |  |                                            |            |   | 2003     |         | 2002         
|                                                   |                                                                                                                                                     |  |                                            |            |   |          |         |              
|                                                   |                                                                                                                                                     |  |                                            | ASSETS     |   |          |         |               |   |           |  | 
|Current assets:                                    |                                                                                                                                                     |  |                                            |            |   |          |         |              
|                                                   | Cash and cash equivalents                                                                                                                           |  | $                                          | 74,913     |   |          | $       | 161,088       |  
|                                                   | Short-term investments                                                                                                                              |  |                                            | 88,596     |   |          |         | 99,466        |  
|                                                   | Notes receivable from Skyworks                                                                                                                      |  |                                            |           |   |          |         | 180,000       |  
|                                                   | Receivables, net of allowance of $1,688 and $6,508 at
June 30, 2003 and September 30, 2002, respectively                                            |  |                                            | 87,300     |   |          |         | 60,984        |  
|                                                   | Inventories                                                                                                                                         |  |                                            | 55,688     |   |          |         | 52,488        |  
|                                                   | Deferred income taxes                                                                                                                               |  |                                            | 32,302     |   |          |         | 32,233        |  
|                                                   | Other current assets                                                                                                                                |  |                                            | 36,516     |   |          |         | 47,382        |  
|                                                   | Current assets of discontinued operations                                                                                                           |  |                                            |           |   |          |         | 29,992        |  
|                                                   |                                                                                                                                                     |  |                                            |            |   |          |         |               |  
|                                                   |                                                                                                                                                     |  | Total current assets                       |            |   | 375,315  |         |               |   | 663,633   | 
|                                                   |                                                                                                                                                     |  |                                            |            |   |          |         |               |   |           | 
|Property, plant and equipment, net                 |                                                                                                                                                     |  | 35,466                                     |            |   |          | 51,140  |              
|Goodwill                                           |                                                                                                                                                     |  | 57,070                                     |            |   |          | 46,426  |              
|Intangible assets, net                             |                                                                                                                                                     |  | 14,012                                     |            |   |          | 14,244  |              
|Deferred income taxes                              |                                                                                                                                                     |  | 223,600                                    |            |   |          | 224,168 |              
|Mindspeed warrant                                  |                                                                                                                                                     |  | 89,000                                     |            |   |          |        |              
|Other assets                                       |                                                                                                                                                     |  | 118,816                                    |            |   |          | 155,179 |              
|Non-current assets of discontinued operations      |                                                                                                                                                     |  |                                           |            |   |          | 756,245 |              
|                                                   |                                                                                                                                                     |  |                                            |            |   |          |         |               |  
|                                                   |                                                                                                                                                     |  | Total assets                               |            | $ | 913,279  |         |               | $ | 1,911,035 | 
|                                                   |                                                                                                                                                     |  |                                            |            |   |          |         |               |  
|LIABILITIES AND SHAREHOLDERS EQUITY               |                                                                                                                                                     |  |                                            |            |   |          |         |              
|Current liabilities:                               |                                                                                                                                                     |  |                                            |            |   |          |         |              
|                                                   | Accounts payable                                                                                                                                    |  | $                                          | 78,137     |   |          | $       | 82,653        |  
|                                                   | Accrued compensation and benefits                                                                                                                   |  |                                            | 31,309     |   |          |         | 24,145        |  
|                                                   | Other current liabilities                                                                                                                           |  |                                            | 49,582     |   |          |         | 50,209        |  
|                                                   | Current liabilities of discontinued operations                                                                                                      |  |                                            |           |   |          |         | 65,422        |  
|                                                   |                                                                                                                                                     |  |                                            |            |   |          |         |               |  
|                                                   |                                                                                                                                                     |  | Total current liabilities                  |            |   | 159,028  |         |               |   | 222,429   | 
|                                                   |                                                                                                                                                     |  |                                            |            |   |          |         |               |   |           | 
|Convertible subordinated notes                     |                                                                                                                                                     |  | 581,825                                    |            |   |          | 681,825 |              
|Other liabilities                                  |                                                                                                                                                     |  | 54,092                                     |            |   |          | 57,588  |              
|Non-current liabilities of discontinued operations |                                                                                                                                                     |  |                                           |            |   |          | 1,366   |              
|                                                   |                                                                                                                                                     |  |                                            |            |   |          |         |               |  
|                                                   |                                                                                                                                                     |  | Total liabilities                          |            |   | 794,945  |         |               |   | 963,208   | 
|                                                   |                                                                                                                                                     |  |                                            |            |   |          |         |               |  
|Commitments and contingencies                      |                                                                                                                                                     |  |                                           |            |   |          |        |              
|                                                   |                                                                                                                                                     |  |                                            |            |   |          |         |              
|Shareholders equity:                              |                                                                                                                                                     |  |                                            |            |   |          |         |              
|                                                   | Preferred and junior preferred stock                                                                                                                |  |                                            |           |   |          |         |              |  
|                                                   | Common stock, $0.01 par value: 1,000,000 shares
authorized; 271,053 and 265,676 shares issued at
June 30, 2003 and September 30, 2002, respectively |  |                                            | 2,711      |   |          |         | 265,676       |  
|                                                   | Additional paid-in capital                                                                                                                          |  |                                            | 3,493,226  |   |          |         | 3,219,044     |  
|                                                   | Accumulated deficit                                                                                                                                 |  |                                            | (3,371,369 | ) |          |         | (2,507,407    | )
|                                                   | Accumulated other comprehensive loss                                                                                                                |  |                                            | (6,118     | ) |          |         | (28,077       | )
|                                                   | Unearned compensation                                                                                                                               |  |                                            | (116       | ) |          |         | (1,409        | )
|                                                   |                                                                                                                                                     |  |                                            |            |   |          |         |               |  
|                                                   |                                                                                                                                                     |  | Total shareholders equity                 |            |   | 118,334  |         |               |   | 947,827   | 
|                                                   |                                                                                                                                                     |  |                                            |            |   |          |         |               |  
|                                                   |                                                                                                                                                     |  | Total liabilities and shareholders equity |            | $ | 913,279  |         |               | $ | 1,911,035 | 
|                                                   |                                                                                                                                                     |  |                                            |            |   |          |         |               |  

See accompanying notes to consolidated condensed financial
statements.

4



---



##### Table of Contents






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

|                                                        |  |                                     |                          |   |                    |        |                   |   |        |        |          |   |         |         |          |   |         |         | 
|------------------------------------------------------- |  | ----------------------------------- | ------------------------ | - | ------------------ | ------ | ----------------- | - | ------ | ------ | -------- | - | ------- | ------- | -------- | - | ------- | ------- | 
|                                                        |  |                                     |                          |   | Three months ended |        | Nine months ended
|                                                        |  |                                     |                          |   | June 30,           |        | June 30,         
|                                                        |  |                                     |                          |   |                    |        |                  
|                                                        |  |                                     |                          |   | 2003               |        | 2002              |   | 2003   |        | 2002    
|                                                        |  |                                     |                          |   |                    |        |                   |   |        |        |         
|Net revenues                                            |  | $                                   | 150,950                  |   |                    | $      | 131,999           |   |        | $      | 435,274  |   |         | $       | 388,664  |  
|Cost of goods sold                                      |  |                                     | 86,000                   |   |                    |        | 74,191            |   |        |        | 245,569  |   |         |         | 243,028  |  
|                                                        |  |                                     |                          |   |                    |        |                   |   |        |        |          |   |         |         |          |  
|Gross margin                                            |  |                                     | 64,950                   |   |                    |        | 57,808            |   |        |        | 189,705  |   |         |         | 145,636  |  
|Operating expenses:                                     |  |                                     |                          |   |                    |        |                   |   |        |        |          |   |         |         |          |  
|                                                        |  | Research and development            |                          |   | 38,849             |        |                   |   | 40,557 |        |          |   | 117,827 |         |          |   | 115,348 |        
|                                                        |  | Selling, general and administrative |                          |   | 22,915             |        |                   |   | 24,324 |        |          |   | 69,471  |         |          |   | 73,423  |        
|                                                        |  | Amortization of intangible assets   |                          |   | 925                |        |                   |   | 4,440  |        |          |   | 2,523   |         |          |   | 15,409  |        
|                                                        |  | Special charges                     |                          |   | 6,526              |        |                   |   | 14,702 |        |          |   | 13,585  |         |          |   | 30,167  |        
|                                                        |  |                                     |                          |   |                    |        |                   |   |        |        |          |   |         |         |          |  
|                                                        |  |                                     | Total operating expenses |   |                    | 69,215 |                   |   |        | 84,023 |          |   |         | 203,406 |          |   |         | 234,347 | 
|                                                        |  |                                     |                          |   |                    |        |                   |   |        |        |          |   |         |         |          |  
|Operating loss                                          |  |                                     | (4,265                   | ) |                    |        | (26,215           | ) |        |        | (13,701  | ) |         |         | (88,711  | )
|Debt conversion costs                                   |  |                                     |                         |   |                    |        | (10,435           | ) |        |        |         |   |         |         | (10,435  | )
|Gain on debt extinguishment                             |  |                                     | 7,376                    |   |                    |        |                  |   |        |        | 42,021   |   |         |         |         |   |        
|Other income (expense), net                             |  |                                     | 544                      |   |                    |        | (5,558            | ) |        |        | (40,785  | ) |         |         | (20,496  | )
|                                                        |  |                                     |                          |   |                    |        |                   |   |        |        |          |   |         |         |          |  
|Income (loss) before income taxes                       |  |                                     | 3,655                    |   |                    |        | (42,208           | ) |        |        | (12,465  | ) |         |         | (119,642 | )
|Provision (benefit) for income taxes                    |  |                                     | 488                      |   |                    |        | (116              | ) |        |        | 1,185    |   |         |         | (2,552   | )
|                                                        |  |                                     |                          |   |                    |        |                   |   |        |        |          |   |         |         |          |  
|Income (loss) from continuing operations                |  |                                     | 3,167                    |   |                    |        | (42,092           | ) |        |        | (13,650  | ) |         |         | (117,090 | )
|Loss from discontinued operations,
net of income taxes  |  |                                     | (52,297                  | ) |                    |        | (257,307          | ) |        |        | (728,877 | ) |         |         | (587,501 | )
|                                                        |  |                                     |                          |   |                    |        |                   |   |        |        |          |   |         |         |          |  
|Net loss                                                |  | $                                   | (49,130                  | ) |                    | $      | (299,399          | ) |        | $      | (742,527 | ) |         | $       | (704,591 | )
|                                                        |  |                                     |                          |   |                    |        |                   |   |        |        |          |   |         |         |          |  
|Income (loss) per share, basic and diluted:             |  |                                     |                          |   |                    |        |                   |   |        |        |          |   |         |         |          |  
|                                                        |  | Continuing operations               |                          | $ | 0.01               |        |                   | $ | (0.16  | )      |          | $ | (0.05   | )       |          | $ | (0.46   | )      
|                                                        |  | Discontinued operations             |                          |   | (0.19              | )      |                   |   | (0.99  | )      |          |   | (2.73   | )       |          |   | (2.28   | )      
|                                                        |  |                                     |                          |   |                    |        |                   |   |        |        |          |   |         |         |          |  
|                                                        |  | Net loss                            |                          | $ | (0.18              | )      |                   | $ | (1.15  | )      |          | $ | (2.78   | )       |          | $ | (2.74   | )      
|                                                        |  |                                     |                          |   |                    |        |                   |   |        |        |          |   |         |         |          |  
|Number of shares used in per share
 computation- basic  |  |                                     | 268,489                  |   |                    |        | 260,414           |   |        |        | 266,915  |   |         |         | 256,971  |  
|                                                        |  |                                     |                          |   |                    |        |                   |   |        |        |          |   |         |         |          |  
|Number of shares used in per share
computation- diluted |  |                                     | 271,051                  |   |                    |        | 260,414           |   |        |        | 266,915  |   |         |         | 256,971  |  
|                                                        |  |                                     |                          |   |                    |        |                   |   |        |        |          |   |         |         |          |  

See accompanying notes to consolidated condensed financial statements.

5



---



##### Table of Contents






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

|                                                                                                                                                                           |                                                          |                                                |          |                   |         |      |          |        |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ---------------------------------------------- | -------- | ----------------- | ------- | ---- | -------- | ------ | ------- | -
|                                                                                                                                                                           |                                                          |                                                |          | Nine months ended
|                                                                                                                                                                           |                                                          |                                                |          | June 30,         
|                                                                                                                                                                           |                                                          |                                                |          |                  
|                                                                                                                                                                           |                                                          |                                                |          | 2003              |         | 2002
|                                                                                                                                                                           |                                                          |                                                |          |                   |         |     
|Cash flows from operating activities:                                                                                                                                      |                                                          |                                                |          |                   |         |      |          |       
|Loss from continuing operations                                                                                                                                            |                                                          | $                                              | (13,650  | )                 |         | $    | (117,090 | )     
|Adjustments to reconcile loss from continuing
operations to net cash provided by (used in)
operating activities, net of effects of
acquisition/dispositions of businesses: |                                                          |                                                |          |                   |         |      |          |       
|                                                                                                                                                                           | Depreciation                                             |                                                |          | 13,576            |         |      |          | 23,247 |        
|                                                                                                                                                                           | Amortization of intangible assets                        |                                                |          | 2,523             |         |      |          | 15,409 |        
|                                                                                                                                                                           | Asset impairments                                        |                                                |          | 8,092             |         |      |          | 13,523 |        
|                                                                                                                                                                           | Write down of non-marketable investments                 |                                                |          | 34,402            |         |      |          | 1,749  |        
|                                                                                                                                                                           | Gain on sale of Pictos investment                        |                                                |          | (5,228            | )       |      |          |       |        
|                                                                                                                                                                           | Debt conversion costs                                    |                                                |          |                  |         |      |          | 10,435 |        
|                                                                                                                                                                           | Gain on extinguishment of debt                           |                                                |          | (42,021           | )       |      |          |       |        
|                                                                                                                                                                           | Reduction in allowance for losses on accounts receivable |                                                |          | (3,912            | )       |      |          | (2,769 | )      
|                                                                                                                                                                           | Inventory provisions                                     |                                                |          | 12,597            |         |      |          | 11,487 |        
|                                                                                                                                                                           | Other non-cash items, net                                |                                                |          | 11,457            |         |      |          | 8,330  |        
|                                                                                                                                                                           | Changes in assets and liabilities:                       |                                                |          |                   |         |      |          |        |        
|                                                                                                                                                                           |                                                          | Receivables                                    |          |                   | (22,410 | )    |          |        | 20,554  |  
|                                                                                                                                                                           |                                                          | Inventories                                    |          |                   | (16,238 | )    |          |        | 9,616   |  
|                                                                                                                                                                           |                                                          | Accounts payable                               |          |                   | (4,974  | )    |          |        | 26,913  |  
|                                                                                                                                                                           |                                                          | Accrued expenses and other current liabilities |          |                   | 1,157   |      |          |        | 16,790  |  
|                                                                                                                                                                           |                                                          | Other                                          |          |                   | 5,612   |      |          |        | (12,753 | )
|                                                                                                                                                                           |                                                          |                                                |          |                   |         |      |          |       
|Net cash provided by (used in) operating activities                                                                                                                        |                                                          |                                                | (19,017  | )                 |         |      | 25,441   |       
|                                                                                                                                                                           |                                                          |                                                |          |                   |         |      |          |       
|Cash flows from investing activities:                                                                                                                                      |                                                          |                                                |          |                   |         |      |          |       
|Advances to Skyworks                                                                                                                                                       |                                                          |                                                | (35,000  | )                 |         |      |         |       
|Repayment of Term Notes and advances by Skyworks                                                                                                                           |                                                          |                                                | 170,000  |                   |         |      |         |       
|Purchase of marketable securities                                                                                                                                          |                                                          |                                                | (73,511  | )                 |         |      | (228,545 | )     
|Sale of marketable securities                                                                                                                                              |                                                          |                                                | 132,900  |                   |         |      | 305,315  |       
|Capital expenditures                                                                                                                                                       |                                                          |                                                | (13,555  | )                 |         |      | (11,811  | )     
|Proceeds from sales of assets                                                                                                                                              |                                                          |                                                | 3,223    |                   |         |      | 71,677   |       
|Investments in and advances to businesses                                                                                                                                  |                                                          |                                                | (4,500   | )                 |         |      | (4,060   | )     
|Proceeds from sale of Pictos investment                                                                                                                                    |                                                          |                                                | 12,155   |                   |         |      |         |       
|Acquisition of business                                                                                                                                                    |                                                          |                                                | (6,796   | )                 |         |      |         |       
|                                                                                                                                                                           |                                                          |                                                |          |                   |         |      |          |       
|Net cash provided by investing activities                                                                                                                                  |                                                          |                                                | 184,916  |                   |         |      | 132,576  |       
|                                                                                                                                                                           |                                                          |                                                |          |                   |         |      |          |       
|Cash flows from financing activities:                                                                                                                                      |                                                          |                                                |          |                   |         |      |          |       
|Proceeds from exercise of stock options                                                                                                                                    |                                                          |                                                | 7,275    |                   |         |      | 14,935   |       
|Repurchase of convertible subordinated notes                                                                                                                               |                                                          |                                                | (56,378  | )                 |         |      |         |       
|                                                                                                                                                                           |                                                          |                                                |          |                   |         |      |          |       
|Net cash provided by (used in) financing activities                                                                                                                        |                                                          |                                                | (49,103  | )                 |         |      | 14,935   |       
|                                                                                                                                                                           |                                                          |                                                |          |                   |         |      |          |       
|Net cash used in discontinued operations                                                                                                                                   |                                                          |                                                | (202,971 | )                 |         |      | (216,264 | )     
|                                                                                                                                                                           |                                                          |                                                |          |                   |         |      |          |       
|Net decrease in cash and cash equivalents                                                                                                                                  |                                                          |                                                | (86,175  | )                 |         |      | (43,312  | )     
|Cash and cash equivalents at beginning of period                                                                                                                           |                                                          |                                                | 161,088  |                   |         |      | 173,008  |       
|                                                                                                                                                                           |                                                          |                                                |          |                   |         |      |          |       
|Cash and cash equivalents at end of period                                                                                                                                 |                                                          | $                                              | 74,913   |                   |         | $    | 129,696  |       
|                                                                                                                                                                           |                                                          |                                                |          |                   |         |      |          |       

See accompanying notes to consolidated condensed financial statements.

6



---



##### Table of Contents






CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)

1.     Basis of Presentation and Significant Accounting Policies

Conexant Systems, Inc. (Conexant or the Company) designs, develops and sells
semiconductor system solutions for broadband digital information and
entertainment networks in the home and small office environments. The Companys
expertise in mixed-signal processing allows it to deliver integrated systems
and semiconductor products which facilitate communications worldwide through
wireline voice and data communications networks and emerging cable, satellite
and fixed wireless broadband communications networks. The Company operates in
one segment.

On June 27, 2003, Conexant completed the distribution to Conexant shareholders
of all outstanding shares of Mindspeed Technologies, Inc. (Mindspeed), a wholly
owned subsidiary of Conexant to which Conexant contributed its internet
infrastructure business, including the stock of certain subsidiaries, and
certain other assets and liabilities, including approximately $100.0 million in
cash (hereinafter, the Mindspeed Spin). In the Mindspeed Spin, 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. Additionally, Conexant entered into a senior secured
revolving credit facility pursuant to which Mindspeed may borrow up to $50.0
million for working capital and general corporate purposes (see Note 11).
Mindspeed issued to Conexant a warrant to purchase 30 million shares of
Mindspeed common stock, representing approximately 20 percent of Mindspeeds
outstanding common stock on a fully diluted basis. The warrant is exercisable
for a period of ten years, commencing one year after the completion of the
Mindspeed Spin, at an exercise price of $3.408 per share (the fair market value
on the date of grant of the warrant). The warrant was assigned a fair value of
$89.0 million using the Black-Scholes option pricing model (assuming volatility
of 90%, a risk-free interest rate of 3.5%, and no dividend yield), and is
presented as a long-term asset on the accompanying consolidated condensed
balance sheet as of June 30, 2003.

On June 25, 2002, Conexant completed the distribution to Conexant shareholders
of outstanding shares of Washington Sub, Inc. (Washington), a wholly owned
subsidiary of Conexant to which Conexant contributed its wireless
communications business, other than certain assets and liabilities which
Conexant retained (together, the Spin-off Transaction). Immediately thereafter,
Washington merged with and into Alpha Industries, Inc. (Alpha), with Alpha the
surviving corporation (the Merger). As a result of the Spin-off Transaction and
the Merger, 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 the Merger, Alpha and its
subsidiaries purchased Conexants semiconductor assembly and test facility
located in Mexicali, Mexico and Conexants 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).

The operating results of the discontinued wireless communications business and
Mexicali Operations (through June 25, 2002) and the discontinued Mindspeed
Technologies business (through June 27, 2003), and the separation costs paid by
Conexant in the Mindspeed Spin, included in the accompanying consolidated
condensed statements of operations were as follows (in thousands):

|                                                       |  |              |         |              |  |             |          |             |  |   |          |   |  |   |          |  
|------------------------------------------------------ |  | ------------ | ------- | ------------ |  | ----------- | -------- | ----------- |  | - | -------- | - |  | - | -------- | -
|                                                       |  | Three months |         | Three months |  | Nine months |          | Nine months
|                                                       |  | ended        |         | ended        |  | ended       |          | ended      
|                                                       |  | June 30,     |         | June 30,     |  | June 30,    |          | June 30,   
|                                                       |  | 2003         |         | 2002         |  | 2003        |          | 2002       
|                                                       |  |              |         |              |  |             |          |            
|Net revenues                                           |  | $            | 20,153  |              |  | $           | 114,200  |             |  | $ | 58,719   |   |  | $ | 328,085  |  
|                                                       |  |              |         |              |  |             |          |             |  |   |          |   |  |   |          |  
|Loss before income taxes                               |  | $            | (52,095 | )            |  | $           | (258,175 | )           |  | $ | (155,231 | ) |  | $ | (583,809 | )
|Provision (benefit) for income taxes                   |  |              | 202     |              |  |             | (868     | )           |  |   | 462      |   |  |   | 3,692    |  
|Cumulative effect of change in accounting for goodwill |  |              |        |              |  |             |         |             |  |   | (573,184 | ) |  |   |         |  
|                                                       |  |              |         |              |  |             |          |             |  |   |          |   |  |   |          |  
|Loss from discontinued operations                      |  | $            | (52,297 | )            |  | $           | (257,307 | )           |  | $ | (728,877 | ) |  | $ | (587,501 | )
|                                                       |  |              |         |              |  |             |          |             |  |   |          |   |  |   |          |  

7



---



##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
(unaudited)

The components of assets and liabilities contributed to Mindspeed in the
Mindspeed Spin as of June 27, 2003 are as follows (in thousands):

|                        |                                    |   |         |         | 
|----------------------- | ---------------------------------- | - | ------- | ------- | 
|Current assets:         |                                    |   |         |        
|                        | Cash and cash equivalents          |   | $       | 101,469 | 
|                        | Receivables, net                   |   |         | 12,074  | 
|                        | Inventories                        |   |         | 5,025   | 
|                        | Other current assets               |   |         | 4,106   | 
|                        |                                    |   |         |         | 
|                        |                                    | $ | 122,674 |        
|                        |                                    |   |         |         | 
|Non-current assets:     |                                    |   |         |        
|                        | Property, plant and equipment, net |   | $       | 30,988  | 
|                        | Intangible assets, net             |   |         | 82,393  | 
|                        | Other assets                       |   |         | 1,975   | 
|                        |                                    |   |         |         | 
|                        |                                    | $ | 238,030 |        
|                        |                                    |   |         |         | 
|Current liabilities:    |                                    |   |         |        
|                        | Accounts payable                   |   | $       | 12,829  | 
|                        | Accrued compensation and benefits  |   |         | 7,806   | 
|                        | Other current liabilities          |   |         | 22,590  | 
|                        |                                    |   |         |         | 
|                        |                                    | $ | 43,225  |        
|                        |                                    |   |         |         | 
|Non-current liabilities |                                    | $ | 1,366   |        
|                        |                                    |   |         |         | 

The components of assets and liabilities of discontinued operations as of
September 30, 2002 are as follows (in thousands):

|                        |                                    |   |         |         | 
|----------------------- | ---------------------------------- | - | ------- | ------- | 
|Current assets:         |                                    |   |         |        
|                        | Cash and cash equivalents          |   | $       | 7,269   | 
|                        | Receivables, net                   |   |         | 12,568  | 
|                        | Inventories                        |   |         | 4,842   | 
|                        | Other current assets               |   |         | 5,313   | 
|                        |                                    |   |         |         | 
|                        |                                    | $ | 29,992  |        
|                        |                                    |   |         |         | 
|Non-current assets:     |                                    |   |         |        
|                        | Property, plant and equipment, net |   | $       | 42,854  | 
|                        | Intangible assets, net             |   |         | 143,632 | 
|                        | Goodwill                           |   |         | 568,900 | 
|                        | Other assets                       |   |         | 859     | 
|                        |                                    |   |         |         | 
|                        |                                    | $ | 756,245 |        
|                        |                                    |   |         |         | 
|Current liabilities:    |                                    |   |         |        
|                        | Accounts payable                   |   | $       | 18,689  | 
|                        | Accrued compensation and benefits  |   |         | 14,784  | 
|                        | Other current liabilities          |   |         | 31,949  | 
|                        |                                    |   |         |         | 
|                        |                                    | $ | 65,422  |        
|                        |                                    |   |         |         | 
|Non-current liabilities |                                    | $ | 1,366   |        
|                        |                                    |   |         |         | 

In the opinion of management, the accompanying consolidated condensed financial
statements contain all adjustments, consisting of adjustments of a normal
recurring nature, as well as the special charges, write-downs of non-marketable
investments, and gains on extinguishment of debt, necessary to present fairly
the Companys financial position, results of operations and cash flows. The
results of operations for interim periods are not necessarily indicative of the
results that may be expected for a full year. These statements should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Companys Annual Report on Form 10-K for the fiscal year ended
September 30, 2002.

Fiscal Periods For presentation purposes, references made to the periods
ended June 30, 2003 and 2002 relate to the actual fiscal 2003 third quarter
ended June 27, 2003 and the actual fiscal 2002 third quarter ended June 28,
2002, respectively.

Supplemental Cash Flow Information Cash paid for interest was $15.6 million
and $16.3 million for the nine months ended June 30, 2003 and 2002,
respectively. Income taxes paid, net of refunds received, for the nine months
ended June 30, 2003 and 2002 were $1.8 million and $(8.2) million,
respectively.

8



---



##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
(unaudited)

Income (Loss) Per Share Basic income (loss) per share is based on the
weighted-average number of shares of common stock outstanding during the
period. Diluted income (loss) per share also includes the effect of stock
options and other common stock equivalents outstanding during the period, and
assumes the conversion of the Companys convertible subordinated notes for the
period of time such notes were outstanding, if such stock options and
convertible notes are dilutive. Except for the amounts for stock options and
restricted stock for the three months ended June 30, 2003, the potential
dilutive effect of the common stock equivalents shown below was not included in
the computation of diluted earnings per share, as these securities were
antidilutive (weighted-average numbers of shares, in thousands):

|                                                |  |                    |       |                   |  |      |        |      |  |  |        |  |  |  |        | 
|----------------------------------------------- |  | ------------------ | ----- | ----------------- |  | ---- | ------ | ---- |  |  | ------ |  |  |  | ------ | 
|                                                |  | Three months ended |       | Nine months ended
|                                                |  | June 30,           |       | June 30,         
|                                                |  |                    |       |                  
|                                                |  | 2003               |       | 2002              |  | 2003 |        | 2002
|                                                |  |                    |       |                   |  |      |        |     
|Stock options (under the treasury stock method) |  |                    | 2,499 |                   |  |      | 1,133  |      |  |  | 370    |  |  |  | 5,883  | 
|4.25% Convertible Subordinated Notes due 2006   |  |                    | 5,962 |                   |  |      | 6,730  |      |  |  | 5,918  |  |  |  | 7,823  | 
|4% Convertible Subordinated Notes due 2007      |  |                    | 9,859 |                   |  |      | 11,607 |      |  |  | 10,902 |  |  |  | 11,607 | 
|Restricted stock                                |  |                    | 63    |                   |  |      | 185    |      |  |  | 81     |  |  |  | 211    | 

Change in Accounting Principle The Company adopted Statement of Financial
Accounting Standards (SFAS) No. 141, Business Combinations and SFAS No. 142,
Goodwill and Other Intangible Assets as of the beginning of fiscal 2003. SFAS
141 requires that all business combinations initiated after June 30, 2001 be
accounted for using the purchase method and provides new criteria for recording
intangible assets separately from goodwill. Upon adoption, the existing
goodwill and intangible assets were evaluated against the new criteria, which
resulted in certain intangible assets with a carrying value of $0.4 million
being subsumed into goodwill. SFAS 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets and requires that
goodwill and intangible assets that have indefinite useful lives no longer be
amortized into results of operations, but instead be tested at least annually
for impairment and written down when impaired. Upon adoption of SFAS 142, the
Company ceased amortizing goodwill against its results of operations.

During the second quarter of fiscal 2003, the Company completed the transition
impairment test of its goodwill (as of the beginning of fiscal 2003) required
by SFAS 142. The Company determined that it has a single reporting unit (as
defined in SFAS 142). For purposes of the impairment test, the fair value of
the reporting unit was determined considering both an income approach and a
market approach. Management determined that the recorded value of its goodwill
at the transition date was not impaired.

The following table shows the Companys net loss and net loss per share,
adjusted for the effect of the adoption of the non-amortization provisions of
SFAS 142 (in thousands, except per share amounts):

|                                                                                 |                       |   |                    |       |                   |   |          |       |      |   |          |       |   |   |          |       |  
|-------------------------------------------------------------------------------- | --------------------- | - | ------------------ | ----- | ----------------- | - | -------- | ----- | ---- | - | -------- | ----- | - | - | -------- | ----- | -
|                                                                                 |                       |   | Three months ended |       | Nine months ended
|                                                                                 |                       |   | June 30,           |       | June 30,         
|                                                                                 |                       |   |                    |       |                  
|                                                                                 |                       |   | 2003               |       | 2002              |   | 2003     |       | 2002
|                                                                                 |                       |   |                    |       |                   |   |          |       |     
|Net loss, as reported                                                            |                       | $ | (49,130            | )     |                   | $ | (299,399 | )     |      | $ | (742,527 | )     |   | $ | (704,591 | )    
|Amortization of goodwill                                                         |                       |   |                   |       |                   |   | 71,406   |       |      |   |         |       |   |   | 216,903  |      
|Amortization of assembled workforce previously
classified as an intangible asset |                       |   |                   |       |                   |   | 503      |       |      |   |         |       |   |   | 1,508    |      
|                                                                                 |                       |   |                    |       |                   |   |          |       |      |   |          |       |   |   |          |      
|Adjusted net loss                                                                |                       | $ | (49,130            | )     |                   | $ | (227,490 | )     |      | $ | (742,527 | )     |   | $ | (486,180 | )    
|                                                                                 |                       |   |                    |       |                   |   |          |       |      |   |          |       |   |   |          |      
|Loss per share, basic and diluted:                                               |                       |   |                    |       |                   |   |          |       |      |   |          |       |   |   |          |      
|                                                                                 | Net loss, as reported |   | $                  | (0.18 | )                 |   | $        | (1.15 | )    |   | $        | (2.78 | ) |   | $        | (2.74 | )
|                                                                                 | Adjusted net loss     |   | $                  | (0.18 | )                 |   | $        | (0.87 | )    |   | $        | (2.78 | ) |   | $        | (1.89 | )

Recent Accounting Standards SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, supersedes previous guidance on financial
accounting and reporting for the impairment or disposal of long-lived assets
and for segments of a business to be disposed. The Company adopted SFAS 144 as
of the beginning of fiscal 2003, with no significant impact on its financial
position or results of operations.

9



---



##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
(unaudited)

SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections rescinds SFAS 4, which
required gains and losses from extinguishment of debt to be aggregated and, if
material, classified as an extraordinary item, net of the related income tax
effect. The Company adopted SFAS 145 as of the beginning of fiscal 2003. The
adoption of SFAS 145 resulted in the reclassification of fiscal 2001 gains of
$11.7 million from extraordinary gain on extinguishment of debt to income from
continuing operations in the consolidated statements of operations.

In August 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS
146 requires that costs associated with exit or disposal activities be
recognized when they are incurred rather than at the date of a commitment to an
exit or disposal plan. The Company must apply SFAS 146 prospectively to exit or
disposal activities initiated after December 31, 2002. If the Company initiates
exit or disposal activities after that date, SFAS 146 will affect the timing of
the recognition of the related costs. The adoption of SFAS 146 had no
significant impact on the Companys financial position or results of
operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS 150
establishes new standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 is effective for financial instruments entered into or modified after May
31, 2003, and is effective for the Company for the quarter ending September 30,
2003. Restatement of previous accounting for applicable financial instruments
is not permitted. The Company does not expect adoption of SFAS 150 to have a
significant impact on its financial position or results of operations.

In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 requires increased
financial statement disclosures by a guarantor about its obligations under
certain guarantees it has issued. FIN 45 also requires that a guarantor
recognize a liability for the fair value of certain guarantees made after
December 31, 2002. The adoption of FIN 45 had no significant impact on the
Companys financial position or results of operations.

In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities. The Company must adopt FIN 46 in the fourth quarter of fiscal 2003
and does not expect such adoption to have a significant impact on its financial
position or results of operations.

Reclassifications Certain prior year amounts have been reclassified to
conform to the current period presentation.

2.     Acquisition

On May 8, 2003, the Company acquired the soft modem business of PCTEL, Inc.
(PCTEL), a provider of internet access products and wireless mobility software.
Consideration for the acquisition consisted of cash of $6.8 million, and a
commitment to pay additional cash totaling $4.0 million in November and
December 2003. The Company has also agreed to purchase copies of PCTELs
proprietary software for a total of $1.0 million, payable in quarterly
installments through June 30, 2004. In addition, the Company and PCTEL have
also entered into a cross-license agreement whereby the Company contributed to
PCTEL certain patents and patent applications and, in exchange, the Company
received a non-exclusive, worldwide license to incorporate certain PCTEL
technology into its products. The Company will pay royalties to PCTEL of up to
$8.0 million over a four-year period on the sale of certain licensed products,
with a maximum of $0.5 million per quarter, through June 30, 2007. The amounts
payable to PCTEL, at their present values, have been included in other current
or long-term liabilities in the accompanying consolidated condensed balance
sheet as of June 30, 2003.

The tangible assets of the acquired business totaled $2.5 million. Assumed
liabilities totaled $0.7 million. Identifiable intangible assets, principally
consisting of developed technology and customer-related intangibles, total

10



---



##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
(unaudited)

$3.1 million and are being amortized over estimated lives of five years. The
residual amount of $6.4 million is classified as goodwill, and is deductible
for income tax purposes.

The results of operations of the acquired business are included in the
consolidated condensed financial statements from the date of acquisition. The
pro forma effect of this acquisition is not material to the Companys results
of operations for fiscal 2003 or 2002.

3.     Supplemental Financial Statement Data

Short-term Investments
Short-term investments consist of the following (in thousands):

|                                                   |  |           |        |         |  |            |       |            |  |   |        |   |  |   |        | 
|-------------------------------------------------- |  | --------- | ------ | ------- |  | ---------- | ----- | ---------- |  | - | ------ | - |  | - | ------ | 
|                                                   |  |           |        |         |  | Gross      |       | Gross      |  |   |        |  
|                                                   |  |           |        |         |  | Unrealized |       | Unrealized |  |   |        |  
|                                                   |  | Amortized |        | Holding |  | Holding    |       | Fair      
|                                                   |  | Cost      |        | Gains   |  | Losses     |       | Value     
|                                                   |  |           |        |         |  |            |       |           
|June 30, 2003:                                     |  |           |        |         |  |            |       |            |  |   |        |   |  |   |        | 
|U.S. government agencies                           |  | $         | 9,014  |         |  | $          | 36    |            |  | $ |       |   |  | $ | 9,050  | 
|Foreign government securities                      |  |           | 4,573  |         |  |            | 32    |            |  |   |       |   |  |   | 4,605  | 
|Corporate debt securities                          |  |           | 26,653 |         |  |            | 119   |            |  |   |       |   |  |   | 26,772 | 
|Skyworks 15% convertible senior subordinated notes |  |           | 46,191 |         |  |            |      |            |  |   | (2,210 | ) |  |   | 43,981 | 
|Equity securities                                  |  |           | 2,320  |         |  |            | 1,868 |            |  |   |       |   |  |   | 4,188  | 
|                                                   |  |           |        |         |  |            |       |            |  |   |        |   |  |   |        | 
|                                                   |  | $         | 88,751 |         |  | $          | 2,055 |            |  | $ | (2,210 | ) |  | $ | 88,596 | 
|                                                   |  |           |        |         |  |            |       |            |  |   |        |   |  |   |        | 
|September 30, 2002:                                |  |           |        |         |  |            |       |            |  |   |        |   |  |   |        | 
|U.S. government agencies                           |  | $         | 24,686 |         |  | $          | 257   |            |  | $ |       |   |  | $ | 24,943 | 
|Foreign government securities                      |  |           | 8,446  |         |  |            | 102   |            |  |   |       |   |  |   | 8,548  | 
|Corporate debt securities                          |  |           | 65,493 |         |  |            | 517   |            |  |   | (35    | ) |  |   | 65,975 | 
|                                                   |  |           |        |         |  |            |       |            |  |   |        |   |  |   |        | 
|                                                   |  | $         | 98,625 |         |  | $          | 876   |            |  | $ | (35    | ) |  | $ | 99,466 | 
|                                                   |  |           |        |         |  |            |       |            |  |   |        |   |  |   |        | 

The Company accounts for the Skyworks 15% convertible senior subordinated notes
as available-for-sale securities carried at their fair value. Unrealized gains
or losses resulting from changes in the fair value of the underlying debt are
included in other comprehensive income. The right to convert the Skyworks 15%
convertible senior subordinated notes into shares of Skyworks common stock is,
for financial accounting purposes, an embedded derivative instrument. Changes
in the fair value of the Skyworks 15% convertible senior subordinated notes
resulting from changes in the value of the conversion right are included in
other income (expense), net each period.

Inventories
Inventories consist of the following (in thousands):

|                |  |          |        |               |  |   |        | 
|--------------- |  | -------- | ------ | ------------- |  | - | ------ | 
|                |  | June 30, |        | September 30,
|                |  | 2003     |        | 2002         
|                |  |          |        |              
|Raw materials   |  | $        |       |               |  | $ | 363    | 
|Work-in-process |  |          | 41,088 |               |  |   | 36,492 | 
|Finished goods  |  |          | 14,600 |               |  |   | 15,633 | 
|                |  |          |        |               |  |   |        | 
|                |  | $        | 55,688 |               |  | $ | 52,488 | 
|                |  |          |        |               |  |   |        | 

GoodwillDuring the first nine months of fiscal 2003, goodwill was adjusted as follows (in thousands):

|                                             |  |   |        | 
|-------------------------------------------- |  | - | ------ | 
|Goodwill, September 30, 2002                 |  | $ | 46,426 | 
|Assembled workforce reclassified to goodwill |  |   | 397    | 
|Settlement of iCompression escrow            |  |   | 3,600  | 
|Acquisition of PCTEL                         |  |   | 6,410  | 
|Other adjustments                            |  |   | 237    | 
|                                             |  |   |        | 
|Goodwill, June 30, 2003                      |  | $ | 57,070 | 
|                                             |  |   |        | 

11



---



##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
(unaudited)

Intangible Assets
Intangible assets consist of the following (in thousands):

|                        |  |               |        |                    |  |     |         |       |  |              |        |             |  |   |        |  |  |   |         |   |  |   |        | 
|----------------------- |  | ------------- | ------ | ------------------ |  | --- | ------- | ----- |  | ------------ | ------ | ----------- |  | - | ------ |  |  | - | ------- | - |  | - | ------ | 
|                        |  | June 30, 2003 |        | September 30, 2002
|                        |  |               |        |                   
|                        |  | Gross         |        | Accumulated        |  |     |         |       |  | Gross        |        | Accumulated |  |   |        | 
|                        |  | Asset         |        | Amortization       |  | Net |         | Asset |  | Amortization |        | Net        
|                        |  |               |        |                    |  |     |         |       |  |              |        |            
|Developed technology    |  | $             | 15,904 |                    |  | $   | (6,961  | )     |  | $            | 8,943  |             |  | $ | 19,413 |  |  | $ | (8,201  | ) |  | $ | 11,212 | 
|Customer base           |  |               | 2,050  |                    |  |     | (238    | )     |  |              | 1,812  |             |  |   | 590    |  |  |   | (49     | ) |  |   | 541    | 
|Assembled workforce     |  |               |       |                    |  |     |        |       |  |              |       |             |  |   | 993    |  |  |   | (596    | ) |  |   | 397    | 
|Other intangible assets |  |               | 8,036  |                    |  |     | (4,779  | )     |  |              | 3,257  |             |  |   | 3,298  |  |  |   | (1,204  | ) |  |   | 2,094  | 
|                        |  |               |        |                    |  |     |         |       |  |              |        |             |  |   |        |  |  |   |         |   |  |   |        | 
|                        |  | $             | 25,990 |                    |  | $   | (11,978 | )     |  | $            | 14,012 |             |  | $ | 24,294 |  |  | $ | (10,050 | ) |  | $ | 14,244 | 
|                        |  |               |        |                    |  |     |         |       |  |              |        |             |  |   |        |  |  |   |         |   |  |   |        | 

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

|                     |  |      |       |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |       | 
|-------------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- |  |  | - | ----- | 
|                     |  | 2003 |       | 2004 |  | 2005 |       | 2006 |  | 2007
|                     |  |      |       |      |  |      |       |      |  |     
|Amortization expense |  | $    | 3,439 |      |  | $    | 3,822 |      |  | $    | 2,625 |  |  | $ | 1,804 |  |  | $ | 1,805 | 

Mindspeed Warrant

The Company accounts for the Mindspeed warrant as a derivative instrument,
and changes in the fair value of the warrant will be included in other
income (expense), net each period, commencing with the fourth fiscal
quarter of 2003.

Other Assets

In connection with the Mindspeed Spin, the exercise price of the warrant
issued to Jazz to purchase approximately 2.9 million shares of the Companys
common stock was adjusted to $3.7624 per share.

Convertible Subordinated Notes

During the first nine months of fiscal 2003, the Company purchased $100.0
million principal amount of its 4% Convertible Subordinated Notes due 2007
at prevailing market prices, resulting in a net gain of $42.0 million.

In connection with the Mindspeed Spin and the adjustment mechanisms in the
notes, the conversion prices of the Companys 4% Convertible Subordinated Notes
and 4.25% Convertible Subordinated Notes were adjusted to $42.432 and $9.075,
respectively.

Common Stock

In February 2003, the Companys shareholders approved an amendment to the
Companys Restated Certificate of Incorporation to change the par value of
its common stock from $1.00 per share to $0.01 per share.

12



---



##### Table of Contents



CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
(unaudited)

Other Income (Expense), Net

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

|                                                                                                          |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                          |  | Three months ended |        | Nine months ended
|                                                                                                          |  | June 30,           |        | June 30,         
|                                                                                                          |  |                    |        |                  
|                                                                                                          |  | 2003               |        | 2002              |  | 2003 |        | 2002
|                                                                                                          |  |                    |        |                   |  |      |        |     
|Investment and interest income                                                                            |  | $                  | 3,585  |                   |  | $    | 1,406  |      |  | $ | 13,134  |   |  | $ | 7,557   |  
|Change in fair value of the conversion
right under the Skyworks 15% convertible
senior subordinated notes |  |                    | (76    | )                 |  |      |       |      |  |   | (1,832  | ) |  |   |        |  
|Interest expense                                                                                          |  |                    | (6,254 | )                 |  |      | (7,698 | )    |  |   | (21,424 | ) |  |   | (23,584 | )
|Write-down of non-marketable investments                                                                  |  |                    |       |                   |  |      |       |      |  |   | (34,402 | ) |  |   | (7,675  | )
|Gain on sales of investments                                                                              |  |                    | 5,228  |                   |  |      | 506    |      |  |   | 5,228   |   |  |   | 3,955   |  
|Other                                                                                                     |  |                    | (1,939 | )                 |  |      | 228    |      |  |   | (1,489  | ) |  |   | (749    | )
|                                                                                                          |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  
|                                                                                                          |  | $                  | 544    |                   |  | $    | (5,558 | )    |  | $ | (40,785 | ) |  | $ | (20,496 | )
|                                                                                                          |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  

During the first nine months of fiscal 2003 and 2002, the Company recorded
charges of $34.4 million and $7.7 million, respectively, to write down the
carrying value of certain non-marketable investments. The investments consist
of equity interests in early stage technology companies which the Company
accounts for under the cost method. The write-downs, reflecting declines in the
fair values of these investments which management determined were other than
temporary, reduced the carrying values of the investments to their estimated
fair values. The estimated fair values were determined by management based upon
financial and other information available at the time of the write-downs,
including current and projected business prospects for the subject companies.

In June 2003, the Company sold its investment in Pictos Technologies (Pictos)
as part of ESS Technologys purchase of Pictos and received $12.2 million in
cash, with an additional $1.5 million to be held in escrow for a period of
twelve months to indemnify the buyer for any damages. A gain of $5.2 million
was recognized on the sale. In addition, the Company accrued $2.0 million for
non-cancelable commitments related to this transaction for losses to complete
the production of certain inventory items and the rendering of future
engineering services.

Stock-Based Compensation

As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company accounts for stock-based compensation under Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Under APB 25, the Company generally recognizes no compensation
expense with respect to stock option awards. Had compensation cost for stock
option awards been determined based on the fair value of each award at its
grant date, consistent with the provisions of SFAS 123, the Companys pro forma
loss from continuing operations and pro forma loss from continuing operations
per share would have been as follows (in thousands, except per share amounts):

|                                                    |  |                    |   |                   |   |      |   |        |   |   |   |        |   |   |   |        
|--------------------------------------------------- |  | ------------------ | - | ----------------- | - | ---- | - | ------ | - | - | - | ------ | - | - | - | -------
|                                                    |  | Three months ended |   | Nine months ended
|                                                    |  | June 30,           |   | June 30,         
|                                                    |  |                    |   |                  
|                                                    |  | 2003               |   | 2002              |   | 2003 |   | 2002  
|                                                    |  |                    |   |                   |   |      |   |       
|Pro forma loss from continuing operations           |  | $                  | ( | 8,349             | ) | $    | ( | 88,112 | ) | $ | ( | 59,185 | ) | $ | ( | 198,520
|                                                    |  |                    |   |                   |   |      |   |        |   |   |   |        |   |   |   |        
|Pro forma loss from continuing operations
per share |  | $                  |   | (0.03             | ) | $    |   | (0.34  | ) | $ |   | (0.22  | ) | $ |   | (0.77  
|                                                    |  |                    |   |                   |   |      |   |        |   |   |   |        |   |   |   |        

4. Skyworks Notes

As of September 30, 2002, the Company held notes receivable from Skyworks with
an aggregate principal amount of $180.0 million, including promissory notes for
$150.0 million guaranteed by Skyworks and certain Skyworks subsidiaries and
secured by substantially all of the assets of Skyworks (the Term Notes) and
$30.0 million outstanding under the $100.0 million credit facility which the
Company had made available to Skyworks. In November 2002, the Company
restructured the financing agreements with Skyworks. Skyworks repaid $105.0
million of the principal amount and all accrued interest owed to the Company
under the Term Notes and the remaining principal amount of the Term Notes was
exchanged for $45.0 million principal amount of the Skyworks 15% convertible
senior subordinated notes with a maturity date of June 30, 2005. Skyworks also
repaid all amounts

13



---



##### Table of Contents



CONEXANT SYSTEMS, INC.NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
(unaudited)

outstanding under the credit facility, the credit facility was cancelled and
the Company released all security interests in Skyworks assets
and properties.

Skyworks may redeem the 15% convertible senior subordinated notes at any time
after May 12, 2004, subject to a redemption premium of 3% of the outstanding
principal amount. The Company may, at its option, convert the outstanding
principal amount of the 15% convertible senior subordinated notes into shares
of Skyworks common stock based upon the conversion price (initially $7.87 per
share, subject to adjustment under certain circumstances). At maturity,
Skyworks must pay the outstanding principal amount by delivery of a number of
shares of its common stock based upon the conversion price. Skyworks has
granted the Company certain registration rights relating to the 15% convertible
senior subordinated notes and the shares of Skyworks common stock underlying
the 15% convertible senior subordinated notes.

As of June 30, 2003, the 15% convertible senior subordinated notes are carried
at their fair value of $44.0 million (including the $0.3 million fair value of
the related conversion right) and are included in short-term investments in the
accompanying consolidated balance sheet because the Company has the ability and
intent to liquidate the 15% convertible senior subordinated notes or shares
underlying the notes as needed to meet its liquidity requirements.

5. Contingent Liabilities

Certain claims have been asserted against the Company, including claims
alleging the use of the intellectual property rights of others in certain of
the Companys products. The resolution of these matters may entail the
negotiation of a license agreement, a settlement, or the resolution of such
claims through arbitration or litigation. In connection with its spin-off from
Rockwell International Corporation, now named Rockwell Automation, Inc.
(Rockwell), Conexant assumed responsibility for all contingent liabilities and
current and future litigation (including environmental and intellectual
property proceedings) against Rockwell or its subsidiaries in respect of the
semiconductor systems business of Rockwell.

The outcome of litigation cannot be predicted with certainty and some lawsuits,
claims or proceedings may be disposed of unfavorably to the Company. Many
intellectual property disputes have a risk of injunctive relief and there can
be no assurance that a license will be granted. Injunctive relief could have a
material adverse effect on the financial condition or results of operations of
the Company. Based on its evaluation of matters which are pending or asserted
and taking into account the Companys reserves for such matters, management
believes the disposition of such matters will not have a material adverse
effect on the financial condition or results of operations of the Company.

6. Comprehensive Loss

Comprehensive loss is as follows (in thousands):

|                                   |                                                                                        |                                   |         |                    |         |                   |          |       |          |      |          |        |          |   |          |        |          |  
|---------------------------------- | -------------------------------------------------------------------------------------- | --------------------------------- | ------- | ------------------ | ------- | ----------------- | -------- | ----- | -------- | ---- | -------- | ------ | -------- | - | -------- | ------ | -------- | -
|                                   |                                                                                        |                                   |         | Three months ended |         | Nine months ended
|                                   |                                                                                        |                                   |         | June 30,           |         | June 30,         
|                                   |                                                                                        |                                   |         |                    |         |                  
|                                   |                                                                                        |                                   |         | 2003               |         | 2002              |          | 2003  |          | 2002
|                                   |                                                                                        |                                   |         |                    |         |                   |          |       |          |     
|Net loss                           |                                                                                        | $                                 | (49,130 | )                  |         | $                 | (299,399 | )     |          | $    | (742,527 | )      |          | $ | (704,591 | )     
|Other comprehensive income (loss): |                                                                                        |                                   |         |                    |         |                   |          |       |          |      |          |        |          |   |          |       
|                                   | Foreign currency translation adjustments                                               |                                   |         | 700                |         |                   |          | 3,585 |          |      |          | 1,327  |          |   |          | (4,865 | )       
|                                   | Reclassification adjustment-accumulated
translation adjustment-discontinued operations |                                   |         | 17,617             |         |                   |          |      |          |      |          | 17,713 |          |   |          |       |         
|                                   | Change in unrealized gains (losses) on available
for-sale securities                   |                                   |         | 934                |         |                   |          | 614   |          |      |          | 1,537  |          |   |          | (2,252 | )       
|                                   | Change in unrealized gains on forward exchange
contracts                               |                                   |         |                   |         |                   |          |      |          |      |          |       |          |   |          | 43     |         
|                                   | Minimum pension liability adjustments                                                  |                                   |         | (213               | )       |                   |          |      |          |      |          | 1,382  |          |   |          |       |         
|                                   | Effect of income taxes                                                                 |                                   |         |                   |         |                   |          | (235  | )        |      |          |       |          |   |          | 1,016  |         
|                                   |                                                                                        |                                   |         |                    |         |                   |          |       |          |      |          |        |          |   |          |       
|                                   |                                                                                        | Other comprehensive income (loss) |         |                    | 19,038  |                   |          |       | 3,964    |      |          |        | 21,959   |   |          |        | (6,058   | )
|                                   |                                                                                        |                                   |         |                    |         |                   |          |       |          |      |          |        |          |   |          |       
|                                   |                                                                                        | Comprehensive loss                |         | $                  | (30,092 | )                 |          | $     | (295,435 | )    |          | $      | (720,568 | ) |          | $      | (710,649 | )
|                                   |                                                                                        |                                   |         |                    |         |                   |          |       |          |      |          |        |          |   |          |       

14



---



##### Table of Contents



CONEXANT SYSTEMS, INC.NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (continued)
(unaudited)

The components of accumulated other comprehensive loss are as follows (in thousands):

|                                                              |                                      |   |          |        |               |   |         |         |  
|------------------------------------------------------------- | ------------------------------------ | - | -------- | ------ | ------------- | - | ------- | ------- | -
|                                                              |                                      |   | June 30, |        | September 30,
|                                                              |                                      |   | 2003     |        | 2002         
|                                                              |                                      |   |          |        |              
|Foreign currency translation adjustments                      |                                      | $ | (3,907   | )      |               | $ | (22,947 | )      
|Unrealized gains on available-for-sale securities, net of tax |                                      |   | 2,056    |        |               |   | 519     |        
|Minimum pension liability adjustments                         |                                      |   | (4,267   | )      |               |   | (5,649  | )      
|                                                              |                                      |   |          |        |               |   |         |        
|                                                              | Accumulated other comprehensive loss |   | $        | (6,118 | )             |   | $       | (28,077 | )
|                                                              |                                      |   |          |        |               |   |         |        

7. Special Charges

Special charges consist of the following (in thousands):

|                      |  |                    |       |                   |  |      |        |      |  |   |        |  |  |   |        | 
|--------------------- |  | ------------------ | ----- | ----------------- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|                      |  | Three months ended |       | Nine months ended
|                      |  | June 30,           |       | June 30,         
|                      |  |                    |       |                  
|                      |  | 2003               |       | 2002              |  | 2003 |        | 2002
|                      |  |                    |       |                   |  |      |        |     
|Asset impairments     |  | $                  | 5,611 |                   |  | $    | 523    |      |  | $ | 8,092  |  |  | $ | 13,523 | 
|Restructuring         |  |                    |      |                   |  |      | 13,778 |      |  |   | 1,904  |  |  |   | 16,098 | 
|Separation costs      |  |                    |      |                   |  |      | 401    |      |  |   |       |  |  |   | 546    | 
|Other special charges |  |                    | 915   |                   |  |      |       |      |  |   | 3,589  |  |  |   |       | 
|                      |  |                    |       |                   |  |      |        |      |  |   |        |  |  |   |        | 
|                      |  | $                  | 6,526 |                   |  | $    | 14,702 |      |  | $ | 13,585 |  |  | $ | 30,167 | 
|                      |  |                    |       |                   |  |      |        |      |  |   |        |  |  |   |        | 

Asset Impairments

During the first nine months of fiscal 2003, the Company recorded impairment
charges of $2.5 million, related to leasehold improvements associated with
properties no longer occupied by the Company and other assets that management
determined to abandon or scrap.

In June 2003, the Company reached an agreement to sell certain manufacturing
assets to Jazz Semiconductor for $1.0 million. A $4.8 million impairment loss
on these assets held for sale was recognized in the quarter ended June 30,
2003. The assets held for sale total $1.0 million as of June 30, 2003 and are
included in property, plant and equipment on the accompanying consolidated
condensed balance sheet at June 30, 2003. The asset sale is expected to be
completed in the fourth fiscal quarter of 2003.

In the first half of fiscal 2002, the Company recorded an impairment charge of
$13.0 million to write down the carrying value (approximately $22.0 million) of
the goodwill related to its digital imaging business. The impairment charge
resulted from the Companys decision to exit the digital imaging business.
Management evaluated the recoverability of the digital imaging business assets
to determine if their value was impaired. The amount of the impairment charge
was determined by comparing the assets estimated fair values, less costs to
sell, to their carrying values. The estimated fair values were determined by
management based upon all available information on the proceeds expected to
result from the disposition of the assets. Management believes the assumptions
used in estimating the fair values were reasonable and the estimated fair
values approximated the amounts that would be realized upon the ultimate
disposition of the related assets. The write-down established a new cost basis
for the impaired assets. The Company completed the planned divestiture of its
digital imaging business in July 2002.

Restructuring Charges

In fiscal 2001 and 2002, the Company implemented a number of cost reduction
initiatives to improve its operating cost structure. The cost reduction
initiatives included workforce reductions, temporary shutdowns of the Companys
manufacturing facilities, significant reductions in capital spending, the
closure or consolidation of certain facilities and salary reductions for the
senior management team until the Company returned to profitability. The costs
and expenses associated with the restructuring activities are included in
special charges in the accompanying consolidated statements of operations.

15



---



##### Table of Contents



CONEXANT SYSTEMS, INC.NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (continued)
(unaudited)

2001 Global Restructuring Plan During the second quarter of fiscal 2001, the
Company announced certain expense reduction initiatives and a broad reduction
in workforce affecting all areas of the Company and reducing the Companys
headcount by approximately 850 employees. These actions were the result of a
comprehensive reassessment of the Companys operations and business activities
in order to focus investment and resources in areas that best support the
Companys strategic growth drivers. As part of the reassessment, the Company
determined that it would explore alternatives to dispose of its digital imaging
business and would also exit its board-level sub-assembly module business. The
Company completed these restructuring actions in fiscal 2002.

The Company terminated approximately 775 employees (including approximately 125
employees in fiscal 2002), with charges for the workforce reduction aggregating
$8.3 million (including $2.6 million in fiscal 2002) based upon estimates of
the cost of severance benefits for the affected employees, including
approximately 530 employees in the Companys manufacturing operations. In
addition, the Company recorded restructuring charges of $5.8 million (including
$0.2 million in fiscal 2002) for costs associated with the consolidation of
certain facilities and lease cancellation and related costs. In fiscal 2002,
the Company reversed $1.6 million of excess lease costs accrued in fiscal 2001
as a result of a favorable resolution upon the termination of the related
lease, and in fiscal 2003, the Company reversed $1.5 million of excess
severance and facility accruals as a result of favorable completion of the
activities. At June 30, 2003, no restructuring liability remains.

Activity and liability balances related to the 2001 Global Restructuring Plan
through June 30, 2003 are as follows (in thousands):

|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|----------------------------------------- |  | ---------- | ------ | --------- |  | ----- | ------ | - |  | - | ------ | -
|                                          |  | Workforce  |        | Facility  |  |       |        |  
|                                          |  | reductions |        | and other |  | Total
|                                          |  |            |        |           |  |      
|Charged to costs and expenses             |  | $          | 5,666  |           |  | $     | 5,584  |   |  | $ | 11,250 |  
|Cash payments                             |  |            | (3,141 | )         |  |       | (223   | ) |  |   | (3,364 | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, September 30, 2001 |  |            | 2,525  |           |  |       | 5,361  |   |  |   | 7,886  |  
|Charged to costs and expenses             |  |            | 2,616  |           |  |       | 172    |   |  |   | 2,788  |  
|Expense reversal                          |  |            |       |           |  |       | (1,646 | ) |  |   | (1,646 | )
|Cash payments                             |  |            | (3,397 | )         |  |       | (2,307 | ) |  |   | (5,704 | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring
balance, September 30, 2002 |  |            | 1,744  |           |  |       | 1,580  |   |  |   | 3,324  |  
|Expense reversal                          |  |            | (994   | )         |  |       | (488   | ) |  |   | (1,482 | )
|Cash payments                             |  |            | (750   | )         |  |       | (1,092 | ) |  |   | (1,842 | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, June 30, 2003      |  | $          |       |           |  | $     |       |   |  | $ |       |  
|                                          |  |            |        |           |  |       |        |   |  |   |        |  

Strategic Manufacturing
Restructuring Plan During the third quarter of fiscal
2001, the Company realigned its manufacturing and procurement strategy to
accelerate its transition to a fabless CMOS business model. As part of the
manufacturing realignment, the Company reduced its workforce by an additional
302 employees (including approximately 220 employees in manufacturing
operations) and recorded charges aggregating $5.6 million based upon estimates
of the cost of severance benefits for the affected employees. These actions
were completed in the fourth quarter of fiscal 2001, and cash payments for the
workforce reductions were completed by September 30, 2002. At June 30, 2003, no
restructuring liability remains.

2002 Corporate and Manufacturing
Restructuring Plan During fiscal 2002, the
Company initiated a further reduction of its workforce throughout its
operations primarily as a result of the divestiture of its Newport Beach wafer
fabrication operations and the Spin-off Transaction. In connection with the
fiscal 2002 corporate and manufacturing restructuring actions, the Company
terminated approximately 120 employees and recorded charges aggregating $2.4
million based upon estimates of the cost of severance benefits for the affected
employees. The Company completed these actions in fiscal 2002. In addition, the
Company recorded restructuring charges of $12.5 million for costs associated
with the consolidation of certain facilities and commitments under license
obligations that management determined would not be used in the future.

As part of the 2002 Corporate and Manufacturing Restructuring Plan, during the
first quarter of fiscal 2003, the Company initiated a further workforce
reduction affecting 58 employees and recorded additional charges of $1.9

16



---



##### Table of Contents



CONEXANT SYSTEMS, INC.NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (continued)
(unaudited)

million based upon estimates of the cost of severance benefits for the affected
employees. During the third quarter of fiscal 2003, the Company revised its
estimate of liabilities for severance benefits and facility costs due to
unfavorable sublease experience to date, and charged an additional $1.5 million
to restructuring.

Activity and liability balances related to the 2002 Corporate and Manufacturing
Restructuring Plan through June 30,
2003 are as follows (in thousands):

|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|----------------------------------------- |  | ---------- | ------ | --------- |  | ----- | ------ | - |  | - | ------ | -
|                                          |  | Workforce  |        | Facility  |  |       |        |  
|                                          |  | reductions |        | and other |  | Total
|                                          |  |            |        |           |  |      
|Charged to costs and expenses             |  | $          | 2,437  |           |  | $     | 12,519 |   |  | $ | 14,956 |  
|Cash payments                             |  |            | (1,664 | )         |  |       | (431   | ) |  |   | (2,095 | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, September 30, 2002 |  |            | 773    |           |  |       | 12,088 |   |  |   | 12,861 |  
|Charged to costs and expenses             |  |            | 2,898  |           |  |       | 488    |   |  |   | 3,386  |  
|Cash payments                             |  |            | (2,968 | )         |  |       | (2,976 | ) |  |   | (5,944 | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, June 30, 2003      |  | $          | 703    |           |  | $     | 9,600  |   |  | $ | 10,303 |  
|                                          |  |            |        |           |  |       |        |   |  |   |        |  

Through June 30, 2003, the Company has paid an aggregate of $24.6 million in
connection with its fiscal 2001 and 2002 restructuring plans and has a
remaining accrued restructuring balance aggregating $10.3 million. The Company
expects to pay a majority of the amounts accrued for the workforce reductions
during the remainder of fiscal 2003 and expects to pay the obligations for the
non-cancelable lease and other commitments over their respective terms, which
principally expire through fiscal 2005. Cash payments to complete the
restructuring actions will be funded from available cash reserves and funds
from product sales, and are not expected to significantly impact the Companys
liquidity.

Separation Costs

Separation costs for the first nine months of fiscal 2002 consist of costs
related to the Companys divestiture of its Newport Beach wafer fabrication
operations.

Other Special Charges

Other special charges for fiscal 2003 principally consist of a $2.7 million
loss on the sale of certain semiconductor test equipment.

8. Sales of Assets

In December 2002, the Company sold certain semiconductor test equipment for net
proceeds of $1.0 million and recognized a loss of $2.7 million.

In December 2001, the Company sold two buildings for net proceeds of $19.3
million. A $2.4 million gain arising from the sale of one building was
recognized upon completion of the transaction. The Company will continue to
occupy the second building under a 15-year lease. Consequently, the $7.9
million gain arising from the sale of the leased-back building has been
deferred and will be recognized ratably over the lease term.

9. Segment Information

The Company operates and tracks its results in one segment which designs,
develops and sells semiconductor system solutions that connect personal
communications access products, such as set-top boxes, residential gateways,
personal computers (PCs) and game consoles to voice, video and data services
over broadband connections, including asynchronous digital subscriber line,
cable and direct broadcast satellite. It also includes the Companys foundation
dial-up access portfolio, including PC data and fax modems, and its broadcast
video encoder and decoder product family.

17



---



##### Table of Contents



CONEXANT SYSTEMS, INC.NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (continued)
(unaudited)

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

|                               |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 
|------------------------------ |  | ------------------ | ------- | ----------------- |  | ---- | ------- | ---- |  | - | ------- |  |  | - | ------- | 
|                               |  | Three months ended |         | Nine months ended
|                               |  | June 30,           |         | June 30,         
|                               |  |                    |         |                  
|                               |  | 2003               |         | 2002              |  | 2003 |         | 2002
|                               |  |                    |         |                   |  |      |         |     
|Americas                       |  | $                  | 15,565  |                   |  | $    | 24,507  |      |  | $ | 50,593  |  |  | $ | 63,474  | 
|Asia-Pacific                   |  |                    | 125,606 |                   |  |      | 97,528  |      |  |   | 352,581 |  |  |   | 278,685 | 
|Europe, Middle
East and Africa |  |                    | 9,779   |                   |  |      | 9,964   |      |  |   | 32,100  |  |  |   | 46,505  | 
|                               |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 
|                               |  | $                  | 150,950 |                   |  | $    | 131,999 |      |  | $ | 435,274 |  |  | $ | 388,664 | 
|                               |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 

The Company believes a substantial portion of the products sold to original
equipment manufacturers (OEMs) and third-party manufacturing service providers
in the Asia-Pacific region are ultimately shipped to end-markets in the
Americas and Europe. For the nine months ended June 30, 2003, two customers
(both foreign distributors) accounted for 22% of net revenues and for the nine
months ended June 30, 2002, one customer (a foreign distributor) accounted for
10% of net revenues. No other customer accounted for 10% or more of the
Companys net revenues for the nine months ended June 30, 2003 or 2002.

10. Guarantees

The Company has made guarantees and indemnities, under which it may be required
to make payments to a guaranteed or indemnified party, in relation to certain
transactions. In connection with the Companys spin-off from Rockwell, the
Company assumed responsibility for all contingent liabilities and then-current
and future litigation (including environmental and intellectual property
proceedings) against Rockwell or its subsidiaries in respect of the operations
of the semiconductor systems business of Rockwell. In connection with the
Companys contribution of certain of its manufacturing operations to Jazz
Semiconductor, Inc. (Jazz), the Company agreed to indemnify Jazz for certain
environmental matters and other customary divestiture-related matters. In
connection with the sales of its products, the Company provides intellectual
property indemnities to its customers. In connection with certain facility
leases, the Company has indemnified its lessors for certain claims arising from
the facility or the lease. The Company indemnifies its directors and officers
to the maximum extent permitted under the laws of the State of Delaware. The
duration of the guarantees and indemnities varies, and in many cases is
indefinite. The guarantees and indemnities to customers in connection with
product sales generally are subject to limits based upon the amount of the
related product sales. The majority of other guarantees and indemnities do not
provide for any limitation of the maximum potential future payments the Company
could be obligated to make. The Company has not recorded any liability for
these guarantees and indemnities in the accompanying consolidated balance
sheets. Product warranty costs are not significant.

11. Mindspeed Credit Facility

In connection with the Mindspeed Spin, the Company entered into a senior
secured revolving credit facility pursuant to which Mindspeed may borrow up to
$50.0 million for working capital and general corporate purposes. Mindspeed may
borrow under the credit facility only to restore its cash balance to $25.0
million. Borrowings accrue interest at 10% per annum, payable at maturity, and
are collateralized by substantially all the assets of Mindspeed. The credit
facility expires on June 29, 2007. As of June 30, 2003, no amounts were
outstanding under the credit facility.

In connection with the credit facility, Mindspeed issued to the Company
warrants to purchase up to approximately 8.3 million shares of Mindspeed common
stock. The number of shares that may be acquired under the warrants will depend
on the level of borrowings under the credit facility, increasing pro rata as
the principal balance of Mindspeeds borrowings increases. The warrants will
be exercisable for a period of ten years after the Mindspeed Spin at a price per
share equal to the fair market value of a share of Mindspeed common stock at
the time of issuance of the warrants or at the time of the borrowing that
entitles the Company to acquire shares thereunder, whichever is lower.

18



---



##### Table of Contents






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

This information should be read in conjunction with our unaudited consolidated
condensed financial statements and the notes thereto included in this Quarterly
Report, and our audited consolidated financial statements and notes thereto and
Managements Discussion and Analysis of Financial Condition and Results of
Operations contained in our Annual Report on Form 10-K for the fiscal year
ended September 30, 2002.

Overview

Except where otherwise noted, this discussion of our financial condition and
results of operations represents our continuing operations, excluding our
discontinued wireless communications business and Mexicali Operations which we
spun off in June 2002, and our discontinued Mindspeed Technologies business
which we spun off in June 2003. See Note 1 of Notes to Consolidated Condensed
Financial Statements for further information on these transactions.

We design, develop and sell semiconductor system solutions for broadband
digital information and entertainment networks in home and small office
environments worldwide. Our expertise in mixed-signal processing allows us to
deliver semiconductor devices and integrated systems which connect personal
communications access products, such as set-top boxes, residential gateways,
personal computers (PCs) and game consoles, to broadband voice, video and data
services over wireline communications networks, including asynchronous digital
subscriber line (ADSL), cable and ethernet, over wireless local area networks
and over direct broadcast satellite, terrestrial and fixed wireless systems. Our dial-up
access products include a broad portfolio of modem chipsets and
software for desktop and notebook PC applications as well as embedded equipment
applications including fax machines, multifunction peripherals, point-of-sale
terminals, set-top boxes, gaming consoles and Internet terminals. Our video
processing solutions include a variety of broadcast video decoder and encoder
devices that enable the capture, display, storage and playback of video and
audio in PCs, set-top boxes, gaming consoles, personal video recorders and DVD
applications. We operate in one business segment.

We market and sell our semiconductor products and system solutions directly to
leading original equipment manufacturers (OEMs) of communication electronics
products, and indirectly through electronic components distributors. We also
sell our products to third-party electronic manufacturing service providers,
who manufacture products incorporating our semiconductor products for OEMs.
Sales to distributors accounted for approximately 40% of net revenues in the
first nine months of fiscal 2003. Two customers (both foreign distributors)
accounted for 22% of our net revenues in the first nine months of fiscal 2003.
One of these distributors, who accounted for approximately 10% of net revenues,
supplies product primarily to Sony. No other customer accounted for 10% or more
of our net revenues for the period. Our top 20 customers accounted for
approximately 73% of net revenues for the first nine months of fiscal 2003.
Revenues derived from customers located in the Americas, Europe and the
Asia-Pacific region were 12%, 7% and 81%, respectively, of our net revenues for
the first nine months of fiscal 2003. We believe a substantial 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.

Results of Operations

Net Revenues

|              |  |                    |       |             |  |             |       |            |  |           |       |  |  |  |   |   |  |  |    |  
|------------- |  | ------------------ | ----- | ----------- |  | ----------- | ----- | ---------- |  | --------- | ----- |  |  |  | - | - |  |  | -- | -
|              |  | Three months ended |       |             |  |             |       |            |  |          
|              |  |                    |       | Change from |  | Change from
|              |  | June 30,           |       | March 31,   |  | June 30,    |       | March 2003 |  | June 2002
|(in millions) |  | 2003               |       | 2003        |  | 2002        |       | Quarter    |  | Quarter  
|              |  |                    |       |             |  |             |       |            |  |          
|Net revenues  |  | $                  | 151.0 |             |  | $           | 140.1 |            |  | $         | 132.0 |  |  |  | 8 | % |  |  | 14 | %

|             |  |                            |       |      |  |        |       |  |  |  |    |  
|------------ |  | -------------------------- | ----- | ---- |  | ------ | ----- |  |  |  | -- | -
|             |  | Nine months ended June 30, |       |      |  |       
|             |  |                            |       |      |  |       
|             |  | 2003                       |       | 2002 |  | Change
|             |  |                            |       |      |  |       
|Net revenues |  | $                          | 435.3 |      |  | $      | 388.7 |  |  |  | 12 | %

19



---



##### Table of Contents



We recognize revenues from product sales upon shipment and transfer of title,
in accordance with the shipping terms specified in the arrangement with the
customer. Revenue recognition is deferred in all instances where the earnings
process is incomplete. We sell a portion of our products to electronic
component distributors under agreements allowing for a right to return unsold
products. We defer the recognition of revenue on all sales to these
distributors until the products are sold by the distributors to a third party.
We record a reserve for sales returns and allowances for other customers based
on historical experience or specific identification of an event necessitating a
reserve. Development revenue is recognized when services are performed and was
not significant for any of the periods presented.

Net revenues for the third quarter of fiscal 2003 increased 14% over the
comparable period of fiscal 2002, while net revenues for the first nine months
of fiscal 2003 increased 12% over the comparable period of fiscal 2002. The
increases principally reflect increased unit shipments of our ADSL modem
solutions, and our communications and media processing solutions despite lower
average selling prices on these products. In addition, revenues from sales
of satellite set-top boxes have increased 70% on a comparable three month
period and 123% on a comparable nine month period.

Net revenues for the third quarter of fiscal 2003 increased 8% compared to the
immediately preceding quarter. We experienced record unit shipments of ADSL
modem solutions, and we experienced the emergence of Sony as a major customer
as they incorporate our products into their game console and personal computer
products.

Gross Margin

|                        |  |                    |      |             |  |             |      |            |  |           |      |   |  |  |   |   |  |  |    |  
|----------------------- |  | ------------------ | ---- | ----------- |  | ----------- | ---- | ---------- |  | --------- | ---- | - |  |  | - | - |  |  | -- | -
|                        |  | Three months ended |      |             |  |             |      |            |  |          
|                        |  |                    |      | Change from |  | Change from
|                        |  | June 30,           |      | March 31,   |  | June 30,    |      | March 2003 |  | June 2002
|(in millions)           |  | 2003               |      | 2003        |  | 2002        |      | Quarter    |  | Quarter  
|                        |  |                    |      |             |  |             |      |            |  |          
|Gross margin            |  | $                  | 65.0 |             |  | $           | 62.0 |            |  | $         | 57.8 |   |  |  | 5 | % |  |  | 12 | %
|Percent of net revenues |  |                    | 43   | %           |  |             | 44   | %          |  |           | 44   | % |  |  |   |   |  |  |    |  

|                        |  |                            |       |      |  |        |       |   |  |  |    |  
|----------------------- |  | -------------------------- | ----- | ---- |  | ------ | ----- | - |  |  | -- | -
|                        |  | Nine months ended June 30, |       |      |  |       
|                        |  |                            |       |      |  |       
|                        |  | 2003                       |       | 2002 |  | Change
|                        |  |                            |       |      |  |       
|Gross margin            |  | $                          | 189.7 |      |  | $      | 145.6 |   |  |  | 30 | %
|Percent of net revenues |  |                            | 44    | %    |  |        | 37    | % |  |  |    |  

Gross margin represents revenues less cost of goods sold. As a fabless
semiconductor company, we use third parties for wafer fabrication, assembly and
test services. Our cost of goods sold consists predominantly of purchased
finished wafers, assembly and test services, royalty and other intellectual
property costs, and labor and overhead associated with product procurement.
Prior to the divestiture of our former manufacturing operations in the second
quarter of fiscal 2002, purchased materials, labor and overhead (including
depreciation) associated with product manufacturing and sustaining engineering
expenses made up a majority of our cost of goods sold.

Our gross margin for the third quarter of fiscal 2003 decreased 1% from the
immediately preceding quarter and the third quarter of fiscal 2002 due to a
slightly unfavorable product mix.

Our gross margins for the first nine months of fiscal 2003 compared with the
similar period of fiscal 2002 reflect the elimination of the burden of our
underutilized former manufacturing operations and the favorable impact of our
cost reduction actions. Gross margins for the first nine months of fiscal 2003
also benefited from improved product mix and the redeployment of our product
and test engineering teamspreviously assigned to our former manufacturing
operationsto product development efforts, with the associated costs
classified as research and development expenses.

Our gross margin for the first nine months of fiscal 2003 and 2002 also
benefited from the sale of inventories with an original cost of $10.9 million
and $36.7 million, respectively, that we had written down to a zero cost basis
during fiscal year 2001. Our gross margin for the third quarter of fiscal 2003
did not benefit from these inventory sales, while our gross margin for the
third quarter of fiscal 2002 reflected a benefit of $14.5 million from sales of
these inventories. These sales resulted from renewed demand for certain
products that was not anticipated at the time of the write-downs. The
previously written-down inventories were generally sold at prices which
exceeded

20



---



##### Table of Contents



their original cost. Had we not previously written down the cost basis of these
goods, our cost of goods sold would include the original cost of such goods,
and our gross margin for the first nine months of fiscal 2003 would have been
$178.8 million (41% of our net revenues) compared to $109.0 million (28% of our
net revenues) for the first nine months of fiscal 2002, and our gross margin
for the third fiscal quarter of 2002 would have been $43.3 million (33% of our
net revenues). As of June 30, 2003, all such inventories have been scrapped
or sold.

We assess the recoverability of our inventories at least quarterly through a
review of inventory levels in relation to foreseeable demand (generally over
six months). Foreseeable demand is based upon all available information,
including sales backlog and forecasts, product marketing plans and product life
cycles. 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.

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.

Under our long-term supply arrangement with Jazz Semiconductor, Inc. (Jazz), we
are obligated to purchase certain minimum annual volumes of wafers through
March 2005. Additionally, under a long-term supply agreement with Skyworks, we
are obligated to purchase certain minimum amounts of assembly and test services
during fiscal 2003. In the event our actual purchases under these arrangements
are less than the required minimum volumes, we will be required to make
additional payments, which would adversely affect our gross margin. We
currently anticipate meeting each of the annual minimum purchase obligations
under the long-term supply agreements with Jazz and Skyworks.

Research and Development

|                         |  |                             |      |                            |  |      |    |      |  |        |      |      |  |   |       |   |  |  |   |   |  |   |       |  
|------------------------ |  | --------------------------- | ---- | -------------------------- |  | ---- | -- | ---- |  | ------ | ---- | ---- |  | - | ----- | - |  |  | - | - |  | - | ----- | -
|                         |  | Three months ended June 30, |      | Nine months ended June 30,
|                         |  |                             |      |                           
|(in millions)            |  | 2003                        |      | Change                     |  | 2002 |    | 2003 |  | Change |      | 2002
|                         |  |                             |      |                            |  |      |    |      |  |        |      |     
|Research and development |  | $                           | 38.8 |                            |  |      | (4 | )%   |  | $      | 40.6 |      |  | $ | 117.8 |   |  |  | 2 | % |  | $ | 115.3 |  
|Percent of net revenues  |  |                             | 26   | %                          |  |      |    |      |  |        | 31   | %    |  |   | 27    | % |  |  |   |   |  |   | 30    | %

Our research and development (R&D) expenses consist principally of direct
personnel costs, design automation
costs, photomask and other costs for pre-production evaluation and testing of
new devices and design and test tool
costs.

The decrease in R&D expenses for the third quarter of fiscal 2003 compared to
the similar period of fiscal 2002
primarily reflects lower headcount and personnel-related costs resulting from
our fiscal 2002 expense reduction and
restructuring actions.

The increase in R&D expenses for the first nine months of fiscal 2003 compared
to the similar period in fiscal 2002 primarily reflects the higher costs of
acquired technology and the inclusion for the fiscal 2003 period of costs
associated with our product and test engineering teams, partially offset by
headcount and personnel-related cost reductions resulting from our fiscal 2002
expense reduction and restructuring actions and from the contribution of the
majority of our advanced process development efforts to Jazz in connection with
the formation of Jazz in the second quarter of fiscal 2002.

21



---



##### Table of Contents



Selling, General and Administrative

|                                    |  |                             |      |                            |  |      |    |      |  |        |      |      |  |   |      |   |  |  |    |    |  |   |      |   | 
|----------------------------------- |  | --------------------------- | ---- | -------------------------- |  | ---- | -- | ---- |  | ------ | ---- | ---- |  | - | ---- | - |  |  | -- | -- |  | - | ---- | - | 
|                                    |  | Three months ended June 30, |      | Nine months ended June 30,
|                                    |  |                             |      |                           
|(in millions)                       |  | 2003                        |      | Change                     |  | 2002 |    | 2003 |  | Change |      | 2002
|                                    |  |                             |      |                            |  |      |    |      |  |        |      |     
|Selling, general and administrative |  | $                           | 22.9 |                            |  |      | (6 | )%   |  | $      | 24.3 |      |  | $ | 69.5 |   |  |  | (5 | )% |  | $ | 73.4 |  
|Percent of net revenues             |  |                             | 15   | %                          |  |      |    |      |  |        | 18   | %    |  |   | 16   | % |  |  |    |    |  |   | 19   | %

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, real estate, information systems,
customer service, sales, marketing, field application engineering and other
services. The decrease in SG&A expenses for the three and nine month periods of
fiscal 2003 compared to the similar periods of fiscal 2002 primarily reflects
lower headcount and personnel-related costs resulting from our fiscal 2002
expense reduction and restructuring actions.

Amortization of Intangible Assets

|                                  |  |                             |     |                            |  |      |     |      |  |        |     |      |  |   |     |  |  |  |     |    |  |   |      |   | 
|--------------------------------- |  | --------------------------- | --- | -------------------------- |  | ---- | --- | ---- |  | ------ | --- | ---- |  | - | --- |  |  |  | --- | -- |  | - | ---- | - | 
|                                  |  | Three months ended June 30, |     | Nine months ended June 30,
|                                  |  |                             |     |                           
|(in millions)                     |  | 2003                        |     | Change                     |  | 2002 |     | 2003 |  | Change |     | 2002
|                                  |  |                             |     |                            |  |      |     |      |  |        |     |     
|Amortization of intangible assets |  | $                           | 0.9 |                            |  |      | (79 | )%   |  | $      | 4.4 |      |  | $ | 2.5 |  |  |  | (84 | )% |  | $ | 15.4 |  
|Percent of net revenues           |  |                             | nm  |                            |  |      |     |      |  |        | 3   | %    |  |   | nm  |  |  |  |     |    |  |   | 4    | %

nm = not meaningful

The lower amortization expenses in the three and nine month periods of fiscal
2003 primarily resulted from the adoption of SFAS 141 and SFAS 142 as of the
beginning of fiscal 2003. SFAS 141 requires that all business combinations be
accounted for using the purchase method and provides new criteria for recording
intangible assets separately from goodwill. Upon adoption, we evaluated our
existing goodwill and intangible assets against the new criteria, which
resulted in certain intangible assets with a carrying value of $0.4 million
being subsumed into goodwill. SFAS 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets, and requires that
we no longer amortize goodwill into our results of operations. Instead,
goodwill must be tested at least annually for impairment and written down when
impaired. We expect that amortization of intangible assets will be
approximately $3.4 million for fiscal 2003.

During the second quarter of fiscal 2003, we completed the transition
impairment test of our goodwill (as of the beginning of fiscal 2003) required
by SFAS 142. Management determined that it has a single reporting unit (as
defined in SFAS 142). For purposes of the impairment test, the fair value of
the reporting unit was determined considering both an income approach and a
market approach. Management determined that the recorded value of its goodwill
at the transition date was not impaired. See Note 1 of Notes to Consolidated
Condensed Financial Statements for further information. In addition, future
periodic impairment tests may result in significant writedowns of the value of
goodwill.

Special Charges

Special charges consist of the following:

|                      |  |                             |     |                            |  |      |  |      |      |        |  |      |      |  |  |    |  |   |      |  |  |  |  |  | 
|--------------------- |  | --------------------------- | --- | -------------------------- |  | ---- |  | ---- | ---- | ------ |  | ---- | ---- |  |  | -- |  | - | ---- |  |  |  |  |  | 
|                      |  | Three months ended June 30, |     | Nine months ended June 30,
|                      |  |                             |     |                           
|(in millions)         |  | 2003                        |     | Change                     |  | 2002 |  | 2003 |      | Change |  | 2002
|                      |  |                             |     |                            |  |      |  |      |      |        |  |     
|Asset impairments     |  | $                           | 5.6 |                            |  | nm   |  | $    | 0.5  |        |  | $    | 8.1  |  |  | nm |  | $ | 13.5 | 
|Restructuring charges |  |                             |    |                            |  | nm   |  |      | 13.8 |        |  |      | 1.9  |  |  | nm |  |   | 16.1 | 
|Separation costs      |  |                             |    |                            |  | nm   |  |      | 0.4  |        |  |      |     |  |  | nm |  |   | 0.5  | 
|Other special charges |  |                             | 0.9 |                            |  | nm   |  |      |     |        |  |      | 3.6  |  |  | nm |  |   |     | 
|                      |  |                             |     |                            |  |      |  |      |      |        |  |      |      |  |  |    |  |   |      |  |  |  |  | 
|                      |  | $                           | 6.5 |                            |  | nm   |  | $    | 14.7 |        |  | $    | 13.6 |  |  | nm |  | $ | 30.1 | 
|                      |  |                             |     |                            |  |      |  |      |      |        |  |      |      |  |  |    |  |   |      |  |  |  |  | 

nm = not meaningful

Asset Impairments

For a discussion of our asset impairment charges, see Note 7 of Notes to
Consolidated Condensed Financial Statements.

22



---



##### Table of Contents



Restructuring Charges

In fiscal 200l and 2002, we implemented a number of cost reduction initiatives
to improve our operating cost structure. For a discussion of our cost reduction
initiatives and activity under our restructuring plans, see Note 7 of Notes to
Consolidated Condensed Financial Statements.

Through June 30, 2003, we have paid an aggregate of $24.6 million in connection
with our restructuring plans and we have a remaining accrued restructuring
balance aggregating $10.3 million. We expect to pay a majority of the amounts
accrued for the workforce reductions during the remainder of fiscal 2003 and we
expect to pay the obligations for the non-cancelable lease and other
commitments over their respective terms, which principally expire through
fiscal 2005. Cash payments to complete the restructuring actions will be funded
from available cash reserves and funds from product sales, and are not expected
to significantly impact our liquidity.

Separation Costs

Separation costs for the first nine months of fiscal 2002 consist of costs
related to the Companys divestiture of its Newport Beach wafer fabrication
operations.

Other Special Charges

Other special charges for fiscal 2003 principally consist of a $2.7 million
loss on the sale of certain semiconductor test equipment.

Gain on Debt Extinguishment

During the first nine months of fiscal 2003, we purchased $100.0 million
principal amount of our 4% Convertible Subordinated Notes due 2007 at
prevailing market prices, resulting in a net gain of $42.0 million.

Other Income (Expense), Net

|                            |  |                             |     |                            |  |      |     |      |  |        |      |      |  |   |       |    |  |  |    |   |  |   |       |    | 
|--------------------------- |  | --------------------------- | --- | -------------------------- |  | ---- | --- | ---- |  | ------ | ---- | ---- |  | - | ----- | -- |  |  | -- | - |  | - | ----- | -- | 
|                            |  | Three months ended June 30, |     | Nine months ended June 30,
|                            |  |                             |     |                           
|(in millions)               |  | 2003                        |     | Change                     |  | 2002 |     | 2003 |  | Change |      | 2002
|                            |  |                             |     |                            |  |      |     |      |  |        |      |     
|Other income (expense), net |  | $                           | 0.5 |                            |  |      | 110 | %    |  | $      | (5.6 | )    |  | $ | (40.8 | )  |  |  | 99 | % |  | $ | (20.5 | ) 
|Percent of net revenues     |  |                             | nm  |                            |  |      |     |      |  |        | (4   | )%   |  |   | (9    | )% |  |  |    |   |  |   | (5    | )%

Other income (expense), net, for the first nine months of fiscal 2003 is
comprised primarily of $34.4 million of write-downs of certain non-marketable
investments, $21.4 million of interest expense on our convertible subordinated
notes, and a $1.8 million decrease in the fair value of the conversion right
under the Skyworks 15% convertible senior subordinated notes, partially offset
by $13.1 million of interest income and a $5.2 million gain on the sale of our
investment in Pictos. Interest expense on our convertible subordinated notes
was lower in the three months ended June 30, 2003 due to the repurchase of
$100.0 million principal of our 4% convertible subordinated notes in March and
April 2003. We adjust the carrying value of the 15% convertible senior
subordinated notes to estimated fair value each period, with changes in the
fair value of the conversion right included in other income (expense).

Other income (expense), net, for the first nine months of fiscal 2002 is
comprised primarily of $23.6 million in interest expense on our convertible
subordinated notes and a $7.7 million write-down of certain non-marketable
investments, partially offset by $7.6 million of interest income on invested
cash balances, and gains on sales of assets.

The investment write-downs reflect declines in the fair values of these
investments which we determined were other than temporary and reduced the
carrying values of the investments to their estimated fair values. The
investments consist of equity interests in early stage technology companies
which we account for under the cost method. We determined the estimated fair
values based upon financial and other information available at the time of the
write-downs, including current and projected business prospects for the
subject companies.

As a result of the restructuring of the financing agreements with Skyworks and
the cash contribution to Mindspeed in June 2003, we expect that our interest
income will continue to be lower than the fiscal 2003 first quarters level.

23



---



##### Table of Contents



Additionally, changes in the fair values of the conversion right
under the Skyworks 15% convertible senior subordinated notes and the Mindspeed
warrant may significantly affect our future other income (expense) (either
favorably or unfavorably) based upon fluctuations in the respective market
prices of the underlying common stocks of Skyworks and Mindspeed.

Provision (Benefit) for Income Taxes

We recorded income tax expense of $1.2 million and an income tax benefit of
$2.5 million for the nine months ended June 30, 2003 and 2002, respectively,
reflecting taxes imposed on our foreign subsidiaries, which in 2002 was offset
by a domestic tax refund. No income tax benefit was recorded for domestic
losses incurred during the nine months ended June 30, 2002 due to uncertainty
regarding future realization of such benefits. No income tax expense was
recorded with respect to our domestic results for the nine months ended June
30, 2003 as they will be offset by net operating loss carryovers that have not
been previously recognized. We expect this will continue for the remainder of
fiscal 2003, and as result, we expect our income tax provision for fiscal 2003
to be approximately $1.5 million consisting primarily of income taxes related
to our foreign operations.

As of September 30, 2002, we had a valuation allowance of approximately $392.0
million for the deferred tax assets that we do not expect to realize through
the reduction of future income tax payments. We believe the remaining portion
of our deferred tax assets will be realized based on our current expectations
of future earnings and tax planning strategies available to us. We evaluate the
realizability of our deferred tax assets quarterly and in the event that we
determine that we will not be able to realize all or part of our deferred tax
assets in the future, an adjustment to the deferred tax assets would be charged
or credited to income in the period such determination is made.

Liquidity and Capital Resources

Our cash and cash equivalents decreased by $86.2 million during the first nine
months of fiscal 2003. Cash used in operating activities was $19.0 million for
the first nine months of fiscal 2003, compared to cash provided by operating
activities of $25.4 million for the comparable period in fiscal 2002. Operating
cash flows for the fiscal 2003 period reflect our loss from continuing
operations of $13.7 million, offset by net non-cash charges of $31.5 million,
and net increase in working capital of $36.9 million. The working capital
changes principally consist of a $16.2 million increase in inventories, a $22.4
million increase in accounts receivable, and a $5.0 million decrease in
accounts payable.

Cash provided by investing activities of $184.9 million for the first nine
months of fiscal 2003 includes the $170.0 million debt repayment from Skyworks, offset
by $35.0 million advanced earlier to Skyworks under the credit facility.
Investing cash flows also included proceeds from the sale of assets of $3.2
million, proceeds from the sale of our Pictos investment of $12.1 million, and
net sales of marketable securities of $59.4 million, offset by capital
expenditures of $13.6 million, purchase of a business for $6.8 million, and
investments of $4.5 million. Cash provided by investing activities of $132.6
million in the first nine months of fiscal 2002 principally consisted of $76.8
million of net sales of marketable securities and $71.7 million in proceeds
from the sale of assets, partially offset by capital expenditures of $11.8
million and payments for acquisitions and investments of $4.1 million.

Cash used in financing activities of $49.1 million for the first nine months of
fiscal 2003 consisted of payments of $56.4 million to repurchase $100.0 million
principal amount of our 4% convertible subordinated notes due 2007, partially
offset by $7.3 million in proceeds from the exercise of stock options. Cash
provided by financing activities of $14.9 million for the first nine months of
fiscal 2002 consisted of proceeds from the exercise of stock options.

See Note 4 of Notes to the Consolidated Condensed Financial Statements for
detail of the repayment of cash advances and Term Notes to Skyworks and the
exchange into the Skyworks 15% convertible senior subordinated notes. As of
June 30, 2003 the estimated fair value of the 15% convertible senior
subordinated notes was approximately $44.0 million. We may sell all or part of
the 15% convertible senior subordinated notes or shares underlying the notes as
needed to meet our liquidity requirements.

Cash used in the discontinued operations of Mindspeed for the nine months of
2003 was $203.0 million, which includes the approximately $100.0 million of
cash provided to them as part of the Mindspeed Spin. Cash used in

24



---



##### Table of Contents



discontinued operations for the nine months of 2002 of $216.3 million
represents the funding of the discontinued wireless communication and Mindspeed
Technologies businesses.

As of June 30, 2003, our principal sources of liquidity are our existing cash
reserves and short-term investments (including the Skyworks 15% convertible
senior subordinated notes) and cash generated from product sales. Combined cash
and cash equivalents, short-term investments and Skyworks 15% convertible
senior subordinated notes at June 30, 2003 totaled $163.5 million compared to
$440.5 million at September 30, 2002. Our working capital at June 30, 2003 was
$216.3 million compared to $441.2 million at September 30, 2002. The overall
working capital change principally reflects cash used in operations, cash
payments to repurchase debt, and cash used in the discontinued operations of
Mindspeed.

In connection with the Mindspeed Spin in June 2003, we entered into a senior
secured revolving credit facility with Mindspeed, pursuant to which Mindspeed
may borrow up to $50.0 million from us for working capital and general
corporate purposes. Mindspeed may borrow under the credit facility only to
restore its cash balance to $25.0 million. The credit facility is available
through June 29, 2007.

We believe that our existing sources of liquidity, along with cash expected to
be generated from product sales, will be sufficient to fund our operations,
research and development efforts, anticipated capital expenditures and other
capital requirements, including our commitment under the credit facility with
Mindspeed, for at least the next twelve months. We will need to continue a
focused program of capital expenditures to meet our research and development
and corporate requirements. We may also consider acquisition opportunities to
extend our technology portfolio and design expertise and to expand our product
offerings. In order to fund capital expenditures, increase our working capital
or complete any acquisitions, we may seek to obtain additional debt financing
or issue additional shares of our common stock. However, we cannot assure you
that such financing will be available to us on favorable terms, or at all.

Recent Accounting Standards

See Note 1 of Notes to Consolidated Condensed Financial Statements.

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 allowances for doubtful
accounts, inventories, long-lived assets, income taxes, restructuring costs and
litigation. 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.
Detailed information on these critical accounting policies is included on pages
48 and 49 of our Annual Report on Form 10-K for the fiscal year ended September
30, 2002, and on pages 29 and 30 of our Quarterly Report on Form 10-Q for the
quarter ended March 31, 2003. Management believes that at June 30, 2003, there
has been no material change to this information.

Certain Business Risks

Our business, financial condition and operating results can be impacted by a
number of factors, any one of which could cause our actual results to vary
materially from recent results or from our anticipated future results.

You should carefully consider and evaluate all of the information in this
Quarterly Report, including the risk factors listed below. 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.

25



---



##### Table of Contents



Except where otherwise noted, the financial information contained herein
represents our continuing operations, excluding the discontinued wireless
communications business and the Mexicali Operations, and excluding the
discontinued Mindspeed Technologies business.

We have recently incurred substantial operating losses.

We incurred a loss from continuing operations of $13.7 million in the first
nine months of fiscal 2003 compared to a loss of $117.1 million in the first
nine months of fiscal 2002. We incurred losses from continuing operations of
$143.8 million in fiscal 2002 and $648.2 million in fiscal 2001.

During the past ten fiscal quarters, we implemented a number of expense
reduction and restructuring initiatives to improve our operating cost
structure. While our continuing business achieved income from continuing
operations in the third fiscal quarter of 2003, we cannot assure you as to
whether we will be able to sustain such profitability.

We operate in the highly cyclical semiconductor industry, which is subject to
significant downturns.

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 and wide fluctuations
in product supply and demand. From time to time these and other factors,
together with changes in general economic conditions, cause significant upturns
and downturns in the industry, and in our business in particular. Periods of
industry downturns such as we are now experiencing have been characterized by
diminished product demand, production overcapacity, high inventory levels and
accelerated erosion of average selling prices. These factors have caused
substantial fluctuations in our revenues and our results of operations. We have
in the past experienced these cyclical fluctuations in our business and may
experience cyclical fluctuations in the future.

Demand for our products in each of the communications electronics end-markets
which we address is subject to a unique set of factors, and a downturn in
demand affecting one market may be more pronounced, or last longer, than a
downturn affecting another of our markets.

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 manufacturers that are
both larger and smaller than us in terms of resources and market share. We
currently face significant competition in our markets and expect that intense
price and product competition will continue. This competition has resulted and
is expected to continue to result 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 in communications electronics, the
trend toward global expansion by foreign and domestic competitors,
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 for certain of our products offer other
products that compete with similar products offered by us.

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; and                        
|
| |  |  | new product innovation.                      

26



---



##### Table of Contents



The specific bases on which we compete vary by market. We cannot assure you
that we will be able to successfully address these factors.

Many of our current and potential competitors have certain advantages over us, including:



| |  |  | stronger financial position and liquidity;                                                            
| | - |  | ------------------------------------------------------------------------------------------------------
|
| |  |  | longer presence in key markets;                                                                       
|
| |  |  | greater name recognition;                                                                             
|
| |  |  | access to larger customer bases; and                                                                  
|
| |  |  | significantly greater sales and marketing, manufacturing, distribution, technical and other resources.

As a result, these competitors may be able to adapt more quickly to new or
emerging technologies and changes in customer requirements or may be able to
devote greater resources to the development, promotion and sale of their
products than we can. Our OEM customers may choose semiconductor suppliers whom
they believe have a stronger financial position or liquidity.

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 among competitors 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 will depend largely on our ability to continue 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;  
| | - |  | --------------------------------------------------------------------------------------------------------------
|
| |  |  | our ability to accurately define new products;                                                                
|
| |  |  | our ability to timely complete development of new products and bring our products to market on a timely
basis;
|
| |  |  | our ability to differentiate our products from offerings of our competitors; and                              
|
| |  |  | overall market acceptance of our products.                                                                    

We cannot assure you that we will have sufficient resources to make the
substantial investment in research and development in order to develop and
bring to market new and enhanced products. Furthermore, we are required to
continually evaluate expenditures for planned product development and to choose
among alternative technologies based on our expectations of future market
growth. 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 able to continue to
reduce the cost of our products to remain competitive.

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;
| | - |  | ---------------------------------

27



---



##### Table of Contents





| |  |  | rapid changes in customer requirements;                                                
| | - |  | ---------------------------------------------------------------------------------------
|
| |  |  | frequent new product introductions and enhancements;                                   
|
| |  |  | short product life cycles with declining prices over the life cycle of the product; and
|
| |  |  | evolving industry standards.                                                           

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 may not be able to attract and retain qualified 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, retain and motivate
qualified personnel, including executive officers and other key management and
technical personnel. 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 in the semiconductor industry. 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.

We may have particular difficulty attracting and retaining key personnel during
periods of poor operating performance. The loss of the services of one or more
of our key employees, including Dwight W. Decker, our Chairman and Chief
Executive Officer, Matthew Rhodes, our President, or certain key design and technical personnel, or our
inability to attract, retain and motivate qualified personnel could have a
material adverse effect on our ability to operate our business.

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 not sold directly to the end-user but 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, 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. This 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. As a
result of this lengthy sales cycle, 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, some of whom
have a right to return unsold products to us. Sales to distributors accounted
for approximately 41% and 40% of our net revenues for fiscal 2002 and the first
nine months of fiscal 2003, respectively. 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

28



---



##### Table of Contents



to OEMs indirectly through distributors 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), including Jazz, in which we hold a minority interest, and Skyworks, for wafer fabrication services. Under our fabless business model, our
long-term revenue growth is dependent on our ability to obtain sufficient
external manufacturing capacity, including wafer production capacity. During
times when the semiconductor industry is experiencing a shortage of wafer
fabrication capacity, we may experience delays in shipments or increased
manufacturing costs.

There are significant risks associated with our reliance on third-party foundries, including:



| |  |  | the lack of assured wafer supply, potential wafer shortages and higher wafer prices;                    
| | - |  | --------------------------------------------------------------------------------------------------------
|
| |  |  | limited control over delivery schedules, manufacturing yields, production costs and product quality; and
|
| |  |  | the unavailability of, or delays in obtaining, access to key process technologies.                      

We have entered into long-term supply arrangements with major foundry partners,
including Jazz, to obtain external wafer manufacturing capacity. However, these
and other foundries we use may allocate their limited capacity to fulfill the
production requirements of other customers that are larger and better financed
than we. If we choose to use a new foundry, it typically takes several months
to complete the qualification process before we can begin shipping products
from the new foundry.

We are also dependent upon third parties, including Skyworks, 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 as are described above 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 a wafer fabrication process on which we rely may adversely
affect our revenues and our customer relationships.

The foundries and other suppliers on whom we rely may experience financial
difficulties or suffer disruptions in their operations due to causes beyond our
control, including labor strikes, work stoppages, electrical power outages,
fire, earthquake, flooding or other natural disasters. Certain of our
suppliers manufacturing facilities are located near major earthquake fault
lines in California, Mexico and the Asia-Pacific region. 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. Difficulties or delays in
securing an adequate supply of our products on favorable terms, or at all,
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 to experience from time to
time 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. Moreover, lower than anticipated manufacturing yields may adversely
affect our cost of goods sold and our results of operations.

29



---



##### Table of Contents



Our success depends, in part, on our ability to effect suitable investments,
alliances and acquisitions; we may have difficulty integrating companies we
acquire.

Although we invest significant resources in research and development
activities, the complexity and rapidity 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:



| |  |  | issuances of equity securities dilutive to our existing shareholders;    
| | - |  | -------------------------------------------------------------------------
|
| |  |  | large one-time write-offs;                                               
|
| |  |  | 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.    

Additionally, in periods subsequent to an acquisition, 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.

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.

We face a risk that capital needed for our business will not be available when
we need it.

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 efforts, anticipated capital expenditures, working
capital and other financing requirements for at least the next twelve months.
However, we cannot assure you that this will be the case and we may need to
obtain alternate sources of financing in the future. We cannot assure you that
we will have access to additional sources of capital on favorable terms or at
all.

In addition, any strategic investments and acquisitions that we may make to
help us grow our business 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 are subject to the risks of doing business internationally.

For fiscal 2002 and the first nine months of fiscal 2003, approximately 89% and
90%, respectively, of our net revenues were from customers located outside the
United States, primarily in the Asia-Pacific region and European countries. In
addition, we have design centers and suppliers located outside the United
States, including the Skyworks assembly and test facility in Mexico and
assembly and test service providers and foundries located in the Asia-Pacific
region. Our international sales and operations are subject to a number of risks
inherent in selling and operating abroad. These include, but are not limited
to, risks regarding:



| |  |  | currency exchange rate fluctuations;                                                                                                                                                              
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | local economic and political conditions;                                                                                                                                                          
|
| |  |  | disruptions of capital and trading markets;                                                                                                                                                       
|
| |  |  | 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;                                                                                                                                                      

30



---



##### Table of Contents





| |  |  | difficulty in obtaining distribution and support;                                                                                                         
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the laws and policies of the United States and other countries
affecting trade, foreign investment and loans, and import or export licensing requirements;
|
| |  |  | tax laws; and                                                                                                                                             
|
| |  |  | limitations on our ability under local laws to protect our intellectual property.                                                                         

Because most of our international sales, other than sales to Japan (which are
denominated principally in Japanese yen), 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. We
cannot assure you that the factors described above will not have a material
adverse effect on our ability to increase or maintain our foreign sales.

We 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.

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

Our revenues and 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 effects 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. If our operating results fail to meet the expectations of analysts or
investors, it could materially and adversely affect the price of our common
stock and other securities.

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

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



| |  |  | our operating and financial performance and prospects;         
| | - |  | ---------------------------------------------------------------
|
| |  |  | the depth and liquidity of the market for our common stock;    
|
| |  |  | investor perception of us and the industry in which we operate;
|
| |  |  | our inclusion in, or removal from, any equity market indices;  

31



---



##### Table of Contents





| |  |  | the level of research coverage of our common stock;                   
| | - |  | ----------------------------------------------------------------------
|
| |  |  | changes in earnings estimates or buy/sell recommendations by analysts;
|
| |  |  | general financial and other market conditions; and                    
|
| |  |  | domestic and international economic conditions.                       

In addition, public stock markets have experienced, and are currently
experiencing, extreme price and trading volume volatility, particularly in the
technology sectors of the market. This volatility has significantly affected
the market prices of securities of many technology companies for reasons
frequently unrelated to or disproportionately impacted by the operating
performance of these companies. These broad market fluctuations may adversely
affect the market price of our common stock.

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. If litigation results in an
adverse ruling we could be required to:



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

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

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 nondisclosure 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.

32



---



##### Table of Contents



We may be liable for penalties under environmental laws, rules and regulations,
which could adversely impact our business.

Our former manufacturing operations used a variety of chemicals and were
subject to a wide range of environmental protection regulations in the United
States and Mexico. In connection with our spin-off from Rockwell, we assumed
all liabilities in respect of environmental matters related to the former
operations of our business. We have been designated as a potentially
responsible party and are engaged in groundwater remediation at one Superfund
site located at a former silicon wafer manufacturing facility and steel
fabrication plant in Parker Ford, Pennsylvania formerly occupied by us. In
addition, we are engaged in remediations of groundwater contamination at our
former Newport Beach, California wafer fabrication facility. We currently
estimate the remaining costs for these remediations to be approximately $2.2
million and have accrued for these costs as of June 30, 2003.

In the United States, environmental regulations often require parties to fund
remedial action regardless of fault. Consequently, it is often difficult to
estimate the future impact of environmental matters, including potential
liabilities. While we have not experienced any material adverse effect on our
operations as a result of such regulations, we cannot assure you that the costs
that might be required to complete remedial actions, if any, will not have a
material adverse effect on our business, financial condition and results of
operations.

Provisions in our organizational documents and rights agreement and Delaware
law may make it difficult for someone to acquire control of us.

We have established certain anti-takeover measures that may affect our common
stock and convertible notes. Our restated certificate of incorporation, our
by-laws, our rights agreement with Mellon Investor Services LLC, as rights
agent, dated as of November 30, 1998, as amended, and the Delaware General
Corporation Law contain several provisions that would make more difficult an
acquisition of control of us in a transaction not approved by our board of
directors. Our restated certificate of incorporation and by-laws include
provisions such as:



| |  |  | the division of our board of directors into three classes to be elected on
a staggered basis, one class each year;                                                                  
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the ability of our board of directors to issue shares of our
preferred stock in one or more series without
further authorization of our shareholders;                               
|
| |  |  | a prohibition on shareholder action by written consent;                                                                                                                             
|
| |  |  | a requirement that shareholders provide advance notice of any shareholder nominations of directors or any
proposal of new business to be considered at any meeting of shareholders; 
|
| |  |  | a requirement that a supermajority vote be obtained to remove a
director for cause or to amend or repeal certain provisions of our restated certificate of incorporation or by-laws;
|
| |  |  | elimination of the right of shareholders to call a special meeting of shareholders; and                                                                                             
|
| |  |  | a fair price provision.                                                                                                                                                             

Our rights agreement gives our shareholders certain rights that would
substantially increase the cost of acquiring us in a transaction not approved
by our board of directors.

In addition to the rights agreement and the provisions in our restated
certificate of incorporation and by-laws, Section 203 of the Delaware General
Corporation Law generally provides that a corporation shall not engage in any
business combination with any interested shareholder during the three-year
period following the time that such shareholder becomes an interested
shareholder, unless a majority of the directors then in office approves either
the business combination or the transaction that results in the shareholder
becoming an interested shareholder or specified shareholder approval
requirements are met.

33



---



##### Table of Contents






ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our financial instruments include cash and cash equivalents, marketable debt
securities, the Skyworks 15% convertible senior subordinated notes, the
Mindspeed warrant, equity securities and our 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 June 30, 2003, the
carrying value of our cash and cash equivalents approximates fair value. Our
marketable debt securities (consisting of commercial paper, corporate bonds and
government securities) principally have remaining terms of two years or less.
Consequently, such securities are not subject to significant interest rate
risk. Marketable equity securities are subject to equity price risk. As of June
30, 2003, a 10% adverse change in equity prices would result in a $0.4 million
decrease in the fair value of our marketable equity securities.

We hold Skyworks 15% convertible senior subordinated notes having an aggregate
principal amount of $45 million. The conversion right is considered an
embedded derivative for financial accounting purposes and the value of the
Skyworks 15% convertible senior subordinated notes is subject to significant
risk related to changes in the market price of Skyworks common stock. As of
June 30, 2003, a 10% decrease in the market price of Skyworks common stock
would not have an effect on the fair value of the Skyworks 15% convertible
senior subordinated notes. The Skyworks 15% convertible senior subordinated
notes are also subject to interest rate risk.

We received the 15% convertible senior subordinated notes from Skyworks in
exchange for the remaining $45 million principal amount of the Term Notes
(originally delivered to us by Skyworks in payment of the purchase price for
our Mexicali assembly and test facility). We do not purchase derivative
financial instruments for speculative or investment purposes.

We hold a warrant to purchase 30 million shares of common stock of Mindspeed.
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 June 30, 2003, a 10% decrease
in the market price of Mindspeeds common stock would decrease the fair value
of this warrant by approximately $9.5 million.

We classify all of our marketable debt and equity securities, including the
Skyworks 15% convertible senior subordinated notes and the Mindspeed warrant,
as available-for-sale securities. As of June 30, 2003, the carrying value of
these securities included net unrealized losses of $0.2 million.

Our long-term debt consists of convertible subordinated notes with interest at
fixed rates. Consequently, we do not have significant cash flow exposure on
our long-term debt. However, 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 June 30, 2003:

|                                                   |  |                |       |            |  |   |       | 
|-------------------------------------------------- |  | -------------- | ----- | ---------- |  | - | ----- | 
|(in millions)                                      |  | Carrying Value |       | Fair Value
|                                                   |  |                |       |           
|Cash and cash equivalents                          |  | $              | 74.9  |            |  | $ | 74.9  | 
|Marketable debt securities                         |  |                | 40.4  |            |  |   | 40.4  | 
|Skyworks 15% convertible senior subordinated notes |  |                | 44.0  |            |  |   | 44.0  | 
|Marketable equity securities                       |  |                | 4.2   |            |  |   | 4.2   | 
|Mindspeed warrant                                  |  |                | 89.0  |            |  |   | 89.0  | 
|Long-term debt                                     |  |                | 581.8 |            |  |   | 473.8 | 

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, we seek to 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 June 30, 2003, we held no foreign
currency forward exchange contracts. Based on our overall currency rate
exposure at June 30, 2003, a 10 percent change in currency rates would not have
a significant effect on our consolidated financial position, results of
operations or cash flows.

34



---



##### Table of Contents






ITEM 4. CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Companys
management, including the Companys Chairman and Chief Executive Officer and
its Senior Vice President and Chief Financial Officer, of the effectiveness of
the design and operation of the Companys disclosure controls and procedures,
which are defined under Securities and Exchange Commission rules as controls
and other procedures of a company that are designed to ensure that information
required to be disclosed by a company in the reports that it files under the
Exchange Act is recorded, processed, summarized and reported within required
time periods. Based upon that evaluation, the Companys Chairman and Chief
Executive Officer and its Senior Vice President and Chief Financial Officer
concluded that the Companys disclosure controls and procedures were effective.

There were no significant changes in the Companys internal controls or other
factors that could significantly affect these controls subsequent to the date
of their evaluation.

35



---



##### Table of Contents






PART II. OTHER INFORMATION




ITEM 5. OTHER INFORMATION

The following disclosure is being provided in accordance with the Securities
and Exchange Commissions filing guidance regarding the provision of notice to
the Commission of certain information relating to a pension fund blackout
period pursuant to new Item 11 of Form 8-K.

On May 14, 2003, Conexant sent a notice to its directors and executive officers
informing them that two blackout periods for the Conexant Systems, Inc.
Retirements Savings Plan and the Conexant Systems, Inc. Hourly Employees
Savings Plan (the Plans) would be imposed in connection with the Mindspeed
Spin. During the Conexant Stock Distribution blackout period, which began on
June 13, 2003 and ended on July 10, 2003, the participants in the Plans were
unable to receive actual distributions of Conexant common stock from the
Conexant Stock Funds in the Plans. During the Conexant Stock Funds blackout
period, which began on June 26, 2003 and ended on July 10, 2003, the
participants in the Plans were unable to direct or diversify investments into
or out of the Conexant Stock Funds in the Plans.

Under new Regulation BTR  Blackout Trading Restriction, Conexants directors
and executive officers were prohibited from purchasing, selling, or otherwise
acquiring or transferring any Conexant common stock or options (including
grants or exercise of options for Conexant common stock) during the Conexant
Stock Distribution blackout period and the Conexant Stock Funds blackout
period.

Any questions regarding the blackout notice were directed to Jasmina Theodore
Boulanger, Conexant Systems, Inc., 4311 Jamboree Road, Newport Beach,
California 92660, telephone: 949-483-3223.




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

|     |  |                                                                                                                                                                                                                                                                               |  |  |  | 
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|10.1 |  | Distribution Agreement dated as of June 27, 2003 by and between the
Company and Mindspeed, filed as Exhibit 2.1 to the Companys Current
Report on Form 8-K dated July 1, 2003, is incorporated herein by
reference.                                                         
|     |  |                                                                                                                                                                                                                                                                              
|10.2 |  | Employee Matters Agreement dated as of June 27, 2003 by and between
the Company and Mindspeed, filed as Exhibit 2.2 to the Companys Current
Report on Form 8-K dated July 1, 2003, is incorporated herein by reference.                                                     
|     |  |                                                                                                                                                                                                                                                                              
|10.3 |  | Tax Allocation Agreement dated as of June 27, 2003 by and between the Company and Mindspeed, filed
as Exhibit 2.3 to the Companys Current Report on Form 8-K dated July 1,
2003, is incorporated herein by reference.                                                       
|     |  |                                                                                                                                                                                                                                                                              
|10.4 |  | Credit Agreement dated as of June 27, 2003 by and among Mindspeed, the
subsidiaries of Mindspeed from time to time parties thereto and the Company,
filed as Exhibit 2.5 to the Companys Current Report on
Form 8-K dated July 1, 2003, is incorporated herein by reference.
|     |  |                                                                                                                                                                                                                                                                              
|99   |  | Written Statement of Chief Executive Officer and Chief Financial Officer.                                                                                                                                                                                                    

(b) Reports on Form 8-K

Current Report on Form 8-K dated April 17, 2003, furnishing the Companys press
release dated April 17, 2003, announcing its financial results for the quarter
ended March 31, 2003 (Items 7 and 12).

Current Report on Form 8-K dated July 1, 2003 reporting the completion of the
spin off transaction of Mindspeed Technologies, Inc. (Items 2 and 7).

Current Report on Form 8-K dated July 24, 2003, furnishing the Companys press
release dated July 24, 2003, announcing its financial results for the quarter
ended June 30, 2003 (Items 7 and 12).

36



---



##### Table of Contents






SIGNATURE

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

|                     |  |                        |  |                                      |  | 
|-------------------- |  | ---------------------- |  | ------------------------------------ |  | 
|                     |  | CONEXANT SYSTEMS, INC.
|                     |  | (Registrant)          
|                     |  |                        |  |                                      |  | 
|Date: August 6, 2003 |  | By                     |  | /s/ J. Scott Blouin

J. Scott Blouin |  | 
|                     |  |                        |  | Senior Vice President and            |  | 
|                     |  |                        |  | Chief Financial Officer              |  | 
|                     |  |                        |  | (principal financial officer)        |  | 

37



---



##### Table of Contents






CERTIFICATIONS

I, Dwight W. Decker, Chairman of the Board and Chief Executive Officer
of Conexant Systems, Inc., certify that:



|1. |  | I have reviewed this Quarterly Report on Form 10-Q of Conexant Systems,
Inc.;                                                                                                                                                                                                                                                 
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this Quarterly Report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this Quarterly
Report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for,
the periods presented in this Quarterly Report;                   
|  
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:                                                                                                      



| | a. |  | designed such disclosure controls and procedures to ensure that
material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities,
particularly during the period in which this Quarterly Report is
being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days
prior to the filing date of this Quarterly Report (the Evaluation
Date); and                                                                                                  
|
| | c. |  | presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officer and I have disclosed, based
on our most recent evaluation, to the
registrants auditors and the audit committee of registrants board of
directors (or persons performing the
equivalent function):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the
registrants ability to record, process, summarize and report financial
data and have identified for the
registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves management or
other employees who have a significant
role in the registrants internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officer and I have indicated in this
Quarterly Report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant
deficiencies and material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Dated: August 6, 2003

|                                      
|--------------------------------------
|/s/ Dwight W. Decker

Dwight W. Decker
|Chairman of the Board and             
|Chief Executive Officer               

38



---



##### Table of Contents



I, J. Scott Blouin, Senior Vice President and Chief Financial Officer of
Conexant Systems, Inc., certify that:



|1. |  | I have reviewed this Quarterly Report on Form 10-Q of Conexant Systems,
Inc.;                                                                                                                                                                                                                                                 
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of
the circumstances under which such
statements were made, not misleading with respect to the period covered by
this Quarterly Report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this Quarterly
Report, fairly present in all material respects the financial condition,
results of operations and cash flows of the
registrant as of, and for, the periods presented in this Quarterly Report;                   
|  
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:                                                                                                      



| | a. |  | designed such disclosure controls and procedures to ensure that
material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities,
particularly during the period in which this Quarterly Report is being
prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days
prior to the filing date of this Quarterly Report (the Evaluation Date);
and                                                                                                  
|
| | c. |  | presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officer and I have disclosed, based
on our most recent evaluation, to the
registrants auditors and the audit committee of registrants board of
directors (or persons performing the
equivalent function):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the
registrants ability to record, process, summarize and report financial
data and have identified for the
registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves management or other
employees who have a significant
role in the registrants internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officer and I have indicated in this
Quarterly Report whether or not there were significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Dated: August 6, 2003

|                                    
|------------------------------------
|/s/ J. Scott Blouin

J. Scott Blouin
|Senior Vice President and           
|Chief Financial Officer             

39



---



##### Table of Contents






EXHIBIT INDEX

|     |  |                                                                                                                                                                                                                                                                               |  |  |  | 
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|10.1 |  | Distribution Agreement dated as of June 27, 2003 by and between the
Company and Mindspeed, filed as Exhibit 2.1 to the Companys Current Report
on Form 8-K dated July 1, 2003, is incorporated herein by reference.                                                         
|     |  |                                                                                                                                                                                                                                                                              
|10.2 |  | Employee Matters Agreement dated as of June 27, 2003 by and between the Company and Mindspeed,
filed as Exhibit 2.2 to the Companys Current Report on Form 8-K dated July 1, 2003, is incorporated
herein by reference.                                                     
|     |  |                                                                                                                                                                                                                                                                              
|10.3 |  | Tax Allocation Agreement dated as of June 27, 2003 by and between the Company and Mindspeed, filed
as Exhibit 2.3 to the Companys Current Report on Form 8-K dated July 1, 2003, is incorporated herein by
reference.                                                       
|     |  |                                                                                                                                                                                                                                                                              
|10.4 |  | Credit Agreement dated as of June 27, 2003 by and among Mindspeed, the subsidiaries of Mindspeed from
time to time parties thereto and the Company, filed as Exhibit 2.5 to the Companys Current Report on
Form 8-K dated July 1, 2003, is incorporated herein by reference.
|     |  |                                                                                                                                                                                                                                                                              
|99   |  | Written Statement of Chief Executive Officer and Chief Financial Officer.