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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



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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 December 31, 2002*                                       
|     
|      |  | 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.)

4311 Jamboree Road
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 January 31,
2003 was 266,509,823.



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|* |  | For presentation purposes of this Form 10-Q, references made to the
December 31, 2002 period relate to the actual fiscal first quarter ended
December 27, 2002.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



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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   
|SIGNATURES                   
|CERTIFICATIONS               
|EXHIBIT 99                   



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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
successful integration of acquisitions; 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; the successful implementation of our expense
reduction and restructuring initiatives; the successful separation of our
Broadband Communications and Mindspeed Technologies businesses; 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.

Mindspeed Technologies is a trademark of Conexant Systems, Inc. Other brands,
names and trademarks contained in this Quarterly Report are the property of
their respective owners.

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CONEXANT SYSTEMS, INC.

INDEX

|                              |  |                                                                                       |  |  |    |      |  | 
|----------------------------- |  | ------------------------------------------------------------------------------------- |  |  | -- | ---- |  | 
|                              |  |                                                                                       |  |  |    | PAGE
|                              |  |                                                                                       |  |  |    |     
|PART I. FINANCIAL INFORMATION |  |                                                                                       |  | 
|                             
|Item 1.                       |  | Financial Statements (unaudited):                                                     |  |  |    |     
|                             
|                              |  | Consolidated Condensed Balance Sheets  December 31, 2002 and September 30, 2002      |  |  | 4  |     
|                             
|                              |  | Consolidated Condensed Statements of Operations  Three Months Ended December         |  |  |    |     
|                              |  | 31, 2002 and 2001                                                                     |  |  | 5  |     
|                             
|                              |  | Consolidated Condensed Statements of Cash Flows  Three Months Ended                  |  |  |    |     
|                              |  | December 31, 2002 and 2001                                                            |  |  | 6  |     
|                             
|                              |  | Notes to Consolidated Condensed Financial Statements                                  |  |  | 7  |     
|                             
|Item 2.                       |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  |  | 17 |     
|                             
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |  | 39 |     
|                             
|Item 4.                       |  | Controls and Procedures                                                               |  |  | 40 |     
|                             
|PART II. OTHER INFORMATION    |  |                                                                                       |  | 
|                             
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                      |  |  | 41 |     
|                             
|                              |  | Signatures                                                                            |  |  | 42 |     

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PART I. FINANCIAL INFORMATION







ITEM 1. FINANCIAL STATEMENTS




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

|                                     |                                                                                                                                                         |                                            |         |            |           |              |         |               |           |  |  | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ---------- | --------- | ------------ | ------- | ------------- | --------- |  |  | 
|                                     |                                                                                                                                                         |                                            |         |            |           | December 31, |         | September 30,
|                                     |                                                                                                                                                         |                                            |         |            |           | 2002         |         | 2002         
|                                     |                                                                                                                                                         |                                            |         |            |           |              |         |              
|ASSETS                              
|Current assets:                      |                                                                                                                                                         |                                            |         |            |           |              |         |              
|                                     | Cash and cash equivalents                                                                                                                               |                                            | $       | 234,562    |           |              | $       | 168,357       |          
|                                     | Short-term investments                                                                                                                                  |                                            |         | 162,543    |           |              |         | 99,466        |          
|                                     | Notes receivable from Skyworks                                                                                                                          |                                            |         |           |           |              |         | 180,000       |          
|                                     | Receivables, net of allowance of $6,045 and $8,405 at
December 31, 2002 and September 30, 2002, respectively                                            |                                            |         | 75,252     |           |              |         | 73,552        |          
|                                     | Inventories                                                                                                                                             |                                            |         | 70,830     |           |              |         | 57,330        |          
|                                     | Deferred income taxes                                                                                                                                   |                                            |         | 32,258     |           |              |         | 32,233        |          
|                                     | Other current assets                                                                                                                                    |                                            |         | 41,083     |           |              |         | 52,695        |          
|                                     |                                                                                                                                                         |                                            |         |            |           |              |         |              
|                                     |                                                                                                                                                         | Total current assets                       |         |            | 616,528   |              |         |               | 663,633   | 
|Property, plant and equipment, net   |                                                                                                                                                         |                                            | 82,761  |            |           |              | 93,994  |              
|Goodwill                             |                                                                                                                                                         |                                            | 621,621 |            |           |              | 615,326 |              
|Intangible assets, net               |                                                                                                                                                         |                                            | 138,593 |            |           |              | 157,876 |              
|Deferred income taxes                |                                                                                                                                                         |                                            | 224,445 |            |           |              | 224,168 |              
|Other assets                         |                                                                                                                                                         |                                            | 159,995 |            |           |              | 156,038 |              
|                                     |                                                                                                                                                         |                                            |         |            |           |              |         |              
|                                     |                                                                                                                                                         | Total assets                               |         | $          | 1,843,943 |              |         | $             | 1,911,035 | 
|                                     |                                                                                                                                                         |                                            |         |            |           |              |         |               |          
|LIABILITIES AND SHAREHOLDERS EQUITY
|Current liabilities:                 |                                                                                                                                                         |                                            |         |            |           |              |         |              
|                                     | Accounts payable                                                                                                                                        |                                            | $       | 88,916     |           |              | $       | 101,342       |          
|                                     | Deferred revenue                                                                                                                                        |                                            |         | 7,744      |           |              |         | 10,420        |          
|                                     | Accrued compensation and benefits                                                                                                                       |                                            |         | 36,208     |           |              |         | 38,929        |          
|                                     | Other current liabilities                                                                                                                               |                                            |         | 71,115     |           |              |         | 71,738        |          
|                                     |                                                                                                                                                         |                                            |         |            |           |              |         |              
|                                     |                                                                                                                                                         | Total current liabilities                  |         |            | 203,983   |              |         |               | 222,429   | 
|Convertible subordinated notes       |                                                                                                                                                         |                                            | 681,825 |            |           |              | 681,825 |              
|Other liabilities                    |                                                                                                                                                         |                                            | 54,864  |            |           |              | 58,954  |              
|                                     |                                                                                                                                                         |                                            |         |            |           |              |         |              
|                                     |                                                                                                                                                         | Total liabilities                          |         |            | 940,672   |              |         |               | 963,208   | 
|                                     |                                                                                                                                                         |                                            |         |            |           |              |         |              
|Commitments and contingencies        |                                                                                                                                                         |                                            |        |            |           |              |        |              
|Shareholders equity:                |                                                                                                                                                         |                                            |         |            |           |              |         |              
|                                     | Preferred and junior preferred stock                                                                                                                    |                                            |         |           |           |              |         |              |          
|                                     | Common stock, $1.00 par value: 1,000,000 shares
authorized; 265,963 and 265,676 shares issued at
December 31, 2002 and September 30, 2002, respectively |                                            |         | 265,963    |           |              |         | 265,676       |          
|                                     | Additional paid-in capital                                                                                                                              |                                            |         | 3,220,199  |           |              |         | 3,219,044     |          
|                                     | Accumulated deficit                                                                                                                                     |                                            |         | (2,559,596 | )         |              |         | (2,507,407    | )        
|                                     | Accumulated other comprehensive loss                                                                                                                    |                                            |         | (22,332    | )         |              |         | (28,077       | )        
|                                     | Unearned compensation                                                                                                                                   |                                            |         | (963       | )         |              |         | (1,409        | )        
|                                     |                                                                                                                                                         |                                            |         |            |           |              |         |              
|                                     |                                                                                                                                                         | Total shareholders equity                 |         |            | 903,271   |              |         |               | 947,827   | 
|                                     |                                                                                                                                                         |                                            |         |            |           |              |         |              
|                                     |                                                                                                                                                         | Total liabilities and shareholders equity |         | $          | 1,843,943 |              |         | $             | 1,911,035 | 
|                                     |                                                                                                                                                         |                                            |         |            |           |              |         |               |          

See accompanying notes to consolidated condensed financial statements.

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

|                                                       |                                     |                          |         |                    |         |      |          |        |         | 
|------------------------------------------------------ | ----------------------------------- | ------------------------ | ------- | ------------------ | ------- | ---- | -------- | ------ | ------- | 
|                                                       |                                     |                          |         | Three months ended
|                                                       |                                     |                          |         | December 31,      
|                                                       |                                     |                          |         |                   
|                                                       |                                     |                          |         | 2002               |         | 2001
|                                                       |                                     |                          |         |                    |         |     
|Net revenues                                           |                                     | $                        | 164,456 |                    |         | $    | 141,115  |       
|Cost of goods sold                                     |                                     |                          | 87,599  |                    |         |      | 93,274   |       
|                                                       |                                     |                          |         |                    |         |      |          |       
|Gross margin                                           |                                     |                          | 76,857  |                    |         |      | 47,841   |       
|Operating expenses:                                    |                                     |                          |         |                    |         |      |          |       
|                                                       | Research and development            |                          |         | 71,467             |         |      |          | 79,413 |        
|                                                       | Selling, general and administrative |                          |         | 34,907             |         |      |          | 45,052 |        
|                                                       | Amortization of intangible assets   |                          |         | 14,999             |         |      |          | 85,522 |        
|                                                       | Special charges                     |                          |         | 10,605             |         |      |          | 1,000  |        
|                                                       |                                     |                          |         |                    |         |      |          |       
|                                                       |                                     | Total operating expenses |         |                    | 131,978 |      |          |        | 210,987 | 
|                                                       |                                     |                          |         |                    |         |      |          |       
|Operating loss                                         |                                     |                          | (55,121 | )                  |         |      | (163,146 | )     
|Other income (expense), net                            |                                     |                          | 3,368   |                    |         |      | (9,169   | )     
|                                                       |                                     |                          |         |                    |         |      |          |       
|Loss before income taxes                               |                                     |                          | (51,753 | )                  |         |      | (172,315 | )     
|Provision (benefit) for income taxes                   |                                     |                          | 436     |                    |         |      | (2,549   | )     
|                                                       |                                     |                          |         |                    |         |      |          |       
|Loss from continuing operations                        |                                     |                          | (52,189 | )                  |         |      | (169,766 | )     
|Loss from discontinued operations,
net of income taxes |                                     |                          |        |                    |         |      | (34,724  | )     
|                                                       |                                     |                          |         |                    |         |      |          |       
|Net loss                                               |                                     | $                        | (52,189 | )                  |         | $    | (204,490 | )     
|                                                       |                                     |                          |         |                    |         |      |          |       
|Loss per share, basic and diluted:                     |                                     |                          |         |                    |         |      |          |       
|                                                       | Continuing operations               |                          | $       | (0.20              | )       |      | $        | (0.67  | )      
|                                                       | Discontinued operations             |                          |         |                   |         |      |          | (0.13  | )      
|                                                       |                                     |                          |         |                    |         |      |          |       
|                                                       | Net loss                            |                          | $       | (0.20              | )       |      | $        | (0.80  | )      
|                                                       |                                     |                          |         |                    |         |      |          |       
|Number of shares used in per share computation         |                                     |                          | 265,714 |                    |         |      | 254,362  |       
|                                                       |                                     |                          |         |                    |         |      |          |       

See accompanying notes to consolidated condensed financial statements.

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

|                                                                                                                                                 |                                             |                                                |         |                    |         |      |          |        |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------- | ---------------------------------------------- | ------- | ------------------ | ------- | ---- | -------- | ------ | ------- | -
|                                                                                                                                                 |                                             |                                                |         | Three months ended
|                                                                                                                                                 |                                             |                                                |         | December 31,      
|                                                                                                                                                 |                                             |                                                |         |                   
|                                                                                                                                                 |                                             |                                                |         | 2002               |         | 2001
|                                                                                                                                                 |                                             |                                                |         |                    |         |     
|Cash flows from operating activities:                                                                                                            |                                             |                                                |         |                    |         |      |          |       
|Loss from continuing operations                                                                                                                  |                                             | $                                              | (52,189 | )                  |         | $    | (169,766 | )     
|Adjustments to reconcile loss from continuing
operations to
net cash used in operating activities, net of
effects of dispositions of businesses: |                                             |                                                |         |                    |         |      |          |       
|                                                                                                                                                 | Depreciation                                |                                                |         | 9,680              |         |      |          | 14,170 |        
|                                                                                                                                                 | Amortization of intangible assets           |                                                |         | 14,999             |         |      |          | 85,522 |        
|                                                                                                                                                 | Asset impairments                           |                                                |         | 2,386              |         |      |          |       |        
|                                                                                                                                                 | Provision for losses on accounts receivable |                                                |         | (2,714             | )       |      |          | 1,203  |        
|                                                                                                                                                 | Inventory provisions                        |                                                |         | 7,004              |         |      |          | 10,887 |        
|                                                                                                                                                 | Other non-cash items, net                   |                                                |         | (1,751             | )       |      |          | 4,687  |        
|                                                                                                                                                 | Changes in assets and liabilities:          |                                                |         |                    |         |      |          |        |        
|                                                                                                                                                 |                                             | Receivables                                    |         |                    | 1,008   |      |          |        | 15,060  |  
|                                                                                                                                                 |                                             | Inventories                                    |         |                    | (20,504 | )    |          |        | 914     |  
|                                                                                                                                                 |                                             | Accounts payable                               |         |                    | (12,986 | )    |          |        | 14,107  |  
|                                                                                                                                                 |                                             | Deferred revenue                               |         |                    | (2,676  | )    |          |        | (5,270  | )
|                                                                                                                                                 |                                             | Accrued expenses and other current liabilities |         |                    | (3,478  | )    |          |        | (28,433 | )
|                                                                                                                                                 |                                             | Other                                          |         |                    | 6,633   |      |          |        | 5,457   |  
|                                                                                                                                                 |                                             |                                                |         |                    |         |      |          |       
|Net cash used in operating activities                                                                                                            |                                             |                                                | (54,588 | )                  |         |      | (51,462  | )     
|                                                                                                                                                 |                                             |                                                |         |                    |         |      |          |       
|Cash flows from investing activities:                                                                                                            |                                             |                                                |         |                    |         |      |          |       
|Advances to Skyworks                                                                                                                             |                                             |                                                | (35,000 | )                  |         |      |         |       
|Repayment of Term Notes and advances by Skyworks                                                                                                 |                                             |                                                | 170,000 |                    |         |      |         |       
|Purchase of marketable securities                                                                                                                |                                             |                                                | (44,615 | )                  |         |      | (78,683  | )     
|Sale of marketable securities                                                                                                                    |                                             |                                                | 34,929  |                    |         |      | 79,563   |       
|Capital expenditures                                                                                                                             |                                             |                                                | (4,795  | )                  |         |      | (6,518   | )     
|Proceeds from sales of assets                                                                                                                    |                                             |                                                | 1,025   |                    |         |      | 20,805   |       
|Investments in and advances to businesses                                                                                                        |                                             |                                                | (1,500  | )                  |         |      | (3,000   | )     
|                                                                                                                                                 |                                             |                                                |         |                    |         |      |          |       
|Net cash provided by investing activities                                                                                                        |                                             |                                                | 120,044 |                    |         |      | 12,167   |       
|                                                                                                                                                 |                                             |                                                |         |                    |         |      |          |       
|Cash flows from financing activities:                                                                                                            |                                             |                                                |         |                    |         |      |          |       
|Proceeds from exercise of stock options                                                                                                          |                                             |                                                | 749     |                    |         |      | 4,907    |       
|                                                                                                                                                 |                                             |                                                |         |                    |         |      |          |       
|Net cash provided by financing activities                                                                                                        |                                             |                                                | 749     |                    |         |      | 4,907    |       
|                                                                                                                                                 |                                             |                                                |         |                    |         |      |          |       
|Net cash used in discontinued operations                                                                                                         |                                             |                                                |        |                    |         |      | (18,221  | )     
|                                                                                                                                                 |                                             |                                                |         |                    |         |      |          |       
|Net increase (decrease) in cash and cash equivalents                                                                                             |                                             |                                                | 66,205  |                    |         |      | (52,609  | )     
|Cash and cash equivalents at beginning of period                                                                                                 |                                             |                                                | 168,357 |                    |         |      | 182,260  |       
|                                                                                                                                                 |                                             |                                                |         |                    |         |      |          |       
|Cash and cash equivalents at end of period                                                                                                       |                                             | $                                              | 234,562 |                    |         | $    | 129,651  |       
|                                                                                                                                                 |                                             |                                                |         |                    |         |      |          |       

See accompanying notes to consolidated condensed financial statements.

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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 communications applications. 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
two business segments: the Broadband Communications business and Mindspeed
Technologies, the Companys Internet infrastructure business.

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 continued to hold their Conexant shares.
Upon completion of the Merger, Alpha and its subsidiaries purchased Conexants
semiconductor assembly, module manufacturing and test facility located in
Mexicali, Mexico and Conexants package design team that supports the Mexicali
facility (together, the Mexicali Operations) for $150 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) included in the accompanying
consolidated condensed statements of operations were as follows (in thousands):

|                                  |  |              |         |  
|--------------------------------- |  | ------------ | ------- | -
|                                  |  | Three months
|                                  |  | ended       
|                                  |  | December 31,
|                                  |  | 2001        
|                                  |  |             
|Net revenues                      |  | $            | 88,404  |  
|                                  |  |              |         |  
|Loss before income taxes          |  | $            | (31,175 | )
|Provision for income taxes        |  |              | 3,549   |  
|                                  |  |              |         |  
|Loss from discontinued operations |  | $            | (34,724 | )
|                                  |  |              |         |  

In September 2000, the Companys Board of Directors approved in principle the
separation of the Broadband Communications and Mindspeed Technologies
businesses. Although business conditions have delayed the separation, the
Company remains committed to completing the separation as soon as business and
market conditions permit. The separation may be subject to the approval of the
Companys shareholders, the receipt of a ruling from the Internal Revenue
Service that any related spin-off will qualify as a tax-free distribution and
other conditions. There can be no assurance that the separation will be
successfully completed.

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, 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 December 31, 2002 and 2001 relate to the actual fiscal 2003 first quarter
ended December 27, 2002 and the actual fiscal 2002 first quarter ended December
28, 2001, respectively.

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

Supplemental Cash Flow Information Cash paid for interest was $1.4 million
and $2.0 million for the three months ended December 31, 2002 and 2001,
respectively. Net income tax payments for the three months ended December 31,
2002 and 2001 were $0.3 million and $1.8 million, respectively.

Recent Accounting Standards 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 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 $4.7 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, the Company ceased amortizing goodwill against its
results of operations.

SFAS 142 also requires the Company to complete a transition impairment test of
its goodwill (as of the beginning of fiscal 2003) no later than the fourth
quarter of fiscal 2003. If the recorded value of goodwill exceeds its estimated
fair value, the Company will write down the value of goodwill to estimated fair
value. Any such transition impairment loss will be recognized as the effect of
a change in accounting principle. The Company expects to complete the
transition impairment test during the second quarter of fiscal 2003 and expects
that the transition impairment test will result in a significant write-down of
the value of goodwill. In addition, future periodic impairment tests may result
in significant write-downs of the value of goodwill (charged against income).

The following table shows our net loss and our net loss per share, as if the
non-amortization provisions of SFAS 142 had been in effect during the three
months ended December 31, 2001 (in thousands, except per share amounts):

|                                                                                 |             |   |                    |       |      |   |          |       |  
|-------------------------------------------------------------------------------- | ----------- | - | ------------------ | ----- | ---- | - | -------- | ----- | -
|                                                                                 |             |   | Three months ended
|                                                                                 |             |   | December 31,      
|                                                                                 |             |   |                   
|                                                                                 |             |   | 2002               |       | 2001
|                                                                                 |             |   |                    |       |     
|Net loss, as reported                                                            |             | $ | (52,189            | )     |      | $ | (204,490 | )    
|Amortization of goodwill                                                         |             |   |                   |       |      |   | 72,254   |      
|Amortization of assembled workforce previously
classified as an intangible asset |             |   |                   |       |      |   | 503      |      
|                                                                                 |             |   |                    |       |      |   |          |      
|Net loss, as adjusted                                                            |             | $ | (52,189            | )     |      | $ | (131,733 | )    
|                                                                                 |             |   |                    |       |      |   |          |      
|Net loss per share, basic and diluted:                                           |             |   |                    |       |      |   |          |      
|                                                                                 | As reported |   | $                  | (0.20 | )    |   | $        | (0.80 | )
|                                                                                 |             |   |                    |       |      |   |          |      
|                                                                                 | As adjusted |   | $                  | (0.20 | )    |   | $        | (0.52 | )
|                                                                                 |             |   |                    |       |      |   |          |      

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 of. The Company adopted SFAS 144 as of the beginning of fiscal
2003, with no significant impact on its financial position or results of
operations. However, future impairment reviews may result in significant
charges against earnings to write down the value of long-lived assets.

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

8



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

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. Management does not expect the
adoption of SFAS 146 to have a significant impact on the Companys financial
position.

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 a certain guarantees made after
December 31, 2002. The Company adopted the disclosure provisions of FIN 45 in
the first quarter of fiscal 2003, with no impact on its 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 is currently evaluating the effect, if any, of such adoption on its
financial position and results of operations.

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

2.     Supplemental Financial Statement Data

Short-term Investments

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

|                                                   |  |           |         |         |  |                  |       |                  |  |   |     |   |  |   |         | 
|-------------------------------------------------- |  | --------- | ------- | ------- |  | ---------------- | ----- | ---------------- |  | - | --- | - |  | - | ------- | 
|                                                   |  |           |         |         |  | Gross Unrealized |       | Gross Unrealized |  |   |     |  
|                                                   |  | Amortized |         | Holding |  | Holding          |       | Fair            
|                                                   |  | Cost      |         | Gains   |  | Losses           |       | Value           
|                                                   |  |           |         |         |  |                  |       |                 
|December 31, 2002:                                 |  |           |         |         |  |                  |       |                  |  |   |     |   |  |   |         | 
|U.S. government agencies                           |  | $         | 35,443  |         |  | $                | 355   |                  |  | $ |    |   |  | $ | 35,798  | 
|Foreign government securities                      |  |           | 8,383   |         |  |                  | 91    |                  |  |   |    |   |  |   | 8,474   | 
|Corporate debt securities                          |  |           | 64,363  |         |  |                  | 445   |                  |  |   | (41 | ) |  |   | 64,767  | 
|Skyworks 15% convertible senior subordinated notes |  |           | 45,379  |         |  |                  | 3,806 |                  |  |   |    |   |  |   | 49,185  | 
|Equity securities                                  |  |           | 2,432   |         |  |                  | 1,887 |                  |  |   |    |   |  |   | 4,319   | 
|                                                   |  |           |         |         |  |                  |       |                  |  |   |     |   |  |   |         | 
|                                                   |  | $         | 156,000 |         |  | $                | 6,584 |                  |  | $ | (41 | ) |  | $ | 162,543 | 
|                                                   |  |           |         |         |  |                  |       |                  |  |   |     |   |  |   |         | 
|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):

|                |  |              |        |               |  |   |        | 
|--------------- |  | ------------ | ------ | ------------- |  | - | ------ | 
|                |  | December 31, |        | September 30,
|                |  | 2002         |        | 2002         
|                |  |              |        |              
|Raw materials   |  | $            |       |               |  | $ | 363    | 
|Work-in-process |  |              | 49,441 |               |  |   | 39,313 | 
|Finished goods  |  |              | 21,389 |               |  |   | 17,654 | 
|                |  |              |        |               |  |   |        | 
|                |  | $            | 70,830 |               |  | $ | 57,330 | 
|                |  |              |        |               |  |   |        | 

9



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

Goodwill

During the first quarter of fiscal 2003, no goodwill was acquired, impaired or
written off. Goodwill by operating segment was adjusted as follows (in
thousands):

|                                             |  |                |        |              |  |       |         |  |  |   |         | 
|-------------------------------------------- |  | -------------- | ------ | ------------ |  | ----- | ------- |  |  | - | ------- | 
|                                             |  | Broadband      |        | Mindspeed    |  |       |         | 
|                                             |  | Communications |        | Technologies |  | Total
|                                             |  |                |        |              |  |      
|Goodwill, September 30, 2002                 |  | $              | 46,426 |              |  | $     | 568,900 |  |  | $ | 615,326 | 
|Assembled workforce reclassified to goodwill |  |                | 2,207  |              |  |       | 2,474   |  |  |   | 4,681   | 
|Other adjustments                            |  |                | 236    |              |  |       | 1,378   |  |  |   | 1,614   | 
|                                             |  |                |        |              |  |       |         |  |  |   |         | 
|Goodwill, December 31, 2002                  |  | $              | 48,869 |              |  | $     | 572,752 |  |  | $ | 621,621 | 
|                                             |  |                |        |              |  |       |         |  |  |   |         | 

Intangible Assets

Intangible assets consist of the following (in thousands):

|                        |  |                   |         |                    |  |     |          |       |  |              |         |             |  |   |         |  |  |   |          |   |  |   |         | 
|----------------------- |  | ----------------- | ------- | ------------------ |  | --- | -------- | ----- |  | ------------ | ------- | ----------- |  | - | ------- |  |  | - | -------- | - |  | - | ------- | 
|                        |  | December 31, 2002 |         | September 30, 2002
|                        |  |                   |         |                   
|                        |  | Gross             |         | Accumulated        |  |     |          |       |  | Gross        |         | Accumulated |  |   |         | 
|                        |  | Asset             |         | Amortization       |  | Net |          | Asset |  | Amortization |         | Net        
|                        |  |                   |         |                    |  |     |          |       |  |              |         |            
|Developed technology    |  | $                 | 289,758 |                    |  | $   | (166,155 | )     |  | $            | 123,603 |             |  | $ | 288,996 |  |  | $ | (152,107 | ) |  | $ | 136,889 | 
|Customer base           |  |                   | 27,822  |                    |  |     | (15,718  | )     |  |              | 12,104  |             |  |   | 27,650  |  |  |   | (14,218  | ) |  |   | 13,432  | 
|Assembled workforce     |  |                   |        |                    |  |     |         |       |  |              |        |             |  |   | 10,592  |  |  |   | (5,911   | ) |  |   | 4,681   | 
|Other intangible assets |  |                   | 13,773  |                    |  |     | (10,887  | )     |  |              | 2,886   |             |  |   | 13,533  |  |  |   | (10,659  | ) |  |   | 2,874   | 
|                        |  |                   |         |                    |  |     |          |       |  |              |         |             |  |   |         |  |  |   |          |   |  |   |         | 
|                        |  | $                 | 331,353 |                    |  | $   | (192,760 | )     |  | $            | 138,593 |             |  | $ | 340,771 |  |  | $ | (182,895 | ) |  | $ | 157,876 | 
|                        |  |                   |         |                    |  |     |          |       |  |              |         |             |  |   |         |  |  |   |          |   |  |   |         | 

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 |  | $    | 59,995 |      |  | $    | 59,995 |      |  | $    | 27,880 |  |  | $ | 1,179 |  |  | $ | 1,179 | 

Other Income (Expense)

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

|                                                                           |  |                    |        |      |  |   |        |  
|-------------------------------------------------------------------------- |  | ------------------ | ------ | ---- |  | - | ------ | -
|                                                                           |  | Three months ended
|                                                                           |  | December 31,      
|                                                                           |  |                   
|                                                                           |  | 2002               |        | 2001
|                                                                           |  |                    |        |     
|Investment and interest income                                             |  | $                  | 5,674  |      |  | $ | 3,418  |  
|Change in fair value of Skyworks 15% convertible
senior subordinated notes |  |                    | 4,029  |      |  |   |       |  
|Interest expense                                                           |  |                    | (7,596 | )    |  |   | (7,907 | )
|Write-down of non-marketable investments                                   |  |                    |       |      |  |   | (5,675 | )
|Other                                                                      |  |                    | 1,261  |      |  |   | 995    |  
|                                                                           |  |                    |        |      |  |   |        |  
|                                                                           |  | $                  | 3,368  |      |  | $ | (9,169 | )
|                                                                           |  |                    |        |      |  |   |        |  

3.     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 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

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

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 December 31, 2002, the 15% convertible senior subordinated notes are
carried at their fair value of $49.2 million (including the $6.1 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.

4.     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.

5.     Comprehensive Loss

Comprehensive loss is as follows (in thousands):

|                                   |                                                             |                                   |         |                    |         |      |          |        |          |  
|---------------------------------- | ----------------------------------------------------------- | --------------------------------- | ------- | ------------------ | ------- | ---- | -------- | ------ | -------- | -
|                                   |                                                             |                                   |         | Three months ended
|                                   |                                                             |                                   |         | December 31,      
|                                   |                                                             |                                   |         |                   
|                                   |                                                             |                                   |         | 2002               |         | 2001
|                                   |                                                             |                                   |         |                    |         |     
|Net loss                           |                                                             | $                                 | (52,189 | )                  |         | $    | (204,490 | )     
|Other comprehensive income (loss): |                                                             |                                   |         |                    |         |      |          |       
|                                   | Foreign currency translation adjustments                    |                                   |         | 2,135              |         |      |          | (2,449 | )       
|                                   | Change in unrealized gains on available-for-sale securities |                                   |         | 2,048              |         |      |          | (1,135 | )       
|                                   | Change in unrealized gains on forward exchange contracts    |                                   |         |                   |         |      |          | (110   | )       
|                                   | Minimum pension liability adjustments                       |                                   |         | 1,562              |         |      |          |       |         
|                                   | Effect of income taxes                                      |                                   |         |                   |         |      |          | 497    |         
|                                   |                                                             |                                   |         |                    |         |      |          |       
|                                   |                                                             | Other comprehensive income (loss) |         |                    | 5,745   |      |          |        | (3,197   | )
|                                   |                                                             |                                   |         |                    |         |      |          |       
|                                   |                                                             | Comprehensive loss                |         | $                  | (46,444 | )    |          | $      | (207,687 | )
|                                   |                                                             |                                   |         |                    |         |      |          |       

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

|                                                              |                                      |   |              |         |               |   |         |         |  
|------------------------------------------------------------- | ------------------------------------ | - | ------------ | ------- | ------------- | - | ------- | ------- | -
|                                                              |                                      |   | December 31, |         | September 30,
|                                                              |                                      |   | 2002         |         | 2002         
|                                                              |                                      |   |              |         |              
|Foreign currency translation adjustments                      |                                      | $ | (20,812      | )       |               | $ | (22,947 | )      
|Unrealized gains on available-for-sale securities, net of tax |                                      |   | 2,567        |         |               |   | 519     |        
|Minimum pension liability adjustments                         |                                      |   | (4,087       | )       |               |   | (5,649  | )      
|                                                              |                                      |   |              |         |               |   |         |        
|                                                              | Accumulated other comprehensive loss |   | $            | (22,332 | )             |   | $       | (28,077 | )
|                                                              |                                      |   |              |         |               |   |         |        

11



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

6.     Special Charges

Special charges consist of the following (in thousands):

|                      |  |                    |        |      |  |   |       | 
|--------------------- |  | ------------------ | ------ | ---- |  | - | ----- | 
|                      |  | Three months ended
|                      |  | December 31,      
|                      |  |                   
|                      |  | 2002               |        | 2001
|                      |  |                    |        |     
|Asset impairments     |  | $                  | 2,386  |      |  | $ |      | 
|Restructuring         |  |                    | 5,545  |      |  |   | 1,000 | 
|Other special charges |  |                    | 2,674  |      |  |   |      | 
|                      |  |                    |        |      |  |   |       | 
|                      |  | $                  | 10,605 |      |  | $ | 1,000 | 
|                      |  |                    |        |      |  |   |       | 

Asset Impairments

During the first quarter of fiscal 2003, the Company recorded asset impairment
charges totaling $2.4 million, principally in the Broadband Communications
segment. The impairment charges related to leasehold improvements associated
with properties no longer occupied by the Company and other assets that
management determined to abandon or scrap. The amounts of the impairment
charges were determined by comparing the assets estimated fair values, less
costs to sell, to their carrying values. The estimated fair values were
determined by management, using all available information, based upon 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-downs established a
new cost basis for the impaired assets.

Restructuring Charges

In fiscal 2001, the Company implemented a number of cost reduction initiatives
to more closely align its cost structure with the then-current business
environment. The cost reduction initiatives included workforce reductions,
temporary shutdowns of the Companys manufacturing facilities, significant
reductions in capital spending, the consolidation of certain facilities and
salary reductions for the senior management team until the Company returns to
profitability. In fiscal 2002 and 2003, the Company expanded the cost reduction
initiatives to provide for further workforce reductions and the consolidation
of additional facilities. The costs and expenses associated with the
restructuring activities are included in special charges in the accompanying
consolidated statements of operations.

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 900 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.

In connection with this broad reduction in workforce, the Company terminated
approximately 840 employees (including approximately 130 employees in fiscal
2002). The charges for the workforce reduction aggregated $9.4 million
(including $2.6 million in fiscal 2002) and were based upon estimates of the
cost of severance benefits for the affected employees. These actions reduced
the Companys workforce in both the Broadband Communications and Mindspeed
Technologies segments, 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.

12



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

Activity and liability balances related to the 2001 global restructuring
actions through December 31, 2002 are as follows (in thousands):

|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|----------------------------------------- |  | ---------- | ------ | --------- |  | ----- | ------ | - |  | - | ------ | -
|                                          |  | Workforce  |        | Facility  |  |       |        |  
|                                          |  | reductions |        | and other |  | Total
|                                          |  |            |        |           |  |      
|Charged to costs and expenses             |  | $          | 6,776  |           |  | $     | 5,584  |   |  | $ | 12,360 |  
|Cash payments                             |  |            | (4,155 | )         |  |       | (223   | ) |  |   | (4,378 | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, September 30, 2001 |  |            | 2,621  |           |  |       | 5,361  |   |  |   | 7,982  |  
|Charged to costs and expenses             |  |            | 2,616  |           |  |       | 172    |   |  |   | 2,788  |  
|Expense reversal                          |  |            |       |           |  |       | (1,646 | ) |  |   | (1,646 | )
|Cash payments                             |  |            | (3,432 | )         |  |       | (2,307 | ) |  |   | (5,739 | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, September 30, 2002 |  |            | 1,805  |           |  |       | 1,580  |   |  |   | 3,385  |  
|Expense reversal                          |  |            | (61    | )         |  |       |       |   |  |   | (61    | )
|Cash payments                             |  |            | (90    | )         |  |       | (184   | ) |  |   | (274   | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, December 31, 2002  |  | $          | 1,654  |           |  | $     | 1,396  |   |  | $ | 3,050  |  
|                                          |  |            |        |           |  |       |        |   |  |   |        |  

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
410 employees and recorded charges aggregating $7.8 million. These charges were
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 reduced the Companys workforce in both the Broadband Communications and
Mindspeed Technologies segments, including approximately 220 employees in the
Companys manufacturing operations. During the first quarter of fiscal 2003,
the Company reversed $0.1 million of previously accrued costs upon the
resolution of liabilities for severance benefits payable under the plan.

Activity and liability balances related to the strategic manufacturing
restructuring actions through December 31, 2002 are as follows (in thousands):

|                                          |  |            |        |  
|----------------------------------------- |  | ---------- | ------ | -
|                                          |  | Workforce 
|                                          |  | reductions
|                                          |  |           
|Charged to costs and expenses             |  | $          | 7,756  |  
|Cash payments                             |  |            | (5,006 | )
|                                          |  |            |        |  
|Restructuring balance, September 30, 2001 |  |            | 2,750  |  
|Cash payments                             |  |            | (2,604 | )
|                                          |  |            |        |  
|Restructuring balance, September 30, 2002 |  |            | 146    |  
|Expense reversal                          |  |            | (146   | )
|                                          |  |            |        |  
|Restructuring balance, December 31, 2002  |  | $          |       |  
|                                          |  |            |        |  

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 230 employees and recorded charges aggregating $4.5
million. These charges were based upon estimates of the cost of severance
benefits for the affected employees. The Company completed these actions in
fiscal 2002, reducing its workforce by approximately 120 employees in the
Broadband Communications segment and approximately 110 employees in the
Mindspeed Technologies segment. In addition, the Company recorded restructuring
charges of $12.7 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.

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

During the first quarter of fiscal 2003, the Company initiated a further
workforce reduction affecting 58 employees in the Broadband Communications
segment and recorded additional charges of $1.9 million based upon estimates of
the cost of severance benefits for the affected employees. Activity and
liability balances related to the 2002 corporate and manufacturing
restructuring actions through December 31, 2002 are as follows (in thousands):

|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|----------------------------------------- |  | ---------- | ------ | --------- |  | ----- | ------ | - |  | - | ------ | -
|                                          |  | Workforce  |        | Facility  |  |       |        |  
|                                          |  | reductions |        | and other |  | Total
|                                          |  |            |        |           |  |      
|Charged to costs and expenses             |  | $          | 4,534  |           |  | $     | 12,690 |   |  | $ | 17,224 |  
|Cash payments                             |  |            | (3,179 | )         |  |       | (468   | ) |  |   | (3,647 | )
|Non-cash charges                          |  |            | (609   | )         |  |       |       |   |  |   | (609   | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, September 30, 2002 |  |            | 746    |           |  |       | 12,222 |   |  |   | 12,968 |  
|Charged to costs and expenses             |  |            | 1,904  |           |  |       |       |   |  |   | 1,904  |  
|Cash payments                             |  |            | (1,013 | )         |  |       | (530   | ) |  |   | (1,543 | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, December 31, 2002  |  | $          | 1,637  |           |  | $     | 11,692 |   |  | $ | 13,329 |  
|                                          |  |            |        |           |  |       |        |   |  |   |        |  

Mindspeed Strategic Restructuring Plan During fiscal 2002, the Companys
Mindspeed Technologies segment announced a number of expense reduction and
restructuring initiatives intended to reduce Mindspeeds operating cost
structure and focus its research and development spending on products for the
Internet infrastructure market segments it believes offer the most attractive
near-term growth prospects. These actions include the elimination of research
and development spending in high-end optical networking applications, the
closure of Novanet, the divestiture of NetPlane and a reduction of support
services spending and reduced Mindspeeds workforce by over 400 employees.
During fiscal 2002, the Company terminated approximately 280 employees and
recorded charges aggregating $7.1 million. These charges were based upon
estimates of the cost of severance benefits for the affected employees. These
actions reduced the Companys workforce throughout the Mindspeed Technologies
segment. In addition, the Company recorded restructuring charges of $16.1
million for costs associated with the consolidation of certain facilities and
lease cancellation and related costs.

During the first quarter of fiscal 2003, the Company implemented an additional
workforce reduction affecting approximately 80 employees in the Mindspeed
Technologies segment and closed its design center in Bristol, United Kingdom.
The Company recorded additional charges of $3.1 million for the workforce
reductions, based upon estimates of the cost of severance benefits for the
affected employees, and $0.8 million for commitments under license obligations
that management determined would not be used in the future. During the first
quarter of fiscal 2003, the Company substantially completed these workforce
reductions and the Company completed the divestiture of NetPlane in January
2003. Activity and liability balances related to the Mindspeed strategic
restructuring actions through December 31, 2002 are as follows (in thousands):

|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|----------------------------------------- |  | ---------- | ------ | --------- |  | ----- | ------ | - |  | - | ------ | -
|                                          |  | Workforce  |        | Facility  |  |       |        |  
|                                          |  | reductions |        | and other |  | Total
|                                          |  |            |        |           |  |      
|Charged to costs and expenses             |  | $          | 7,061  |           |  | $     | 16,109 |   |  | $ | 23,170 |  
|Cash payments                             |  |            | (2,419 | )         |  |       | (1,211 | ) |  |   | (3,630 | )
|Non-cash charges                          |  |            | (552   | )         |  |       | (354   | ) |  |   | (906   | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, September 30, 2002 |  |            | 4,090  |           |  |       | 14,544 |   |  |   | 18,634 |  
|Charged to costs and expenses             |  |            | 3,056  |           |  |       | 792    |   |  |   | 3,848  |  
|Cash payments                             |  |            | (2,253 | )         |  |       | (2,629 | ) |  |   | (4,882 | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, December 31, 2002  |  | $          | 4,893  |           |  | $     | 12,707 |   |  | $ | 17,600 |  
|                                          |  |            |        |           |  |       |        |   |  |   |        |  

Through December 31, 2002, the Company has paid an aggregate of $31.7 million
in connection with its fiscal 2001 and 2002 restructuring plans and has a
remaining accrued restructuring balance aggregating $34.0 million. The Company
expects to pay a majority of the amounts accrued for the workforce reductions
during 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 operations, and are
not expected to significantly impact the Companys liquidity.

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

Other Special Charges

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

7.     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.

8.     Segment Information

The Company operates and tracks its results in two segmentsBroadband
Communications and Mindspeed Technologies. The Broadband Communications segment
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. The Broadband Communications
segment also includes the Companys foundation analog dial-up access portfolio,
including PC data and fax modems, and its broadcast video encoder and decoder
product family. Mindspeed Technologies designs, develops and sells
semiconductor networking solutions for communications applications that extend
from the edge of the Internet and throughout linked metropolitan area networks.

The accounting policies of the segments are the same as those described in Note
1. The Company evaluates segment performance based on segment operating income
(loss) excluding amortization of intangible assets, special charges, in-process
research and development and stock compensation costs. Special charges excluded
from segment operating expenses and segment operating income (loss) consist of
asset impairments, restructuring charges, the settlement of certain litigation
and losses on the disposal of certain assets. This definition of segment
operating income (loss) may be different than definitions used by other
companies.

The tables below present information about reportable segments (in thousands):

|                                    |                            |                                 |         |                    |         |      |         |        |         |  
|----------------------------------- | -------------------------- | ------------------------------- | ------- | ------------------ | ------- | ---- | ------- | ------ | ------- | -
|                                    |                            |                                 |         | Three months ended
|                                    |                            |                                 |         | December 31,      
|                                    |                            |                                 |         |                   
|                                    |                            |                                 |         | 2002               |         | 2001
|                                    |                            |                                 |         |                    |         |     
|Broadband Communications:           |                            |                                 |         |                    |         |      |         |       
|Revenues                            |                            | $                               | 144,201 |                    |         | $    | 126,937 |       
|Cost of goods sold                  |                            |                                 | 81,462  |                    |         |      | 86,364  |       
|                                    |                            |                                 |         |                    |         |      |         |       
|                                    | Gross margin               |                                 |         | 62,739             |         |      |         | 40,573 |        
|Research and development            |                            |                                 | 39,769  |                    |         |      | 36,151  |       
|Selling, general and administrative |                            |                                 | 22,434  |                    |         |      | 23,377  |       
|                                    |                            |                                 |         |                    |         |      |         |       
|                                    | Segment operating expenses |                                 |         | 62,203             |         |      |         | 59,528 |        
|                                    |                            |                                 |         |                    |         |      |         |       
|                                    |                            | Segment operating income (loss) |         | $                  | 536     |      |         | $      | (18,955 | )
|                                    |                            |                                 |         |                    |         |      |         |       
|Mindspeed Technologies:             |                            |                                 |         |                    |         |      |         |       
|Revenues                            |                            | $                               | 20,255  |                    |         | $    | 14,178  |       
|Cost of goods sold                  |                            |                                 | 6,137   |                    |         |      | 6,910   |       
|                                    |                            |                                 |         |                    |         |      |         |       
|                                    | Gross margin               |                                 |         | 14,118             |         |      |         | 7,268  |        
|Research and development            |                            |                                 | 31,151  |                    |         |      | 41,747  |       
|Selling, general and administrative |                            |                                 | 12,085  |                    |         |      | 21,149  |       
|                                    |                            |                                 |         |                    |         |      |         |       
|                                    | Segment operating expenses |                                 |         | 43,236             |         |      |         | 62,896 |        
|                                    |                            |                                 |         |                    |         |      |         |       
|                                    |                            | Segment operating loss          |         | $                  | (29,118 | )    |         | $      | (55,628 | )
|                                    |                            |                                 |         |                    |         |      |         |       

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

A reconciliation of segment operating loss to operating loss is as follows (in
thousands):

|                                  |                |   |                    |         |      |   |         |          |  
|--------------------------------- | -------------- | - | ------------------ | ------- | ---- | - | ------- | -------- | -
|                                  |                |   | Three months ended
|                                  |                |   | December 31,      
|                                  |                |   |                   
|                                  |                |   | 2002               |         | 2001
|                                  |                |   |                    |         |     
|Total segment operating loss      |                | $ | (28,582            | )       |      | $ | (74,583 | )       
|Amortization of intangible assets |                |   | 14,999             |         |      |   | 85,522  |         
|Special charges                   |                |   | 10,605             |         |      |   | 1,000   |         
|Stock compensation                |                |   | 935                |         |      |   | 2,041   |         
|                                  |                |   |                    |         |      |   |         |         
|                                  | Operating loss |   | $                  | (55,121 | )    |   | $       | (163,146 | )
|                                  |                |   |                    |         |      |   |         |         

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

|                               |                    |   |                    |         |      |   |         |        | 
|------------------------------ | ------------------ | - | ------------------ | ------- | ---- | - | ------- | ------ | 
|                               |                    |   | Three months ended
|                               |                    |   | December 31,      
|                               |                    |   |                   
|                               |                    |   | 2002               |         | 2001
|                               |                    |   |                    |         |     
|United States                  |                    | $ | 23,181             |         |      | $ | 21,117  |       
|Other Americas                 |                    |   | 8,357              |         |      |   | 4,259   |       
|                               |                    |   |                    |         |      |   |         |       
|                               | Total Americas     |   |                    | 31,538  |      |   |         | 25,376 | 
|Taiwan                         |                    |   | 38,900             |         |      |   | 20,983  |       
|Hong Kong                      |                    |   | 39,643             |         |      |   | 46,887  |       
|Other Asia-Pacific             |                    |   | 28,569             |         |      |   | 18,225  |       
|                               |                    |   |                    |         |      |   |         |       
|                               | Total Asia-Pacific |   |                    | 107,112 |      |   |         | 86,095 | 
|Japan                          |                    |   | 11,075             |         |      |   | 13,267  |       
|Europe, Middle East and Africa |                    |   | 14,731             |         |      |   | 16,377  |       
|                               |                    |   |                    |         |      |   |         |       
|                               |                    | $ | 164,456            |         |      | $ | 141,115 |       
|                               |                    |   |                    |         |      |   |         |       

The Company believes a substantial portion of the products sold to 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 three
months ended December 31, 2002, one customer (a foreign distributor) accounted
for 11% of net revenues. For the three months ended December 31, 2001, another
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 any of the
periods presented.

9. 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. The Company may also be
responsible for certain federal income tax liabilities that relate to its
spin-off from Rockwell under the Tax Allocation Agreement, dated as of December
31, 1998, between the Company and Rockwell, which provides that the Company
will be responsible for certain taxes imposed on Rockwell, Conexant or Rockwell
shareholders. 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.

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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

We design, develop and sell semiconductor system solutions for communications
applications. Our expertise in mixed-signal processing allows us 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. We
operate in two business segments: our Broadband Communications business and
Mindspeed Technologies, our Internet infrastructure business.

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.

Our Broadband Communications business 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 (ADSL), cable and direct
broadcast satellite systems. The Broadband Communications business also
includes our foundation analog dial-up access portfolio and our video
processing product family. Our dial-up access products include a broad
portfolio of high speed modem chipsets and software for desktop and notebook PC
applications as well as embedded equipment applications including fax machines,
multifunctional peripherals, 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, personal video recorders and
DVD applications.

Mindspeed Technologies designs, develops and sells semiconductor networking
solutions for communications applications that extend from the edge of the
Internet and throughout linked metropolitan area networks. Mindspeed
Technologies products, ranging from physical-layer devices to higher-layer
network processors, are sold to infrastructure original equipment manufacturers
(OEMs) and include multiservice access products, T/E carrier products and
asynchronous transfer mode (ATM) network processing solutions, as well as
digital subscriber line (DSL) transceivers and crosspoint switches. OEMs use
our products in a variety of networking equipment, including voice and media
gateways, high-speed routers, ATM switches, add-drop multiplexers, DSL access
multiplexers, digital cross-connect systems and storage area servers.

We market and sell our semiconductor products and system solutions directly to
leading OEMs of communication electronics products and third-party electronic
manufacturing service providers, and indirectly through electronic components
distributors. Sales to distributors accounted for approximately 43% of net
revenues in the first quarter of fiscal 2003. One customer, a foreign
distributor, accounted for 11% of our net revenues in the first quarter of
fiscal 2003; no other customer accounted for 10% or more of our net revenues
for the period. Our top 20 customers accounted for 69% of net revenues for the
first quarter of fiscal 2003. Revenues derived from customers located in the
Americas, Europe, Japan and the Asia-Pacific region were 19%, 9%, 7% and 65%,
respectively, of our net revenues for the first quarter 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.

Spin-off and Merger of Wireless Communications Business

On June 25, 2002, we completed the distribution to Conexant shareholders (the
Spin-off Transaction) of outstanding shares of our wholly owned subsidiary
Washington Sub, Inc. (Washington), to which we contributed our wireless
communications business, other than certain assets and liabilities which we
retained, pursuant to the Contribution and Distribution Agreement dated as of
December 16, 2001, as amended, by and between us and Washington.

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Immediately thereafter, pursuant to the Agreement and Plan of Reorganization
dated as of December 16, 2001, as amended as of April 12, 2002, by and among
us, Washington and Alpha Industries, Inc. (Alpha), Washington merged with and
into 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 continued to
hold their Conexant shares.

Upon completion of the Merger, Alpha and its subsidiaries purchased our
semiconductor assembly, module manufacturing and test facility located in
Mexicali, Mexico and our package design team that supports the Mexicali
facility. In connection with the purchase, we, Alpha and certain subsidiaries
of Alpha entered into a financing agreement pursuant to which Alpha and a
subsidiary of Alpha delivered to us promissory notes for $150 million (the Term
Notes) guaranteed by Alpha and certain Alpha subsidiaries and secured by
substantially all assets of Alpha in payment of the purchase price for the
Mexicali facility and the package design team. The Term Notes, dated June 25,
2002, were to mature 50 percent in March 2003 and 50 percent in June 2003 and
were to bear interest initially at 10 percent, increasing to 12 percent in
three months and 15 percent in six months. The financing agreement also
provided for a revolving credit facility under which Alpha could borrow up to
$100 million, less specified reserves, for one year at the same interest rate
and with the same security applicable to the Term Notes. Effective June 26,
2002, Alpha changed its name to Skyworks Solutions, Inc. (Skyworks).

In November 2002, we restructured the financing agreements with Skyworks.
Skyworks repaid $105.0 million of the principal amount and all accrued interest
owed to us under the Term Notes and the remaining principal balance 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 paid us all amounts outstanding under the credit facility, the
credit facility was cancelled and we released all security interests in
Skyworks assets and properties. See Managements Discussion and Analysis of
Financial Condition and Results of OperationsLiquidity and Capital Resources.

Separation of Broadband Communications and Mindspeed Technologies Businesses

In September 2000, our Board of Directors approved in principle the separation
of our Broadband Communications and Mindspeed Technologies businesses. Although
business conditions have delayed the separation, we remain committed to
completing the separation as soon as business and market conditions permit. The
separation may be subject to the approval of our shareholders, the receipt of a
ruling from the Internal Revenue Service that any related spin-off will qualify
as a tax-free distribution and other conditions. We cannot assure you that we
will successfully complete the separation.

Results of Operations

Net Revenues

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. The following table
summarizes our net revenues by business segment:

|                                 |  |                    |       |             |  |             |       |            |  |           |       |   |  |  |     |    |  |  |    |  
|-------------------------------- |  | ------------------ | ----- | ----------- |  | ----------- | ----- | ---------- |  | --------- | ----- | - |  |  | --- | -- |  |  | -- | -
|                                 |  | Three months ended |       |             |  |             |       |            |  |          
|                                 |  |                    |       | Change from |  | Change from
|                                 |  | Dec. 31,           |       | Sept. 30,   |  | Dec. 31,    |       | Sept. 2002 |  | Dec. 2001
|(in millions)                    |  | 2002               |       | 2002        |  | 2001        |       | Quarter    |  | Quarter  
|                                 |  |                    |       |             |  |             |       |            |  |          
|Net revenues:                    |  |                    |       |             |  |             |       |            |  |           |       |   |  |  |     |    |  |  |    |  
|Broadband Communications         |  | $                  | 144.2 |             |  | $           | 133.0 |            |  | $         | 126.9 |   |  |  | 8   | %  |  |  | 14 | %
|Mindspeed Technologies           |  |                    | 20.3  |             |  |             | 24.9  |            |  |           | 14.2  |   |  |  | (19 | )% |  |  | 43 | %
|                                 |  |                    |       |             |  |             |       |            |  |           |       |   |  |  |     |    |  |  |    |  
|                                 |  | $                  | 164.5 |             |  | $           | 157.9 |            |  | $         | 141.1 |   |  |  | 4   | %  |  |  | 17 | %
|                                 |  |                    |       |             |  |             |       |            |  |           |       |   |  |  |     |    |  |  |    |  
|As a percentage of net revenues: |  |                    |       |             |  |             |       |            |  |           |       |   |  |  |     |    |  |  |    |  
|Broadband Communications         |  |                    | 88    | %           |  |             | 84    | %          |  |           | 90    | % |  |  |     |    |  |  |    |  
|Mindspeed Technologies           |  |                    | 12    | %           |  |             | 16    | %          |  |           | 10    | % |  |  |     |    |  |  |    |  
|                                 |  |                    |       |             |  |             |       |            |  |           |       |   |  |  |     |    |  |  |    |  
|                                 |  |                    | 100   | %           |  |             | 100   | %          |  |           | 100   | % |  |  |     |    |  |  |    |  
|                                 |  |                    |       |             |  |             |       |            |  |           |       |   |  |  |     |    |  |  |    |  

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Broadband Communications

Our Broadband Communications product revenues for the first quarter of fiscal
2003 increased 14% over the comparable period of fiscal 2002. The increase
principally reflects increased shipments of our home network processing
solutions, our satellite set-top box tuners and demodulators and our
client-side ADSL modem product line. In particular, our home network processors
benefited from increased production of home routers and wireless access points
among leading OEMs of consumer network products. In addition, we experienced
steady demand for our dial-up modem portfolio, with volume increases more than
offsetting a decline in average selling prices for those products. These
increases were partially offset by lower sales of our media processing
products, including our broadcast video encoder/decoder solutions and the
impact of the divestiture of our digital imaging business subsequent to the
first quarter of fiscal 2002.

Broadband Communications revenues for the fiscal 2003 first quarter were 8%
higher than the immediately preceding quarterthe fifth consecutive quarter of
sequential revenue growthprimarily driven by higher shipments of our home
network processing solutions and seasonally strong demand for our satellite
set-top box and consumer broadcast video solutions.

Mindspeed Technologies

Mindspeed Technologies net revenues continue to be impacted by the sharply
lower demand for network equipment which has affected us, our customers and our
competitors since the second quarter of fiscal 2001. This downturn in demand
led to sharply lower sales volume, as compared to fiscal 2000 levels, across
the majority of our multiservice access and broadband networking products,
including multiservice access processors, multi-megabit DSL and optical
networking physical media devices, and transceivers. The effect was most
pronounced in the first quarter of fiscal 2002, when Mindspeed Technologies
quarterly revenues decreased to $14.2 milliontheir lowest level in several
yearsas many of our OEM, subcontractor and distributor customers dramatically
reduced purchases as they sought to consume the higher than normal levels of
component inventories. Since that time, our Mindspeed Technologies segment has
experienced some renewed demand in its addressed markets. Mindspeed
Technologies revenues of $20.3 million for the first quarter of fiscal 2003
reflect modestly higher sales volumes in each of our product lines as compared
to the fiscal 2002 first quarter.

Mindspeed Technologies fiscal 2003 first quarter revenues decreased
approximately $4.6 million compared to the fiscal 2002 fourth quarter, which
included a $4.6 million revenue benefit resulting from the favorable resolution
of a customer obligation. Excluding the impact of this item, Mindspeed
Technologies revenues were relatively flat in comparison to the immediately
preceding quarter, reflecting steady demand across our multiservice access, T/E
carrier and ATM/MPLS network processors product families. We believe that
demand for the products sold by our Mindspeed Technologies business, which are
incorporated into telecommunications and data communications infrastructure
equipment, is recovering more slowly than demand for products offered by our
Broadband Communications business, which are ultimately sold to individual
consumers in products such as PCs, cable and satellite set-top boxes and other
home networking products.

Gross Margin

|                        |  |                    |      |             |  |             |      |            |  |           |      |   |  |  |   |   |  |  |    |  
|----------------------- |  | ------------------ | ---- | ----------- |  | ----------- | ---- | ---------- |  | --------- | ---- | - |  |  | - | - |  |  | -- | -
|                        |  | Three months ended |      |             |  |             |      |            |  |          
|                        |  |                    |      | Change from |  | Change from
|                        |  | Dec. 31,           |      | Sept. 30,   |  | Dec. 31,    |      | Sept. 2002 |  | Dec. 2001
|(in millions)           |  | 2002               |      | 2002        |  | 2001        |      | Quarter    |  | Quarter  
|                        |  |                    |      |             |  |             |      |            |  |          
|Gross margin            |  | $                  | 76.9 |             |  | $           | 75.4 |            |  | $         | 47.8 |   |  |  | 2 | % |  |  | 61 | %
|Percent of net revenues |  |                    | 47   | %           |  |             | 48   | %          |  |           | 34   | % |  |  |   |   |  |  |    |  

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 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 margins for the first quarter 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

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margins for the first quarter of fiscal 2003 also benefited from lower
provisions for excess and obsolete inventories, 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 quarter of fiscal 2003 and 2002 also benefited
from the sale of inventories with an original cost of $8.8 million and $14.0
million, respectively, that we had written down to a zero cost basis during
fiscal year 2001. 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 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 quarter of fiscal 2003 would have been $68.1
million (41% of our net revenues) compared to $33.8 million (24% of our net
revenues) for the first quarter of fiscal 2002.

When compared with the immediately preceding quarter, our gross margins for the
first quarter of fiscal 2003 decreased from 48% to 47% of net revenues. The
change in gross margin principally reflects the impact of sales of inventories
previously written down to a zero cost basis (in fiscal 2001), which were $1.9
million higher in the fourth quarter of fiscal 2002, lower average selling
prices in our Broadband Communications segment and changes in our product mix,
partially offset by product cost reductions.

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.

We recorded an aggregate of $188.8 million of inventory write-downs in fiscal
2001. From the time of these write-downs and through December 31, 2002, we
scrapped a portion of these inventories having an original cost of $41.5
million and sold a portion of these inventories with an original cost of $66.2
million. The sales resulted from increased demand beginning in the fourth
quarter of fiscal 2001 which was not anticipated at the time of the
write-downs. As of December 31, 2002, we continued to hold inventories with an
original cost of $81.1 million which were previously written down to a zero
cost basis. We currently intend to hold these remaining inventories and will
sell these inventories if we experience renewed demand for these products.
While there can be no assurance that we will be able to do so, if we are able
to sell a portion of the inventories which are carried at zero cost basis, our
gross margins will be favorably affected by an amount equal to the original
cost of the zero-cost basis inventory sold. To the extent that we do not
experience renewed demand for the remaining inventories, they will be scrapped
as they become obsolete.

We base our assessment of the recoverability of our inventories, and the
amounts of any write-downs, on currently available information and assumptions
about future demand and market conditions. Demand for our products may
fluctuate significantly over time, and actual demand and market conditions may
be more or less favorable than those projected by management. In the event that
actual demand is lower than originally projected, additional inventory
write-downs may be required.

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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 December 31,
|                         |  |                                
|(in millions)            |  | 2002                            |      | Change |  | 2001
|                         |  |                                 |      |        |  |     
|Research and development |  | $                               | 71.5 |        |  |      | (10 | )% |  | $ | 79.4 |  
|Percent of net revenues  |  |                                 | 43   | %      |  |      |     |    |  |   | 56   | %

Our research and development (R&D) expenses consist principally of direct
personnel costs, photomask and other costs for pre-production evaluation and
testing of new devices and design and test tool costs. Our R&D expenses also
include the costs for advanced semiconductor process development, design
automation and advanced package development for the benefit of each of our
businesses. The decrease in R&D expenses for the first 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 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.

Selling, General and Administrative

|                                    |  |                                 |      |        |  |      |     |    |  |   |      |  
|----------------------------------- |  | ------------------------------- | ---- | ------ |  | ---- | --- | -- |  | - | ---- | -
|                                    |  | Three months ended December 31,
|                                    |  |                                
|(in millions)                       |  | 2002                            |      | Change |  | 2001
|                                    |  |                                 |      |        |  |     
|Selling, general and administrative |  | $                               | 34.9 |        |  |      | (23 | )% |  | $ | 45.1 |  
|Percent of net revenues             |  |                                 | 21   | %      |  |      |     |    |  |   | 32   | %

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 first 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.

Amortization of Intangible Assets

|                                  |  |                                 |      |        |  |      |     |    |  |   |      | 
|--------------------------------- |  | ------------------------------- | ---- | ------ |  | ---- | --- | -- |  | - | ---- | 
|                                  |  | Three months ended December 31,
|                                  |  |                                
|(in millions)                     |  | 2002                            |      | Change |  | 2001
|                                  |  |                                 |      |        |  |     
|Amortization of intangible assets |  | $                               | 15.0 |        |  |      | (82 | )% |  | $ | 85.5 | 

The lower amortization expenses in the first quarter 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 $4.7 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.

SFAS 142 also requires that we complete a transition impairment test of our
goodwill (as of the beginning of fiscal 2003) no later than the fourth quarter
of fiscal 2003. If the recorded value of goodwill exceeds its estimated fair
value, we will write down the value of goodwill to estimated fair value. Any
such transition impairment loss will be recognized as the effect of a change in
accounting principle. We expect to complete the transition impairment test
during the second quarter of fiscal 2003. While we have not yet completed the
test, we expect that the transition

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impairment test will result in a significant write-down of the value of
goodwill. In addition, future periodic impairment tests may result in
significant write-downs of the value of goodwill (charged against income).

Special Charges

Special charges consist of the following (in thousands):

|                      |  |                                 |      |        |  |      |  |   |     |  |  | 
|--------------------- |  | ------------------------------- | ---- | ------ |  | ---- |  | - | --- |  |  | 
|                      |  | Three months ended December 31,
|                      |  |                                
|(in millions)         |  | 2002                            |      | Change |  | 2001
|                      |  |                                 |      |        |  |     
|Asset impairments     |  | $                               | 2.4  |        |  | nm   |  | $ |    | 
|Restructuring charges |  |                                 | 5.5  |        |  | nm   |  |   | 1.0 | 
|Other special charges |  |                                 | 2.7  |        |  | nm   |  |   |    | 
|                      |  |                                 |      |        |  |      |  |   |     |  |  | 
|                      |  | $                               | 10.6 |        |  | nm   |  | $ | 1.0 | 
|                      |  |                                 |      |        |  |      |  |   |     |  |  | 

Asset Impairments

During the first quarter of fiscal 2003, we recorded asset impairment charges
totaling $2.4 million, principally in the Broadband Communications segment. The
impairment charges related to leasehold improvements associated with properties
we no longer occupy and other assets that we determined to abandon or scrap. We
determined the amounts of the impairment charges by comparing the assets
estimated fair values, less costs to sell, to their carrying values. We
determined the estimated fair values, using all available information, based
upon the proceeds expected to result from the disposition of the assets. We
believe 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-downs established a
new cost basis for the impaired assets.

Restructuring Charges

In fiscal 2001, we implemented a number of cost reduction initiatives to more
closely align our cost structure with the then-current business environment.
The cost reduction initiatives included workforce reductions, temporary
shutdowns of our manufacturing facilities, significant reductions in capital
spending, the consolidation of certain facilities and salary reductions for the
senior management team until we return to profitability. In fiscal 2002, we
expanded the cost reduction initiatives to provide for further workforce
reductions and the consolidation of additional facilities. The costs and
expenses associated with the restructuring activities are included in special
charges in the accompanying consolidated statements of operations.

2001 Global Restructuring Plan During the second quarter of fiscal 2001, we
announced certain expense reduction initiatives and a broad reduction in
workforce which affected all areas of our operations and reduced our headcount
by approximately 900 employees. These actions were the result of a
comprehensive reassessment of our operations and business activities in order
to focus investment and resources in areas that best support our strategic
growth drivers. As part of the reassessment, we determined that we would
explore alternatives to dispose of our digital imaging business and would also
exit our board-level sub-assembly module business. We completed these
restructuring actions in fiscal 2002.

In connection with this broad reduction in workforce, we terminated
approximately 840 employees (including approximately 130 employees in fiscal
2002). The charges for the workforce reduction aggregated $9.4 million
(including $2.6 million in fiscal 2002) and were based upon estimates of the
cost of severance benefits for the affected employees. These actions reduced
our workforce in both the Broadband Communications and Mindspeed Technologies
segments, including approximately 530 employees in our manufacturing
operations. In addition, we 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, we 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.

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Activity and liability balances related to the 2001 global restructuring
actions through December 31, 2002 are as follows (in thousands):

|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|----------------------------------------- |  | ---------- | ------ | --------- |  | ----- | ------ | - |  | - | ------ | -
|                                          |  | Workforce  |        | Facility  |  |       |        |  
|                                          |  | reductions |        | and other |  | Total
|                                          |  |            |        |           |  |      
|Charged to costs and expenses             |  | $          | 6,776  |           |  | $     | 5,584  |   |  | $ | 12,360 |  
|Cash payments                             |  |            | (4,155 | )         |  |       | (223   | ) |  |   | (4,378 | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, September 30, 2001 |  |            | 2,621  |           |  |       | 5,361  |   |  |   | 7,982  |  
|Charged to costs and expenses             |  |            | 2,616  |           |  |       | 172    |   |  |   | 2,788  |  
|Expense reversal                          |  |            |       |           |  |       | (1,646 | ) |  |   | (1,646 | )
|Cash payments                             |  |            | (3,432 | )         |  |       | (2,307 | ) |  |   | (5,739 | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, September 30, 2002 |  |            | 1,805  |           |  |       | 1,580  |   |  |   | 3,385  |  
|Expense reversal                          |  |            | (61    | )         |  |       |       |   |  |   | (61    | )
|Cash payments                             |  |            | (90    | )         |  |       | (184   | ) |  |   | (274   | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, December 31, 2002  |  | $          | 1,654  |           |  | $     | 1,396  |   |  | $ | 3,050  |  
|                                          |  |            |        |           |  |       |        |   |  |   |        |  

Strategic Manufacturing Restructuring Plan During the third quarter of fiscal
2001, we realigned our manufacturing and procurement strategy to accelerate our
transition to a fabless CMOS business model. As part of the manufacturing
realignment, we reduced our workforce by an additional 410 employees and
recorded charges aggregating $7.8 million. These charges were based upon
estimates of the cost of severance benefits for the affected employees. We
completed these actions in the fourth quarter of fiscal 2001, reducing our
workforce in both the Broadband Communications and Mindspeed Technologies
segments, including approximately 220 employees in our manufacturing
operations. During the first quarter of fiscal 2003, we reversed $0.1 million
of previously accrued costs upon the resolution of liabilities for severance
benefits payable under the plan.

Activity and liability balances related to the strategic manufacturing
restructuring actions through December 31, 2002 are as follows (in thousands):

|                                          |  |            |        |  
|----------------------------------------- |  | ---------- | ------ | -
|                                          |  | Workforce 
|                                          |  | reductions
|                                          |  |           
|Charged to costs and expenses             |  | $          | 7,756  |  
|Cash payments                             |  |            | (5,006 | )
|                                          |  |            |        |  
|Restructuring balance, September 30, 2001 |  |            | 2,750  |  
|Cash payments                             |  |            | (2,604 | )
|                                          |  |            |        |  
|Restructuring balance, September 30, 2002 |  |            | 146    |  
|Expense reversal                          |  |            | (146   | )
|                                          |  |            |        |  
|Restructuring balance, December 31, 2002  |  | $          |       |  
|                                          |  |            |        |  

2002 Corporate and Manufacturing Restructuring Plan During fiscal 2002, we
initiated a further reduction of our workforce throughout our operations
primarily as a result of the divestiture of our Newport Beach wafer fabrication
operations and the Spin-off Transaction. In connection with the fiscal 2002
corporate and manufacturing restructuring actions, we terminated approximately
230 employees and recorded charges aggregating $4.5 million. These charges were
based upon estimates of the cost of severance benefits for the affected
employees. We completed these actions in fiscal 2002, reducing our workforce by
approximately 120 employees in the Broadband Communications segment and
approximately 110 employees in the Mindspeed Technologies segment. In addition,
we recorded restructuring charges of $12.7 million for costs associated with
the consolidation of certain facilities and commitments under license
obligations that we determined would not be used in the future.

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During the first quarter of fiscal 2003, we initiated a further workforce
reduction affecting 58 employees in the Broadband Communications segment and
recorded additional charges of $1.9 million based upon estimates of the cost of
severance benefits for the affected employees. Activity and liability balances
related to the 2002 corporate and manufacturing restructuring actions through
December 31, 2002 are as follows (in thousands):

|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|----------------------------------------- |  | ---------- | ------ | --------- |  | ----- | ------ | - |  | - | ------ | -
|                                          |  | Workforce  |        | Facility  |  |       |        |  
|                                          |  | reductions |        | and other |  | Total
|                                          |  |            |        |           |  |      
|Charged to costs and expenses             |  | $          | 4,534  |           |  | $     | 12,690 |   |  | $ | 17,224 |  
|Cash payments                             |  |            | (3,179 | )         |  |       | (468   | ) |  |   | (3,647 | )
|Non-cash charges                          |  |            | (609   | )         |  |       |       |   |  |   | (609   | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, September 30, 2002 |  |            | 746    |           |  |       | 12,222 |   |  |   | 12,968 |  
|Charged to costs and expenses             |  |            | 1,904  |           |  |       |       |   |  |   | 1,904  |  
|Cash payments                             |  |            | (1,013 | )         |  |       | (530   | ) |  |   | (1,543 | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, December 31, 2002  |  | $          | 1,637  |           |  | $     | 11,692 |   |  | $ | 13,329 |  
|                                          |  |            |        |           |  |       |        |   |  |   |        |  

Mindspeed Strategic Restructuring Plan During fiscal 2002, our Mindspeed
Technologies segment announced a number of expense reduction and restructuring
initiatives intended to reduce Mindspeeds operating cost structure and focus
its research and development spending on products for the Internet
infrastructure market segments it believes offer the most attractive near-term
growth prospects. These actions include the elimination of research and
development spending in high-end optical networking applications, the closure
of Novanet, the divestiture of NetPlane and a reduction of support services
spending and reduced Mindspeeds workforce by over 400 employees. During
fiscal 2002, we terminated approximately 280 employees and recorded charges
aggregating $7.1 million. These charges were based upon estimates of the cost
of severance benefits for the affected employees. These actions reduced our
workforce throughout the Mindspeed Technologies segment. In addition, we
recorded restructuring charges of $16.1 million for costs associated with the
consolidation of certain facilities and lease cancellation and related costs.

During the first quarter of fiscal 2003, we implemented an additional workforce
reduction affecting approximately 80 employees in the Mindspeed Technologies
segment and closed our design center in Bristol, England. We recorded
additional charges of $3.1 million for the workforce reductions, based upon
estimates of the cost of severance benefits for the affected employees, and
$0.8 million for commitments under license obligations that we determined would
not be used in the future. During the first quarter of fiscal 2003, we
substantially completed these workforce reductions and we completed the
divestiture of NetPlane in January 2003. Activity and liability balances
related to the Mindspeed strategic restructuring actions through December 31,
2002 are as follows (in thousands):

|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|----------------------------------------- |  | ---------- | ------ | --------- |  | ----- | ------ | - |  | - | ------ | -
|                                          |  | Workforce  |        | Facility  |  |       |        |  
|                                          |  | reductions |        | and other |  | Total
|                                          |  |            |        |           |  |      
|Charged to costs and expenses             |  | $          | 7,061  |           |  | $     | 16,109 |   |  | $ | 23,170 |  
|Cash payments                             |  |            | (2,419 | )         |  |       | (1,211 | ) |  |   | (3,630 | )
|Non-cash charges                          |  |            | (552   | )         |  |       | (354   | ) |  |   | (906   | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, September 30, 2002 |  |            | 4,090  |           |  |       | 14,544 |   |  |   | 18,634 |  
|Charged to costs and expenses             |  |            | 3,056  |           |  |       | 792    |   |  |   | 3,848  |  
|Cash payments                             |  |            | (2,253 | )         |  |       | (2,629 | ) |  |   | (4,882 | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, December 31, 2002  |  | $          | 4,893  |           |  | $     | 12,707 |   |  | $ | 17,600 |  
|                                          |  |            |        |           |  |       |        |   |  |   |        |  

Through December 31, 2002, we have paid an aggregate of $31.7 million in
connection with our fiscal 2001 and 2002 restructuring plans and have a
remaining accrued restructuring balance totaling $34.0 million. We expect to
pay a majority of the amounts accrued for the workforce reductions during
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 operations, and are not
expected to significantly impact our liquidity.

Other Special Charges

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

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Other Income (Expense), Net

|                            |  |                                 |     |        |  |      |  |   |      |   |  | 
|--------------------------- |  | ------------------------------- | --- | ------ |  | ---- |  | - | ---- | - |  | 
|                            |  | Three months ended December 31,
|                            |  |                                
|(in millions)               |  | 2002                            |     | Change |  | 2001
|                            |  |                                 |     |        |  |     
|Other income (expense), net |  | $                               | 3.4 |        |  | nm   |  | $ | (9.2 | )

Other income, net for the first quarter of fiscal 2003 is comprised primarily
of interest income on invested cash balances, the notes receivable from
Skyworks and the Skyworks 15% convertible senior subordinated notes and equity
in the earnings of investees we account for under the equity method. Other
income also includes a $4.0 million benefit from the increase in the fair value
of the conversion right under the Skyworks 15% convertible senior subordinated
notes. 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) each period. These
amounts were partially offset by interest expense on our convertible
subordinated notes.

As a result of the restructuring of the financing agreements with Skyworks, we
expect that our interest income will decrease significantly from the fiscal
2003 first quarters level. Additionally, changes in the fair value of the
conversion right under the Skyworks 15% convertible senior subordinated notes
may significantly affect our other income (expense), net (either favorably or
unfavorably) based upon fluctuations in the market price of Skyworks common
stock.

Other expense, net for the first quarter of fiscal 2002 is comprised primarily
of a $5.7 million write-off of certain non-marketable investments, which we
determined to be permanently impaired, and interest expense on our convertible
subordinated notes, partially offset by interest income on invested cash
balances and gains on sales of assets.

Provision (Benefit) for Income Taxes

As a result of our recent operating losses and our expectation of future
operating results, we determined that it is more likely than not that the
additional income tax benefits (principally net operating losses we can carry
forward to future years) which arose during fiscal 2002 and the first quarter
of fiscal 2003 will not be realized. Accordingly, we have not recognized any
income tax benefits relating to our operating losses for those periods and we
do not expect to recognize any income tax benefits relating to future operating
losses until we believe that such tax benefits are more likely than not to be
realized. We expect foreign income taxes to be insignificant. Consequently, we
expect our effective income tax rate will be approximately 0% for fiscal 2003.
Our provision for income taxes for the first quarter of fiscal 2003 and 2002
consisted of foreign income taxes incurred by certain of our subsidiaries,
offset by refunds received.

As of September 30, 2002, we had a valuation allowance of $524 million for the
deferred tax assets which 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
against income in the period such determination is made.

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Segment Operating Performance

Our segment operating income (loss) excludes amortization of intangible assets,
special charges, in-process research and development and stock compensation
costs. Special charges excluded from segment operating income (loss) consist of
asset impairments, restructuring charges, the settlement of certain litigation,
separation costs and losses on the disposal of certain assets. Our definition
of segment operating income (loss) may be different than definitions used by
other companies. The following table presents our segment operating income
(loss) and consolidated operating loss:

|                                    |                            |                                 |       |                    |       |           |       |          |        |   |       |      |        |  
|----------------------------------- | -------------------------- | ------------------------------- | ----- | ------------------ | ----- | --------- | ----- | -------- | ------ | - | ----- | ---- | ------ | -
|                                    |                            |                                 |       | Three months ended
|                                    |                            |                                 |       |                   
|                                    |                            |                                 |       | Dec. 31,           |       | Sept. 30, |       | Dec. 31,
|                                    |                            |                                 |       | 2002               |       | 2002      |       | 2001    
|                                    |                            |                                 |       |                    |       |           |       |         
|Broadband Communications:           |                            |                                 |       |                    |       |           |       |          |        |   |       |     
|Revenues                            |                            | $                               | 144.2 |                    |       | $         | 133.1 |          |        | $ | 126.9 |     
|Cost of goods sold                  |                            |                                 | 81.5  |                    |       |           | 74.9  |          |        |   | 86.4  |     
|                                    |                            |                                 |       |                    |       |           |       |          |        |   |       |     
|                                    | Gross margin               |                                 |       | 62.7               |       |           |       | 58.2     |        |   |       | 40.5 |       
|                                    | Gross margin %             |                                 |       | 44                 | %     |           |       | 44       | %      |   |       | 32   | %     
|Research and development            |                            |                                 | 39.8  |                    |       |           | 41.4  |          |        |   | 36.1  |     
|Selling, general and administrative |                            |                                 | 22.4  |                    |       |           | 22.9  |          |        |   | 23.4  |     
|                                    |                            |                                 |       |                    |       |           |       |          |        |   |       |     
|                                    | Segment operating expenses |                                 |       | 62.2               |       |           |       | 64.3     |        |   |       | 59.5 |       
|                                    |                            |                                 |       |                    |       |           |       |          |        |   |       |     
|                                    |                            | Segment operating income (loss) |       | $                  | 0.5   |           |       | $        | (6.1   | ) |       | $    | (19.0  | )
|                                    |                            |                                 |       |                    |       |           |       |          |        |   |       |     
|Mindspeed Technologies:             |                            |                                 |       |                    |       |           |       |          |        |   |       |     
|Revenues                            |                            | $                               | 20.2  |                    |       | $         | 24.9  |          |        | $ | 14.2  |     
|Cost of goods sold                  |                            |                                 | 6.1   |                    |       |           | 7.7   |          |        |   | 6.9   |     
|                                    |                            |                                 |       |                    |       |           |       |          |        |   |       |     
|                                    | Gross margin               |                                 |       | 14.1               |       |           |       | 17.2     |        |   |       | 7.3  |       
|                                    | Gross margin %             |                                 |       | 70                 | %     |           |       | 69       | %      |   |       | 51   | %     
|Research and development            |                            |                                 | 31.1  |                    |       |           | 37.2  |          |        |   | 41.7  |     
|Selling, general and administrative |                            |                                 | 12.1  |                    |       |           | 14.1  |          |        |   | 21.2  |     
|                                    |                            |                                 |       |                    |       |           |       |          |        |   |       |     
|                                    | Segment operating expenses |                                 |       | 43.2               |       |           |       | 51.3     |        |   |       | 62.9 |       
|                                    |                            |                                 |       |                    |       |           |       |          |        |   |       |     
|                                    |                            | Segment operating loss          |       | $                  | (29.1 | )         |       | $        | (34.1  | ) |       | $    | (55.6  | )
|                                    |                            |                                 |       |                    |       |           |       |          |        |   |       |     
|Total segment operating loss        |                            | $                               | (28.6 | )                  |       | $         | (40.2 | )        |        | $ | (74.6 | )   
|Amortization of intangible assets   |                            |                                 | 15.0  |                    |       |           | 75.9  |          |        |   | 85.5  |     
|Special charges                     |                            |                                 | 10.6  |                    |       |           | 43.6  |          |        |   | 1.0   |     
|Stock compensation                  |                            |                                 | 0.9   |                    |       |           | (0.5  | )        |        |   | 2.0   |     
|                                    |                            |                                 |       |                    |       |           |       |          |        |   |       |     
|                                    |                            | Operating loss                  |       | $                  | (55.1 | )         |       | $        | (159.2 | ) |       | $    | (163.1 | )
|                                    |                            |                                 |       |                    |       |           |       |          |        |   |       |     

Broadband Communications

For the first quarter of fiscal 2003, our Broadband Communications segment
returned to operating profitability with segment operating income of $0.5
million compared to a segment operating loss of $19.0 million for the fiscal
2002 first quarter. The improved operating performance reflects the 17%
increase in Broadband Communications net revenues over the fiscal 2002 first
quarter. Our segment operating income for the first quarter of fiscal 2003 also
benefited from the elimination of the negative impact on our cost of goods sold
of our underutilized former manufacturing operations (which we contributed to
Jazz in the second quarter of fiscal 2002). In addition, the Broadband
Communications segments operating performance for the first quarter of fiscal
2003 and 2002 benefited from the sale of inventories with an original cost of
$7.2 million and $13.5 million, respectively, that we had written down to a
zero cost basis during fiscal year 2001. These sales resulted from renewed
demand for certain products that was not anticipated at the time we recorded
the inventory write-down in fiscal 2001.

As compared to the immediately preceding quarter, the Broadband Communications
segments improved operating performance reflects the benefit of the 8%
increase in quarterly revenues, along with lower operating expenses resulting
from our cost reduction initiatives.

Mindspeed Technologies

The improvement in Mindspeed Technologies segment operating loss for the first
quarter of fiscal 2003 compared to the immediately preceding quarter and the
similar fiscal 2002 period principally reflects the positive impact of our cost
reduction initiatives. The lower segment operating loss also reflects the gross
margin impact of a $6.1 million (43%) increase in net revenues we experienced
for the first quarter of fiscal 2003 compared to the similar fiscal 2002
period.

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Mindspeed Technologies quarterly revenues remain substantially lower than
fiscal 2000 levels and we believe that demand for Mindspeed Technologies
products, which are incorporated into telecommunications and data
communications infrastructure equipment, is recovering more slowly than demand
for products offered by our Broadband Communications business. During fiscal
2002, we began to experience some renewed demand in the end markets for certain
of our Mindspeed Technologies products, including our T/E physical layer
products, crosspoint switches and ATM/MPLS network processors. Moreover, the
expense reduction and restructuring initiatives we initiated in fiscal 2001 and
2002 are substantially complete, and we expect to realize their full effects
beginning in the fiscal 2003 second quarter. These actions have significantly
reduced Mindspeeds operating cost structure and we estimate that these actions
have reduced Mindspeeds breakeven point to approximately $55 million in
quarterly revenues.

Liquidity and Capital Resources

Our cash and cash equivalents increased by $66.2 million during the first
quarter of fiscal 2003. Cash used in operating activities was $54.6 million for
the first quarter of fiscal 2003, compared to cash used in operating activities
of $51.5 million for the comparable period in fiscal 2002. Operating cash flows
for the fiscal 2003 period reflect our loss from continuing operations of $52.2
million, offset by non-cash charges (depreciation and amortization and other)
of $29.6 million, and a net increase in the non-cash components of working
capital of $32.0 million. The working capital increases principally consist of
a $20.5 million increase in inventories and a $13.0 million decrease in
accounts payable. Before the effect of the working capital changes, cash used
in operating activities was $22.6 million for the first quarter of fiscal 2003,
compared to $53.3 million for the comparable period of fiscal 2002.

Cash provided by investing activities of $120.0 million for the first quarter
of fiscal 2003 includes the $170.0 debt repayment from Skyworks, offset by
$35.0 million advanced to Skyworks under the credit facility earlier in the
quarter. Investing cash flows also included proceeds from the sale of assets of
$1.0 million, offset by capital expenditures of $4.8 million, net purchases of
marketable securities of $9.7 million and investments of $1.5 million. Cash
provided by investing activities in the first quarter of fiscal 2002
principally consisted of $20.8 million in proceeds from the sale of assets and
$0.9 million of net sales of marketable securities, partially offset by capital
expenditures of $6.5 million and payments for investments of $3.0 million.

Cash provided by financing activities of $0.7 million and $4.9 million for the
first quarter of fiscal 2003 and 2002, respectively, consisted of proceeds from
the exercise of stock options.

As of September 30, 2002, we held notes receivable from Skyworks with an
aggregate principal amount of $180.0 million, including the $150.0 million Term
Notes and $30.0 million outstanding under the revolving credit facility. In
November 2002, we restructured the financing agreements with Skyworks. Skyworks
repaid $105.0 million of the principal amount and all of the accrued interest
owed to us under the Term Notes and the remaining principal balance 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 paid us all amounts outstanding under the credit facility, the
credit facility was cancelled and we 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. We may, at our 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 delivering to us a number of shares of its common stock
based upon the conversion price. Skyworks has granted us 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 December 31, 2002 the estimated fair value of the 15% convertible
senior subordinated notes was approximately $49.2 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.

As of December 31, 2002, 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

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subordinated notes at December 31, 2002 totaled $397.1 million compared to
$447.8 million at September 30, 2002. Our working capital at December 31, 2002
was $412.5 compared to $441.2 million at September 30, 2002. The overall
working capital change principally reflects cash used in operations and cash
payments for capital expenditures and investments.

During fiscal 2001 and 2002, we reduced our capital expenditures and
implemented a number of expense reduction initiatives (including workforce
reductions, the consolidation of certain facilities and salary reductions of
10% for senior management) to improve our operating cost structure. However, we
expect that reduced end-customer demand (as compared to fiscal 2000 levels),
changes in our revenue mix and other factors will continue to adversely affect
our operating results in fiscal 2003 and we anticipate that we will continue to
experience negative cash flows from operations in the near term.

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, working
capital and other financing requirements 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
other contingencies. 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.

Impairment of long-lived assets

Long-lived assets, including fixed assets, non-marketable investments, goodwill
and intangible assets, are continually monitored and are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of any such asset may not be recoverable. The determination of
recoverability is based on an estimate of undiscounted cash flows expected to
result from the use of an asset and its eventual disposition. The estimate of
cash flows is based upon, among other things, certain assumptions about
expected future operating performance, growth rates and other factors. Our
estimates of undiscounted cash flows may differ from actual cash flows due to,
among other things, technological changes, economic conditions, changes to our
business model or changes in our operating performance. If the sum of the
undiscounted cash flows (excluding interest) is less than the carrying value,
we recognize an impairment loss, measured as the amount by which the carrying
value exceeds the fair value of the asset.

In the first quarter of fiscal 2003, we adopted the new rules in SFAS 142 for
measuring the impairment of goodwill, which prescribe a fair value-based
approach. The estimates and assumptions described above (along with other
factors such as discount rates) will affect the amounts of any impairment
losses that result from the transition impairment test or future periodic
impairment tests required under SFAS 142.

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Deferred income taxes

We evaluate the realizability of our deferred tax assets and assess the need
for a valuation allowance quarterly. We record a valuation allowance to reduce
our deferred tax assets to the net amount that is more likely than not to be
realized. Our assessment of the need for a valuation allowance is based upon
our expectations of future taxable income and the ongoing prudent and feasible
tax planning strategies available to us. In the event that we determine that we
will not be able to realize all or part of our deferred tax assets in the
future, an adjustment to the deferred tax assets would be charged against
income in the period such determination is made. Likewise, in the event we were
to determine that we will be able to realize our deferred tax assets in the
future in excess of the net recorded amount, an adjustment to the deferred tax
assets would increase income in the period such determination is made.

Inventories

We write down our inventory for estimated obsolescence or unmarketable
inventory in an amount equal to the difference between the cost of inventory
and the estimated market value based upon assumptions about future demand and
market conditions. If actual market conditions are less favorable than our
estimates, additional inventory write-downs may be required.

Allowance for doubtful accounts

We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. If the financial
condition of our customers were to deteriorate, our actual losses may exceed
our estimates, and additional allowances would be required.

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

We have recently incurred substantial operating losses and we anticipate
additional future losses.

We incurred a loss from continuing operations of $52 million in the first
quarter of fiscal 2003 compared to a loss of $169.8 million in the first
quarter of fiscal 2002. We incurred losses from continuing operations of $812
million in fiscal 2002 and $1.2 billion in fiscal 2001.

During the past eight fiscal quarters, we implemented a number of expense
reduction and restructuring initiatives to more closely align our cost
structure with the current business environment. The cost reduction initiatives
include a worldwide workforce reduction, temporary shutdowns of our
manufacturing facilities, significant reductions in capital spending, the
consolidation of certain facilities and salary reductions for our senior
management team until we return to profitability. However, these expense
reduction initiatives alone will not return us to profitability. We expect that
reduced end-customer demand, changes in our revenue mix and other factors will
continue to adversely affect our operating results in the near term. In order
to return to profitability, we must achieve substantial revenue growth and
currently we continue to face an environment of uncertain demand in many of the
markets our products address. While our Broadband Communications segment
returned to operating profitability in the first quarter of fiscal 2003, on a
consolidated basis we anticipate incurring additional losses from our
continuing operations. We cannot assure you as to whether or when we will
return to profitability or whether we will be able to sustain such
profitability, if achieved.

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

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conditions, cause significant upturns and downturns in the industry, and in our
business in particular. Periods of industry downturns have been characterized
by diminished product demand, production overcapacity, high inventory levels
and accelerated erosion of average selling prices. These factors cause
substantial fluctuations in our revenues and our results of operations. We have
experienced these cyclical fluctuations in our business in the past and may
experience cyclical fluctuations in the future.

During the late 1990s and extending into 2000, the semiconductor industry in
general, and communications applications in particular, enjoyed unprecedented
growth, benefiting from the rapid expansion of the Internet and other
communication services worldwide. During fiscal 2001 and 2002, welike many of
our customers and competitorswere adversely impacted by a global economic
slowdown and an abrupt decline in demand for many of the end-user products that
incorporate our communications semiconductor products and system solutions. The
impact of weakened end-customer demand was compounded by higher-than-normal
levels of equipment and component inventories held by many of our OEM,
subcontractor and distributor customers in fiscal 2001. As a result of this
sharply reduced demand across our product portfolio, we recorded $188.8 million
of inventory write-downs in fiscal 2001. We expect that reduced levels of
end-customer demand, changes in our revenue mix and other factors will continue
to adversely affect our operating results in the near term. In addition, this
environment of weak end-customer demand has, in some cases, led to delays in
payments for our products. In the event that our customers delay payments to
us, or are unable to pay amounts owed to us, we may incur additional losses on
our accounts receivable.

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. In particular, demand for the
products sold by our Mindspeed Technologies business, which are incorporated
into telecommunications and data communications infrastructure equipment, is
recovering more slowly than demand for products offered by our Broadband
Communications business, which are ultimately sold to individual consumers in
products such as PCs, cable and satellite set-top boxes and other small office
and home networking products.

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.                      

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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:



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

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. We have recently incurred substantial operating losses and we anticipate future
losses. 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.

A number of our competitors have combined with each other and consolidated
their businesses, including the consolidation of competitors with our
customers. This is attributable to a number of factors, including the
historically high-growth nature of the communications electronics industry and
the time-to-market pressures on suppliers to decrease the time required for
product conception, research and development, sampling and production launch
before a product reaches the market. This consolidation trend is expected to
continue, since investments, alliances and acquisitions may enable
semiconductor suppliers, including us and our competitors, to augment technical
capabilities or to achieve faster time-to-market for their products than would
be possible solely through internal development.

Consolidation by industry participants has created entities with increased
market share, customer base, technology and marketing expertise in markets in
which we compete. These developments may significantly and adversely affect our
current markets, the markets we are seeking to serve and our ability to compete
successfully in those markets.

Our success is dependent upon our ability to timely develop 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

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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;                                                      
| | - |  | ---------------------------------------------------------------------------------------
|
| |  |  | 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 continue 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 is intense in the semiconductor industry. We
cannot assure you that we will be able to continue 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, given, among other things, the
significant use of equity-based compensation by our competitors and us. The
loss of the services of one or more of our key employees, including Dwight W.
Decker, our Chairman and Chief Executive Officer, 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. Without these 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. 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. We may be unable to
achieve design wins or to convert design wins into actual sales.

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

Our customers may need six months or longer to test and evaluate our products
and an additional six months or more to begin volume production of equipment
that incorporates our products. The lengthy period of time required also
increases the possibility that a customer may decide to cancel or change
product plans, which could reduce or eliminate sales to that customer. 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 rights to return unsold products to us. Sales to distributors accounted
for approximately 41% and 43% of our net revenues for fiscal 2002 and the first
quarter 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 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.

During fiscal 2001, the communications electronics markets which we address
were characterized by dramatic decreases in end-user demand and high levels of
channel inventories that reduced visibility into future demand for our
products. As a result of this sharply reduced demand across our product
portfolio, we recorded $188.8 million of inventory write-downs in fiscal 2001.

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

In March 2002 we contributed our Newport Beach wafer fabrication operations to
Jazz, a joint venture in which we hold a minority ownership. In June 2002 we
contributed our Newbury Park gallium arsenide wafer fabrication facility to
Washington as part of the Spin-off Transaction and the Merger. As a result, we
are entirely dependent upon outside wafer fabrication facilities (known as
foundries), including Jazz 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 ensured 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 third-party foundries we use may allocate their limited capacity to
fulfill their internal production requirements or 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.

Upon completion of the Spin-off Transaction and the Merger, Skyworks purchased
our Mexicali, Mexico assembly and test facility. As a result, we are dependent
upon third parties, including Skyworks, for the assembly and test of all 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.

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Wafer fabrication processes are subject to obsolescence, and third-party
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 discontinuance 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. Certain
manufacturing processes we rely on, including the silicon germanium and gallium
arsenide semiconductor manufacturing processes, are highly 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.

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.

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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 quarter of fiscal 2003, approximately 83% and
86%, 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 suppliers located outside the United States, including the
Skyworks assembly and test facility in Mexicali, Mexico and third-party
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 transfer of
funds and trade protection measures, including export duties and quotas
and customs duties and tariffs);
|
| |  |  | changes in legal or regulatory requirements;                                                                                                                                  
|
| |  |  | limitations on the repatriation of funds;                                                                                                                                     
|
| |  |  | 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.
Moreover, we may be competitively disadvantaged relative to our competitors
located outside the United States who may benefit from a devaluation of their
local currency. 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.

Our past operating performance has been impacted by adverse economic conditions
in the Asia-Pacific region, which have increased the uncertainty with respect
to the long-term viability of certain of our customers and suppliers in the
region. Sales to customers in Japan and other countries in the Asia-Pacific
region, principally Taiwan and Hong Kong, represented approximately 67% and
72%, respectively, of our net revenues in fiscal 2002 and the first quarter of
fiscal 2003.

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



| |  |  | changes in end-user demand for the products manufactured and sold by our customers;
| | - |  | -----------------------------------------------------------------------------------

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

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. Since our
common stock began trading publicly and through the date of the Spin-off
Transaction and the Merger (June 25, 2002), the reported closing price of our
common stock on the Nasdaq National Market was as high as $124.42 and as low as
$3.16 per share. Subsequent to the Spin-off Transaction and the Merger, the
reported closing price of our common stock has been as high as $2.59 and as low
as $0.53 per share. This 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;         
|
| |  |  | 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 intellectual property rights.

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

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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. In addition, we often
incorporate the intellectual property of our customers into our designs, and we
have obligations with respect to the non-use and non-disclosure of their
intellectual property. In the past, we have found it necessary to engage 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 expect 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.

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 $2.4
million and have accrued for these costs as of December 31, 2002.

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.

Our management team is subject to a variety of demands for its attention.

Our management currently faces a variety of challenges, including the
implementation of our expense reduction and restructuring initiatives. While we
believe that we have sufficient management resources to execute each of these

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initiatives, we cannot assure you that we will have these resources or that our
initiatives will be successfully implemented.

Certain 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.                                                                                                                                                             

We also have a rights agreement which 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.

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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, 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 December 31, 2002, 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
December 31, 2002, a 10% adverse change in equity prices would result in a $0.4
million decrease in the 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
December 31, 2002, a 10% decrease in the market price of Skyworks common stock
would decrease the fair value of the Skyworks 15% convertible senior
subordinated notes by approximately $5.1 million. 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 classify all of our marketable debt and equity
securities, including the Skyworks
15% convertible senior subordinated notes, as available-for-sale securities. As
of December 31, 2002, the carrying value of these securities
included net unrealized gains of $6.5 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
December 31, 2002:

|                                                   |  |                |       |            |  |   |       | 
|-------------------------------------------------- |  | -------------- | ----- | ---------- |  | - | ----- | 
|(in millions)                                      |  | Carrying Value |       | Fair Value
|                                                   |  |                |       |           
|Cash and cash equivalents                          |  | $              | 234.6 |            |  | $ | 234.6 | 
|Marketable debt securities                         |  |                | 109.0 |            |  |   | 109.0 | 
|Skyworks 15% convertible senior subordinated notes |  |                | 49.2  |            |  |   | 49.2  | 
|Marketable equity securities                       |  |                | 4.3   |            |  |   | 4.3   | 
|Long-term debt                                     |  |                | 681.8 |            |  |   | 321.3 | 

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 December 31, 2002, we held no foreign currency forward exchange contracts.
Based on our overall currency rate exposure at December 31, 2002, a 10 percent
change in currency rates would not have a significant effect on our
consolidated financial position, results of operations or cash flows.

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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.

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PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits:

99    Written Statement of Chief Executive Officer and Chief Financial Officer.

(b)  Reports on Form 8-K

Current Report on Form 8-K dated November 22, 2002, reporting consolidated
financial statements of the Company for the three years ended September 30,
2001, restated to present as discontinued operations the Companys wireless
communications business and Mexicali Operations, which were divested on June
25, 2002 (Items 5 and 7).

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SIGNATURES

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

|                        |  |                                     |  |                                                                                                                             
|----------------------- |  | ----------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------
|                        |  | CONEXANT SYSTEMS, INC.
(Registrant)
|                       
|Date: February 10, 2003 |  | By                                  |  | /s/ Balakrishnan S. IyerBalakrishnan S. Iyer
Senior Vice President and
Chief Financial Officer
(principal financial officer)
|                       
|Date: February 10, 2003 |  | By                                  |  | /s/ J. Scott BlouinJ. Scott Blouin
Senior Vice President and
Chief Accounting Officer
(principal accounting officer)        

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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: February 10, 2003

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

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##### Table of Contents



I, Balakrishnan S. Iyer, 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: February 10, 2003

/s/ Balakrishnan S. Iyer
Balakrishnan S. Iyer
Senior Vice President and  Chief
Financial Officer

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EXHIBIT INDEX

99    Written Statement of Chief Executive Officer and Chief Financial Officer.