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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

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

For the quarterly period ended June 30, 2002*

OR

|      |  |                                                                                         
|----- |  | ----------------------------------------------------------------------------------------
|(BOX) |  | 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  (XBOX) No  (BOX)

Number of shares of registrants common stock outstanding as of July 26, 2002
was 264,187,085.



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|  |  |                                                                                                                                                        
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| 
| 
| 
|* |  | For presentation purposes of this Form 10-Q, references made to the June
30, 2002 period relate to the actual fiscal third quarter ended June 28,
2002.



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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 and raw materials; 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; the safety and security of our employees and of our facilities; 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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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
|PART II. OTHER INFORMATION                                                                   
|                                                                                              | ITEM 2. CHANGES IN SECURITIES                                     
|                                                                                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                          
|SIGNATURES                                                                                   
|EXHIBIT INDEX                                                                                
|Exhibit 12                                                                                   
|EXHIBIT 99.1                                                                                 



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##### Table of Contents



CONEXANT SYSTEMS, INC.

INDEX

|                              |  |                                                                                                             |  |     
|----------------------------- |  | ----------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                             |  | PAGE
|                              |  |                                                                                                             |  |     
|PART I. FINANCIAL INFORMATION
|                             
|                             
|                             
|                             
|                              |  |                                                                                                             |  |     
|                             
|                             
|                             
|                             
|Item 1.                       |  | Financial Statements (unaudited):                                                                           |  |     
|                             
|                             
|                             
|                             
|                              |  |                                                                                                             |  |     
|                             
|                             
|                             
|                             
|                              |  | Consolidated Condensed Balance Sheets  June 30, 2002 and September 30, 2001                                |  | 4   
|                             
|                             
|                             
|                             
|                              |  |                                                                                                             |  |     
|                             
|                             
|                             
|                             
|                              |  | Consolidated Condensed Statements of Operations  Three Months and Nine Months
Ended June 30, 2002 and 2001 |  | 5   
|                             
|                             
|                             
|                             
|                              |  |                                                                                                             |  |     
|                             
|                             
|                             
|                             
|                              |  | Consolidated Condensed Statements of Cash Flows  Nine Months Ended
June 30, 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  
|                             
|                             
|                             
|                             
|                              |  |                                                                                                             |  |     
|                             
|                             
|                             
|                             
|PART II. OTHER INFORMATION   
|                             
|                             
|                             
|                             
|                              |  |                                                                                                             |  |     
|                             
|                             
|                             
|                             
|Item 2.                       |  | Changes in Securities                                                                                       |  | 40  
|                             
|                             
|                             
|                             
|                              |  |                                                                                                             |  |     
|                             
|                             
|                             
|                             
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                            |  | 41  
|                             
|                             
|                             
|                             
|                              |  |                                                                                                             |  |     
|                             
|                             
|                             
|                             
|                              |  | Signatures                                                                                                  |  | 42  

3



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##### Table of Contents






PART I. FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS




CONEXANT SYSTEMS, INC.

Consolidated Condensed Balance Sheets
(unaudited, in thousands, except per share amounts)


|                                                   |                                                          |                                                    |                                            |                                      |         |           |           |               |         |           |  | 
|-------------------------------------------------- | -------------------------------------------------------- | -------------------------------------------------- | ------------------------------------------ | ------------------------------------ | ------- | --------- | --------- | ------------- | ------- | --------- |  | 
|                                                   |                                                          |                                                    |                                            |                                      |         | June 30,  |           | September 30,
|                                                   |                                                          |                                                    |                                            |                                      |         | 2002      |           | 2001         
|                                                   |                                                          |                                                    |                                            |                                      |         |           |           |              
|                                                   |                                                          |                                                    |                                            | ASSETS                               |         |           |           |               |         |           |  | 
|                                                  
|                                                  
|                                                  
|                                                  
|Current assets:                                    |                                                          |                                                    |                                            |                                      |         |           |           |              
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Cash and cash equivalents                                |                                                    | $                                          | 136,083                              |         |           | $         | 182,260       |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Short-term investments                                   |                                                    |                                            | 81,266                               |         |           |           | 156,660       |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Refundable deposit                                       |                                                    |                                            | 150,000                              |         |           |           |              |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Receivables, net of allowance for doubtful accounts      |                                                    |                                            |                                      |         |           |           |               |        
|                                                   |                                                          | of $12,635 and $15,000 at June 30, 2002            |                                            |                                      |         |           |           |               |         |          
|                                                   |                                                          | and September 30, 2001, respectively               |                                            |                                      | 68,516  |           |           |               | 92,931  |          
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Notes receivable from Skyworks                           |                                                    |                                            | 150,000                              |         |           |           |              |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Inventories                                              |                                                    |                                            | 53,756                               |         |           |           | 85,014        |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Deferred income taxes                                    |                                                    |                                            | 59,399                               |         |           |           | 75,710        |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Other current assets                                     |                                                    |                                            | 51,866                               |         |           |           | 51,414        |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Current assets of discontinued operations                |                                                    |                                            | 45,174                               |         |           |           | 81,362        |        
|                                                   |                                                          |                                                    |                                            |                                      |         |           |           |               |        
|                                                   |                                                          |                                                    | Total current assets                       |                                      |         | 796,060   |           |               |         | 725,351   | 
|                                                  
|                                                  
|                                                  
|                                                  
|Property, plant and equipment, net                 |                                                          |                                                    | 119,171                                    |                                      |         |           | 217,886   |              
|                                                  
|                                                  
|                                                  
|                                                  
|Goodwill and intangible assets, net                |                                                          |                                                    | 856,204                                    |                                      |         |           | 1,191,429 |              
|                                                  
|                                                  
|                                                  
|                                                  
|Deferred income taxes                              |                                                          |                                                    | 203,076                                    |                                      |         |           | 183,444   |              
|                                                  
|                                                  
|                                                  
|                                                  
|Other assets                                       |                                                          |                                                    | 156,671                                    |                                      |         |           | 264,529   |              
|                                                  
|                                                  
|                                                  
|                                                  
|Non-current assets of discontinued operations      |                                                          |                                                    |                                           |                                      |         |           | 232,841   |              
|                                                   |                                                          |                                                    |                                            |                                      |         |           |           |               |        
|                                                   |                                                          |                                                    | Total assets                               |                                      | $       | 2,131,182 |           |               | $       | 2,815,480 | 
|                                                   |                                                          |                                                    |                                            |                                      |         |           |           |               |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                          |                                                    |                                            | LIABILITIES AND SHAREHOLDERS EQUITY |         |           |           |               |         |           |  | 
|                                                  
|                                                  
|                                                  
|                                                  
|Current liabilities:                               |                                                          |                                                    |                                            |                                      |         |           |           |              
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Accounts payable                                         |                                                    | $                                          | 132,269                              |         |           | $         | 95,488        |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Deferred revenue                                         |                                                    |                                            | 12,607                               |         |           |           | 26,583        |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Accrued compensation and benefits                        |                                                    |                                            | 39,719                               |         |           |           | 38,044        |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Other current liabilities                                |                                                    |                                            | 78,711                               |         |           |           | 100,062       |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Current liabilities of discontinued operations           |                                                    |                                            | 2,982                                |         |           |           | 22,820        |        
|                                                   |                                                          |                                                    |                                            |                                      |         |           |           |               |        
|                                                   |                                                          |                                                    | Total current liabilities                  |                                      |         | 266,288   |           |               |         | 282,997   | 
|                                                  
|                                                  
|                                                  
|                                                  
|Convertible subordinated notes                     |                                                          |                                                    | 681,825                                    |                                      |         |           | 709,849   |              
|                                                  
|                                                  
|                                                  
|                                                  
|Other liabilities                                  |                                                          |                                                    | 57,671                                     |                                      |         |           | 45,652    |              
|                                                  
|                                                  
|                                                  
|                                                  
|Non-current liabilities of discontinued operations |                                                          |                                                    |                                           |                                      |         |           | 3,806     |              
|                                                   |                                                          |                                                    |                                            |                                      |         |           |           |               |        
|                                                   |                                                          |                                                    | Total liabilities                          |                                      |         | 1,005,784 |           |               |         | 1,042,304 | 
|                                                   |                                                          |                                                    |                                            |                                      |         |           |           |               |        
|Commitments and contingencies                      |                                                          |                                                    |                                           |                                      |         |           |          |              
|                                                  
|                                                  
|                                                  
|                                                  
|Shareholders equity:                              |                                                          |                                                    |                                            |                                      |         |           |           |              
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Preferred and junior preferred stock                     |                                                    |                                            |                                     |         |           |           |              |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Common stock, $1.00 par value: 1,000,000 shares          |                                                    |                                            |                                      |         |           |           |               |        
|                                                   |                                                          | authorized; 263,732 and 253,900 shares issued at   |                                            |                                      |         |           |           |               |         |          
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                          | June 30, 2002 and September 30, 2001, respectively |                                            |                                      | 263,732 |           |           |               | 253,900 |          
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Additional paid-in capital                               |                                                    |                                            | 3,219,316                            |         |           |           | 3,113,205     |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Accumulated deficit                                      |                                                    |                                            | (2,331,231                           | )       |           |           | (1,566,209    | )      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Accumulated other comprehensive loss                     |                                                    |                                            | (23,262                              | )       |           |           | (17,204       | )      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Treasury stock, at cost: 41 shares at September 30, 2001 |                                                    |                                            |                                     |         |           |           | (1,807        | )      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Unearned compensation                                    |                                                    |                                            | (3,157                               | )       |           |           | (8,709        | )      
|                                                   |                                                          |                                                    |                                            |                                      |         |           |           |               |        
|                                                   |                                                          |                                                    | Total shareholders equity                 |                                      |         | 1,125,398 |           |               |         | 1,773,176 | 
|                                                   |                                                          |                                                    |                                            |                                      |         |           |           |               |        
|                                                   |                                                          |                                                    | Total liabilities and shareholders equity |                                      | $       | 2,131,182 |           |               | $       | 2,815,480 | 
|                                                   |                                                          |                                                    |                                            |                                      |         |           |           |               |        

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 |         | Nine months ended
|                                               |                                     |                               |                          |         | June 30,           |         | June 30,         
|                                               |                                     |                               |                          |         |                    |         |                  
|                                               |                                     |                               |                          |         | 2002               |         | 2001              |         | 2002     |         | 2001    
|                                               |                                     |                               |                          |         |                    |         |                   |         |          |         |         
|Net revenues                                   |                                     | $                             | 153,957                  |         |                    | $       | 157,836           |         |          | $       | 443,818  |         |         | $       | 704,099    |        
|                                              
|                                              
|                                              
|                                              
|Cost of goods sold                             |                                     |                               | 81,266                   |         |                    |         | 173,861           |         |          |         | 264,759  |         |         |         | 634,783    |        
|                                               |                                     |                               |                          |         |                    |         |                   |         |          |         |          |         |         |         |            |        
|Gross margin                                   |                                     |                               | 72,691                   |         |                    |         | (16,025           | )       |          |         | 179,059  |         |         |         | 69,316     |        
|                                              
|                                              
|                                              
|                                              
|Operating expenses:                            |                                     |                               |                          |         |                    |         |                   |         |          |         |          |         |         |         |            |        
|                                              
|                                              
|                                              
|                                              
|                                               | Research and development            |                               |                          | 82,669  |                    |         |                   | 90,557  |          |         |          | 245,351 |         |         |            | 281,591 |         
|                                              
|                                              
|                                              
|                                              
|                                               | Selling, general and administrative |                               |                          | 40,963  |                    |         |                   | 63,377  |          |         |          | 128,623 |         |         |            | 199,406 |         
|                                              
|                                              
|                                              
|                                              
|                                               | Amortization of intangible assets   |                               |                          | 84,570  |                    |         |                   | 81,351  |          |         |          | 256,032 |         |         |            | 239,855 |         
|                                              
|                                              
|                                              
|                                              
|                                               | Special charges                     |                               |                          | 133,447 |                    |         |                   | 345,835 |          |         |          | 155,766 |         |         |            | 363,764 |         
|                                               |                                     |                               |                          |         |                    |         |                   |         |          |         |          |         |         |         |            |        
|                                               |                                     |                               | Total operating expenses |         |                    | 341,649 |                   |         |          | 581,120 |          |         |         | 785,772 |            |         |          | 1,084,616 | 
|                                               |                                     |                               |                          |         |                    |         |                   |         |          |         |          |         |         |         |            |        
|Operating loss                                 |                                     |                               | (268,958                 | )       |                    |         | (597,145          | )       |          |         | (606,713 | )       |         |         | (1,015,300 | )      
|                                              
|                                              
|                                              
|                                              
|Debt conversion costs                          |                                     |                               | (10,435                  | )       |                    |         |                  |         |          |         | (10,435  | )       |         |         | (42,584    | )      
|                                              
|                                              
|                                              
|                                              
|Other expense, net                             |                                     |                               | (5,043                   | )       |                    |         | (4,789            | )       |          |         | (21,021  | )       |         |         | (10,218    | )      
|                                               |                                     |                               |                          |         |                    |         |                   |         |          |         |          |         |         |         |            |        
|Loss before income taxes                       |                                     |                               | (284,436                 | )       |                    |         | (601,934          | )       |          |         | (638,169 | )       |         |         | (1,068,102 | )      
|                                              
|                                              
|                                              
|                                              
|Provision (benefit) for income taxes           |                                     |                               | 137                      |         |                    |         | 20                |         |          |         | (2,009   | )       |         |         | (106,352   | )      
|                                               |                                     |                               |                          |         |                    |         |                   |         |          |         |          |         |         |         |            |        
|Loss from continuing operations                |                                     |                               | (284,573                 | )       |                    |         | (601,954          | )       |          |         | (636,160 | )       |         |         | (961,750   | )      
|                                              
|                                              
|                                              
|                                              
|Loss from discontinued operations,             |                                     |                               |                          |         |                    |         |                   |         |          |         |          |         |         |         |            |        
|                                              
|                                              
|                                              
|                                              
|                                               |                                     | net of income taxes           |                          |         | (14,826            | )       |                   |         | (142,986 | )       |          |         | (68,431 | )       |            |         | (252,061 | )        
|                                               |                                     |                               |                          |         |                    |         |                   |         |          |         |          |         |         |         |            |        
|Loss before extraordinary item                 |                                     |                               | (299,399                 | )       |                    |         | (744,940          | )       |          |         | (704,591 | )       |         |         | (1,213,811 | )      
|                                              
|                                              
|                                              
|                                              
|Extraordinary gain on extinguishment of debt,  |                                     |                               |                          |         |                    |         |                   |         |          |         |          |         |         |         |            |        
|                                              
|                                              
|                                              
|                                              
|                                               |                                     | net of income taxes of $4,426 |                          |         |                   |         |                   |         |         |         |          |         |        |         |            |         | 7,284    |          
|                                               |                                     |                               |                          |         |                    |         |                   |         |          |         |          |         |         |         |            |        
|Net loss                                       |                                     | $                             | (299,399                 | )       |                    | $       | (744,940          | )       |          | $       | (704,591 | )       |         | $       | (1,206,527 | )      
|                                               |                                     |                               |                          |         |                    |         |                   |         |          |         |          |         |         |         |            |        
|Loss per share, basic and diluted:             |                                     |                               |                          |         |                    |         |                   |         |          |         |          |         |         |         |            |        
|                                              
|                                              
|                                              
|                                              
|                                               | Continuing operations               |                               | $                        | (1.09   | )                  |         | $                 | (2.44   | )        |         | $        | (2.48   | )       |         | $          | (3.97   | )       
|                                              
|                                              
|                                              
|                                              
|                                               | Discontinued operations             |                               |                          | (0.06   | )                  |         |                   | (0.58   | )        |         |          | (0.26   | )       |         |            | (1.04   | )       
|                                              
|                                              
|                                              
|                                              
|                                               | Extraordinary item                  |                               |                          |        |                    |         |                   |        |          |         |          |        |         |         |            | 0.03    |         
|                                               |                                     |                               |                          |         |                    |         |                   |         |          |         |          |         |         |         |            |        
|                                               | Net loss                            |                               | $                        | (1.15   | )                  |         | $                 | (3.02   | )        |         | $        | (2.74   | )       |         | $          | (4.98   | )       
|                                               |                                     |                               |                          |         |                    |         |                   |         |          |         |          |         |         |         |            |        
|Number of shares used in per share
computation |                                     |                               | 260,414                  |         |                    |         | 246,777           |         |          |         | 256,971  |         |         |         | 242,138    |        
|                                               |                                     |                               |                          |         |                    |         |                   |         |          |         |          |         |         |         |            |        

See accompanying notes to consolidated condensed financial statements.

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##### Table of Contents






CONEXANT SYSTEMS, INC.

Consolidated Condensed Statements of Cash Flows
(unaudited, in thousands)


|                                                           |                                             |                                                |          |                   |         |      |          |          |          |  
|---------------------------------------------------------- | ------------------------------------------- | ---------------------------------------------- | -------- | ----------------- | ------- | ---- | -------- | -------- | -------- | -
|                                                           |                                             |                                                |          | Nine months ended
|                                                           |                                             |                                                |          | June 30,         
|                                                           |                                             |                                                |          |                  
|                                                           |                                             |                                                |          | 2002              |         | 2001
|                                                           |                                             |                                                |          |                   |         |     
|Cash flows from operating activities:                      |                                             |                                                |          |                   |         |      |          |         
|                                                          
|                                                          
|                                                          
|                                                          
|Loss from continuing operations                            |                                             | $                                              | (636,160 | )                 |         | $    | (961,750 | )       
|                                                          
|                                                          
|                                                          
|                                                          
|Adjustments to reconcile loss from continuing              |                                             |                                                |          |                   |         |      |          |         
|operations to net cash used in operating activities, net   |                                             |                                                |          |                   |         |      |          |         
|of effects of acquisitions and dispositions of businesses: |                                             |                                                |          |                   |         |      |          |         
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Depreciation                                |                                                |          | 40,289            |         |      |          | 102,626  |         
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Amortization of intangible assets           |                                                |          | 256,032           |         |      |          | 239,855  |         
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Asset impairments                           |                                                |          | 132,514           |         |      |          | 342,791  |         
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Provision for losses on accounts receivable |                                                |          | (47               | )       |      |          | 17,215   |         
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Inventory provisions                        |                                                |          | 14,186            |         |      |          | 188,814  |         
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Deferred income taxes                       |                                                |          | (2,305            | )       |      |          | (153,908 | )       
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Stock compensation                          |                                                |          | 8,491             |         |      |          | 12,305   |         
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Debt conversion costs                       |                                                |          | 10,435            |         |      |          | 42,584   |         
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Other non-cash items, net                   |                                                |          | 8,193             |         |      |          | 12,834   |         
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Changes in assets and liabilities:          |                                                |          |                   |         |      |          |          |         
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                             | Receivables                                    |          |                   | 25,682  |      |          |          | 210,266  |  
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                             | Inventories                                    |          |                   | 10,107  |      |          |          | (67,143  | )
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                             | Accounts payable                               |          |                   | 35,338  |      |          |          | (135,146 | )
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                             | Deferred revenue                               |          |                   | (13,976 | )    |          |          | (8,190   | )
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                             | Accrued expenses and other current liabilities |          |                   | (901    | )    |          |          | (23,627  | )
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |                                             | Other                                          |          |                   | (19,128 | )    |          |          | (10,424  | )
|                                                           |                                             |                                                |          |                   |         |      |          |         
|Net cash used in operating activities                      |                                             |                                                | (131,250 | )                 |         |      | (190,898 | )       
|                                                           |                                             |                                                |          |                   |         |      |          |         
|Cash flows from investing activities:                      |                                             |                                                |          |                   |         |      |          |         
|                                                          
|                                                          
|                                                          
|                                                          
|Purchase of marketable securities                          |                                             |                                                | (228,545 | )                 |         |      | (516,102 | )       
|                                                          
|                                                          
|                                                          
|                                                          
|Sale of marketable securities                              |                                             |                                                | 305,315  |                   |         |      | 347,314  |         
|                                                          
|                                                          
|                                                          
|                                                          
|Capital expenditures                                       |                                             |                                                | (20,024  | )                 |         |      | (98,622  | )       
|                                                          
|                                                          
|                                                          
|                                                          
|Proceeds from sales of assets                              |                                             |                                                | 71,756   |                   |         |      | 1,021    |         
|                                                          
|                                                          
|                                                          
|                                                          
|Investments in and advances to businesses                  |                                             |                                                | (4,060   | )                 |         |      | (91,094  | )       
|                                                          
|                                                          
|                                                          
|                                                          
|Acquisitions of businesses, net of cash acquired           |                                             |                                                | (24,989  | )                 |         |      | (12,710  | )       
|                                                           |                                             |                                                |          |                   |         |      |          |         
|Net cash provided by (used in) investing activities        |                                             |                                                | 99,453   |                   |         |      | (370,193 | )       
|                                                           |                                             |                                                |          |                   |         |      |          |         
|Cash flows from financing activities:                      |                                             |                                                |          |                   |         |      |          |         
|                                                          
|                                                          
|                                                          
|                                                          
|Proceeds from exercise of stock options                    |                                             |                                                | 14,935   |                   |         |      | 13,255   |         
|                                                          
|                                                          
|                                                          
|                                                          
|Payment of debt conversion costs                           |                                             |                                                |         |                   |         |      | (42,584  | )       
|                                                          
|                                                          
|                                                          
|                                                          
|Repurchase of convertible subordinated notes               |                                             |                                                |         |                   |         |      | (22,400  | )       
|                                                           |                                             |                                                |          |                   |         |      |          |         
|Net cash provided by (used in) financing activities        |                                             |                                                | 14,935   |                   |         |      | (51,729  | )       
|                                                           |                                             |                                                |          |                   |         |      |          |         
|Net cash used in discontinued operations                   |                                             |                                                | (29,315  | )                 |         |      | (71,119  | )       
|                                                           |                                             |                                                |          |                   |         |      |          |         
|Net decrease in cash and cash equivalents                  |                                             |                                                | (46,177  | )                 |         |      | (683,939 | )       
|                                                          
|                                                          
|                                                          
|                                                          
|Cash and cash equivalents at beginning of period           |                                             |                                                | 182,260  |                   |         |      | 831,100  |         
|                                                           |                                             |                                                |          |                   |         |      |          |         
|Cash and cash equivalents at end of period                 |                                             | $                                              | 136,083  |                   |         | $    | 147,161  |         
|                                                           |                                             |                                                |          |                   |         |      |          |         

See accompanying notes to consolidated condensed financial statements.

6



---



##### Table of Contents






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

1. Basis of Presentation and Significant Accounting Policies

Conexant Systems, Inc. (Conexant or the Company) designs, develops and sells
semiconductor system solutions for 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 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.

In September 2000, the Company announced a plan for the separation of its
Broadband Communications and Mindspeed Technologies businesses. Although
current business conditions have delayed the separation, the Company remains
committed to completing the separation as soon as business and market
conditions permit. The separation is subject to receipt of a ruling from the
Internal Revenue Service (IRS) that the related spin-off will qualify as a
tax-free distribution and may be subject to approval of the Companys
shareholders. An IRS ruling has been received and although it is generally
binding on the IRS, its continuing applicability will depend on the form of the
separation transaction and the extent of intervening events between the date of
the ruling and the separation. 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 inventory write-downs, special charges, debt
conversion costs and extraordinary gain on extinguishment of debt, necessary to
present fairly the Companys financial position, results of operations and cash
flows. The results of operations for interim periods are not necessarily
indicative of the results that may be expected for a full year. These
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Companys Annual Report on Form
10-K for the fiscal year ended September 30, 2001.

Fiscal PeriodsFor presentation purposes, references made to the periods ended
June 30, 2002 and 2001 relate to the actual fiscal 2002 third quarter ended
June 28, 2002 and the actual fiscal 2001 third quarter ended June 29, 2001,
respectively.

Supplemental Cash Flow InformationCash paid for interest was $16.3 million and
$22.8 million for the nine months ended June 30, 2002 and 2001, respectively.
Net income tax payments (refunds) for the nine months ended June 30, 2002 and
2001 were $(7.3) million and $4.4 million, respectively.

Recent Accounting StandardsIn June 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations and SFAS No. 142, Goodwill and Other Intangible
Assets. 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. Existing goodwill and intangible assets will
be evaluated against these new criteria, which may result in certain intangible
assets being subsumed into goodwill. SFAS 142 addresses financial accounting
and reporting for acquired goodwill and other intangible assets. Goodwill and
intangible assets that have indefinite useful lives will not be amortized into
results of operations, but instead will be evaluated at least annually for
impairment and written down when the recorded value exceeds the estimated fair
value. The Company will adopt the provisions of each statement which apply to
goodwill and intangible assets acquired prior to June 30, 2001 as of the
beginning of fiscal 2003. However, SFAS 142 is immediately applicable to any
goodwill and intangible assets the Company may acquire after June 30, 2001.
Upon adoption, the Company will cease amortizing goodwill against its results
of operations, reducing annual amortization expense by approximately $270
million. The Company is evaluating the full impact of adopting the new
standards. In addition, impairment reviews may result in charges against
earnings to write down the value of goodwill.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which 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. Adoption of SFAS 144 is
required no later than
7Table of Contents

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

the beginning of fiscal 2003. Management does not expect the adoption of SFAS
144 to have a significant impact on the Companys financial position or results
of operations. However, future impairment reviews may result in charges against
earnings to write down the value of long-lived assets.

ReclassificationsCertain prior year amounts have been reclassified to conform
to the current period presentation.

2. Spin-off and Merger of Wireless Communications 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. In connection
with the purchase, Conexant, Alpha and certain subsidiaries of Alpha entered
into a financing agreement pursuant to which Alpha and a subsidiary of Alpha
delivered to Conexant promissory notes for $150 million (the Term Notes)
guaranteed by Alpha and certain Alpha subsidiaries and secured by substantially
all the 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,
mature 50 percent in nine months and 50 percent in one year and bear interest
initially at 10 percent, increasing to 12 percent in three months and 15
percent in six months. The financing agreement also provides for a revolving
credit facility under which Alpha may 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. Currently, Alpha may borrow up to $75 million
under the credit facility. As of June 30, 2002, no borrowings were outstanding
under the credit facility.

The consolidated condensed financial statements for periods prior to June 30,
2002 have been restated to reflect the wireless communications business and
Mexicali operations as discontinued operations. For financial accounting
purposes, the sale of the Mexicali operations by Conexant to Alpha has been
treated as if Conexant had contributed the Mexicali operations to Washington as
part of the Spin-off Transaction, and the $150 million purchase price has been
treated as a return of capital to Conexant. The carrying value of the assets
and liabilities which the Company contributed to Washington (including the
Mexicali operations) was $210.4 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 |         | Nine months ended
|                                     |  | June 30,           |         | June 30,         
|                                     |  |                    |         |                  
|                                     |  | 2002               |         | 2001              |  | 2002 |          | 2001
|                                     |  |                    |         |                   |  |      |          |     
|Net revenues                         |  | $                  | 92,242  |                   |  | $    | 42,310   |      |  | $ | 272,931 |   |  | $ | 157,411  |  
|                                     |  |                    |         |                   |  |      |          |      |  |   |         |   |  |   |          |  
|                                    
|                                    
|                                    
|                                    
|Loss before income taxes             |  | $                  | (15,947 | )                 |  | $    | (142,639 | )    |  | $ | (65,282 | ) |  | $ | (297,492 | )
|                                    
|                                    
|                                    
|                                    
|Provision (benefit) for income taxes |  |                    | (1,121  | )                 |  |      | 347      |      |  |   | 3,149   |   |  |   | (45,431  | )
|                                     |  |                    |         |                   |  |      |          |      |  |   |         |   |  |   |          |  
|Loss from discontinued operations    |  | $                  | (14,826 | )                 |  | $    | (142,986 | )    |  | $ | (68,431 | ) |  | $ | (252,061 | )
|                                     |  |                    |         |                   |  |      |          |      |  |   |         |   |  |   |          |  

8



---



##### Table of Contents



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

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

|                        |                                     |   |          |        |               |   |         |         | 
|----------------------- | ----------------------------------- | - | -------- | ------ | ------------- | - | ------- | ------- | 
|                        |                                     |   | June 30, |        | September 30,
|                        |                                     |   | 2002     |        | 2001         
|                        |                                     |   |          |        |              
|Current assets:         |                                     |   |          |        |               |   |         |        
|                       
|                       
|                       
|                       
|                        | Receivables, net                    |   | $        | 45,174 |               |   | $       | 40,754  | 
|                       
|                       
|                       
|                       
|                        | Inventories                         |   |          |       |               |   |         | 37,383  | 
|                       
|                       
|                       
|                       
|                        | Other current assets                |   |          |       |               |   |         | 3,225   | 
|                        |                                     |   |          |        |               |   |         |         | 
|                        |                                     | $ | 45,174   |        |               | $ | 81,362  |        
|                        |                                     |   |          |        |               |   |         |         | 
|                       
|                       
|                       
|                       
|Non-current assets:     |                                     |   |          |        |               |   |         |        
|                       
|                       
|                       
|                       
|                        | Property, plant and equipment, net  |   | $        |       |               |   | $       | 169,547 | 
|                       
|                       
|                       
|                       
|                        | Goodwill and intangible assets, net |   |          |       |               |   |         | 59,824  | 
|                       
|                       
|                       
|                       
|                        | Other assets                        |   |          |       |               |   |         | 3,470   | 
|                        |                                     |   |          |        |               |   |         |         | 
|                        |                                     | $ |         |        |               | $ | 232,841 |        
|                        |                                     |   |          |        |               |   |         |         | 
|                       
|                       
|                       
|                       
|Current liabilities:    |                                     |   |          |        |               |   |         |        
|                       
|                       
|                       
|                       
|                        | Accounts payable                    |   | $        | 2,982  |               |   | $       | 2,653   | 
|                       
|                       
|                       
|                       
|                        | Accrued compensation and benefits   |   |          |       |               |   |         | 12,363  | 
|                       
|                       
|                       
|                       
|                        | Other current liabilities           |   |          |       |               |   |         | 7,804   | 
|                        |                                     |   |          |        |               |   |         |         | 
|                        |                                     | $ | 2,982    |        |               | $ | 22,820  |        
|                        |                                     |   |          |        |               |   |         |         | 
|Non-current liabilities |                                     | $ |         |        |               | $ | 3,806   |        
|                        |                                     |   |          |        |               |   |         |         | 

The assets and liabilities of discontinued operations as of June 30, 2002
represent assets and liabilities of the wireless communications business which
the Company retained in the Spin-off Transaction.

3. Acquisitions

On June 24, 2002, the Company acquired the video compression business of
iCompression, Inc. (iCompression), a wholly-owned subsidiary of
GlobespanVirata, Inc. The acquisition will enable the Company to accelerate the
development of video products for the encoder markets including personal
computers and cable set-top boxes. Consideration for the acquisition consisted
of 1.25 million shares of the Companys common stock and promissory notes for
$21 million, including 150,000 shares of common stock and a promissory note for
$1.8 million initially held in escrow for the settlement of any contingent
indemnity claims through the expiration of a one-year escrow period. The total
value of the initial consideration to iCompression (excluding amounts held in
escrow) was $32.4 million. To the extent the amounts escrowed are paid to
iCompression, they will be accounted for as additional purchase price. In
addition, Conexant may be required to pay additional consideration of up to $20
million pursuant to an earn-out provision if certain revenue milestones are
achieved. The Company paid the amounts owed under the promissory notes in July
2002. The promissory notes have been included in other current liabilities in
the accompanying consolidated condensed balance sheet as of June 30, 2002.

Under the asset purchase agreement, the Company guaranteed the value of the
shares issued to iCompression for a defined period through September 2003
(subject to certain conditions and elections). The guaranty is subject to
adjustment for any stock split, stock dividend, recapitalization, merger or
similar transaction (including the Spin-off Transaction and Merger of the
wireless communications business). In the event that the common stock delivered
to iCompression (including the shares of Skyworks common stock received in
respect thereof) does not maintain a market value per share equal to or greater
than $12.00 for at least seven consecutive trading days during the guaranty
period, Conexant would be required to make an additional cash payment to
iCompression for the difference between $12.00 and the market value per share
of such shares as of specified dates. Consequently, the Company has valued the
shares delivered to iCompression at the guaranteed value of $12.00 per share.

The results of operations of the acquired business are included in the
Broadband Communications segment in the consolidated condensed financial
statements from the date of acquisition. The pro forma effect of this
acquisition is not material to the Companys results of operations for fiscal
2002 or 2001.

During the first nine months of fiscal 2002, the Company paid additional
consideration to the sellers of two businesses acquired in fiscal 2000 upon the
achievement of performance and technology goals specified in the related
acquisition agreements. The additional consideration consisted of $25.0 million
in cash and 94,572 shares of the Companys common stock valued at $1.3 million
(based upon the market price of the common stock at the time of the resolution
of the contingency). The $26.3 million aggregate value of the additional
consideration increased the
9Table of ContentsCONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
(unaudited)amounts of goodwill related to the acquired companies. As of June 30, 2002, no
additional consideration is payable, or contingently payable, for acquisitions
the Company completed prior to fiscal 2002.4. Supplemental Financial Statement DataThe $150.0 million refundable deposit, which was returned to the Company by a
wafer supplier in July 2002, was classified as a current asset as of June 30,
2002. The refundable deposit was included in other assets at September 30,
2001.Inventories consist of the following (in thousands):

|                |  |          |        |               |  |   |        | 
|--------------- |  | -------- | ------ | ------------- |  | - | ------ | 
|                |  | June 30, |        | September 30,
|                |  | 2002     |        | 2001         
|                |  |          |        |              
|Raw materials   |  | $        | 842    |               |  | $ | 5,621  | 
|               
|               
|               
|               
|Work-in-process |  |          | 37,000 |               |  |   | 72,756 | 
|               
|               
|               
|               
|Finished goods  |  |          | 15,914 |               |  |   | 6,637  | 
|                |  |          |        |               |  |   |        | 
|                |  | $        | 53,756 |               |  | $ | 85,014 | 
|                |  |          |        |               |  |   |        | 

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

|                                                       |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------------ |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                       |  | Three months ended |        | Nine months ended
|                                                       |  | June 30,           |        | June 30,         
|                                                       |  |                    |        |                  
|                                                       |  | 2002               |        | 2001              |  | 2002 |        | 2001
|                                                       |  |                    |        |                   |  |      |        |     
|Investment and interest income                         |  | $                  | 1,428  |                   |  | $    | 5,991  |      |  | $ | 7,675   |   |  | $ | 25,443  |  
|                                                      
|                                                      
|                                                      
|                                                      
|Gain (loss) on sales of assets, net                    |  |                    | 506    |                   |  |      | (108   | )    |  |   | 3,955   |   |  |   | (102    | )
|                                                      
|                                                      
|                                                      
|                                                      
|Interest expense                                       |  |                    | (7,757 | )                 |  |      | (7,281 | )    |  |   | (23,645 | ) |  |   | (25,541 | )
|                                                      
|                                                      
|                                                      
|                                                      
|Write-down of non-marketable investments               |  |                    |       |                   |  |      |       |      |  |   | (7,675  | ) |  |   | (5,000  | )
|                                                      
|                                                      
|                                                      
|                                                      
|Equity in earnings (losses) of equity method investees |  |                    | 113    |                   |  |      |       |      |  |   | (1,749  | ) |  |   |        |  
|                                                      
|                                                      
|                                                      
|                                                      
|Write-off of terminated credit facility costs          |  |                    |       |                   |  |      | (4,146 | )    |  |   |        |   |  |   | (4,146  | )
|                                                      
|                                                      
|                                                      
|                                                      
|Other                                                  |  |                    | 667    |                   |  |      | 755    |      |  |   | 418     |   |  |   | (872    | )
|                                                       |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  
|                                                       |  | $                  | (5,043 | )                 |  | $    | (4,789 | )    |  | $ | (21,021 | ) |  | $ | (10,218 | )
|                                                       |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  

During the nine months ended June 30, 2002 and 2001, the Company recorded
charges of $7.7 million and $5.0 million, respectively, to write down the
carrying values of certain non-marketable investments to their fair values,
estimated to be zero. The investments consisted of equity interests in early
stage technology companies which the Company had accounted for under the cost
method. Management estimated the fair value of these investments based upon
available financial and other information, including then-current and projected
business prospects for the subject companies, and determined that the
decline in the fair value of these investments was other than temporary.

5. Debt

During the third quarter of fiscal 2002, the Company exchanged 2.2 million
shares of its common stock for approximately $28.0 million principal amount of
its 4-1/4% Convertible Subordinated Notes due 2006. In connection with this
transaction, the Company recognized debt conversion costs of $10.4 million for
the fair value of the shares issued in excess of the number of shares issuable
in a conversion of the notes pursuant to their original terms.

During the first quarter of fiscal 2001, approximately $255.1 million principal
amount of the Companys 4-1/4% Convertible Subordinated Notes due 2006 were
converted into approximately 11.0 million shares of common stock at a cost to
the Company of $42.6 million. In addition, the Company purchased $35.0 million
principal amount of its 4% Convertible Subordinated Notes due 2007 at
prevailing market prices, resulting in an extraordinary gain of $7.3 million
(net of income taxes of $4.4 million).

10



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##### Table of Contents



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

6. Contingent Liabilities

Claims have been asserted against the Company 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), the Company
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 operations 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.

7. Comprehensive Income (Loss)

Comprehensive income (loss) is as follows (in thousands):

|                                   |                                                             |                                   |          |                    |          |                   |          |        |          |      |          |        |          |   |            |         |            |  
|---------------------------------- | ----------------------------------------------------------- | --------------------------------- | -------- | ------------------ | -------- | ----------------- | -------- | ------ | -------- | ---- | -------- | ------ | -------- | - | ---------- | ------- | ---------- | -
|                                   |                                                             |                                   |          | Three months ended |          | Nine months ended
|                                   |                                                             |                                   |          | June 30,           |          | June 30,         
|                                   |                                                             |                                   |          |                    |          |                  
|                                   |                                                             |                                   |          | 2002               |          | 2001              |          | 2002   |          | 2001
|                                   |                                                             |                                   |          |                    |          |                   |          |        |          |     
|Net loss                           |                                                             | $                                 | (299,399 | )                  |          | $                 | (744,940 | )      |          | $    | (704,591 | )      |          | $ | (1,206,527 | )      
|                                  
|                                  
|                                  
|                                  
|Other comprehensive income (loss): |                                                             |                                   |          |                    |          |                   |          |        |          |      |          |        |          |   |            |        
|                                  
|                                  
|                                  
|                                  
|                                   | Foreign currency translation adjustments                    |                                   |          | 3,585              |          |                   |          | (2,295 | )        |      |          | (4,865 | )        |   |            | (18,664 | )         
|                                  
|                                  
|                                  
|                                  
|                                   | Change in unrealized gains on available-for-sale securities |                                   |          | 614                |          |                   |          | 831    |          |      |          | (2,252 | )        |   |            | (51,735 | )         
|                                  
|                                  
|                                  
|                                  
|                                   | Change in unrealized gains on forward exchange contracts    |                                   |          |                   |          |                   |          | (221   | )        |      |          | 43     |          |   |            | 70      |           
|                                  
|                                  
|                                  
|                                  
|                                   | Effect of income taxes                                      |                                   |          | (235               | )        |                   |          |       |          |      |          | 1,016  |          |   |            | 20,168  |           
|                                   |                                                             |                                   |          |                    |          |                   |          |        |          |      |          |        |          |   |            |        
|                                   |                                                             | Other comprehensive income (loss) |          |                    | 3,964    |                   |          |        | (1,685   | )    |          |        | (6,058   | ) |            |         | (50,161    | )
|                                   |                                                             |                                   |          |                    |          |                   |          |        |          |      |          |        |          |   |            |        
|                                   |                                                             | Comprehensive loss                |          | $                  | (295,435 | )                 |          | $      | (746,625 | )    |          | $      | (710,649 | ) |            | $       | (1,256,688 | )
|                                   |                                                             |                                   |          |                    |          |                   |          |        |          |      |          |        |          |   |            |        

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

|                                                              |                                      |   |          |         |               |   |         |         |  
|------------------------------------------------------------- | ------------------------------------ | - | -------- | ------- | ------------- | - | ------- | ------- | -
|                                                              |                                      |   | June 30, |         | September 30,
|                                                              |                                      |   | 2002     |         | 2001         
|                                                              |                                      |   |          |         |              
|Unrealized gains on available-for-sale securities, net of tax |                                      | $ | 355      |         |               | $ | 1,591   |        
|                                                             
|                                                             
|                                                             
|                                                             
|Unrealized losses on forward exchange contracts               |                                      |   |         |         |               |   | (43     | )      
|                                                             
|                                                             
|                                                             
|                                                             
|Foreign currency translation adjustments                      |                                      |   | (23,617  | )       |               |   | (18,752 | )      
|                                                              |                                      |   |          |         |               |   |         |        
|                                                              | Accumulated other comprehensive loss |   | $        | (23,262 | )             |   | $       | (17,204 | )
|                                                              |                                      |   |          |         |               |   |         |        

8. Special Charges

Special charges consist of the following (in thousands):

|                  |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 
|----------------- |  | ------------------ | ------- | ----------------- |  | ---- | ------- | ---- |  | - | ------- |  |  | - | ------- | 
|                  |  | Three months ended |         | Nine months ended
|                  |  | June 30,           |         | June 30,         
|                  |  |                    |         |                  
|                  |  | 2002               |         | 2001              |  | 2002 |         | 2001
|                  |  |                    |         |                   |  |      |         |     
|Asset impairments |  | $                  | 114,928 |                   |  | $    | 342,791 |      |  | $ | 132,514 |  |  | $ | 342,791 | 
|                 
|                 
|                 
|                 
|Restructuring     |  |                    | 18,118  |                   |  |      | 609     |      |  |   | 22,706  |  |  |   | 6,341   | 
|                 
|                 
|                 
|                 
|Separation costs  |  |                    | 401     |                   |  |      | 2,435   |      |  |   | 546     |  |  |   | 14,632  | 
|                  |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 
|                  |  | $                  | 133,447 |                   |  | $    | 345,835 |      |  | $ | 155,766 |  |  | $ | 363,764 | 
|                  |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 

11



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##### Table of Contents



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

Asset Impairments

During the third quarter of fiscal 2002, the Company recorded impairment
charges of $114.1 million in the Mindspeed Technologies segment to write down
the carrying value of long-lived assets (principally goodwill and developed
technology) related to its Novanet Semiconductor Limited (Novanet) and NetPlane
Systems, Inc. (NetPlane) subsidiaries. The Company terminated the operations of
Novanet in June 2002 and intends to divest NetPlane by the end of the first
quarter of fiscal 2003.

During the second quarter of fiscal 2002, the Company recorded an impairment
charge of $13.0 million in the Broadband Communications segment to write down
the carrying value (approximately $22 million) of the goodwill related to its
digital imaging business. In July 2002, the Company completed the planned
divestiture of its digital imaging business and merged the business with Zing
Network, Inc. to create a new privately held company named Pictos Technologies,
Inc. (Pictos). In connection with this transaction, the Company contributed the
assets and intellectual property of the digital imaging business to Pictos in
exchange for shares of Pictos stock. The Company will account for its
investment in Pictos under the cost method, as it has less than 20% of the
voting rights and does not exercise significant influence over the management
or operation of Pictos.

The impairment charges resulted from the Companys decision to exit these
businesses. Management evaluated the recoverability of the assets of these
businesses to determine if their value was impaired. 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 based upon all available information of 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.

During the first nine months of fiscal 2002, the Company also recorded
impairment charges in the Mindspeed Technologies segment and Broadband
Communications segment totaling $4.9 million and $0.5 million, respectively.
The impairment charges for the Mindspeed Technologies segment primarily related
to a prepaid license for technology that management determined, in the second
quarter of fiscal 2002, would not be used in the future. The other impairment
charges were associated with various assets that management determined to
abandon or scrap.

During the third quarter of fiscal 2001, the Company recorded impairment
charges totaling $342.8 million associated with manufacturing assets in its
Broadband Communications segment. During the third quarter of fiscal 2001, the
Company determined that it would realign its manufacturing and procurement
strategies, accelerating its transition from volume digital CMOS manufacturing
to a fabless CMOS business model.

Management believed the decision to realign the Companys manufacturing and
procurement strategies and the resulting elimination of future investment in
process technology and capacity during the transition period, together with the
then-current and projected business conditions, indicated that the carrying
value of the silicon wafer manufacturing facility and related wafer fabrication
machinery and equipment at its former Newport Beach, California facility (the
wafer fabrication assets) may have been impaired and that an impairment
analysis should be performed. In performing the analysis for recoverability,
management estimated the future cash flows expected to result from the
manufacturing activities at the Newport Beach facility over a six-year period.
This period reflected the Companys expectation (as of the date it made the
impairment analysis) of the period over which the wafer fabrication assets
would generate cash flow during the Companys transition to a fabless business.
The estimated cash flows were based on declining volumes and average wafer
prices for the products the Company expected to manufacture at the Newport
Beach facility during the transition period. The declines in volume and average
wafer prices were consistent with historical trends and managements decision to
focus on existing specialty-process products based on the current process
technology. Since the estimated undiscounted cash flows were less than the
carrying value (approximately $410 million based on historical cost) of the
wafer fabrication assets, it was concluded that an impairment loss should be
recognized. The Company recorded an impairment charge of $325.8 million, which
was determined by comparing the estimated fair value of the wafer fabrication
assets to their carrying value. The fair value of the assets was determined by
computing the present value of the estimated future cash flows

12



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##### Table of Contents



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

using a discount rate of 30%, which management believed was commensurate with
the underlying risks associated with the projected cash flows. Management
believes the assumptions used in the discounted cash flow model represented a
reasonable estimate of the fair value of the assets. The write-down established
a new cost basis for the impaired assets, which would be depreciated based upon
new estimated useful lives ranging from one to six years.

The Company recorded an impairment charge of $17.0 million in the third quarter
of fiscal 2001 to write down the carrying value of an advance deposit to a
third-party foundry. Under the terms of the advance deposit, the third-party
foundry would repay the deposit as wafers were purchased from the foundry
during a specified time period. As a result of the then-current and projected
business conditions, management estimated that purchases during the remaining
term of the arrangement with this foundry would be insufficient to fully
recover the advance deposit.

Restructuring Charges

During the first nine months of fiscal 2002, the Company reduced its workforce
by approximately 450 employees, including approximately 250 employees in the
Broadband Communications segment and approximately 200 employees in the
Mindspeed Technologies segment. The workforce reductions in the Broadband
Communications segment included approximately 100 employees at the Companys
former El Paso, Texas board-level sub-assembly business. The Company recorded
restructuring charges of $9.1 million for such actions during the first nine
months of fiscal 2002, based upon estimates of the severance benefits for the
affected employees, and $13.6 million related to the consolidation of its
excess facilities and other contractual obligations that will not be utilized
in the future.

Activity and liability balances related to restructuring actions through June
30, 2002 are as follows (in thousands):

|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|----------------------------------------- |  | ---------- | ------ | --------- |  | ----- | ------ | - |  | - | ------ | -
|                                          |  | Workforce  |        | Facility  |  |       |        |  
|                                          |  | reductions |        | and other |  | Total
|                                          |  |            |        |           |  |      
|Restructuring balance, September 30, 2001 |  | $          | 5,371  |           |  | $     | 5,361  |   |  | $ | 10,732 |  
|                                         
|                                         
|                                         
|                                         
|Charged to costs and expenses             |  |            | 828    |           |  |       | 172    |   |  |   | 1,000  |  
|                                         
|                                         
|                                         
|                                         
|Cash payments                             |  |            | (2,312 | )         |  |       | (436   | ) |  |   | (2,748 | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, December 31, 2001  |  |            | 3,887  |           |  |       | 5,097  |   |  |   | 8,984  |  
|                                         
|                                         
|                                         
|                                         
|Charged to costs and expenses             |  |            | 3,417  |           |  |       | 171    |   |  |   | 3,588  |  
|                                         
|                                         
|                                         
|                                         
|Cash payments                             |  |            | (3,411 | )         |  |       | (1,029 | ) |  |   | (4,440 | )
|                                         
|                                         
|                                         
|                                         
|Non-cash costs                            |  |            | (322   | )         |  |       | (287   | ) |  |   | (609   | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, March 31, 2002     |  |            | 3,571  |           |  |       | 3,952  |   |  |   | 7,523  |  
|                                         
|                                         
|                                         
|                                         
|Charged to costs and expenses             |  |            | 4,878  |           |  |       | 13,240 |   |  |   | 18,118 |  
|                                         
|                                         
|                                         
|                                         
|Cash payments                             |  |            | (2,237 | )         |  |       | (582   | ) |  |   | (2,819 | )
|                                         
|                                         
|                                         
|                                         
|Non-cash costs                            |  |            | (552   | )         |  |       |       |   |  |   | (552   | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, June 30, 2002      |  | $          | 5,660  |           |  | $     | 16,610 |   |  | $ | 22,270 |  
|                                          |  |            |        |           |  |       |        |   |  |   |        |  

The Company expects to pay a majority of the amounts accrued for the workforce
reductions within one year. The obligations for non-cancelable lease and other
commitments are expected to be paid over their respective contractual 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.

Restructuring charges for the first nine months of fiscal 2001 consisted of
$6.3 million of costs, principally related to workforce reductions.

Separation Costs

Separation costs for the first nine months of fiscal 2002 consisted of costs
related to the Companys divestiture of its Newport Beach wafer fabrication
operations and its digital imaging business. Separation costs for the first
nine months of fiscal 2001 consisted of costs related to the previously
announced separation of the Mindspeed Technologies business from Conexant.

13



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##### Table of Contents



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

9. Sales of Assets

In March 2002, the Company and The Carlyle Group formed a new specialty foundry
company named Jazz Semiconductor, Inc. (Jazz), in which Conexant owns a 45%
equity interest and The Carlyle Group owns the remaining 55%. In the
transaction, Conexant contributed its Newport Beach, California wafer
fabrication operations and certain intellectual property to Jazz. In connection
with this transaction, the Company received $19.3 million in cash and the 45%
equity interest in Jazz, having an estimated fair value of $42.5 million. In
addition to contributing its Newport Beach wafer fabrication operations (with a
carrying value of approximately $43.2 million) and certain related assets and
liabilities, the Company also issued to Jazz a warrant to purchase 2.9 million
shares of Conexant common stock at a price of $13.05 per share (the fair market
value on the date of grant of the warrant) through January 2005. The warrant
had a fair value of $14.2 million, determined by an independent valuation
specialist using the Black-Scholes option pricing model (assuming volatility of
68.5%, a risk-free interest rate of 4.1%, and no dividend yield) and discounted
for the lack of marketability. In connection with the Spin-off Transaction and
the Merger, the exercise price of the warrant was adjusted to $4.62 per share.

This transaction resulted in a $2.6 million gain, which represented the
difference between the Companys carrying value and the fair value of the net
assets deemed to have been sold by the Company to Jazz. The Company accounts
for its investment in Jazz under the equity method of accounting.

The Company expects to purchase a substantial portion of its requirements for
silicon-based semiconductor products from Jazz. During the first two years of
the long-term supply arrangement with Jazz, the Companys cost of wafers will
be an amount which approximates its historical cost. Thereafter, the cost of
wafers will be based on market prices. Additionally, the Company is obligated
to purchase certain minimum annual volumes of wafers during the first three
years of the arrangement. In the event the Companys actual wafer purchases are
less than the required minimum volumes, it will be required to make additional
payments to Jazz.

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. The lease requires
the Company to make minimum lease payments aggregating $1.4 million annually
(subject to certain adjustments).

In June 2002, the Company sold two additional buildings for net proceeds of
$27.5 million. The Company will continue to occupy the buildings under a
15-year lease. Consequently, the $11.7 million gain arising from the sale of
the leased-back buildings has been deferred and will be recognized ratably over
the lease term. The lease requires the Company to make minimum lease payments
aggregating $3.1 million annually (subject to certain adjustments).

10. 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 access products such as set-top boxes, residential gateways, personal
computers (PCs) and game consoles to voice, video and data processing services
over broadband connections including asynchronous digital subscriber line
(ADSL), 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. Additionally, the Broadband Communications segment includes the
Companys digital cordless telephone chipset products (which the Company
retained in the Spin-off Transaction) and its global positioning
system receiver
product line (which was divested subsequent to the third quarter of
fiscal 2001), each of which were formerly part of the Companys wireless
communications business. Prior to the Spin-off Transaction, the Companys
current Broadband Communications segment, together with the wireless
communications business and the Mexicali Operations, made up the Companys
former Personal Networking segment. Mindspeed Technologies designs, develops
and sells semiconductor networking solutions that facilitate the aggregation,
processing, transmission and switching of data, video and voice primarily from
the edge of the Internet to linked metropolitan area networks.

14



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##### Table of Contents



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

The Company evaluates segment performance based on segment operating income
(loss), which excludes the amortization of intangible assets, special charges
and stock compensation costs. Special charges excluded from segment operating
income (loss) consist of restructuring charges, asset impairments and
separation costs.

The tables below present information about the Companys segments (in
thousands):

|                                  |                          |                |         |                    |         |                   |         |          |          |      |         |          |          |   |         |            |          |  
|--------------------------------- | ------------------------ | -------------- | ------- | ------------------ | ------- | ----------------- | ------- | -------- | -------- | ---- | ------- | -------- | -------- | - | ------- | ---------- | -------- | -
|                                  |                          |                |         | Three months ended |         | Nine months ended
|                                  |                          |                |         | June 30,           |         | June 30,         
|                                  |                          |                |         |                    |         |                  
|                                  |                          |                |         | 2002               |         | 2001              |         | 2002     |          | 2001
|                                  |                          |                |         |                    |         |                   |         |          |          |     
|Net revenues:                     |                          |                |         |                    |         |                   |         |          |          |      |         |          |          |   |         |           
|                                 
|                                 
|                                 
|                                 
|                                  | Broadband Communications |                | $       | 131,999            |         |                   | $       | 121,689  |          |      | $       | 388,664  |          |   | $       | 420,762    |         
|                                 
|                                 
|                                 
|                                 
|                                  | Mindspeed Technologies   |                |         | 21,958             |         |                   |         | 36,147   |          |      |         | 55,154   |          |   |         | 283,337    |         
|                                  |                          |                |         |                    |         |                   |         |          |          |      |         |          |          |   |         |            |         
|                                  |                          | Segment totals |         | $                  | 153,957 |                   |         | $        | 157,836  |      |         | $        | 443,818  |   |         | $          | 704,099  |  
|                                  |                          |                |         |                    |         |                   |         |          |          |      |         |          |          |   |         |            |         
|                                 
|                                 
|                                 
|                                 
|Gross margin:                     |                          |                |         |                    |         |                   |         |          |          |      |         |          |          |   |         |           
|                                 
|                                 
|                                 
|                                 
|                                  | Broadband Communications |                | $       | 57,808             |         |                   | $       | (9,147   | )        |      | $       | 145,636  |          |   | $       | (10,244    | )       
|                                 
|                                 
|                                 
|                                 
|                                  | Mindspeed Technologies   |                |         | 14,883             |         |                   |         | (6,878   | )        |      |         | 33,423   |          |   |         | 79,560     |         
|                                  |                          |                |         |                    |         |                   |         |          |          |      |         |          |          |   |         |            |         
|                                  | Segment totals           |                | $       | 72,691             |         |                   | $       | (16,025  | )        |      | $       | 179,059  |          |   | $       | 69,316     |         
|                                  |                          |                |         |                    |         |                   |         |          |          |      |         |          |          |   |         |            |         
|                                 
|                                 
|                                 
|                                 
|Operating expenses:               |                          |                |         |                    |         |                   |         |          |          |      |         |          |          |   |         |           
|                                 
|                                 
|                                 
|                                 
|                                  | Broadband Communications |                | $       | 66,968             |         |                   | $       | 71,752   |          |      | $       | 189,907  |          |   | $       | 245,364    |         
|                                 
|                                 
|                                 
|                                 
|                                  | Mindspeed Technologies   |                |         | 58,949             |         |                   |         | 79,597   |          |      |         | 183,721  |          |   |         | 228,342    |         
|                                  |                          |                |         |                    |         |                   |         |          |          |      |         |          |          |   |         |            |         
|                                  |                          | Segment totals |         | $                  | 125,917 |                   |         | $        | 151,349  |      |         | $        | 373,628  |   |         | $          | 473,706  |  
|                                  |                          |                |         |                    |         |                   |         |          |          |      |         |          |          |   |         |            |         
|                                 
|                                 
|                                 
|                                 
|Operating loss:                   |                          |                |         |                    |         |                   |         |          |          |      |         |          |          |   |         |           
|                                 
|                                 
|                                 
|                                 
|                                  | Broadband Communications |                | $       | (9,160             | )       |                   | $       | (80,899  | )        |      | $       | (44,271  | )        |   | $       | (255,608   | )       
|                                 
|                                 
|                                 
|                                 
|                                  | Mindspeed Technologies   |                |         | (44,066            | )       |                   |         | (86,475  | )        |      |         | (150,298 | )        |   |         | (148,782   | )       
|                                  |                          |                |         |                    |         |                   |         |          |          |      |         |          |          |   |         |            |         
|                                  |                          | Segment totals |         |                    | (53,226 | )                 |         |          | (167,374 | )    |         |          | (194,569 | ) |         |            | (404,390 | )
|                                 
|                                 
|                                 
|                                 
|Amortization of intangible assets |                          |                | 84,570  |                    |         |                   | 81,351  |          |          |      | 256,032 |          |          |   | 239,855 |           
|                                 
|                                 
|                                 
|                                 
|Special charges                   |                          |                | 133,447 |                    |         |                   | 345,835 |          |          |      | 155,766 |          |          |   | 363,764 |           
|                                 
|                                 
|                                 
|                                 
|Stock compensation                |                          |                | (2,285  | )                  |         |                   | 2,585   |          |          |      | 346     |          |          |   | 7,291   |           
|                                  |                          |                |         |                    |         |                   |         |          |          |      |         |          |          |   |         |            |         
|                                  | Operating loss           |                | $       | (268,958           | )       |                   | $       | (597,145 | )        |      | $       | (606,713 | )        |   | $       | (1,015,300 | )       
|                                  |                          |                |         |                    |         |                   |         |          |          |      |         |          |          |   |         |            |         

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

|                               |                    |   |                    |        |                   |   |         |        |      |   |         |         |  |   |         |         | 
|------------------------------ | ------------------ | - | ------------------ | ------ | ----------------- | - | ------- | ------ | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                               |                    |   | Three months ended |        | Nine months ended
|                               |                    |   | June 30,           |        | June 30,         
|                               |                    |   |                    |        |                  
|                               |                    |   | 2002               |        | 2001              |   | 2002    |        | 2001
|                               |                    |   |                    |        |                   |   |         |        |     
|United States                  |                    | $ | 27,365             |        |                   | $ | 40,066  |        |      | $ | 72,361  |         |  | $ | 255,424 |        
|                              
|                              
|                              
|                              
|Other Americas                 |                    |   | 9,357              |        |                   |   | 2,375   |        |      |   | 21,906  |         |  |   | 17,771  |        
|                               |                    |   |                    |        |                   |   |         |        |      |   |         |         |  |   |         |        
|                               | Total Americas     |   |                    | 36,722 |                   |   |         | 42,441 |      |   |         | 94,267  |  |   |         | 273,195 | 
|                              
|                              
|                              
|                              
|Taiwan                         |                    |   | 40,411             |        |                   |   | 41,215  |        |      |   | 92,573  |         |  |   | 121,454 |        
|                              
|                              
|                              
|                              
|Hong Kong                      |                    |   | 27,331             |        |                   |   | 19,239  |        |      |   | 101,304 |         |  |   | 85,277  |        
|                              
|                              
|                              
|                              
|Other Asia-Pacific             |                    |   | 25,961             |        |                   |   | 14,391  |        |      |   | 63,098  |         |  |   | 77,961  |        
|                               |                    |   |                    |        |                   |   |         |        |      |   |         |         |  |   |         |        
|                               | Total Asia-Pacific |   |                    | 93,703 |                   |   |         | 74,845 |      |   |         | 256,975 |  |   |         | 284,692 | 
|                              
|                              
|                              
|                              
|Japan                          |                    |   | 9,625              |        |                   |   | 20,010  |        |      |   | 35,006  |         |  |   | 55,288  |        
|                              
|                              
|                              
|                              
|Europe, Middle East and Africa |                    |   | 13,907             |        |                   |   | 20,540  |        |      |   | 57,570  |         |  |   | 90,924  |        
|                               |                    |   |                    |        |                   |   |         |        |      |   |         |         |  |   |         |        
|                               |                    | $ | 153,957            |        |                   | $ | 157,836 |        |      | $ | 443,818 |         |  | $ | 704,099 |        
|                               |                    |   |                    |        |                   |   |         |        |      |   |         |         |  |   |         |        

For the nine months ended June 30, 2002, one customer, a foreign distributor,
accounted for 10% of net revenues; no customer accounted for 10% or more of the
Companys net revenues for the nine months ended June 30, 2001.

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##### Table of Contents



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

11. Subsequent Event

In July 2002, the Company announced a number of expense reduction and
restructuring initiatives, principally in the Mindspeed Technologies segment.
The restructuring initiatives include the elimination of research and
development spending in high-end optical networking applications, the
planned divestiture of NetPlane and a reduction of support services spending. These
actions, which the Company expects to complete by the end of calendar year
2002, will reduce Mindspeeds workforce by over 400 employees (approximately
35% of Mindspeeds workforce).

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##### Table of Contents






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

This information should be read in conjunction with our unaudited consolidated
condensed financial statements and the notes thereto included in this Quarterly
Report, and our audited consolidated financial statements and notes thereto and
Managements Discussion and Analysis of Financial Condition and Results of
Operations contained in our Annual Report on Form 10-K for the fiscal year
ended September 30, 2001.

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 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 access products such as set-top boxes,
residential gateways, personal computers (PCs) and game consoles to voice,
video and data processing services over broadband connections including
asynchronous digital subscriber line (ADSL), cable and direct broadcast
satellite. The Broadband Communications business also includes our foundation
analog dial-up access portfolio, including PC data and fax modems, and our
broadcast video encoder and decoder product family.

Mindspeed Technologies designs, develops and sells semiconductor networking
solutions that facilitate the aggregation, processing, transmission and
switching of data, video and voice primarily from the edge of the Internet to
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 can be classified
into two general categories: multi-service access products and broadband
networking products. Our multi-service access products include a family of
voiceband processor solutions designed to support voice and data services
across wireline and wireless networks and are found in a variety of network
access platforms such as remote access concentrators, media gateways and
wireless base stations. Our broadband networking products include T3/E3 line
interface units and framers, multi-megabit digital subscriber line (DSL)
transceivers, high-speed serializers/deserializers, crosspoint switches and
switch fabric solutions and asynchronous transfer mode (ATM), multi-protocol
label switching (MPLS) and packet network processors. These solutions are used
in a variety of network equipment, including high-speed routers, ATM switches,
optical switches, add-drop multiplexers and dense wave division multiplexers.

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 23% of net
revenues in the first nine months of fiscal 2002. One customer, a foreign
distributor, accounted for 10% of our net revenues in the first nine months of
fiscal 2002; no other customer accounted for 10% or more of our net revenues
for the period. Our top 20 customers accounted for 65% of net revenues for the
first nine months of fiscal 2002. Revenues derived from customers located in
the Americas, Europe, Japan and the Asia-Pacific region were 21%, 13%, 8% and
58%, respectively, of our net revenues for the first nine months of fiscal
2002. 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
Distribution) 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

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##### Table of Contents



and Distribution Agreement dated as of December 16, 2001, as amended, by and
between us and Washington. 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 Distribution 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, mature 50 percent in nine months and 50 percent in one year and bear
interest initially at 10 percent, increasing to 12 percent in three months and
15 percent in six months. The financing agreement also provides for a revolving
credit facility under which Alpha may 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. Currently, Alpha may borrow up to $75 million
under the credit facility. As of the date hereof, no borrowings are outstanding
under the credit facility.

Effective June 26, 2002, Alpha changed its name to Skyworks Solutions, Inc.
(Skyworks).

Newport Foundry Joint Venture

In March 2002, we and The Carlyle Group formed a new specialty foundry company
named Jazz Semiconductor, Inc. (Jazz), in which we own a 45% equity interest.
We contributed our Newport Beach, California wafer fabrication operations,
certain intellectual property, and related assets and liabilities to Jazz. We
also issued to Jazz a warrant to purchase 2.9 million shares of Conexant common
stock (at a price of $4.62 per share, as adjusted to reflect the Distribution).
In connection with this transaction, we received $19.3 million in cash and the
45% equity interest in the joint venture, having an estimated fair value of
$42.5 million. We recognized a $2.6 million gain on the transaction.

We expect to purchase a substantial portion of our requirements for
silicon-based semiconductor products from Jazz. We entered into a long-term
supply arrangement with Jazz under which the joint venture will provide
capacity to meet a portion of our requirements for CMOS and specialty-process
wafer fabrication services and we agreed to purchase certain minimum annual
volumes of wafers during the first three years of the supply agreement.

Separation of Mindspeed Technologies Business from Conexant

In September 2000, we announced a plan for the separation of our Broadband
Communications and Mindspeed Technologies businesses. Although current business
conditions have delayed the separation, we remain committed to completing the
separation as soon as business and market conditions permit. The separation is
subject to receipt of a ruling from the IRS that the related spin-off will
qualify as a tax-free distribution and may be subject to the approval of our
shareholders. An IRS ruling has been received and although it is generally
binding on the IRS, its continuing applicability will depend on the form of the
separation transaction and the extent of intervening events between the date of
the ruling and the separation. We cannot assure you that we will successfully
complete the separation.

Digital Imaging Divestiture

In July 2002, we merged our digital imaging business with Zing Network, Inc., a
developer of advanced connectivity and imaging software, to create a new
privately held company named Pictos Technologies, Inc. (Pictos). In connection
with this transaction, we contributed the assets and intellectual property of
our digital imaging business to Pictos in exchange for shares of Pictos stock.

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Acquisition of Video Compression Business

In June 2002, we acquired the video compression business of iCompression, Inc.
(iCompression), a wholly-owned subsidiary of GlobespanVirata, Inc. The
acquisition will enable us to accelerate the development of video products for
the encoder markets including personal computers and cable set-top boxes.
Consideration for the acquisition consisted of 1.25 million shares of our
common stock and promissory notes for $21 million, a portion of which are
initially held in escrow for the settlement of any contingent indemnity claims
through the expiration of a one-year escrow period. We may be required to pay
additional consideration of up to $20 million pursuant to an earn-out provision
if certain revenue milestones are achieved. In addition, we guaranteed the
value of the shares we issued to iCompression and we may be required to make
additional cash payments to iCompression for the difference between $12.00 and
the market value per share of the shares of common stock delivered to
iCompression (including the market value of Skyworks common stock received in
respect thereof). We paid the amounts owed under the promissory notes in July
2002.

Expense Reduction and Restructuring Initiatives

In June and July 2002, we announced a number of expense reduction and
restructuring initiatives, principally in our Mindspeed Technologies business.
These restructuring initiatives are intended to reduce our operating cost
structure and to focus our research and development spending on products for
the Internet infrastructure market segments our products address, such as the
metro/access market segments, which we believe present the most attractive
near-term growth prospects. Our key products for metro/access applications
include our multi-service voice over packet, T/E carrier, and ATM/MPLS network
processor solutions.

The restructuring initiatives include the elimination of research and
development spending in high-end optical networking applications, the closure
of our Novanet Semiconductor Limited (Novanet) design center in Israel, the
planned divestiture of our NetPlane Systems, Inc. (NetPlane) subsidiary and a reduction
of support services spending. These actions will reduce Mindspeeds workforce
by over 400 employees (approximately 35% of Mindspeeds workforce). We expect
to complete these actions by the end of calendar year 2002. As a result of
these restructuring initiatives, we expect to record additional restructuring
charges of approximately $60 million to $70 million through the first quarter
of fiscal 2003.

Asset Impairments

As part of the restructuring initiatives in our Mindspeed Technologies
business, we closed our Novanet design center in Israel and we determined that
we would divest NetPlane. As a result of these decisions, in the third quarter
of fiscal 2002 we recorded asset impairment charges of $114.1 million to write
down the carrying value of the goodwill and certain other long-lived assets
associated with these operations.

Results of Operations

Welike many of our customers and competitorswere adversely impacted
throughout all of fiscal 2001 by a broad slowdown affecting the technology
sector, including most of the communications electronics end-markets which our
products address. Sales of our Broadband Communications products were affected
by slower than anticipated deployment of broadband services by system
providers. Moreover, weak consumer demand for PCs and related peripheral
devices and satellite set-top boxes led to lower sales of our products for
these applications as compared to prior year levels. Net revenues in our
Mindspeed Technologies business were also significantly affected by slowing
investment in communications network capacity expansion by Internet service
providers (ISPs), competitive local exchange carriers (CLECs) and incumbent
local exchange and inter-exchange carriers. In most cases, the effect of
weakened end-customer demand was compounded by higher than normal levels of
equipment and component inventories among our OEM, subcontractor and
distributor customers.

During the first nine months of fiscal 2002, our Broadband Communications
segment saw improved demand in a number of the markets addressed by its
products. Although a comparison of our consolidated quarterly results of
operations on a year-over-year basis will remain unfavorable in the near term,
the third quarter of fiscal 2002 represents the third consecutive quarter of
sequential revenue growth in our Broadband Communications business. Also during
the third quarter of fiscal 2002, our Mindspeed Technologies segment achieved
sequential revenue growth of 15% over the preceding quarter, its second
consecutive quarter of sequential revenue growth.

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Net Revenues

We generally recognize revenues from product sales directly to
customers upon shipment and transfer of title. We sell some of our
products to electronic component distributors under agreements allowing for
price protection and/or a right of return on unsold products. We defer the
recognition of revenue on sales to these distributors until the products are
sold by the distributors.

The following table summarizes our net revenues:

|                                 |  |                    |       |           |  |          |       |           |  |           |       |   |  |             |    |             |  |  |     |   
|-------------------------------- |  | ------------------ | ----- | --------- |  | -------- | ----- | --------- |  | --------- | ----- | - |  | ----------- | -- | ----------- |  |  | --- | --
|                                 |  | Three months ended |       |           |  |          |       |           |  |          
|                                 |  |                    |       |           |  |          |       |           |  |          
|                                 |  |                    |       |           |  |          |       |           |  |           |       |   |  | Change from |    | Change from
|                                 |  | June 30,           |       | March 31, |  | June 30, |       | Mar. 2002 |  | June 2001
|(in millions)                    |  | 2002               |       | 2002      |  | 2001     |       | Quarter   |  | Quarter  
|                                 |  |                    |       |           |  |          |       |           |  |          
|Net revenues:                    |  |                    |       |           |  |          |       |           |  |           |       |   |  |             |    |             |  |  |     |   
|                                
|                                
|                                
|                                
|Broadband Communications         |  | $                  | 132.0 |           |  | $        | 129.7 |           |  | $         | 121.7 |   |  |             | 2  | %           |  |  | 8   | % 
|                                
|                                
|                                
|                                
|Mindspeed Technologies           |  |                    | 22.0  |           |  |          | 19.0  |           |  |           | 36.1  |   |  |             | 15 | %           |  |  | (39 | )%
|                                 |  |                    |       |           |  |          |       |           |  |           |       |   |  |             |    |             |  |  |     |   
|                                 |  | $                  | 154.0 |           |  | $        | 148.7 |           |  | $         | 157.8 |   |  |             | 4  | %           |  |  | (2  | )%
|                                 |  |                    |       |           |  |          |       |           |  |           |       |   |  |             |    |             |  |  |     |   
|                                
|                                
|                                
|                                
|As a percentage of net revenues: |  |                    |       |           |  |          |       |           |  |           |       |   |  |             |    |             |  |  |     |   
|                                
|                                
|                                
|                                
|Broadband Communications         |  |                    | 86    | %         |  |          | 87    | %         |  |           | 77    | % |  |             |    |             |  |  |     |   
|                                
|                                
|                                
|                                
|Mindspeed Technologies           |  |                    | 14    | %         |  |          | 13    | %         |  |           | 23    | % |  |             |    |             |  |  |     |   
|                                 |  |                    |       |           |  |          |       |           |  |           |       |   |  |             |    |             |  |  |     |   
|                                 |  |                    | 100   | %         |  |          | 100   | %         |  |           | 100   | % |  |             |    |             |  |  |     |   
|                                 |  |                    |       |           |  |          |       |           |  |           |       |   |  |             |    |             |  |  |     |   

|                                 |  |                            |       |      |  |        |       |   |  |  |     |   
|-------------------------------- |  | -------------------------- | ----- | ---- |  | ------ | ----- | - |  |  | --- | --
|                                 |  | Nine months ended June 30, |       |      |  |       
|                                 |  |                            |       |      |  |       
|                                 |  | 2002                       |       | 2001 |  | Change
|                                 |  |                            |       |      |  |       
|Net revenues:                    |  |                            |       |      |  |        |       |   |  |  |     |   
|                                
|                                
|                                
|                                
|Broadband Communications         |  | $                          | 388.7 |      |  | $      | 420.8 |   |  |  | (8  | )%
|                                
|                                
|                                
|                                
|Mindspeed Technologies           |  |                            | 55.1  |      |  |        | 283.3 |   |  |  | (81 | )%
|                                 |  |                            |       |      |  |        |       |   |  |  |     |   
|                                 |  | $                          | 443.8 |      |  | $      | 704.1 |   |  |  | (37 | )%
|                                 |  |                            |       |      |  |        |       |   |  |  |     |   
|                                
|                                
|                                
|                                
|As a percentage of net revenues: |  |                            |       |      |  |        |       |   |  |  |     |   
|                                
|                                
|                                
|                                
|Broadband Communications         |  |                            | 88    | %    |  |        | 60    | % |  |  |     |   
|                                
|                                
|                                
|                                
|Mindspeed Technologies           |  |                            | 12    | %    |  |        | 40    | % |  |  |     |   
|                                 |  |                            |       |      |  |        |       |   |  |  |     |   
|                                 |  |                            | 100   | %    |  |        | 100   | % |  |  |     |   
|                                 |  |                            |       |      |  |        |       |   |  |  |     |   

Broadband Communications

Our Broadband Communications product revenues for the first nine months of
fiscal 2002 were 8% lower than the comparable period of fiscal 2001. The
decline reflects lower sales volume in our legacy cordless telephone chipset
products and the divestiture of our global positioning system receiver product
line subsequent to the third quarter of fiscal 2001. The decline also reflects
lower average selling prices in our dial-up modem portfolio resulting from the
continued shift in our product mix toward lower-priced soft modem
solutions which use software to perform functions traditionally
executed by semiconductor components.
These decreases were partially offset by higher sales of media processing
products, including our broadcast video solutions.

Broadband Communications revenues for the fiscal 2002 third quarter increased
2% over the immediately preceding quarterthe third consecutive quarter of
sequential revenue growthdriven by increased demand for our PC data and fax
modems, and broadband access solutions, including ADSL, satellite set-top box
and home network processing solutions. These increases were partially offset by
lower sales of our broadcast video solutions in the fiscal 2002 third quarter.

Mindspeed Technologies

Since the second quarter of fiscal 2001, net revenues for Mindspeed
Technologies have been impacted by the sharply lower demand for network
equipment which has affected us, our customers and our competitors. ISPs and
CLECs have dramatically reduced their investment in network capacity expansion
as their business models failed to generate sufficient cash flow. Incumbent
local exchange carriers and inter-exchange carriers have also reduced their
capital spending. Demand was further affected by higher-than-normal levels of
equipment and component inventories among many OEM, subcontractor and
distributor customers. As a result, Mindspeed Technologies net revenues for the
first nine months of fiscal 2002 compared with the comparable fiscal 2001
period reflect lower sales volume across the majority of our multi-service
access and broadband networking products, including multi-service access
processors, multi-megabit DSL and optical networking physical media devices,
and transceivers.

In the fiscal 2002 third quarter, net revenues for Mindspeed Technologies
increased 15% over the immediately preceding quarter, the second consecutive
quarter of sequential growth. This revenue growth reflected improved demand for
several broadband networking product families, including our T/E physical layer
products, OC-3 to OC-12

20



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optical physical layer products, crosspoint switches and multi-service ATM
and MPLS network processors.

Gross Margin

|                        |  |                    |      |           |  |          |      |            |  |           |       |    |  |             |    |             |  |    |  | 
|----------------------- |  | ------------------ | ---- | --------- |  | -------- | ---- | ---------- |  | --------- | ----- | -- |  | ----------- | -- | ----------- |  | -- |  | 
|                        |  | Three months ended |      |           |  |          |      |            |  |          
|                        |  |                    |      |           |  |          |      |            |  |          
|                        |  |                    |      |           |  |          |      |            |  |           |       |    |  | Change from |    | Change from
|                        |  | June 30,           |      | March 31, |  | June 30, |      | March 2002 |  | June 2001
|(in millions)           |  | 2002               |      | 2002      |  | 2001     |      | Quarter    |  | Quarter  
|                        |  |                    |      |           |  |          |      |            |  |          
|Gross margin            |  | $                  | 72.7 |           |  | $        | 58.5 |            |  | $         | (16.0 | )  |  |             | 24 | %           |  | nm
|                       
|                       
|                       
|                       
|Percent of net revenues |  |                    | 47   | %         |  |          | 39   | %          |  |           | (10   | )% |  |             |    |             |  |    |  | 

|                        |  |                            |       |      |  |        |      |   |  |  |     |  
|----------------------- |  | -------------------------- | ----- | ---- |  | ------ | ---- | - |  |  | --- | -
|                        |  | Nine months ended June 30, |       |      |  |       
|                        |  |                            |       |      |  |       
|                        |  | 2002                       |       | 2001 |  | Change
|                        |  |                            |       |      |  |       
|Gross margin            |  | $                          | 179.1 |      |  | $      | 69.3 |   |  |  | 158 | %
|                       
|                       
|                       
|                       
|Percent of net revenues |  |                            | 40    | %    |  |        | 10   | % |  |  |     |  

nm = not meaningful

Gross margin represents revenues less cost of goods sold. Cost of goods sold
consists primarily of purchased materials, labor and overhead (including
depreciation) associated with product manufacturing and procurement, royalty
and other intellectual property costs, warranties and sustaining engineering
expenses pertaining to products sold. Gross margins for the third quarter and
first nine months of fiscal 2001 included inventory write-downs of
approximately $38.8 million and $188.8 million, respectively. For the first
nine months of fiscal 2002, gross margins reflect the favorable impact of cost
reductions initiated in fiscal 2001 and lower depreciation expense which
resulted from the write-down of manufacturing assets in fiscal 2001. Gross
margins for the first nine months of fiscal 2002 also benefited from the sale
of approximately $40.0 million of inventories that we had written down to a
zero cost basis during fiscal year 2001, partially offset by provisions for
excess and obsolete inventories of $14.2 million. These sales resulted from
renewed demand for certain products that was not anticipated at the time of the
write-downs.

When compared with the immediately preceding quarter, our gross margins for the
third quarter of fiscal 2002 increased from 39% to 47% of net revenues. Gross
margin improvement for the third quarter resulted from the elimination of the
burden of our underutilized former manufacturing operations (which we
contributed to Jazz in the second quarter of fiscal 2002), improved utilization
of our former Mexicali operations and sales of inventories previously written
down to a zero cost basis (in fiscal 2001) which were $5.8 million higher than
in the second quarter. Gross margin for the third quarter was also favorably
affected by 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.

The inventory write-downs we recorded in the first nine months of fiscal 2001
resulted from the sharply reduced end-customer demand for PCs and Internet
infrastructure equipment during that period. As a result of these market
conditions, we experienced a significant number of order cancellations and a
decline in the volume of new orders beginning in the fiscal 2001 first quarter,
and becoming more pronounced in the second quarter.

We assess the recoverability of inventories through an on-going review of
inventory levels in relation to 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. Our products are used by
OEM customers 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 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. In many cases, when the quantities of inventory on hand exceed
forecasted 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. 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.

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##### Table of Contents



From the time of the $188.8 million inventory write-downs in fiscal 2001 and
through June 30, 2002, we scrapped inventories having an original cost of
approximately $34.4 million and sold $46.8 million of inventories previously
written down to a zero cost basis. As of June 30, 2002, we continued to hold
inventories with an original cost of approximately $107.6 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. 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.

We expect to purchase a substantial portion of our requirements for
silicon-based semiconductor products from Jazz. During the first two years of
the long-term supply arrangement with Jazz, our cost of wafers will be an
amount which approximates our historical cost. Thereafter, our cost of wafers
will be based on market prices. Additionally, we are obligated to purchase
certain minimum annual volumes of wafers during the first three years of the
arrangement. In the event our actual wafer purchases are less than the required
minimum volumes, we will be required to make additional payments to Jazz, which
would adversely affect our gross margin.

Research and Development

|                         |  |                             |      |                            |  |      |    |      |  |        |      |      |  |   |       |   |  |  |     |    |  |   |       |  
|------------------------ |  | --------------------------- | ---- | -------------------------- |  | ---- | -- | ---- |  | ------ | ---- | ---- |  | - | ----- | - |  |  | --- | -- |  | - | ----- | -
|                         |  | Three months ended June 30, |      | Nine months ended June 30,
|                         |  |                             |      |                           
|(in millions)            |  | 2002                        |      | Change                     |  | 2001 |    | 2002 |  | Change |      | 2001
|                         |  |                             |      |                            |  |      |    |      |  |        |      |     
|Research and development |  | $                           | 82.7 |                            |  |      | (9 | )%   |  | $      | 90.6 |      |  | $ | 245.4 |   |  |  | (13 | )% |  | $ | 281.6 |  
|                        
|                        
|                        
|                        
|Percent of net revenues  |  |                             | 54   | %                          |  |      |    |      |  |        | 57   | %    |  |   | 55    | % |  |  |     |    |  |   | 40    | %

Our research and development (R&D) expenses consist principally of direct
personnel costs, 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 decreases in
R&D expenses for the third quarter and first nine months of fiscal 2002
compared to the similar periods of fiscal 2001 primarily reflect lower
headcount and personnel-related costs resulting from the expense reduction and
restructuring actions initiated during fiscal 2001 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 June 30, |      | Nine months ended June 30,
|                                    |  |                             |      |                           
|(in millions)                       |  | 2002                        |      | Change                     |  | 2001 |     | 2002 |  | Change |      | 2001
|                                    |  |                             |      |                            |  |      |     |      |  |        |      |     
|Selling, general and administrative |  | $                           | 41.0 |                            |  |      | (35 | )%   |  | $      | 63.4 |      |  | $ | 128.6 |   |  |  | (35 | )% |  | $ | 199.4 |  
|                                   
|                                   
|                                   
|                                   
|Percent of net revenues             |  |                             | 27   | %                          |  |      |     |      |  |        | 40   | %    |  |   | 29    | % |  |  |     |    |  |   | 28    | %

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 decreases in SG&A expenses for the third quarter and first nine
months of fiscal 2002 compared to the similar periods of fiscal 2001 primarily
reflect lower headcount and personnel-related costs resulting from the expense
reduction and restructuring actions initiated during fiscal 2001 and lower
provisions for uncollectible accounts receivable. The provision for
uncollectible accounts receivable of $(47,000) for the first nine months of
fiscal 2002 resulted from accounts receivable collections more favorable than
previously estimated; in the first nine months of fiscal 2001 the provision for
uncollectible accounts receivable of $17.2 million reflected an increase in
past-due accounts which management estimated would ultimately be uncollectible.

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Amortization of Intangible Assets

|                                  |  |                             |      |                            |  |      |   |      |  |        |      |      |  |   |       |  |  |  |   |   |  |   |       | 
|--------------------------------- |  | --------------------------- | ---- | -------------------------- |  | ---- | - | ---- |  | ------ | ---- | ---- |  | - | ----- |  |  |  | - | - |  | - | ----- | 
|                                  |  | Three months ended June 30, |      | Nine months ended June 30,
|                                  |  |                             |      |                           
|(in millions)                     |  | 2002                        |      | Change                     |  | 2001 |   | 2002 |  | Change |      | 2001
|                                  |  |                             |      |                            |  |      |   |      |  |        |      |     
|Amortization of intangible assets |  | $                           | 84.6 |                            |  |      | 4 | %    |  | $      | 81.4 |      |  | $ | 256.0 |  |  |  | 7 | % |  | $ | 239.9 | 

The higher amortization expenses in the third quarter and first nine months of
fiscal 2002 primarily resulted from the additional consideration paid
subsequent to June 2001 in connection with certain of our fiscal 2000 business
acquisitions. The value of the additional consideration paid was added to the
recorded amounts of goodwill, and is amortized over the remainder of the
original estimated lives of the goodwill.

During the first nine months of fiscal 2002, we paid additional consideration
to the sellers of two businesses we acquired in fiscal 2000 upon the
achievement of performance and technology goals specified in the related
acquisition agreements. The additional consideration consisted of $25.0 million
in cash and 94,572 shares of our common stock valued at $1.3 million (based
upon the market price of our common stock at the time of the resolution of the
contingency). The $26.3 million aggregate value of the additional consideration
increased the amounts of goodwill related to the acquired companies. As of June
30, 2002, no additional consideration is payable, or contingently payable, for
acquisitions we completed prior to fiscal 2002.

Under the recently issued Statement of Financial Accounting Standards No. 142,
which we will adopt in the first quarter of fiscal 2003, we will cease
amortizing goodwill against our results of operations, reducing annual
amortization expense by approximately $270 million. However, we will be
required to evaluate goodwill at least annually for impairment, and to write
down the value of goodwillwith a charge against our results of operationswhen
the recorded value of goodwill exceeds its estimated fair value.

Special Charges

Special charges consist of the following (in thousands):

|                      |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 
|--------------------- |  | ------------------ | ------- | ----------------- |  | ---- | ------- | ---- |  | - | ------- |  |  | - | ------- | 
|                      |  | Three months ended |         | Nine months ended
|                      |  | June 30,           |         | June 30,         
|                      |  |                    |         |                  
|                      |  | 2002               |         | 2001              |  | 2002 |         | 2001
|                      |  |                    |         |                   |  |      |         |     
|Asset impairments     |  | $                  | 114,928 |                   |  | $    | 342,791 |      |  | $ | 132,514 |  |  | $ | 342,791 | 
|                     
|                     
|                     
|                     
|Restructuring charges |  |                    | 18,118  |                   |  |      | 609     |      |  |   | 22,706  |  |  |   | 6,341   | 
|                     
|                     
|                     
|                     
|Separation costs      |  |                    | 401     |                   |  |      | 2,435   |      |  |   | 546     |  |  |   | 14,632  | 
|                      |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 
|                      |  | $                  | 133,447 |                   |  | $    | 345,835 |      |  | $ | 155,766 |  |  | $ | 363,764 | 
|                      |  |                    |         |                   |  |      |         |      |  |   |         |  |  |   |         | 

Asset Impairments

During the third quarter of fiscal 2002, we recorded impairment charges of
$114.1 million in our Mindspeed Technologies segment to write down the carrying
value of long-lived assets (principally goodwill and developed technology)
related to our Novanet and NetPlane subsidiaries. We terminated the operations
of Novanet in June 2002 and we intend to divest NetPlane by the end of the
first quarter of fiscal 2003.

During the second quarter of fiscal 2002, we recorded an impairment charge of
$13.0 million in our Broadband Communications segment to write down the
carrying value (approximately $22 million) of the goodwill related to our
digital imaging business. In July 2002, we completed the planned divestiture of
our digital imaging business and merged it with Zing Network, Inc. to create
Pictos. In connection with this transaction, we contributed the assets and
intellectual property of our digital imaging business to Pictos in exchange for
shares of Pictos stock.

The impairment charges resulted from our decision to exit these businesses. We
evaluated the recoverability of the assets of these businesses to determine if
their value was impaired. We determined the amounts of the impairment charges
by comparing the assets estimated fair values, less costs to sell, to their
carrying values. The estimated fair values are the cash flows we expected to
receive from the disposition of the assets, which we determined based upon all
information available to us. We believe the assumptions used in estimating the
fair values are reasonable and the estimated fair values approximate 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.

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During the first nine months of fiscal 2002, we also recorded impairment
charges in our Mindspeed Technologies segment and Broadband Communication
segment totaling $4.9 million and $0.5 million, respectively. The impairment
charges for our Mindspeed Technologies segment primarily related to a prepaid
license for technology that we determined, in the second quarter of fiscal
2002, would not be used in the future. The other impairment charges were
associated with various assets that we determined to abandon or scrap.

During the third quarter of fiscal 2001, we recorded impairment charges
totaling $342.8 million associated with manufacturing assets in our Broadband
Communications segment. During the third quarter of fiscal 2001, we decided to
realign our manufacturing and procurement strategies, accelerating our
transition from volume digital CMOS manufacturing to a fabless CMOS business
model.

We believe the decision to realign our manufacturing and procurement strategies
made in the third quarter of fiscal 2001 and the resulting elimination of
future investment in process technology and capacity during the transition
period, together with the then-current and projected business conditions,
indicated that the carrying value of the silicon wafer manufacturing facility
and related wafer fabrication machinery and equipment at our former Newport
Beach, California facility (the wafer fabrication assets) may have been
impaired and that an impairment analysis should be performed. In performing the
analysis for recoverability, we estimated the future cash flows expected to
result from the manufacturing activities at the Newport Beach facility over a
six-year period. This period reflected our expectation (as of the date we made
the impairment analysis) of the period over which the wafer fabrication assets
would generate cash flow during our transition to a fabless business. The
estimated cash flows were based on declining volumes and average wafer prices
for the existing products that we expected to manufacture at the Newport Beach
facility during the transition period. The declines in volume and average wafer
prices were consistent with historical trends and our decision to focus on
existing specialty-process products based on our current process technology.
Since the estimated undiscounted cash flows were less than the carrying value
(approximately $410 million based on historical cost) of the wafer fabrication
assets, we concluded that an impairment loss should be recognized. We recorded
an impairment charge of $325.8 million, which was determined by comparing the
estimated fair value of the wafer fabrication assets to their carrying value.
The fair value of the assets was determined by computing the present value of
the estimated future cash flows using a discount rate of 30%, which we believed
was commensurate with the underlying risks associated with the projected cash
flows. We believe the assumptions used in the discounted cash flow model
represented a reasonable estimate of the fair value of the assets. The
write-down established a new cost basis for the impaired assets, which would be
depreciated based upon new estimated useful lives ranging from one to six
years.

We recorded an impairment charge of $17.0 million in the third quarter of
fiscal 2001 to write down the carrying value of an advance deposit to a
third-party foundry. Under the terms of the advance deposit, the third-party
foundry would repay the deposit as wafers were purchased from the foundry
during a specified time period. As a result of the then-current and projected
business conditions, we estimated that purchases during the remaining term of
the arrangement with this foundry would be insufficient to fully recover the
advance deposit.

Restructuring Charges

During the first nine months of fiscal 2002, we reduced our workforce by
approximately 450 employees, including approximately 250 employees in our
Broadband Communications segment and approximately 200 employees in our
Mindspeed Technologies segment. The workforce reductions in our Broadband
Communications segment included approximately 100 employees at our former El
Paso, Texas board-level sub-assembly business. We recorded restructuring
charges of $9.1 million for such actions during the first nine months of fiscal
2002, based upon estimates of the severance benefits for the affected
employees, and charges of $13.6 million related to the consolidation of our
excess facilities and other contractual obligations that will not be utilized
in the future.

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Activity and liability balances related to restructuring actions through June
30, 2002 are as follows (in thousands):

|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|----------------------------------------- |  | ---------- | ------ | --------- |  | ----- | ------ | - |  | - | ------ | -
|                                          |  | Workforce  |        | Facility  |  |       |        |  
|                                          |  | reductions |        | and other |  | Total
|                                          |  |            |        |           |  |      
|Restructuring balance, September 30, 2001 |  | $          | 5,371  |           |  | $     | 5,361  |   |  | $ | 10,732 |  
|                                         
|                                         
|                                         
|                                         
|Charged to costs and expenses             |  |            | 828    |           |  |       | 172    |   |  |   | 1,000  |  
|                                         
|                                         
|                                         
|                                         
|Cash payments                             |  |            | (2,312 | )         |  |       | (436   | ) |  |   | (2,748 | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, December 31, 2001  |  |            | 3,887  |           |  |       | 5,097  |   |  |   | 8,984  |  
|                                         
|                                         
|                                         
|                                         
|Charged to costs and expenses             |  |            | 3,417  |           |  |       | 171    |   |  |   | 3,588  |  
|                                         
|                                         
|                                         
|                                         
|Cash payments                             |  |            | (3,411 | )         |  |       | (1,029 | ) |  |   | (4,440 | )
|                                         
|                                         
|                                         
|                                         
|Non-cash costs                            |  |            | (322   | )         |  |       | (287   | ) |  |   | (609   | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, March 31, 2002     |  |            | 3,571  |           |  |       | 3,952  |   |  |   | 7,523  |  
|                                         
|                                         
|                                         
|                                         
|Charged to costs and expenses             |  |            | 4,878  |           |  |       | 13,240 |   |  |   | 18,118 |  
|                                         
|                                         
|                                         
|                                         
|Cash payments                             |  |            | (2,237 | )         |  |       | (582   | ) |  |   | (2,819 | )
|                                         
|                                         
|                                         
|                                         
|Non-cash costs                            |  |            | (552   | )         |  |       |       |   |  |   | (552   | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, June 30, 2002      |  | $          | 5,660  |           |  | $     | 16,610 |   |  | $ | 22,270 |  
|                                          |  |            |        |           |  |       |        |   |  |   |        |  

We expect to pay a majority of the amounts accrued for the workforce reductions
within one year. We expect to pay the obligations for non-cancelable lease and
other commitments over their respective contractual 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. We anticipate that these
actions, when fully implemented, will result in a cost savings of approximately
$39 million annually.

Restructuring charges for the first nine months of fiscal 2001 consisted of
$6.3 million of costs, principally related to workforce reductions.

Separation Costs
Separation costs for the first nine months of fiscal 2002 consisted of costs
related to the divestiture of our Newport Beach wafer fabrication operations
and our digital imaging business. Separation costs for the first nine months of
fiscal 2001 consisted of costs related to the previously announced separation
of our Mindspeed Technologies business from Conexant.

Debt Conversion Costs
In the third quarter of fiscal 2002, we exchanged 2.2 million shares of our
common stock for approximately $28.0 million principal amount of our 4-1/4%
Convertible Subordinated Notes due 2006. In connection with this transaction,
we recognized debt conversion costs of $10.4 million for the fair value of the
shares we issued in excess of the number of shares issuable in a conversion of
the notes pursuant to their original terms.

In the first quarter of fiscal 2001, approximately $255.1 million principal
amount of our 4-1/4% Convertible Subordinated Notes due 2006 were converted
into approximately 11.0 million shares of our common stock, at a cost of $42.6
million.

Other Expense, Net

|                   |  |                             |      |                            |  |      |   |      |  |        |      |      |  |   |       |   |  |  |     |   |  |   |       |  
|------------------ |  | --------------------------- | ---- | -------------------------- |  | ---- | - | ---- |  | ------ | ---- | ---- |  | - | ----- | - |  |  | --- | - |  | - | ----- | -
|                   |  | Three months ended June 30, |      | Nine months ended June 30,
|                   |  |                             |      |                           
|(in millions)      |  | 2002                        |      | Change                     |  | 2001 |   | 2002 |  | Change |      | 2001
|                   |  |                             |      |                            |  |      |   |      |  |        |      |     
|Other expense, net |  | $                           | (5.0 | )                          |  |      | 5 | %    |  | $      | (4.8 | )    |  | $ | (21.0 | ) |  |  | 106 | % |  | $ | (10.2 | )

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

Other expense, net for the first nine months of fiscal 2001 was comprised
primarily of a $5.0 million write-down of a non-marketable
investment, a $4.1
million write-off of costs related to a terminated credit facility, and net
interest expense.

The carrying values of the non-marketable investments were written down to
their fair values, estimated to be zero. These investments consisted of equity
interests in early stage technology companies which we had accounted for

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under the cost method. We estimated the fair value of these investments based
upon available financial and other information, including then-current and
projected business prospects for the subject companies, and determined that the
decline in the fair value of these investments was other than temporary.

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 which arose during the first nine months of
fiscal 2002 will not be realized. Consequently, we have not recognized any
income tax benefits relating to our fiscal 2002 operating loss. Our provision
(benefit) for income taxes for the third quarter and first nine months of
fiscal 2002 consists of foreign income taxes incurred by certain of our
subsidiaries, offset by refunds received.

For the first nine months of fiscal 2001, we recorded an income tax benefit of
$106.4 million (10.0% of pretax loss), which reflects the value our net loss to
reduce our income taxes, net of the impact of non-deductible debt conversion
costs and amortization of intangible assets, through the second quarter of
fiscal 2001. As a result of our large operating losses and asset write-offs and
our expectation of future operating results, we determined that it is more
likely than not that the additional income tax benefits which arose during the
third quarter of fiscal 2001 will not be realized and we recognized no income
tax benefit for losses incurred in the third quarter of fiscal 2001.

We do not expect to recognize any income tax benefits relating to future
operating losses until we believe that such benefits are more likely than not
to be realized. Consequently, we expect our effective income tax rate will be
approximately 0% for fiscal 2002.

Extraordinary Item
During the first quarter of fiscal 2001, we purchased $35.0 million principal
amount of our 4% Convertible Subordinated Notes due 2007 at prevailing market
prices, resulting in a gain of $11.7 million. Such gain has been presented in
the statement of operations as an extraordinary item, net of incomes taxes of
$4.4 million.

Liquidity and Capital Resources
Our cash and cash equivalents decreased by $46.2 million during the first nine
months of fiscal 2002. Cash used in operating activities was $131.3 million for
the fiscal 2002 period, compared to cash used in operating activities of $190.9
million for the comparable period in fiscal 2001. Operating cash flows for the
fiscal 2002 period reflect our loss from continuing operations of $636.2
million offset by noncash charges (depreciation and amortization and other) of
$467.8 million, and a net decrease in the non-cash components of working
capital of $37.1 million.

The fiscal 2002 working capital decreases include a $25.7 million decrease in
accounts receivable, principally due to our aggressive accounts receivable
collection efforts, a $35.3 million increase in accounts payable and a $10.1
million decrease in inventories. These working capital changes were partially
offset by a $14.0 million decrease in deferred revenue due to lower inventory
levels at our major distributors and changes in other assets and liabilities
totaling $20.0 million.

Cash provided by investing activities of $99.5 million for the first nine
months of fiscal 2002 includes proceeds from net sales of marketable securities
of $76.8 million and proceeds from the sale of assets of $71.8 million. Capital
expenditures were $20.0 million, reflecting implementation of our cost
reduction initiatives and lower capital expenditure requirements resulting from
our transition to a fully fabless business model. Other investing activities
included equity investments of $4.1 million and the payment of $25.0 million of
contingent consideration for businesses acquired in fiscal 2000. Cash used in
investing activities during the first nine months of fiscal 2001 principally
consisted of net purchases of marketable securities of $168.8 million, capital
expenditures of $98.6 million, and payments for investments, advances and
acquisitions totaling $103.8 million.

Cash provided by financing activities of $14.9 million during the first nine
months of fiscal 2002 consisted of proceeds from the exercise of stock options.
In the first nine months of fiscal 2001, cash used in financing activities
consisted of $65.0 million paid in connection with the conversion and
repurchase of a portion of our convertible subordinated notes, partially offset
by $13.3 million in proceeds from the exercise of stock options.

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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 mature 50 percent
in nine months and 50 percent in one year and bear interest initially at 10
percent, increasing to 12 percent in three months and 15 percent in six months.
The financing agreement also provides for a revolving credit facility under
which Alpha may 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. Currently, Alpha may borrow up to $75 million from us under the
credit facility. As of the date hereof, no borrowings are outstanding under the
credit facility.

Our principal sources of liquidity are our existing cash reserves (including
the $150 million refunded deposit returned to us by a supplier in July 2002),
available-for-sale marketable securities and cash generated from operations.
Combined cash and cash equivalents and marketable securities at June 30, 2002
totaled $217.3 million compared to $338.9 million at September 30, 2001. Our
working capital at June 30, 2002 was $529.8 million compared to $442.4 million
at September 30, 2001. The overall working capital change principally reflects
the notes receivable from Skyworks and the reclassification of the refundable
deposit to current assets, offset by cash used in operations and cash payments
for capital expenditures and investments.

While the dramatic changes in end-user demand from the levels we experienced in
fiscal 2000 and the continued high levels of channel inventories have reduced
visibility into future demand, we expect that these and other factors will
continue to affect our revenues in fiscal 2002. The reduced level of revenues
in relation to our operating costsincluding our continued substantial
investment in research and developmentwill adversely affect our results of
operations. Consequently, we anticipate that we will continue to experience
negative cash flows from operations in the near term. During fiscal 2001 and
2002, we reduced our capital expenditures and implemented a number of expense
reduction initiatives, including workforce reductions, temporary shutdowns of
our manufacturing facilities, the consolidation of certain facilities and
salary reductions of 10% for senior management.

In July 2002 we paid the $21 million owed under the promissory notes we
delivered as part of the consideration for the acquisition of the video
compression business of iCompression. We may be required to pay additional
consideration of up to $20 million pursuant to an earn-out provision if certain
revenue milestones are achieved. In addition, we guaranteed the value of the
shares we issued to iCompression and we may be required to make additional cash
payments to iCompression for the difference between $12.00 and the market value
per share of the shares of common stock delivered to iCompression (including
the market value of Skyworks common stock received in respect thereof).

We believe that our existing sources of liquidity, together with cash expected
to be generated from operations will be sufficient to fund our operations,
research and development efforts, anticipated capital expenditures and
consideration payable to iCompression for at least the next twelve months.
Although reduced capital expenditures are a key component of our fabless
business model, 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.

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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, warranties,
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.

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.

Impairment of long-lived assets
Long-lived assets, including fixed assets, 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.
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.

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. Should we determine that we will not
be able to realize all or part of our net deferred tax asset in the future, an
adjustment to the deferred tax asset would be charged against income in the
period such determination was 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 its net recorded amount, an adjustment to the deferred tax asset would
increase income in the period such determination was made.

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.

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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.
Our net revenues for the first nine months of fiscal 2002 were $443.8 million
compared to $704.1 million for the first nine months of fiscal 2001 due to
sharply reduced end-customer demand in many of the communications electronics
end-markets which our products address. We incurred losses from continuing
operations of $636.2 million in the first nine months of fiscal 2002 and $1.2
billion for fiscal 2001. Including our discontinued operations, we incurred a
net loss of $704.6 million in the first nine months of fiscal 2002 and a net
loss of $1.4 billion for fiscal 2001.

During fiscal 2001 and continuing into fiscal 2002, 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 and we
anticipate incurring additional losses in the fourth quarter of fiscal 2002 and
in fiscal 2003. In order to return to profitability, we must achieve
substantial revenue growth and we currently face an environment of uncertain
demand in the markets our products address. 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 conditions, cause significant upturns
and downturns in the industry, and in our business in particular. Periods of
industry downturnsas we experienced in fiscal 2001 and continue to
experience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have been 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 has been compounded by
higher-than-normal levels of equipment and component inventories among our OEM,
subcontractor and distributor customers. 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, an environment of weak end-customer demand and high levels of
channel inventories has, in some cases, led to delays in payments for our
products. During fiscal 2001, we recorded $23.1 million of

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provisions for uncollectible accounts receivable from slow-paying customers. 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 home
networking products.

We are subject to intense competition.
The 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 market 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.                      

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; and                                                                             
|
| |  |  | significantly greater financial, sales and marketing, manufacturing,
distribution, technical and other resources.

As a result, these competitors may be able to adapt more quickly to new or
emerging technologies and changes in customer requirements or may be able to
devote greater resources to the development, promotion and sale of their
products than we can.

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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 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, 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;

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| |  |  | 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.

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 27% and 23% of our net revenues for fiscal 2001 and the first
nine months of fiscal 2002, 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

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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 continued high
levels of channel inventories that reduced visibility into future demand for
our products. We expect that these and other factors will continue to affect
our revenues in the near term. As a result of 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 45% ownership. In June 2002 we
contributed our Newbury Park gallium arsenide wafer fabrication facility to
Washington as part of the Distribution and Merger of our wireless
communications business to form Skyworks. 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. We have also
entered into a supply agreement with Skyworks for the supply of
specialty-process wafer fabrication services. 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 Distribution 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.

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.

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

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

We are subject to the risks of doing business internationally.
For fiscal 2001 and the first nine months of fiscal 2002, approximately 66% and
84% of our net revenues, respectively, were from customers located outside the
United States, primarily in the Asia-Pacific 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;
| | - |  | ------------------------------------

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| |  |  | 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 50% and 66% of our net revenues in fiscal 2001 and the first nine
months of fiscal 2002, respectively.

We enter into foreign currency forward exchange contracts, principally for the
Japanese yen, 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 and our financial condition and results of operations could
be affected (negatively or positively) 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;                         
| | - |  | ------------------------------------------------------------------------------------------------------------
|
| |  |  | 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 produced and sold;                                                           
|
| |  |  | market acceptance of our products and our customers products;                                              
|
| |  |  | intellectual property disputes;                                                                             
|
| |  |  | seasonal customer demand;                                                                                   

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| |  |  | 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 Distribution
and 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 Distribution and Merger, the reported closing price of
our common stock has been as high as $2.59 and as low as
$1.09 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;       
|
| |  |  | 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
technology. Any litigation to determine the validity of claims that our
products infringe or may infringe these rights, including claims arising
through our contractual indemnification of our customers, regardless of their
merit or resolution, could be costly and divert the efforts and attention of
our management and technical personnel. We cannot assure you that we would
prevail in litigation given the complex technical issues and inherent
uncertainties in intellectual property litigation. If litigation results in an
adverse ruling we could be required to:



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

If we are not successful in protecting our intellectual property rights, it may
harm our ability to compete.
We rely primarily on patent, copyright, trademark and trade secret laws, as
well as nondisclosure and confidentiality agreements and other methods, to
protect our proprietary technologies and processes. In addition, we often
incorporate the intellectual property of our customers into our designs, and we
have obligations with respect to the

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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 $2.6
million and have accrued for these costs as of June 30, 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, the
integration of a recently-acquired business and the anticipated separation of
our Broadband Communications and Mindspeed Technologies businesses. While we
believe that we have sufficient management resources to execute each of these
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 shareowners;
|
| |  |  | a prohibition on shareowner action by written consent;                                                                                              

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| |  |  | a requirement that shareowners provide advance notice of any
shareowner nominations of directors or any proposal of new business to
be considered at any meeting of shareowners;    
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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 shareowners to call a special meeting of shareowners; and                                                                                               
|
| |  |  | a fair price provision.                                                                                                                                                             

We also have a rights agreement which gives our shareowners 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 shareowner during the three-year
period following the time that such shareowner becomes an interested
shareowner, unless a majority of the directors then in office approves either
the business combination or the transaction that results in the shareowner
becoming an interested shareowner or specified shareowner 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
securities, short-term promissory notes receivable and long-term debt. Our main
investment objectives are the preservation of investment capital and the
maximization of after-tax returns on our investment portfolio. Consequently, we
invest with only high-credit-quality issuers and we limit the amount of our
credit exposure to any one issuer. We do not use derivative instruments for
speculative or investment purposes.

Our cash and cash equivalents are not subject to significant interest rate risk
due to the short maturities of these instruments. As of June 30, 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. All of our marketable securities are classified as available for
sale. As of June 30, 2002, unrealized gains and losses on these securities
included in accumulated other comprehensive income were not significant.

We hold short-term promissory notes receivable from Skyworks and a subsidiary
of Skyworks having an aggregate principal amount of $150 million, delivered to
us in payment of the purchase price for our Mexicali assembly and test
facility. These notes, 50 percent of which are due within nine months and 50
percent of which are due within one year, are not subject to significant
interest rate risk.

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 investments, notes receivable
and long-term debt as of June 30, 2002:

|                               |  |                |       |            |  |   |       | 
|------------------------------ |  | -------------- | ----- | ---------- |  | - | ----- | 
|(in millions)                  |  | Carrying Value |       | Fair Value
|                               |  |                |       |           
|Cash and cash equivalents      |  | $              | 136.1 |            |  | $ | 136.1 | 
|                              
|                              
|                              
|                              
|Marketable debt securities     |  |                | 81.3  |            |  |   | 81.3  | 
|                              
|                              
|                              
|                              
|Notes receivable from Skyworks |  |                | 150.0 |            |  |   | 150.0 | 
|                              
|                              
|                              
|                              
|Long-term debt                 |  |                | 681.8 |            |  |   | 309.5 | 

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 (principally
the Japanese yen). Under this program, we seek to offset foreign currency
transaction gains and losses with gains and losses on the forward contracts, so
as to mitigate our overall risk of foreign transaction gains and losses. We do
not enter into forward contracts for speculative or trading purposes.

At June 30, 2002, we held no foreign currency forward exchange contracts. Based
on our overall currency rate exposure at June 30, 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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PART II. OTHER INFORMATION




ITEM 2. CHANGES IN SECURITIES

In January 2002, the Company issued 94,572 shares of its common stock to the
shareholders of Applied Telecom, Inc. pursuant to an earn-out in connection
with the acquisition by the Company of Applied Telecom, Inc. The issuance of
shares was pursuant to an exemption from registration under Section 4(2) of the
Securities Act of 1933, as amended
(the Securities Act). The holders of such shares have been granted certain
registration rights.

In May 2002, the Company exchanged 2,233,469 shares of its common stock for
approximately $28.0 million principal amount of its 4-1/4% Convertible
Subordinated Notes due 2006. The issuance of shares was pursuant to an
exemption from registration under the Securities Act.

In June 2002, the Company issued 1,250,000 shares of its common stock to
iCompression, Inc., a wholly-owned subsidiary of GlobespanVirata, Inc.
(iCompression), in connection with the acquisition by the Company of certain
assets of iCompression. The issuance of shares was pursuant to an exemption
from registration under Section 4(2) of the Securities Act. On July 29, 2002, the Company filed a registration
statement on Form S-3 (Registration No. 333-97285) with the Securities and
Exchange Commission registering the resale of these shares by iCompression,
which registration statement has not been declared effective.

The Company received no cash proceeds from the issuance of these securities.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits:



|2.1  |  | Agreement and Plan of Reorganization dated as of December 16, 2001, as
amended as of April 12, 2002, by and among Conexant, Washington and
Alpha (excluding exhibits), filed as Exhibit 2.1 to Conexants Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002, is
incorporated herein by reference.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|10.1 |  | Contribution and Distribution Agreement dated as of December 16, 2001,
as amended as of June 25, 2002, by and between Conexant and Washington
(excluding schedules) filed as Exhibit 2.2 to Conexants Current Report
on Form 8-K dated July 1, 2002, is incorporated herein by reference.                        
|    
|10.2 |  | Employee Matters Agreement dated as of June 25, 2002 by and among
Conexant, Washington and Alpha (excluding schedules) filed as Exhibit
2.3 to Conexants Current Report on Form 8-K dated July 1, 2002, is
incorporated herein by reference.                                                                     
|    
|10.3 |  | Tax Allocation Agreement dated as of June 25, 2002 by and among
Conexant, Washington and Alpha (excluding schedules) filed as Exhibit
2.4 to Conexants Current Report on Form 8-K dated July 1, 2002, is
incorporated herein by reference.                                                                       
|    
|10.4 |  | Mexican Stock Purchase Agreement dated as of June 25, 2002 by and
between Conexant and Alpha (excluding exhibits and schedules) filed as
Exhibit 99.1 to Conexants Current Report on Form 8-K dated July 1,
2002, is incorporated herein by reference.                                                           
|    
|10.5 |  | Amended and Restated Mexican Asset Purchase Agreement dated as of June
25, 2002 by and between Conexant and Alpha (excluding exhibits and
schedules) filed as Exhibit 99.2 to Conexants Current Report on Form
8-K dated July 1, 2002, is incorporated herein by reference.                                      
|    
|10.6 |  | U.S. Asset Purchase Agreement dated as of December 16, 2001, as amended
as of June 25, 2002, by and between Conexant and Alpha (excluding
exhibits and schedules) filed as Exhibit 99.3 to Conexants Current
Report on Form 8-K dated July 1, 2002, is incorporated herein by
reference.                         
|    
|10.7 |  | Financing Agreement dated as of June 25, 2002 by and among Alpha,
certain of its subsidiaries identified therein and Conexant (excluding
certain exhibits and schedules) filed as Exhibit 99.4 to Conexants
Current Report on Form 8-K dated July 1, 2002, is incorporated herein by
reference.                  
|    
|12   |  | Statement re: Computation of Ratios                                                                                                                                                                                                                                                                               
|    
|99.1 |  | Written Statement of Chief Executive Officer and Chief Financial Officer.                                                                                                                                                                                                                                         

(b)  Reports on Form 8-K

Current Report on Form 8-K dated July 1, 2002, with respect to the Companys
disposition of its wireless communications business (Items 2 and 7).

Current Report on Form 8-K/A dated July 10, 2002, including pro forma financial
information with respect to the Companys disposition of its wireless
communications business (Item 7).

Current Report on Form 8-K/A dated July 29, 2002, including additional pro
forma financial information with respect to the Companys disposition of its
wireless communications business (Item 5).

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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: August 12, 2002 |  | By                                  |  | /s/ Balakrishnan S. Iyer                                                                            
|                      |  |                                     |  |                                                                                                     
|                      |  |                                     |  | Balakrishnan S. Iyer
Senior Vice President and
Chief Financial Officer
(principal financial officer)
|                     
|                     
|                     
|                     
|                      |  |                                     |  |                                                                                                     
|                     
|                     
|                     
|                     
|Date: August 12, 2002 |  | By                                  |  | /s/ J. Scott Blouin                                                                                 
|                      |  |                                     |  |                                                                                                     
|                      |  |                                     |  | J. Scott Blouin
Senior Vice President and
Chief Accounting Officer
(principal accounting officer)   

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EXHIBIT INDEX



|12   |  | Statement re: Computation of Ratios                                      
|---- |  | -------------------------------------------------------------------------
|    
|99.1 |  | Written Statement of Chief Executive Officer and Chief Financial Officer.