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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

|          |  |                                                                                         
|--------- |  | ----------------------------------------------------------------------------------------
|Check Box |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 
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|          |  | For the quarterly period ended March 31, 2002*                                          
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|          |  | OR                                                                                      
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|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   Check Box     No   Box

Number of shares of registrants common stock outstanding as of May 3, 2002 was
258,478,845.



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|* |  | For presentation purposes of this Form 10-Q, references made to the March
31, 2002 period relate to the actual fiscal second quarter ended March 29,
2002.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



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TABLE OF CONTENTS



|                                                     |                                                                                               |  |  |  |  |  |  | 
|---------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|                                                     | PART I. FINANCIAL INFORMATION                                                                
|                                                     | ITEM 1. FINANCIAL STATEMENTS                                                                 
|Consolidated Condensed Balance Sheets               
|Consolidated Condensed Statements of Operations     
|Consolidated Condensed Statements of Cash Flows     
|NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
|                                                     | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                     | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II. OTHER INFORMATION                          
|                                                     | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                                                     | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                                                     | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                                          
|EXHIBIT 2.1                                         
|EXHIBIT 10.1                                        
|EXHIBIT 12                                          



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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 and extent of
utilization 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 strategic manufacturing
realignment, expense reduction and restructuring initiatives; the successful
separation of our broadband access and Mindspeed Technologies businesses; the
successful spin-off and merger of our wireless communications business with
Alpha Industries, Inc.; our labor relations and those of our customers and
suppliers; 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



CONEXANT SYSTEMS, INC.

INDEX

|                                   |  |                                                                                                             |  |     
|---------------------------------- |  | ----------------------------------------------------------------------------------------------------------- |  | ----
|                                   |  |                                                                                                             |  | PAGE
|                                   |  |                                                                                                             |  |     
|PART I.      FINANCIAL INFORMATION |  |                                                                                                            
|                                  
|                                  
|                                  
|                                  
|                                   |  |                                                                                                             |  |     
|                                  
|                                  
|                                  
|                                  
|Item 1.                            |  | Financial Statements (unaudited):                                                                           |  |     
|                                  
|                                  
|                                  
|                                  
|                                   |  |                                                                                                             |  |     
|                                  
|                                  
|                                  
|                                  
|                                   |  | Consolidated Condensed Balance Sheets  March 31, 2002 and September 30, 2001                               |  | 4   
|                                  
|                                  
|                                  
|                                  
|                                   |  |                                                                                                             |  |     
|                                  
|                                  
|                                  
|                                  
|                                   |  | Consolidated Condensed Statements of Operations  Three Months and Six
Months Ended March 31, 2002 and 2001 |  | 5   
|                                  
|                                  
|                                  
|                                  
|                                   |  |                                                                                                             |  |     
|                                  
|                                  
|                                  
|                                  
|                                   |  | Consolidated Condensed Statements of Cash Flows  Six Months Ended
March 31, 2002 and 2001                  |  | 6   
|                                  
|                                  
|                                  
|                                  
|                                   |  |                                                                                                             |  |     
|                                  
|                                  
|                                  
|                                  
|                                   |  | Notes to Consolidated Condensed Financial Statements                                                        |  | 7   
|                                  
|                                  
|                                  
|                                  
|                                   |  |                                                                                                             |  |     
|                                  
|                                  
|                                  
|                                  
|Item 2.                            |  | Managements Discussion and Analysis of Financial Condition and
Results of Operations                       |  | 12  
|                                  
|                                  
|                                  
|                                  
|                                   |  |                                                                                                             |  |     
|                                  
|                                  
|                                  
|                                  
|                                   |  |                                                                                                             |  |     
|                                  
|                                  
|                                  
|                                  
|Item 3.                            |  | Quantitative and Qualitative Disclosures About Market Risk                                                  |  | 33  
|                                  
|                                  
|                                  
|                                  
|                                   |  |                                                                                                             |  |     
|                                  
|                                  
|                                  
|                                  
|PART II.      OTHER INFORMATION    |  |                                                                                                            
|                                  
|                                  
|                                  
|                                  
|                                   |  |                                                                                                             |  |     
|                                  
|                                  
|                                  
|                                  
|Item 1.                            |  | Legal Proceedings                                                                                           |  | 34  
|                                  
|                                  
|                                  
|                                  
|                                   |  |                                                                                                             |  |     
|                                  
|                                  
|                                  
|                                  
|Item 4.                            |  | Submission of Matters to a Vote of Security Holders                                                         |  | 35  
|                                  
|                                  
|                                  
|                                  
|                                   |  |                                                                                                             |  |     
|                                  
|                                  
|                                  
|                                  
|Item 6.                            |  | Exhibits and Reports on Form 8-K                                                                            |  | 36  
|                                  
|                                  
|                                  
|                                  
|                                   |  |                                                                                                             |  |     
|                                  
|                                  
|                                  
|                                  
|                                   |  | Signatures                                                                                                  |  | 37  

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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)

|                                    |                                                                                                                                                      |                                            |                                      |            |           |           |           |               |           |  |  | 
|----------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------ | ---------- | --------- | --------- | --------- | ------------- | --------- |  |  | 
|                                    |                                                                                                                                                      |                                            |                                      |            |           | March 31, |           | September 30,
|                                    |                                                                                                                                                      |                                            |                                      |            |           | 2002      |           | 2001         
|                                    |                                                                                                                                                      |                                            |                                      |            |           |           |           |              
|                                    |                                                                                                                                                      |                                            |                                      | ASSETS     |           |           |           |               |          
|                                   
|                                   
|                                   
|                                   
|Current assets:                     |                                                                                                                                                      |                                            |                                      |            |           |           |           |              
|                                   
|                                   
|                                   
|                                   
|                                    | Cash and cash equivalents                                                                                                                            |                                            | $                                    | 151,790    |           |           | $         | 182,260       |          
|                                   
|                                   
|                                   
|                                   
|                                    | Short-term investments                                                                                                                               |                                            |                                      | 108,276    |           |           |           | 156,660       |          
|                                   
|                                   
|                                   
|                                   
|                                    | Refundable deposit                                                                                                                                   |                                            |                                      | 150,000    |           |           |           |              |          
|                                   
|                                   
|                                   
|                                   
|                                    | Receivables, net of allowance for doubtful accounts
of $14,880 and $18,206 at March 31, 2002
and September 30, 2001, respectively                    |                                            |                                      | 107,811    |           |           |           | 133,685       |          
|                                   
|                                   
|                                   
|                                   
|                                    | Inventories                                                                                                                                          |                                            |                                      | 99,423     |           |           |           | 122,397       |          
|                                   
|                                   
|                                   
|                                   
|                                    | Deferred income taxes                                                                                                                                |                                            |                                      | 68,368     |           |           |           | 75,710        |          
|                                   
|                                   
|                                   
|                                   
|                                    | Other current assets                                                                                                                                 |                                            |                                      | 57,426     |           |           |           | 54,639        |          
|                                    |                                                                                                                                                      |                                            |                                      |            |           |           |           |              
|                                    |                                                                                                                                                      | Total current assets                       |                                      |            | 743,094   |           |           |               | 725,351   | 
|                                   
|                                   
|                                   
|                                   
|Property, plant and equipment, net  |                                                                                                                                                      |                                            | 298,737                              |            |           |           | 387,433   |              
|                                   
|                                   
|                                   
|                                   
|Goodwill and intangible assets, net |                                                                                                                                                      |                                            | 1,072,231                            |            |           |           | 1,251,253 |              
|                                   
|                                   
|                                   
|                                   
|Deferred income taxes               |                                                                                                                                                      |                                            | 194,289                              |            |           |           | 183,444   |              
|                                   
|                                   
|                                   
|                                   
|Other assets                        |                                                                                                                                                      |                                            | 149,549                              |            |           |           | 267,999   |              
|                                    |                                                                                                                                                      |                                            |                                      |            |           |           |           |              
|                                    |                                                                                                                                                      | Total assets                               |                                      | $          | 2,457,900 |           |           | $             | 2,815,480 | 
|                                    |                                                                                                                                                      |                                            |                                      |            |           |           |           |               |          
|                                    |                                                                                                                                                      |                                            | LIABILITIES AND SHAREHOLDERS EQUITY |            |           |           |           |               |          
|                                   
|                                   
|                                   
|                                   
|Current liabilities:                |                                                                                                                                                      |                                            |                                      |            |           |           |           |              
|                                   
|                                   
|                                   
|                                   
|                                    | Accounts payable                                                                                                                                     |                                            | $                                    | 121,709    |           |           | $         | 98,141        |          
|                                   
|                                   
|                                   
|                                   
|                                    | Deferred revenue                                                                                                                                     |                                            |                                      | 17,042     |           |           |           | 27,149        |          
|                                   
|                                   
|                                   
|                                   
|                                    | Accrued compensation and benefits                                                                                                                    |                                            |                                      | 59,750     |           |           |           | 50,407        |          
|                                   
|                                   
|                                   
|                                   
|                                    | Other current liabilities                                                                                                                            |                                            |                                      | 89,350     |           |           |           | 107,300       |          
|                                    |                                                                                                                                                      |                                            |                                      |            |           |           |           |              
|                                    |                                                                                                                                                      | Total current liabilities                  |                                      |            | 287,851   |           |           |               | 282,997   | 
|                                   
|                                   
|                                   
|                                   
|Convertible subordinated notes      |                                                                                                                                                      |                                            | 709,849                              |            |           |           | 709,849   |              
|                                   
|                                   
|                                   
|                                   
|Other long-term liabilities         |                                                                                                                                                      |                                            | 49,793                               |            |           |           | 49,458    |              
|                                    |                                                                                                                                                      |                                            |                                      |            |           |           |           |              
|                                    |                                                                                                                                                      | Total liabilities                          |                                      |            | 1,047,493 |           |           |               | 1,042,304 | 
|                                    |                                                                                                                                                      |                                            |                                      |            |           |           |           |              
|Commitments and contingencies       |                                                                                                                                                      |                                            |                                     |            |           |           |          |              
|                                   
|Shareholders equity:               |                                                                                                                                                      |                                            |                                      |            |           |           |           |              
|                                   
|                                   
|                                   
|                                   
|                                    | Preferred and junior preferred stock                                                                                                                 |                                            |                                      |           |           |           |           |              |          
|                                   
|                                   
|                                   
|                                   
|                                    | Common stock, $1.00 par value: 1,000,000 shares
authorized; 257,998 and 253,900 shares issued at
March 31, 2002 and September 30, 2001, respectively |                                            |                                      | 257,998    |           |           |           | 253,900       |          
|                                   
|                                   
|                                   
|                                   
|                                    | Additional paid-in capital                                                                                                                           |                                            |                                      | 3,156,230  |           |           |           | 3,113,205     |          
|                                   
|                                   
|                                   
|                                   
|                                    | Accumulated deficit                                                                                                                                  |                                            |                                      | (1,971,401 | )         |           |           | (1,566,209    | )        
|                                   
|                                   
|                                   
|                                   
|                                    | Accumulated other comprehensive loss                                                                                                                 |                                            |                                      | (27,226    | )         |           |           | (17,204       | )        
|                                   
|                                   
|                                   
|                                   
|                                    | Treasury stock, at cost: 41 shares at September 30, 2001                                                                                             |                                            |                                      |           |           |           |           | (1,807        | )        
|                                   
|                                   
|                                   
|                                   
|                                    | Unearned compensation                                                                                                                                |                                            |                                      | (5,194     | )         |           |           | (8,709        | )        
|                                    |                                                                                                                                                      |                                            |                                      |            |           |           |           |              
|                                    |                                                                                                                                                      | Total shareholders equity                 |                                      |            | 1,410,407 |           |           |               | 1,773,176 | 
|                                    |                                                                                                                                                      |                                            |                                      |            |           |           |           |              
|                                    |                                                                                                                                                      | Total liabilities and shareholders equity |                                      | $          | 2,457,900 |           |           | $             | 2,815,480 | 
|                                    |                                                                                                                                                      |                                            |                                      |            |           |           |           |               |          

See accompanying notes to consolidated condensed financial statements.

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##### Table of Contents






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

|                                                                            |                                     |                                |                          |         |                    |         |                  |         |       |         |          |         |       |         |          |         |       |         | 
|--------------------------------------------------------------------------- | ----------------------------------- | ------------------------------ | ------------------------ | ------- | ------------------ | ------- | ---------------- | ------- | ----- | ------- | -------- | ------- | ----- | ------- | -------- | ------- | ----- | ------- | 
|                                                                            |                                     |                                |                          |         | Three months ended |         | Six months ended
|                                                                            |                                     |                                |                          |         | March 31,          |         | March 31,       
|                                                                            |                                     |                                |                          |         |                    |         |                 
|                                                                            |                                     |                                |                          |         | 2002               |         | 2001             |         | 2002  |         | 2001    
|                                                                            |                                     |                                |                          |         |                    |         |                  |         |       |         |         
|Net revenues                                                                |                                     | $                              | 241,031                  |         |                    | $       | 251,003          |         |       | $       | 470,550  |         |       | $       | 661,364  |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Cost of goods sold                                                          |                                     |                                | 153,465                  |         |                    |         | 334,168          |         |       |         | 319,468  |         |       |         | 630,771  |        
|                                                                            |                                     |                                |                          |         |                    |         |                  |         |       |         |          |         |       |         |          |        
|Gross margin                                                                |                                     |                                | 87,566                   |         |                    |         | (83,165          | )       |       |         | 151,082  |         |       |         | 30,593   |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Operating expenses:                                                         |                                     |                                |                          |         |                    |         |                  |         |       |         |          |         |       |         |          |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Research and development            |                                |                          | 114,889 |                    |         |                  | 128,879 |       |         |          | 226,483 |       |         |          | 247,417 |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Selling, general and administrative |                                |                          | 53,974  |                    |         |                  | 89,741  |       |         |          | 109,662 |       |         |          | 170,117 |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Amortization of intangible assets   |                                |                          | 90,095  |                    |         |                  | 84,040  |       |         |          | 179,702 |       |         |          | 166,344 |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Special charges                     |                                |                          | 21,384  |                    |         |                  | 11,848  |       |         |          | 22,384  |       |         |          | 19,775  |      
|                                                                            |                                     |                                |                          |         |                    |         |                  |         |       |         |          |         |       |         |          |        
|                                                                            |                                     |                                | Total operating expenses |         |                    | 280,342 |                  |         |       | 314,508 |          |         |       | 538,231 |          |         |       | 603,653 | 
|                                                                            |                                     |                                |                          |         |                    |         |                  |         |       |         |          |         |       |         |          |        
|Operating loss                                                              |                                     |                                | (192,776                 | )       |                    |         | (397,673         | )       |       |         | (387,149 | )       |       |         | (573,060 | )      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Debt conversion costs                                                       |                                     |                                |                         |         |                    |         |                 |         |       |         |         |         |       |         | (42,584  | )      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Other expense, net                                                          |                                     |                                | (6,802                   | )       |                    |         | (1,021           | )       |       |         | (15,919  | )       |       |         | (5,377   | )      
|                                                                            |                                     |                                |                          |         |                    |         |                  |         |       |         |          |         |       |         |          |        
|Loss before income taxes                                                    |                                     |                                | (199,578                 | )       |                    |         | (398,694         | )       |       |         | (403,068 | )       |       |         | (621,021 | )      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Provision (benefit) for income taxes                                        |                                     |                                | 1,124                    |         |                    |         | (136,683         | )       |       |         | 2,124    |         |       |         | (152,150 | )      
|                                                                            |                                     |                                |                          |         |                    |         |                  |         |       |         |          |         |       |         |          |        
|Loss before extraordinary item                                              |                                     |                                | (200,702                 | )       |                    |         | (262,011         | )       |       |         | (405,192 | )       |       |         | (468,871 | )      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Extraordinary gain on extinguishment of debt,
net of income taxes of $4,426 |                                     |                                |                         |         |                    |         |                 |         |       |         |         |         |       |         | 7,284    |        
|                                                                            |                                     |                                |                          |         |                    |         |                  |         |       |         |          |         |       |         |          |        
|Net loss                                                                    |                                     | $                              | (200,702                 | )       |                    | $       | (262,011         | )       |       | $       | (405,192 | )       |       | $       | (461,587 | )      
|                                                                            |                                     |                                |                          |         |                    |         |                  |         |       |         |          |         |       |         |          |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Loss per share, basic and diluted:                                          |                                     |                                |                          |         |                    |         |                  |         |       |         |          |         |       |         |          |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                     | Loss before extraordinary item |                          | $       | (0.78              | )       |                  | $       | (1.08 | )       |          | $       | (1.59 | )       |          | $       | (1.96 | )      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                     | Extraordinary item             |                          |         |                   |         |                  |         |      |         |          |         |      |         |          |         | 0.04  |        
|                                                                            |                                     |                                |                          |         |                    |         |                  |         |       |         |          |         |       |         |          |        
|                                                                            |                                     | Net loss                       |                          | $       | (0.78              | )       |                  | $       | (1.08 | )       |          | $       | (1.59 | )       |          | $       | (1.92 | )      
|                                                                            |                                     |                                |                          |         |                    |         |                  |         |       |         |          |         |       |         |          |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Number of shares used in per share
computation                              |                                     |                                | 256,135                  |         |                    |         | 243,515          |         |       |         | 255,249  |         |       |         | 239,813  |        
|                                                                            |                                     |                                |                          |         |                    |         |                  |         |       |         |          |         |       |         |          |        

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)

|                                                                            |                                                     |                                                |          |                  |         |      |          |          |          |  
|--------------------------------------------------------------------------- | --------------------------------------------------- | ---------------------------------------------- | -------- | ---------------- | ------- | ---- | -------- | -------- | -------- | -
|                                                                            |                                                     |                                                |          | Six months ended
|                                                                            |                                                     |                                                |          | March 31,       
|                                                                            |                                                     |                                                |          |                 
|                                                                            |                                                     |                                                |          | 2002             |         | 2001
|                                                                            |                                                     |                                                |          |                  |         |     
|Cash flows from operating activities:                                       |                                                     |                                                |          |                  |         |      |          |         
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Net loss                                                                    |                                                     | $                                              | (405,192 | )                |         | $    | (461,587 | )       
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Adjustments to reconcile net loss to net cash
used in operating activities: |                                                     |                                                |          |                  |         |      |          |         
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                     | Depreciation                                   |          |                  | 51,615  |      |          |          | 98,250   |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                     | Amortization of intangible assets              |          |                  | 179,702 |      |          |          | 166,344  |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                     | Asset impairments                              |          |                  | 25,261  |      |          |          |         |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                     | Provision for losses on accounts receivable    |          |                  | (1,073  | )    |          |          | 12,913   |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                     | Inventory provisions                           |          |                  | 11,800  |      |          |          | 206,050  |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                     | Deferred income taxes                          |          |                  | (2,252  | )    |          |          | (149,482 | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                     | Stock compensation                             |          |                  | 3,698   |      |          |          | 6,791    |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                     | Debt conversion costs                          |          |                  |        |      |          |          | 42,584   |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                     | Extraordinary gainextinguishment of debt      |          |                  |        |      |          |          | (11,710  | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                     | Other non-cash items, net                      |          |                  | (1,624  | )    |          |          | 7,951    |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Changes in assets and liabilities:                  |                                                |          |                  |         |      |          |          |         
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                     | Receivables                                    |          |                  | 26,947  |      |          |          | 160,602  |  
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                     | Inventories                                    |          |                  | 3,744   |      |          |          | (118,705 | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                     | Accounts payable                               |          |                  | 22,835  |      |          |          | (103,876 | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                     | Deferred revenue                               |          |                  | (10,107 | )    |          |          | (8,229   | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                     | Accrued expenses and other current liabilities |          |                  | 131     |      |          |          | (15,937  | )
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                     | Other                                          |          |                  | (10,936 | )    |          |          | (10,456  | )
|                                                                            |                                                     |                                                |          |                  |         |      |          |         
|                                                                            | Net cash used in operating activities               |                                                |          | (105,451         | )       |      |          | (178,497 | )       
|                                                                            |                                                     |                                                |          |                  |         |      |          |         
|Cash flows from investing activities:                                       |                                                     |                                                |          |                  |         |      |          |         
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Net sales (purchases) of marketable securities                              |                                                     |                                                | 49,260   |                  |         |      | (253,658 | )       
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Capital expenditures                                                        |                                                     |                                                | (19,477  | )                |         |      | (118,833 | )       
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Proceeds from sale of assets                                                |                                                     |                                                | 41,696   |                  |         |      |         |         
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Investments in and advances to businesses                                   |                                                     |                                                | (4,060   | )                |         |      | (89,090  | )       
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Acquisitions of businesses, net of cash acquired                            |                                                     |                                                | (2,673   | )                |         |      | (12,512  | )       
|                                                                            |                                                     |                                                |          |                  |         |      |          |         
|                                                                            | Net cash provided by (used in) investing activities |                                                |          | 64,746           |         |      |          | (474,093 | )       
|                                                                            |                                                     |                                                |          |                  |         |      |          |         
|Cash flows from financing activities:                                       |                                                     |                                                |          |                  |         |      |          |         
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Proceeds from exercise of stock options                                     |                                                     |                                                | 10,235   |                  |         |      | 10,618   |         
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Payment of debt conversion costs                                            |                                                     |                                                |         |                  |         |      | (42,584  | )       
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Repurchase of convertible subordinated notes                                |                                                     |                                                |         |                  |         |      | (22,400  | )       
|                                                                            |                                                     |                                                |          |                  |         |      |          |         
|                                                                            | Net cash provided by (used in) financing activities |                                                |          | 10,235           |         |      |          | (54,366  | )       
|                                                                            |                                                     |                                                |          |                  |         |      |          |         
|Net decrease in cash and cash equivalents                                   |                                                     |                                                | (30,470  | )                |         |      | (706,956 | )       
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Cash and cash equivalents at beginning of period                            |                                                     |                                                | 182,260  |                  |         |      | 831,100  |         
|                                                                            |                                                     |                                                |          |                  |         |      |          |         
|Cash and cash equivalents at end of period                                  |                                                     | $                                              | 151,790  |                  |         | $    | 124,144  |         
|                                                                            |                                                     |                                                |          |                  |         |      |          |         

See accompanying notes to consolidated condensed financial statements.

6



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##### 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) is a worldwide leader in
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, cellular telephony systems and
emerging cable, satellite and fixed wireless broadband communications networks.
The Company operates in two business segments: the Personal Networking business
and Mindspeed Technologies, the Companys Internet infrastructure business.

On December 16, 2001, the Company entered into agreements with Washington Sub,
Inc. (Washington), currently a wholly-owned subsidiary of Conexant, and Alpha
Industries, Inc. (Alpha), a provider of radio frequency (RF) and microwave
integrated circuit products and solutions primarily for wireless
communications. Under the agreements, the Company will contribute to Washington
its wireless communications business, including its Newbury Park, California
gallium arsenide wafer fabrication facility, but excluding certain assets and
liabilities, and will distribute all the outstanding shares of Washington to
Conexant shareholders (the Wireless Spin-off). Immediately thereafter,
Washington will merge with and into Alpha, with Alpha as the surviving
corporation (the Merger). Completion of the Wireless Spin-off and the Merger
are subject to, among other things, regulatory approvals, a ruling by the
Internal Revenue Service (IRS) that the Wireless Spin-off qualifies as tax-free
and approval of the Merger by Alphas stockholders. Upon completion of the
Merger, Alpha will purchase Conexants semiconductor assembly and test
facility, located in Mexicali, Mexico, and certain related assets, for $150
million. The waiting period for the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 terminated on January 29, 2002. There can be no assurance that the
other regulatory approvals, the IRS ruling or the approval of the Merger by
Alphas stockholders will be obtained, or that the Wireless Spin-off and the
Merger will be successfully completed.

In September 2000, the Company announced a plan for
the separation of its
broadband access 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 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
March 31, 2002 and 2001 relate to the actual fiscal 2002 second quarter ended
March 29, 2002 and the actual fiscal 2001 second quarter ended March 30, 2001,
respectively.

Supplemental Cash Flow InformationCash paid for interest was $14.3 million and
$20.7 million for the six months ended March 31, 2002 and 2001, respectively.
Net income tax payments (refunds) for the six months ended March 31, 2002 and
2001 were $(6.5) million and $2.5 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

7



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##### Table of Contents



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

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 $285
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 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. |  | Supplemental Financial Statement Data
|-- |  | -------------------------------------

The refundable deposit, currently held by a wafer supplier under an agreement
for foundry capacity, is classified as a current asset as of March 31, 2002
because the Company expects the supplier to repay this deposit during fiscal
2002. The refundable deposit was included in other assets at September 30,
2001.

Inventories consist of the following (in thousands):

|                |  |           |        |               |  |   |         | 
|--------------- |  | --------- | ------ | ------------- |  | - | ------- | 
|                |  | March 31, |        | September 30,
|                |  | 2002      |        | 2001         
|                |  |           |        |              
|Raw materials   |  | $         | 7,678  |               |  | $ | 10,727  | 
|               
|               
|               
|               
|Work-in-process |  |           | 65,937 |               |  |   | 100,012 | 
|               
|               
|               
|               
|Finished goods  |  |           | 25,808 |               |  |   | 11,658  | 
|                |  |           |        |               |  |   |         | 
|                |  | $         | 99,423 |               |  | $ | 122,397 | 
|                |  |           |        |               |  |   |         | 



|3. |  | 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.

8



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##### Table of Contents



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



|4. |  | Comprehensive Income (Loss)
|-- |  | ---------------------------

Comprehensive income (loss) for the three months and six months ended March 31,
2002 and 2001 is as follows (in thousands):

|                          |                                                             |                          |          |                    |          |                  |          |        |          |      |          |        |          |   |          |         |          |  
|------------------------- | ----------------------------------------------------------- | ------------------------ | -------- | ------------------ | -------- | ---------------- | -------- | ------ | -------- | ---- | -------- | ------ | -------- | - | -------- | ------- | -------- | -
|                          |                                                             |                          |          | Three months ended |          | Six months ended
|                          |                                                             |                          |          | March 31,          |          | March 31,       
|                          |                                                             |                          |          |                    |          |                 
|                          |                                                             |                          |          | 2002               |          | 2001             |          | 2002   |          | 2001
|                          |                                                             |                          |          |                    |          |                  |          |        |          |     
|Net loss                  |                                                             | $                        | (200,702 | )                  |          | $                | (262,011 | )      |          | $    | (405,192 | )      |          | $ | (461,587 | )      
|                         
|                         
|                         
|                         
|Other comprehensive loss: |                                                             |                          |          |                    |          |                  |          |        |          |      |          |        |          |   |          |        
|                         
|                         
|                         
|                         
|                          | Foreign currency translation adjustments                    |                          |          | (6,001             | )        |                  |          | (8,097 | )        |      |          | (8,450 | )        |   |          | (16,369 | )       
|                         
|                         
|                         
|                         
|                          | Change in unrealized gains on available-for-sale securities |                          |          | (1,731             | )        |                  |          | (1,998 | )        |      |          | (2,866 | )        |   |          | (52,566 | )       
|                         
|                         
|                         
|                         
|                          | Change in unrealized gains on forward exchange contracts    |                          |          | 153                |          |                  |          | 220    |          |      |          | 43     |          |   |          | 291     |         
|                         
|                         
|                         
|                         
|                          | Effect of income taxes                                      |                          |          | 754                |          |                  |          | 756    |          |      |          | 1,251  |          |   |          | 20,168  |         
|                          |                                                             |                          |          |                    |          |                  |          |        |          |      |          |        |          |   |          |        
|                          |                                                             | Other comprehensive loss |          |                    | (6,825   | )                |          |        | (9,119   | )    |          |        | (10,022  | ) |          |         | (48,476  | )
|                          |                                                             |                          |          |                    |          |                  |          |        |          |      |          |        |          |   |          |        
|                          |                                                             | Comprehensive loss       |          | $                  | (207,527 | )                |          | $      | (271,130 | )    |          | $      | (415,214 | ) |          | $       | (510,063 | )
|                          |                                                             |                          |          |                    |          |                  |          |        |          |      |          |        |          |   |          |        

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

|                                                                       |                                      |   |           |         |               |   |         |         |  
|---------------------------------------------------------------------- | ------------------------------------ | - | --------- | ------- | ------------- | - | ------- | ------- | -
|                                                                       |                                      |   | March 31, |         | September 30,
|                                                                       |                                      |   | 2002      |         | 2001         
|                                                                       |                                      |   |           |         |              
|Unrealized gains (losses) on available-for-sale securities, net of tax |                                      | $ | (24       | )       |               | $ | 1,591   |        
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Unrealized losses on forward exchange contracts                        |                                      |   |          |         |               |   | (43     | )      
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Foreign currency translation adjustments                               |                                      |   | (27,202   | )       |               |   | (18,752 | )      
|                                                                       |                                      |   |           |         |               |   |         |        
|                                                                       | Accumulated other comprehensive loss |   | $         | (27,226 | )             |   | $       | (17,204 | )
|                                                                       |                                      |   |           |         |               |   |         |        



|5. |  | Special Charges
|-- |  | ---------------

During the first six months of fiscal 2002, the Company recorded restructuring
charges aggregating $4.7 million principally relating to additional workforce
reductions and facility consolidation costs. The charges were based on the
estimated cost of severance benefits for approximately 300 affected employees
and lease cancellation and related costs. The actions reduced the Companys
workforce in both the Personal Networking and Mindspeed Technologies segments,
including approximately 100 affected employees at our former El Paso, Texas
board-level sub-assembly business. Activity and liability balances related to
restructuring actions through March 31, 2002 are as follows (in thousands):

|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|----------------------------------------- |  | ---------- | ------ | --------- |  | ----- | ------ | - |  | - | ------ | -
|                                          |  | Workforce  |        | Facility  |  |       |        |  
|                                          |  | reductions |        | and other |  | Total
|                                          |  |            |        |           |  |      
|Restructuring balance, September 30, 2001 |  | $          | 6,095  |           |  | $     | 5,361  |   |  | $ | 11,456 |  
|                                         
|                                         
|                                         
|                                         
|Charged to costs and expenses             |  |            | 4,310  |           |  |       | 343    |   |  |   | 4,653  |  
|                                         
|                                         
|                                         
|                                         
|Cash payments                             |  |            | (6,190 | )         |  |       | (1,465 | ) |  |   | (7,655 | )
|                                         
|                                         
|                                         
|                                         
|Non-cash costs                            |  |            | (322   | )         |  |       | (287   | ) |  |   | (609   | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, March 31, 2002     |  | $          | 3,893  |           |  | $     | 3,952  |   |  | $ | 7,845  |  
|                                          |  |            |        |           |  |       |        |   |  |   |        |  

A majority of the amounts accrued for these actions are expected to be paid
within one year. 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.

During the first six months of fiscal 2002, the Company recorded an impairment
charge of $13.0 million in the Personal Networking segment to write down the
value of the goodwill related to its digital imaging business. The impairment
resulted from the Companys decision to exit the digital imaging business and
the adoption of a plan to dispose of the related assets. Management evaluated
the recoverability of the assets of the digital imaging business to determine
if their value was impaired. The amount of the impairment charge was determined
by comparing the assets estimated fair values, less costs to sell, to their
carrying values. Management believes the assumptions used in estimating the
fair values are reasonable and approximate the amounts that will be realized
upon the ultimate sale or disposition of the related assets. The write-down
established a new cost basis for the impaired assets. The Company also recorded
impairment charges totaling $4.6 million associated with certain technology
assets included in the Mindspeed Technologies segment that management had
determined to abandon or sell.

9



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##### Table of Contents



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

Special charges for the first six months of fiscal 2001 consisted of $12.2
million of costs related to the previously announced separation of the
Mindspeed Technologies business from Conexant and $7.6 million for
restructuring charges, principally related to workforce reductions.



|6. |  | Sales of Assets
|-- |  | ---------------

In March 2002, the Company and The Carlyle Group
formed a new specialty foundry company called Jazz Semiconductor, 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 Semiconductor.
In connection with this transaction, the Company received $19.3 million in cash
and the 45% equity interest in Jazz Semiconductor, 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
Semiconductor 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). The warrant had a fair value of $14.2 million, determined by an
independent valuation specialist.

This transaction resulted in a $2.6 million gain, which represents 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 Semiconductor. The
Company will account for its investment in Jazz Semiconductor under the equity
method of accounting.

The Company expects to purchase a substantial portion of its requirements for
silicon-based semiconductor products from Jazz Semiconductor. During the first
two years of the long-term supply arrangement with Jazz Semiconductor, 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. 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 Semiconductor.

In December 2001, the Company sold two buildings for net proceeds of $19.3
million. A $2.1 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 $7.8
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).



|7. |  | Segment Information
|-- |  | -------------------

The Company operates and tracks its results in two reportable segmentsPersonal
Networking and Mindspeed Technologies. The Personal Networking segment designs,
develops and sells semiconductor system solutions for two general personal
communications applications marketswireless communications and broadband
access. For segment reporting purposes, these product groups have been
aggregated because of their common characteristics and their reliance on shared
operating functions. Mindspeed Technologies designs, develops and sells
semiconductor networking solutions that facilitate the aggregation,
transmission and switching of data, video and voice from the edge of the
Internet to linked metropolitan area networks and long-haul networks.

The Company evaluates segment performance based on segment operating income
(loss) excluding 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
incurred in connection with the proposed separation of the broadband access and
Mindspeed Technologies businesses.

10



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##### Table of Contents



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

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

|                                  |                        |                |        |                    |         |                  |        |          |          |      |         |          |          |   |         |          |          |  
|--------------------------------- | ---------------------- | -------------- | ------ | ------------------ | ------- | ---------------- | ------ | -------- | -------- | ---- | ------- | -------- | -------- | - | ------- | -------- | -------- | -
|                                  |                        |                |        | Three months ended |         | Six months ended
|                                  |                        |                |        | March 31,          |         | March 31,       
|                                  |                        |                |        |                    |         |                 
|                                  |                        |                |        | 2002               |         | 2001             |        | 2002     |          | 2001
|                                  |                        |                |        |                    |         |                  |        |          |          |     
|Net revenues:                     |                        |                |        |                    |         |                  |        |          |          |      |         |          |          |   |         |         
|                                 
|                                 
|                                 
|                                 
|                                  | Personal Networking    |                | $      | 222,013            |         |                  | $      | 169,718  |          |      | $       | 437,354  |          |   | $       | 414,174  |         
|                                 
|                                 
|                                 
|                                 
|                                  | Mindspeed Technologies |                |        | 19,018             |         |                  |        | 81,285   |          |      |         | 33,196   |          |   |         | 247,190  |         
|                                  |                        |                |        |                    |         |                  |        |          |          |      |         |          |          |   |         |         
|                                  |                        | Segment totals |        | $                  | 241,031 |                  |        | $        | 251,003  |      |         | $        | 470,550  |   |         | $        | 661,364  |  
|                                  |                        |                |        |                    |         |                  |        |          |          |      |         |          |          |   |         |          |         
|                                 
|                                 
|                                 
|                                 
|Operating loss:                   |                        |                |        |                    |         |                  |        |          |          |      |         |          |          |   |         |         
|                                 
|                                 
|                                 
|                                 
|                                  | Personal Networking    |                | $      | (30,241            | )       |                  | $      | (213,090 | )        |      | $       | (76,052  | )        |   | $       | (319,442 | )       
|                                 
|                                 
|                                 
|                                 
|                                  | Mindspeed Technologies |                |        | (50,604            | )       |                  |        | (86,476  | )        |      |         | (106,232 | )        |   |         | (62,793  | )       
|                                  |                        |                |        |                    |         |                  |        |          |          |      |         |          |          |   |         |         
|                                  |                        | Segment totals |        |                    | (80,845 | )                |        |          | (299,566 | )    |         |          | (182,284 | ) |         |          | (382,235 | )
|                                 
|                                 
|                                 
|                                 
|Amortization of intangible assets |                        |                | 90,095 |                    |         |                  | 84,040 |          |          |      | 179,702 |          |          |   | 166,344 |         
|                                 
|                                 
|                                 
|                                 
|Special charges                   |                        |                | 21,384 |                    |         |                  | 11,848 |          |          |      | 22,384  |          |          |   | 19,775  |         
|                                 
|                                 
|                                 
|                                 
|Stock compensation                |                        |                | 452    |                    |         |                  | 2,219  |          |          |      | 2,779   |          |          |   | 4,706   |         
|                                  |                        |                |        |                    |         |                  |        |          |          |      |         |          |          |   |         |         
|                                  | Operating loss         |                | $      | (192,776           | )       |                  | $      | (397,673 | )        |      | $       | (387,149 | )        |   | $       | (573,060 | )       
|                                  |                        |                |        |                    |         |                  |        |          |          |      |         |          |          |   |         |          |         

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

|                               |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         | 
|------------------------------ |  | ------------------ | ------- | ---------------- |  | ---- | ------- | ---- |  | - | ------- |  |  | - | ------- | 
|                               |  | Three months ended |         | Six months ended
|                               |  | March 31,          |         | March 31,       
|                               |  |                    |         |                 
|                               |  | 2002               |         | 2001             |  | 2002 |         | 2001
|                               |  |                    |         |                  |  |      |         |     
|Americas                       |  | $                  | 36,441  |                  |  | $    | 87,075  |      |  | $ | 65,318  |  |  | $ | 246,041 | 
|                              
|                              
|                              
|                              
|Europe, Middle East and Africa |  |                    | 31,222  |                  |  |      | 32,620  |      |  |   | 51,172  |  |  |   | 93,437  | 
|                              
|                              
|                              
|                              
|Japan                          |  |                    | 12,444  |                  |  |      | 10,956  |      |  |   | 25,756  |  |  |   | 37,288  | 
|                              
|                              
|                              
|                              
|Asia-Pacific                   |  |                    | 160,924 |                  |  |      | 120,352 |      |  |   | 328,304 |  |  |   | 284,598 | 
|                               |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         | 
|                               |  | $                  | 241,031 |                  |  | $    | 251,003 |      |  | $ | 470,550 |  |  | $ | 661,364 | 
|                               |  |                    |         |                  |  |      |         |      |  |   |         |  |  |   |         | 

For the six months ended March 31, 2002, one customer accounted for 20% of net
revenues; no customer accounted for 10% or more of the Companys net revenues for
the six months ended March 31, 2001.

11



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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 are a worldwide leader in 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, cellular
telephony systems and emerging cable, satellite and fixed wireless broadband
communications networks. We operate in two business segments: the Personal
Networking business and Mindspeed Technologies, our Internet infrastructure
business.

Our Personal Networking business designs, develops and sells semiconductor
system solutions for wireless communications and broadband access applications.
Our wireless communications products are comprised of components, subsystems,
and system-level semiconductor solutions for wireless voice and data
applications supporting the worlds most widely-adopted wireless standards,
including code division multiple access (CDMA), time division multiple access
(TDMA) and global system for mobile communications (GSM). Our wireless
communications products include power amplifier modules, radio frequency
components and subsystems, and complete cellular systems for digital cellular
handsets and base stations as well as advanced mobile terminals that support
next-generation multimedia and high-speed web browsing. Our broadband access
products include semiconductor 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 and our foundation analog communication products such as PC data
and fax modems.

Mindspeed Technologies designs, develops and sells semiconductor networking
solutions that facilitate the aggregation, transmission and switching of data,
video and voice from the edge of the Internet to linked metropolitan area
networks and long-haul 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: wide area network (WAN) access products and WAN
transport products. WAN access products include multi-service access gateway
solutions, including voice-over-Internet protocol, and a broad family of
multi-megabit digital subscriber line (DSL) products that are used in a variety
of network access platforms such as remote access concentrators, voice
gateways, digital loop carriers, DSL access multiplexers and integrated access
devices. WAN transport products include T/E carrier, asynchronous transfer mode
(ATM), and synchronous optical networking (SONET)/synchronous digital hierarchy
(SDH) transceivers, switch products, network processors and software
subsystems. Our customers use these solutions in a variety of network
equipment, including high-speed routers, ATM switches, optical switches,
add-drop multiplexers, digital cross-connect systems and dense wave division
multiplexer equipment.

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 15% of net
revenues in the first six months of fiscal 2002. One customer accounted for 20%
of our net revenues in the first six 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 72% of net revenues for the first six months of fiscal
2002. Revenues derived from customers located in the Americas, Europe, Japan
and the Asia-Pacific region were 14%, 11%, 5% and 70%, respectively, of our net
revenues for the first six 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.

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Newport Foundry Joint Venture

In March 2002, we and The Carlyle Group formed a
new specialty foundry company called Jazz
Semiconductor, 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 Semiconductor. We also issued to Jazz Semiconductor a warrant to
purchase 2.9 million shares of Conexant common stock (at a price of $13.05 per
share). 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 Semiconductor. We entered into a
long-term supply arrangement with Jazz Semiconductor 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.

Spin-off and Merger of Wireless Communications Business

On December 16, 2001, we entered into agreements with Washington Sub, Inc.
(Washington), currently a wholly-owned subsidiary of ours, and Alpha
Industries, Inc. (Alpha), a provider of radio frequency (RF) and microwave
integrated circuit products and solutions principally for wireless
communications. Under the agreements, we will contribute to Washington our
wireless communications business, including our Newbury Park, California
gallium arsenide wafer fabrication facility, but excluding certain assets and
liabilities, and will distribute all the outstanding shares of Washington to
our shareholders (the Wireless Spin-off). Immediately thereafter, Washington
will merge with and into Alpha, with Alpha as the surviving corporation (the
Merger). Completion of the Wireless Spin-off and the Merger are subject to,
among other things, regulatory approvals, a ruling by the Internal Revenue
Service (IRS) that the Wireless Spin-off qualifies as tax-free and approval of
the Merger by Alphas stockholders. Upon completion of the Merger, Alpha will
purchase our semiconductor assembly and test facility, located in Mexicali,
Mexico, and certain related assets, for $150 million. The waiting period for
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 terminated on January
29, 2002. We cannot assure you that the other regulatory approvals, the IRS
ruling or the approval of the Merger by Alphas stockholders will be obtained,
or that we will successfully complete the Wireless Spin-off and the Merger.

Separation of Mindspeed Technologies Business from Conexant

In September 2000, we announced a plan for the separation of our broadband
access 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.

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. Wireless communications net revenues for fiscal 2001 reflect
a deterioration in the digital cellular handset market, as compared with fiscal
2000, which resulted from excess channel inventories due to a slowdown in
demand for cellular phones and a slower transition to next-generation phones.
In addition, sales of our broadband access 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.

13



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##### Table of Contents



During the first six months of fiscal 2002, our Personal Networking segment saw
strong demand for our wireless communications product portfolio and improved
demand in a number of the markets addressed by our broadband access 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 second
quarter of fiscal 2002 represents the third consecutive quarter of sequential
revenue growth in our wireless communications and broadband access businesses.
Also during the second quarter of fiscal 2002, our Mindspeed Technologies
segment achieved sequential revenue growth of 34% over the preceding quarter.
For the third quarter of fiscal 2002, we expect sequential revenue growth of
three to five percent from the immediately preceding quarter. We anticipate that
our gross margin will continue to improve to approximately 38 percent and we
expect a sequential improvement of 15% in the level of our pro forma operating
loss in the third quarter of fiscal 2002.

Net Revenues

The following table summarizes our net revenues:

|                                 |                           |                |       |                    |   |                |       |             |   |         |       |       |   |  |   |    |   |  |    |     |    | 
|-------------------------------- | ------------------------- | -------------- | ----- | ------------------ | - | -------------- | ----- | ----------- | - | ------- | ----- | ----- | - |  | - | -- | - |  | -- | --- | -- | 
|                                 |                           |                |       | Three months ended |   | Change from    |       | Change from
|                                 |                           |                |       |                    |   | Dec. 2001      |       | Mar. 2001  
|(in
millions)                    |                           | March 31, 2002 |       | December 31, 2001  |   | March 31, 2001 |       | quarter     |   | quarter
|                                 |                           |                |       |                    |   |                |       |             |   |         |       |      
|Net revenues:                    |                           |                |       |                    |   |                |       |             |   |         |       |       |   |  |   |    |   |  |    |    
|                                
|                                
|                                
|                                
|Personal Networking:             |                           |                |       |                    |   |                |       |             |   |         |       |       |   |  |   |    |   |  |    |    
|                                
|                                
|                                
|                                
|                                 | Wireless communications   |                | $     | 95.1               |   |                | $     | 92.3        |   |         | $     | 56.3  |   |  |   | 3  | % |  |    | 69  | % 
|                                
|                                
|                                
|                                
|                                 | Broadband access          |                |       | 126.9              |   |                |       | 123.0       |   |         |       | 113.4 |   |  |   | 3  | % |  |    | 12  | % 
|                                 |                           |                |       |                    |   |                |       |             |   |         |       |       |   |  |   |    |   |  |    |    
|                                 | Total Personal Networking |                |       | 222.0              |   |                |       | 215.3       |   |         |       | 169.7 |   |  |   | 3  | % |  |    | 31  | % 
|                                
|                                
|                                
|                                
|                                 | Mindspeed Technologies    |                |       | 19.0               |   |                |       | 14.2        |   |         |       | 81.3  |   |  |   | 34 | % |  |    | (77 | )%
|                                 |                           |                |       |                    |   |                |       |             |   |         |       |       |   |  |   |    |   |  |    |    
|                                 |                           | $              | 241.0 |                    |   | $              | 229.5 |             |   | $       | 251.0 |       |   |  | 5 | %  |   |  | (4 | )% 
|                                 |                           |                |       |                    |   |                |       |             |   |         |       |       |   |  |   |    |   |  |    |    
|                                
|                                
|                                
|                                
|As a percentage of net revenues: |                           |                |       |                    |   |                |       |             |   |         |       |       |   |  |   |    |   |  |    |    
|                                
|                                
|                                
|                                
|Personal Networking:             |                           |                |       |                    |   |                |       |             |   |         |       |       |   |  |   |    |   |  |    |    
|                                
|                                
|                                
|                                
|                                 | Wireless communications   |                |       | 39                 | % |                |       | 40          | % |         |       | 23    | % |  |   |    |   |  |    |     |   
|                                
|                                
|                                
|                                
|                                 | Broadband access          |                |       | 53                 | % |                |       | 54          | % |         |       | 45    | % |  |   |    |   |  |    |     |   
|                                 |                           |                |       |                    |   |                |       |             |   |         |       |       |   |  |   |    |   |  |    |    
|                                 | Total Personal Networking |                |       | 92                 | % |                |       | 94          | % |         |       | 68    | % |  |   |    |   |  |    |     |   
|                                
|                                
|                                
|                                
|                                 | Mindspeed Technologies    |                |       | 8                  | % |                |       | 6           | % |         |       | 32    | % |  |   |    |   |  |    |     |   
|                                 |                           |                |       |                    |   |                |       |             |   |         |       |       |   |  |   |    |   |  |    |    
|                                 |                           |                | 100   | %                  |   |                | 100   | %           |   |         | 100   | %     |   |  |   |    |   |  |    |    
|                                 |                           |                |       |                    |   |                |       |             |   |         |       |       |   |  |   |    |   |  |    |    

|                                 |                           |   |       |                            |   |      |       |        |   |  |     |     |    | 
|-------------------------------- | ------------------------- | - | ----- | -------------------------- | - | ---- | ----- | ------ | - |  | --- | --- | -- | 
|                                 |                           |   |       | Six months ended March 31, |   |      |       |       
|                                 |                           |   |       |                            |   |      |       |       
|                                 |                           |   |       | 2002                       |   | 2001 |       | Change
|                                 |                           |   |       |                            |   |      |       |       
|Net revenues:                    |                           |   |       |                            |   |      |       |        |   |  |     |    
|                                
|                                
|                                
|                                
|Personal Networking:             |                           |   |       |                            |   |      |       |        |   |  |     |    
|                                
|                                
|                                
|                                
|                                 | Wireless communications   |   | $     | 187.5                      |   |      | $     | 140.2  |   |  |     | 34  | % 
|                                
|                                
|                                
|                                
|                                 | Broadband access          |   |       | 249.9                      |   |      |       | 274.0  |   |  |     | (9  | )%
|                                 |                           |   |       |                            |   |      |       |        |   |  |     |    
|                                 | Total Personal Networking |   |       | 437.4                      |   |      |       | 414.2  |   |  |     | 6   | % 
|                                
|                                
|                                
|                                
|                                 | Mindspeed Technologies    |   |       | 33.2                       |   |      |       | 247.2  |   |  |     | (87 | )%
|                                 |                           |   |       |                            |   |      |       |        |   |  |     |    
|                                 |                           | $ | 470.6 |                            |   | $    | 661.4 |        |   |  | (29 | )% 
|                                 |                           |   |       |                            |   |      |       |        |   |  |     |    
|                                
|                                
|                                
|                                
|As a percentage of net revenues: |                           |   |       |                            |   |      |       |        |   |  |     |    
|                                
|                                
|                                
|                                
|Personal Networking:             |                           |   |       |                            |   |      |       |        |   |  |     |    
|                                
|                                
|                                
|                                
|                                 | Wireless communications   |   |       | 40                         | % |      |       | 21     | % |  |     |     |   
|                                
|                                
|                                
|                                
|                                 | Broadband access          |   |       | 53                         | % |      |       | 42     | % |  |     |     |   
|                                 |                           |   |       |                            |   |      |       |        |   |  |     |    
|                                 | Total Personal Networking |   |       | 93                         | % |      |       | 63     | % |  |     |     |   
|                                
|                                
|                                
|                                
|                                 | Mindspeed Technologies    |   |       | 7                          | % |      |       | 37     | % |  |     |     |   
|                                 |                           |   |       |                            |   |      |       |        |   |  |     |    
|                                 |                           |   | 100   | %                          |   |      | 100   | %      |   |  |     |    
|                                 |                           |   |       |                            |   |      |       |        |   |  |     |    

Wireless Communications

Our wireless communications product revenues for the first six months of fiscal
2002, up 34% from the comparable period of fiscal 2001, reflect increased unit
shipments of our global system for mobile communications (GSM) cellular system
solutions. We also experienced increased demand for power amplifier modules for
both CDMA and GSM applications. These revenue increases were partially offset
by lower sales volume of 900MHz digital cordless telephone chipsets and by the
impact of the sale of our global positioning system (GPS) business to SiRF
Technology, Inc. in the third quarter of fiscal 2001.

In our second quartera period generally characterized by seasonally weak
demandwe continued to experience strong demand across our major wireless
communications product lines. As a result, in the fiscal 2002 second quarter we
achieved a 3% increase in wireless communications revenues compared with the
immediately preceding

14



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##### Table of Contents



quarter, driven by market share gains in power amplifiers, strength in radio
frequency subsystems, and record unit shipments of complete GSM general packet
radio service (GPRS) cellular system solutions.

Broadband Access

Our broadband access product revenues for the first six months of fiscal 2002
were 9% lower than the comparable period of fiscal 2001. The decline reflects
relatively weaker end-market demand for personal access products such as
set-top boxes, PCs, game consoles and fax machines compared with the same
period in fiscal 2001. Consequently, our broadband access net revenues for the
first six months of fiscal 2002 reflect lower unit shipments of our analog
dial-up modems and our satellite set-top box tuners and demodulators. These
declines were partially offset by higher sales of media processing products,
including our broadcast video encoder/decoder and set-top box MPEG 2 solutions.

While revenue comparisons on a year-over-year basis remain unfavorable, our
broadband access revenues for the fiscal 2002 second quarter increased 3% over
the immediately preceding quarterthe third consecutive quarter of sequential
revenue growthdriven by sustained demand for our PC data and fax modems, and
increased demand for digital media gateway products, including asymmetric
digital subscriber line (ADSL) and cable modems, as well as set-top box and
home networking solutions.

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 has been 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 six months of fiscal 2002 compared with the comparable fiscal 2001 period
reflect lower sales volume across the majority of our WAN access and WAN
transport products, including multi-service access processors, multi-megabit
DSL and optical networking physical media devices, and transceivers.

In the fiscal 2002 second quarter, net revenues for Mindspeed Technologies
showed sequential revenue growth of 34% over the immediately preceding quarter.
While revenue growth was strongest among our WAN transport product lines, we
experienced revenue growth across each of our key access product families.

Gross Margin

|                        |  |                    |      |                   |  |                |      |         |  |         |       |    |  |  |    |   |  |    |  | 
|----------------------- |  | ------------------ | ---- | ----------------- |  | -------------- | ---- | ------- |  | ------- | ----- | -- |  |  | -- | - |  | -- |  | 
|                        |  | Three months ended |      | Change from       |  | Change from   
|                        |  |                    |      | Dec. 2001         |  | Mar. 2001     
|(in millions)           |  | March 31, 2002     |      | December 31, 2001 |  | March 31, 2001 |      | Quarter |  | Quarter
|                        |  |                    |      |                   |  |                |      |         |  |        
|Gross margin            |  | $                  | 87.6 |                   |  | $              | 63.5 |         |  | $       | (83.2 | )  |  |  | 38 | % |  | nm
|                       
|                       
|                       
|                       
|Percent of net revenues |  |                    | 36   | %                 |  |                | 28   | %       |  |         | (33   | )% |  |  |    |   |  |    |  | 

|                        |  |                            |       |      |  |        |      |   |  |  |     |  
|----------------------- |  | -------------------------- | ----- | ---- |  | ------ | ---- | - |  |  | --- | -
|                        |  | Six months ended March 31, |       |      |  |       
|                        |  |                            |       |      |  |       
|                        |  | 2002                       |       | 2001 |  | Change
|                        |  |                            |       |      |  |       
|Gross margin            |  | $                          | 151.1 |      |  | $      | 30.6 |   |  |  | 394 | %
|                       
|                       
|                       
|                       
|Percent of net revenues |  |                            | 32    | %    |  |        | 5    | % |  |  |     |  



---

| |  | nm = not meaningful
| |  | -------------------

Cost of goods sold consists primarily of purchased materials, labor and
overhead (including depreciation) associated with product manufacturing,
royalty and other intellectual property costs, warranties and sustaining
engineering expenses pertaining to products sold. During the first six months
of fiscal 2002 our gross margin continued to be adversely affected by the
impact of lower revenues (down 29% from the comparable period of fiscal 2001)
on a base of relatively fixed manufacturing support costs, which was partially
offset by lower depreciation expense as a result of the write-down of
manufacturing assets in fiscal 2001. Gross margins for the second quarter and
first six months of fiscal 2001 included inventory write-downs of approximately
$148.6 million and $206.1 million, respectively.

When compared with the immediately preceding quarter, our gross margins for the
second quarter of fiscal 2002 improved from 28% to 36% of net revenues,
reflecting increased quarterly sales and higher utilization of our

15



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##### Table of Contents



manufacturing capacity. Gross margins for the first six months of fiscal 2002
were adversely impacted by provisions for excess and obsolete inventories of
$11.8 million and additional warranty costs of $14.0 million. The effect of
these charges was partially offset by the sale of approximately $32.8 million
of inventories that we had written down to a zero cost basis during fiscal year
2001.

The inventory write-downs we recorded in the first six months of fiscal 2001
resulted from the sharply reduced end-customer demand for PCs, Internet
infrastructure equipment and digital cellular handsets 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. The amount of the
write-down is the excess of historical cost over estimated realizable value
(generally zero). Once established, these write-downs are considered permanent
adjustments to the cost basis of the excess inventory.

As of March 31, 2002, we continue to hold inventories with an original cost of
approximately $138.8 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 Semiconductor. During the first
two years of the long-term supply arrangement with Jazz Semiconductor, 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. In the event
our actual wafer purchases are less than the required minimum volumes, we will
be required to make additional payments to Jazz Semiconductor, which would
adversely affect our gross margin.

Research and Development

|                         |  |                              |       |                            |  |      |     |      |  |        |       |      |  |   |       |   |  |  |    |    |  |   |       |  
|------------------------ |  | ---------------------------- | ----- | -------------------------- |  | ---- | --- | ---- |  | ------ | ----- | ---- |  | - | ----- | - |  |  | -- | -- |  | - | ----- | -
|                         |  | Three months ended March 31, |       | Six months ended March 31,
|                         |  |                              |       |                           
|(in millions)            |  | 2002                         |       | Change                     |  | 2001 |     | 2002 |  | Change |       | 2001
|                         |  |                              |       |                            |  |      |     |      |  |        |       |     
|Research and development |  | $                            | 114.9 |                            |  |      | (11 | )%   |  | $      | 128.9 |      |  | $ | 226.5 |   |  |  | (8 | )% |  | $ | 247.4 |  
|                        
|                        
|                        
|                        
|Percent of net revenues  |  |                              | 48    | %                          |  |      |     |      |  |        | 51    | %    |  |   | 48    | % |  |  |    |    |  |   | 37    | %

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 second quarter and first six 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.

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Selling, General and Administrative

|                                    |  |                              |      |                            |  |      |     |      |  |        |      |      |  |   |       |   |  |  |     |    |  |   |       |  
|----------------------------------- |  | ---------------------------- | ---- | -------------------------- |  | ---- | --- | ---- |  | ------ | ---- | ---- |  | - | ----- | - |  |  | --- | -- |  | - | ----- | -
|                                    |  | Three months ended March 31, |      | Six months ended March 31,
|                                    |  |                              |      |                           
|(in millions)                       |  | 2002                         |      | Change                     |  | 2001 |     | 2002 |  | Change |      | 2001
|                                    |  |                              |      |                            |  |      |     |      |  |        |      |     
|Selling, general and administrative |  | $                            | 54.0 |                            |  |      | (40 | )%   |  | $      | 89.7 |      |  | $ | 109.7 |   |  |  | (36 | )% |  | $ | 170.1 |  
|                                   
|                                   
|                                   
|                                   
|Percent of net revenues             |  |                              | 22   | %                          |  |      |     |      |  |        | 36   | %    |  |   | 23    | % |  |  |     |    |  |   | 26    | %

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 second quarter and first six
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.

Amortization of Intangible Assets

|                                  |  |                              |      |                            |  |      |   |      |  |        |      |      |  |   |       |  |  |  |   |   |  |   |       | 
|--------------------------------- |  | ---------------------------- | ---- | -------------------------- |  | ---- | - | ---- |  | ------ | ---- | ---- |  | - | ----- |  |  |  | - | - |  | - | ----- | 
|                                  |  | Three months ended March 31, |      | Six months ended March 31,
|                                  |  |                              |      |                           
|(in millions)                     |  | 2002                         |      | Change                     |  | 2001 |   | 2002 |  | Change |      | 2001
|                                  |  |                              |      |                            |  |      |   |      |  |        |      |     
|Amortization of intangible assets |  | $                            | 90.1 |                            |  |      | 7 | %    |  | $      | 84.0 |      |  | $ | 179.7 |  |  |  | 8 | % |  | $ | 166.3 | 

The higher amortization expenses in the second quarter and first six months of
fiscal 2002 primarily resulted from the additional consideration paid
subsequent to March 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.

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 $285 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

During the first six months of fiscal 2002, we recorded restructuring charges
aggregating $4.7 million principally relating to additional workforce
reductions and facility consolidation costs. The charges were based on the
estimated cost of severance benefits for approximately 300 affected employees
and lease cancellation and related costs. The actions reduced our workforce in
both our Mindspeed Technologies and Personal Networking segments, including
approximately 100 affected employees at our former El Paso, Texas board-level
sub-assembly business. Activity and liability balances related to restructuring
actions through March 31, 2002 are as follows (in thousands):

|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|----------------------------------------- |  | ---------- | ------ | --------- |  | ----- | ------ | - |  | - | ------ | -
|                                          |  | Workforce  |        | Facility  |  |       |        |  
|                                          |  | reductions |        | and other |  | Total
|                                          |  |            |        |           |  |      
|Restructuring balance, September 30, 2001 |  | $          | 6,095  |           |  | $     | 5,361  |   |  | $ | 11,456 |  
|                                         
|                                         
|                                         
|                                         
|Charged to costs and expenses             |  |            | 4,310  |           |  |       | 343    |   |  |   | 4,653  |  
|                                         
|                                         
|                                         
|                                         
|Cash payments                             |  |            | (6,190 | )         |  |       | (1,465 | ) |  |   | (7,655 | )
|                                         
|                                         
|                                         
|                                         
|Non-cash costs                            |  |            | (322   | )         |  |       | (287   | ) |  |   | (609   | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, March 31, 2002     |  | $          | 3,893  |           |  | $     | 3,952  |   |  | $ | 7,845  |  
|                                          |  |            |        |           |  |       |        |   |  |   |        |  

We expect to pay a majority of the amounts accrued for these actions within one
year. 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 $20 million
annually.

During the first six months of fiscal 2002, we recorded an impairment charge of
$13.0 million to write down the value of the goodwill related to our digital
imaging business. The impairment resulted from our decision to exit the digital
imaging business and our adoption of a plan to dispose of the related assets.
We evaluated the recoverability of the digital imaging assets to determine if
the value of the assets was impaired. We determined the amount of the
impairment charge by comparing the assets estimated fair values, less costs to
sell, to their carrying values. We

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believe the assumptions used in estimating the fair values are reasonable and
approximate the amounts that will be realized upon the ultimate sale or
disposition of the related assets. The write-down established a new cost basis
for the impaired assets. We also recorded impairment charges aggregating $4.6
million associated with certain technology assets in the Mindspeed Technologies
segment that management determined to abandon or sell.

Special charges for the first six months of fiscal 2001 consisted of $12.2
million of costs related to the previously announced separation of our
Mindspeed Technologies business from Conexant and $7.6 million for
restructuring charges, principally related to workforce reductions.

Debt Conversion Costs

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 March 31, |      | Six months ended March 31,
|                   |  |                              |      |                           
|(in millions)      |  | 2002                         |      | Change                     |  | 2001 |     | 2002 |  | Change |      | 2001
|                   |  |                              |      |                            |  |      |     |      |  |        |      |     
|Other expense, net |  | $                            | (6.8 | )                          |  |      | 566 | %    |  | $      | (1.0 | )    |  | $ | (15.9 | ) |  |  | 196 | % |  | $ | (5.4 | )

Other expense, net for the first six months of fiscal 2002 is comprised
primarily of interest expense on our convertible subordinated notes and $7.7
million of write-offs of certain non-marketable investments (including $2.0
million in the fiscal 2002 second quarter), which we determined to be
permanently impaired, partially offset by interest income on invested cash
balances and gains on sales of assets.

Other expense, net for the first six months of fiscal 2001 is comprised
primarily of a $5.0 million write-off of certain non-marketable investments,
which we determined to be permanently impaired, and net interest expense.

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 six 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
for income taxes for the second quarter and first six months of fiscal 2002
consists of foreign income taxes incurred by certain of our subsidiaries. For
the first six months of fiscal 2001, we recorded an income tax benefit of
$152.2 million (24.5% of pretax loss), which reflects our net loss and the
impact of non-deductible debt conversion costs and amortization of intangible
assets.

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 accompanying statement of operations as an extraordinary item, net of
incomes taxes of $4.4 million.

Pro Forma Earnings

Pro forma loss before extraordinary item and pro forma loss per share before
extraordinary item exclude the amortization of intangible assets, special
charges, stock compensation and certain non-operating gains and losses. We
believe these measures of earnings provide a better understanding of our
underlying operating results and we use these measures internally to evaluate
our operating performance. These measures of earnings are not in accordance
with, or an alternative for, generally accepted accounting principles and may
be different from pro forma measures used by other companies.

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Pro forma loss before extraordinary item and pro forma loss per share before
extraordinary item are calculated as follows:

|                                                                      |                                          |      |                    |         |                  |      |          |          |   |   |          |          |   |   |          |          |  
|--------------------------------------------------------------------- | ---------------------------------------- | ---- | ------------------ | ------- | ---------------- | ---- | -------- | -------- | - | - | -------- | -------- | - | - | -------- | -------- | -
|                                                                      |                                          |      | Three months ended |         | Six months ended
|                                                                      |                                          |      | March 31,          |         | March 31,       
|                                                                      |                                          |      |                    |         |                 
|(in thousands, except per share data)                                 |                                          | 2002 |                    | 2001    |                  | 2002 |          | 2001    
|                                                                      |                                          |      |                    |         |                  |      |          |          |  
|Loss before extraordinary item                                        |                                          | $    | (200,702           | )       |                  | $    | (262,011 | )        |   | $ | (405,192 | )        |   | $ | (468,871 | )       
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Amortization of intangible assets                                     |                                          |      | 90,095             |         |                  |      | 84,040   |          |   |   | 179,702  |          |   |   | 166,344  |         
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Special charges                                                       |                                          |      | 21,384             |         |                  |      | 11,848   |          |   |   | 22,384   |          |   |   | 19,775   |         
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Stock compensation                                                    |                                          |      | 452                |         |                  |      | 2,219    |          |   |   | 2,779    |          |   |   | 4,706    |         
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Equity in losses of equity method investees                           |                                          |      | 1,113              |         |                  |      |         |          |   |   | 1,862    |          |   |   |         |         
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Gains on sales of assets                                              |                                          |      | (2,613             | )       |                  |      |         |          |   |   | (5,150   | )        |   |   |         |         
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Write-down of investments                                             |                                          |      | 2,000              |         |                  |      |         |          |   |   | 7,675    |          |   |   | 5,000    |         
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Debt conversion costs                                                 |                                          |      |                   |         |                  |      |         |          |   |   |         |          |   |   | 42,584   |         
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Income taxes                                                          |                                          |      |                   |         |                  |      | (23,550  | )        |   |   |         |          |   |   | (14,409  | )       
|                                                                      |                                          |      |                    |         |                  |      |          |          |   |   |          |          |   |   |          |         
|                                                                      | Pro forma loss before extraordinary item |      | $                  | (88,271 | )                |      | $        | (187,454 | ) |   | $        | (195,940 | ) |   | $        | (244,871 | )
|                                                                      |                                          |      |                    |         |                  |      |          |          |   |   |          |          |   |   |          |         
|Pro forma loss per share before
extraordinary item, basic and diluted |                                          | $    | (0.34              | )       |                  | $    | (0.77    | )        |   | $ | (0.77    | )        |   | $ | (1.02    | )       
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Shares used in per share computation                                  |                                          |      | 256,135            |         |                  |      | 243,515  |          |   |   | 255,249  |          |   |   | 239,813  |         

Special charges excluded from our pro forma results consist of asset
impairments, restructuring charges and separation costs incurred in connection
with the proposed separation of our broadband access and Mindspeed Technologies
businesses. Pro forma results also exclude stock compensation costs,
representing the amortization of the value of certain stock options we assumed
in connection with business acquisitions and the incremental cost that results
from the use of variable, rather than fixed, accounting for a stock-based
incentive compensation plan. Under variable accounting, the amount of
compensation expense we recognize for awards under the plan will fluctuate over
time based upon changes in the value of our common stock. Non-operating gains
and losses excluded from pro forma results consist of our equity in the losses
of investments accounted for under the equity method, gains on sales of assets,
the write-down of certain non-marketable investments and debt conversion costs.
For the first six months of fiscal 2001, the pro forma results reflect an
income tax benefit based upon a 36% effective tax rate.

Liquidity and Capital Resources

Our cash and cash equivalents decreased by $30.5 million during the first six
months of fiscal 2002. Cash used in operating activities was $105.5 million for
the fiscal 2002 period, compared to cash used in operating activities of $178.5
million for the comparable period in fiscal 2001. Operating cash flows reflect
our net loss of $405.2 million offset by noncash charges (depreciation and
amortization and other) of $267.1 million, and a net decrease in the non-cash
components of working capital of $32.6 million.

The fiscal 2002 working capital decreases include a $26.9 million decrease in
accounts receivable, principally due to our aggressive accounts receivable
collection efforts, a $22.8 million increase in accounts payable and a $3.7
million decrease in inventories. These working capital changes were partially
offset by a $10.1 million decrease in deferred revenues due to lower inventory
levels at our major distributors and changes in other assets and liabilities
totaling $10.9 million.

Cash provided by investing activities of $64.7 million for the first six months
of fiscal 2002 includes proceeds from net sales of marketable securities of
$49.3 million and proceeds from the sale of assets of $41.7 million. Capital
expenditures were $19.5 million, reflecting implementation of our cost
reduction initiatives. Other investing activities included equity investments
of $4.1 million and the payment of $2.7 million of contingent consideration for
a business acquired in fiscal 2000. Cash used in investing activities during
the first six months of fiscal 2001 consisted of net purchases of marketable
securities of $253.7 million, capital expenditures of $118.8 million, and
payments for investments, advances and acquisitions totaling $101.6 million.

Cash provided by financing activities of $10.2 million during the first six
months of fiscal 2002 consisted of proceeds from the exercise of stock options.
In the first six 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, offset by $10.6
million in proceeds from the exercise of stock options.

Our principal sources of liquidity are our existing cash reserves and
available-for-sale marketable securities and cash generated from operations. In
addition, we expect the repayment of a refundable deposit, currently held by a
vendor,

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will provide us an additional $150 million of liquidity in the middle of
calendar 2002. Combined cash and cash equivalents and marketable securities at
March 31, 2002 totaled $260.1 million compared to $338.9 million at September
30, 2001. Our working capital at March 31, 2002 was $455.2 million compared to
$442.4 million at September 30, 2001. The overall working capital change
principally reflects the reclassification of the refundable deposit to current
assets, offset by cash used in operations and cash payments for capital
expenditures and investments.

Upon completion of the Merger, Alpha will purchase our semiconductor assembly
and test facility, located in Mexicali, Mexico, and certain related assets, for
$150 million. We expect that Alpha will pay the purchase price by delivering to
us a short-term promissory note under which 50% of the principal will be
payable six months after the closing date, with the remainder payable nine
months after the closing date. The note will bear interest at specified rates
and will be secured by all current and future assets of Alpha and its
subsidiaries, including the stock of Alphas subsidiaries. We cannot assure you
that this transaction will be completed.

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 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. We have also reduced our planned capital expenditures based upon
our current revenue outlook.

We believe that our existing sources of liquidity, together with anticipated
cash flows from the return of a refundable deposit and cash expected to be
generated from operations will be sufficient to fund our operations, research
and development efforts and anticipated capital expenditures for at least the
next twelve months. Although reduced capital expenditures are a key component
of our realigned manufacturing and procurement strategy, we will need to
continue a focused program of capital expenditures to sustain our current
manufacturing capabilities and 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 renewed capital expenditures, increase our working
capital or complete any acquisitions, we may seek to obtain additional debt
financing or issue additional shares of our common stock. However, we cannot
assure you that such financing will be available to us on favorable terms, or
at all.

Recent Accounting Standards

See Note 1 of Notes to Consolidated Condensed Financial Statements.

Critical Accounting Policies

The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Among the significant estimates affecting our
combined 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.

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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.

Certain Business Risks

Our business, financial condition and operating results can be impacted by a
number of factors including, but not limited to, those set forth below, 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.

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

Our net revenues for the first six months of fiscal 2002 were $470.6 million
compared to $661.4 million for first six 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 a net loss of $405.2
million in the first six 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

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us to profitability. We expect that reduced end-customer demand,
underutilization of our manufacturing capacity, 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 fiscal 2002. 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 $245.1 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 $22.6 million of additional
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 Personal
Networking business, which are ultimately sold to individual consumers in
products such as PCs and digital cellular handsets.

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 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:
22Table of Contents



| |  |  | time-to-market;                        
| | - |  | ---------------------------------------
|
| |  |  | product performance;                   
|
| |  |  | level of integration;                  
|
| |  |  | price and total system cost;           
|
| |  |  | compliance with industry standards;    
|
| |  |  | design and engineering capabilities;   
|
| |  |  | strategic relationships with customers;
|
| |  |  | customer support;                      
|
| |  |  | new product innovation; and            
|
| |  |  | quality.                               

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.

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 is creating 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.

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

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, manufacture 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,
manufacture and sale of our products.

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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 22% and 15% of our net revenues for fiscal 2001 and the first
six months of fiscal 2002, respectively. We routinely purchase and manufacture
inventory based on estimates of end-market demand for our customers products,
which is difficult to predict. This difficulty may be compounded when we sell
to OEMs indirectly through distributors or contract manufacturers, or both, as
our forecasts of demand are then based on estimates provided by multiple
parties. In addition, our customers may change their inventory practices on
short notice for any reason. The cancellation or deferral of product orders,
the return of previously sold products or overproduction due to the failure of
anticipated orders to materialize could result in our holding excess or
obsolete inventory, which could result in write-downs of inventory.

During fiscal 2001, the communications electronics markets which we address
were characterized by dramatic decreases in end-user demand and 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 $245.1 million of inventory write-downs in
fiscal 2001.

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We currently are, and increasingly will be, 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 Semiconductor, a joint venture in which we hold 45% ownership. As a result
of this transaction, we are now dependent upon third parties, including Jazz
Semiconductor, for the manufacture of all CMOS wafers used in our products.
Moreover, upon completion of the Wireless Spin-off, we will contribute to
Washington our Newbury Park gallium arsenide wafer fabrication facility. Upon
completion of the Wireless Spin-off and Merger, we will be entirely dependent
upon outside wafer fabrication facilities (known as foundries), including Jazz
Semiconductor and Alpha, for wafer fabrication services. Under this fabless
business model, our long-term revenue growth will be 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 Semiconductor, to obtain external wafer manufacturing capacity.
In connection with the Wireless Spin-off and the Merger, we will also enter
into a supply agreement with Alpha 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. The foundries we use may experience
financial difficulties or suffer damage or destruction to their facilities,
particularly since many of them are located in earthquake zones. If these
events or any other disruption of wafer fabrication capacity occur, we may not
have a second manufacturing source immediately available. We may therefore
experience difficulties or delays in securing an adequate supply of our
products on favorable terms, or at all, which could impair our ability to meet
our customers needs and have a material adverse effect on our operating
results.

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

Currently, third-party subcontractors also assemble and test a substantial
portion of our products. Moreover, upon completion of the Wireless Spin-off and
the Merger, Alpha will purchase our Mexicali, Mexico assembly and test
facility. As a result, we will no longer have internal assembly and test
facilities and it will be necessary for us to obtain assembly and test services
from third-party subcontractors, including Alpha. Because we rely on others to
assemble and test our products, we are subject to many of the same risks as are
described above with respect to independent wafer fabrication facilities.

Our manufacturing processes are extremely complex and specialized.

Our manufacturing operations are complex and subject to disruption due to
causes beyond our control. The fabrication of integrated circuits is an
extremely complex and precise process consisting of hundreds of separate steps.
It requires production in a highly controlled, clean environment. Minute
impurities, errors in any step of the fabrication process, defects in the masks
used to print circuits on a wafer or a number of other factors can cause a
substantial percentage of wafers to be rejected or numerous die on each wafer
not to function.

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Our operations may be affected by lengthy or recurring disruptions of
operations at any of our production facilities or those of our subcontractors.
These disruptions may include labor strikes, work stoppages, electrical power
outages, fire, earthquake, flooding or other natural disasters. Certain of our
manufacturing facilities are located near major earthquake fault lines,
including our California and Mexico facilities. We maintain no earthquake
insurance coverage on these facilities. Disruptions of our or our
subcontractors manufacturing operations could cause significant delays in
shipments until we could shift the products from an affected facility or
subcontractor to another facility or subcontractor.

In the event of these types of delays, we cannot assure you that the required
alternate capacity, particularly wafer production capacity, would be available
on a timely basis or at all. Even if alternate wafer production capacity is
available, we may not be able to obtain it on favorable terms, which could
result in a loss of customers. We may be unable to obtain sufficient
manufacturing capacity to meet demand.

Due to the highly specialized nature of the gallium arsenide semiconductor
manufacturing process, in the event of a disruption at our Newbury Park,
California wafer fabrication facility, alternate gallium arsenide production
capacity would not be readily available from third-party sources. Although we
have a multi-year agreement with another foundry that guarantees us access to
additional gallium arsenide wafer production capacity, a disruption of
operations at our Newbury Park wafer fabrication facility or an interruption in
the supply of epitaxial wafers used in the gallium arsenide process could have
a material adverse effect on our business, financial condition and results of
operations, particularly with respect to our wireless communications products.

Other wafer manufacturing processes we rely on, including the silicon germanium
process, are also highly specialized. In the event of a disruption at Jazz
Semiconductor, we may be required to seek alternate specialty-process
production capacity from other third-party sources. These processes are
available from a limited number of third-party sources, including a foundry
partner to whom we recently licensed our silicon germanium process technology.
We cannot assure you that we would be able to obtain adequate external
specialty-process wafer manufacturing capacity on favorable terms, or at all.

We may not be able to achieve manufacturing yields that contribute positively
to our gross margin and profitability.

Our operating results are highly dependent upon our ability to produce
integrated circuits at acceptable manufacturing yields. Minor deviations in the
manufacturing process can cause substantial manufacturing yield loss, and in
some cases, cause production to be suspended. Manufacturing yields for new
products initially tend to be lower as we complete product development and
commence volume manufacturing, and will typically increase as we ramp to full
production. Our forward product pricing includes this assumption of improving
manufacturing yields and, as a result, material variances between projected and
actual manufacturing yields have a direct effect on our gross margin and
profitability. The difficulty of forecasting manufacturing yields accurately
and maintaining cost competitiveness through improving manufacturing yields
will continue to be magnified by the ever-increasing process complexity of
manufacturing semiconductor products. We also face pressures arising from the
compression of product life cycles which requires us to bring new products to
market faster and for shorter periods while maintaining acceptable
manufacturing yields and quality without, in many cases, reaching the
longer-term, high-volume manufacturing conducive to higher manufacturing yields
and declining costs.

We are dependent upon adequate supplies of raw materials and components.

We believe there are adequate sources for the supply of raw materials and
components for the manufacture of our products with suppliers located around
the world. We are currently dependent on two suppliers for epitaxial wafers
used in the gallium arsenide semiconductor manufacturing processes at our
Newbury Park facility. Although in the past the number of qualified alternative
suppliers for wafers has been limited and the process of qualifying a new wafer
supplier has required a substantial lead-time, more epitaxial wafer capacity
has recently become available and the supplier qualification process has become
less lengthy and complex. Nevertheless, while we historically have not
experienced any significant difficulties in obtaining an adequate supply of raw
materials, including epitaxial wafers, and components necessary for the
manufacture of our products, we cannot assure you that a significant supplier
may not be lost or that a supplier may be unable to meet performance and
quality specifications or delivery schedules.

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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 anticipated
cash flows from the return of a refundable deposit and 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 six months of fiscal 2002, approximately 71% and
89% 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 facilities and suppliers located outside the United States,
including our assembly and test facility in Mexicali, Mexico and third-party
foundries located in the Asia-Pacific region. Our international sales and
operations are subject to a number of risks inherent in selling and operating
abroad. These include, but are not limited to, risks regarding:



| |  |  | currency exchange rate fluctuations;                                                                                                                                          
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | local economic and political conditions;                                                                                                                                      
|
| |  |  | disruptions of capital and trading markets;                                                                                                                                   
|
| |  |  | restrictive governmental actions (such as restrictions on transfer of
funds and trade protection measures, including export duties and quotas
and customs duties and tariffs);

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| |  |  | 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, South Korea and Hong Kong, represented
approximately 56% and 75% of our net revenues in fiscal 2001 and the first six
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;
|
| |  |  | production capacity levels and 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;                                                                                   
|
| |  |  | the timing of receipt, reduction or cancellation of significant orders by customers; and                    
|
| |  |  | the timing and extent of product development costs.                                                         

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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, the reported sale price of our common
stock on the Nasdaq National Market has been as high as $132.50 and as low as
$6.57 per share. This price may be influenced by many factors, including:



| |  |  | our 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 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

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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.

We use a variety of chemicals in our manufacturing operations and are subject
to a wide range of environmental protection regulations in the United States
and Mexico. While we have not experienced any material adverse effect on our
operations as a result of such regulations, we cannot assure you that current
or future regulations would not have a material adverse effect on our business,
financial condition and results of operations.

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. We cannot assure you that the amount of expense and capital
expenditures that might be required to complete remedial actions and to
continue to comply with applicable environmental laws will not have a material
adverse effect on our business, financial condition and results of operations.

In connection with our spin-off from Rockwell, we assumed all liabilities in
respect of environmental matters related to our current and former operations.
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 Newbury Park, California wafer fabrication
facility and our former Newport Beach, California wafer fabrication facility.
We currently estimate the remaining costs for these remediations to be
approximately $3.4 million and have accrued for these costs as of March 31,
2002.

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 strategic manufacturing realignment, the implementation
of our expense reduction and restructuring initiatives, the Wireless Spin-off
and the Merger, and the anticipated separation of our broadband access 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;

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| |  |  | a prohibition on shareowner action by written consent;                                                                                                                              
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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 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 March 31, 2002, the
carrying value of our cash and cash equivalents approximates fair value.

Our marketable debt securities (consisting of commercial paper, corporate bonds
and government securities) principally have remaining terms of two years or
less. Consequently, such securities are not subject to significant interest
rate risk. All of our marketable securities are classified as available for
sale. As of March 31, 2002, unrealized gains and losses on these securities
included in accumulated other comprehensive income were not significant.

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 and long-term debt
as of March 31, 2002:

|                           |  |                |       |            |  |   |       | 
|-------------------------- |  | -------------- | ----- | ---------- |  | - | ----- | 
|(in millions)              |  | Carrying Value |       | Fair Value
|                           |  |                |       |           
|Cash and cash equivalents  |  | $              | 151.8 |            |  | $ | 151.8 | 
|                          
|                          
|                          
|                          
|Marketable debt securities |  |                | 108.3 |            |  |   | 108.3 | 
|                          
|                          
|                          
|                          
|Long-term debt             |  |                | 709.8 |            |  |   | 475.1 | 

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 March 31, 2002, we held foreign currency forward exchange contracts (to sell
Japanese yen at specified rates) having an aggregate notional amount of
approximately 93.0 million yen, at a notional weighted-average exchange rate of
approximately 133.35 yen to one dollar. The net unrealized gain/loss on the
forward contracts outstanding at March 31, 2002 was not material to our
consolidated financial statements.

Based on our overall currency rate exposure at March 31, 2002, a 10 percent
change in currency rates would not have a significant effect on our
consolidated financial position, results of operations or cash flows.

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##### Table of Contents






PART II.      OTHER INFORMATION




ITEM 1.      LEGAL PROCEEDINGS

On May 30, 1997, Klaus Holtz filed suit against Rockwell in the U.S. District
Court for the Northern District of California for patent infringement relating
to our modem products utilizing the V.42bis standard for data compression. On
September 30, 1998, the Court barred any alleged damages arising before May 30,
1997. On December 17, 1998, the Court issued an order construing the claims of
the patent. We filed a motion for Summary Judgment of Non-Infringement on
February 22, 1999. A hearing was held thereon on June 14, 1999. On October 25,
1999, the Court found in our favor and the case was dismissed. On July 10,
2000, the District Court granted our motion to declare the case an exceptional
case under 35 U.S.C. 285, and awarded us $250,000. Mr. Holtz filed a notice of
appeal to the court of appeals for the Federal Circuit, challenging the
District Courts findings on claim construction, non-infringement and laches.
We began collection efforts on the approximately $275,000 owed to us by Mr.
Holtz as a result of the litigation so far. On August 22, 2000, Mr. Holtz filed
for bankruptcy protection under Chapter 7 of the bankruptcy laws in the State
of California. The Federal Circuit appeals were placed under the control of the
trustee in bankruptcy, and were stayed pending resolution of the bankruptcy. In
the bankruptcy proceeding, Klaus Holtz contended that his interest in the
patent in suit was transferred to a third party, IP Holdings, and that the
patent and the appeal were therefore not subject to disposition by the trustee.
We subsequently reached a settlement agreement with the trustee and IP
Holdings to resolve this matter. This agreement, which was contested by Mr.
Holtz, was approved by the Bankruptcy Court over Mr. Holtz objection.

Various other lawsuits, claims and proceedings have been or may be instituted
or asserted against us or our subsidiaries, including those pertaining to
product liability, intellectual property, environmental, safety and health, and
employment matters. In connection with our spin-off from Rockwell, we assumed
responsibility for all 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 us. 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 our financial condition or results of operations.
Based on our evaluation of matters which are pending or asserted and taking
into account our reserves for such matters, we believe the disposition of such
matters will not have a material adverse effect on our financial condition or
results of operations.

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##### Table of Contents






ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Our annual meeting of shareholders was held on February 27, 2002 in Los
Angeles, California. At the meeting, the following matters were voted on by our
shareholders and approved by the following votes:

|                                                                                                    |                     |  |              |             |              |  |             |   |  |  |           |            | 
|--------------------------------------------------------------------------------------------------- | ------------------- |  | ------------ | ----------- | ------------ |  | ----------- | - |  |  | --------- | ---------- | 
|                                                                                                    |                     |  |              |             |              |  |             |   |  |  | Votes    
|                                                                                                    |                     |  | Shares Voted |             | Shares Voted |  | Withheld/  
|                                                                                                    |                     |  | For          |             | Against      |  | Abstentions
|                                                                                                    |                     |  |              |             |              |  |            
|Election of directors:                                                                              |                     |  |              |             |              |  |             |   |  |  |           |           
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Richard M. Bressler |  |              | 205,447,653 |              |  |             |  |  |  |           | 13,081,060 | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Ralph J. Cicerone   |  |              | 215,161,108 |              |  |             |  |  |  |           | 3,367,605  | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Proposal to approve amendments to the Directors
Stock Plan                                          |                     |  | 142,954,876  |             |              |  | 72,464,016  |   |  |  | 3,109,821 |           
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Proposal to approve the adoption by the Board of
Directors of the 2001 Employee Stock Purchase Plan |                     |  | 205,550,365  |             |              |  | 10,837,303  |   |  |  | 2,141,045 |           
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Proposal to ratify the appointment of Deloitte &
Touche LLP as our independent auditors             |                     |  | 212,755,683  |             |              |  | 4,086,477   |   |  |  | 1,686,553 |           

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##### Table of Contents






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 the Company, Washington and Alpha (excluding
exhibits)
|    
|    
|    
|    
|     |  |                                                                                                                                                                         
|    
|    
|    
|    
|10.1 |  | Wafer Supply and Services Agreement dated as of March 30, 2002 by and between
Specialtysemi, Inc. and the Company.*                                                     
|    
|    
|    
|    
|     |  |                                                                                                                                                                         
|    
|    
|    
|    
|12   |  | Statement re: Computation of Ratios                                                                                                                                     



---

|* |  | Certain confidential portions of this Exhibit have been omitted pursuant
to a request for confidential treatment. Omitted portions have been filed
separately with the Securities and Exchange Commission.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(b)  Reports on Form 8-K

Current Report on Form 8-K dated March 1, 2002, with respect to the Companys
announcement of a definitive agreement with The Carlyle Group for the formation
of a specialty wafer foundry company (Items 5 and 7).

Current Report on Form 8-K dated March 15, 2002, with respect to the Companys
announcement of the completion of the formation of a new specialty wafer
foundry company (Items 5 and 7).

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##### Table of Contents






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: May 13, 2002 |  | By                                  |  | /s/ BALAKRISHNAN S. IYER

Balakrishnan S. Iyer
Senior Vice President and
Chief Financial Officer
(principal financial officer)
|                  
|                  
|                  
|                  
|                   |  |                                     |  |                                                                                                                               
|                  
|                  
|                  
|                  
|Date: May 13, 2002 |  | By                                  |  | /s/ J. SCOTT BLOUIN

J. Scott Blouin
Senior Vice President and
Chief Accounting Officer
(principal accounting officer)        

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##### Table of Contents



EXHIBIT INDEX

|     |  |                                                                                                                                                                         
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |  |                                                                                                                                                                         
|    
|    
|    
|    
|2.1  |  | Agreement and Plan of Reorganization dated as of December 16, 2001, as amended as
of April 12, 2002, by and among the Company, Washington and Alpha (excluding
exhibits)
|     |  |                                                                                                                                                                         
|10.1 |  | Wafer Supply and Services Agreement dated as of March 30, 2002 by and between
Specialtysemi, Inc. and the Company.*                                                     
|    
|    
|    
|    
|     |  |                                                                                                                                                                         
|12   |  | Statement re: Computation of Ratios                                                                                                                                     



---

|* |  | Certain confidential portions of this Exhibit have been omitted pursuant
to a request for confidential treatment. Omitted portions have been filed
separately with the Securities and Exchange Commission.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

38