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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-K

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

For the fiscal year ended September 30, 2003*

Commission file number: 000-24923

CONEXANT SYSTEMS, INC.

(Exact name of registrant as specified in its charter)


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


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


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

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 Par Value Per Share
(including associated Preferred Share Purchase Rights)

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [  ]

The aggregate market value of the Registrants voting stock held by
non-affiliates of the Registrant (based on the closing price as reported on the
Nasdaq National Market on March 28, 2003) was approximately
$386.4 million.
Shares of voting stock held by each officer and director and by each shareowner
affiliated with a director have been excluded from this calculation because
such persons may be deemed to be affiliates. This determination of officer or
affiliate status is not necessarily a conclusive determination for other
purposes. The number of outstanding shares of the Registrants Common Stock as
of November 28, 2003 was 277,540,412.

Documents Incorporated by Reference

Portions of the Registrants Proxy Statement for the 2004 Annual Meeting
of Shareowners to be held on February 25, 2004, are incorporated by reference
into Part III of this Form 10-K.



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|* |  | For presentation purposes of this Form 10-K, references made to the
September 30, 2003 period relate to the actual fiscal year ended October
3, 2003.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



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CAUTIONARY STATEMENT

This Annual Report on Form 10-K contains statements relating to future results
of Conexant Systems, Inc. (including certain projections and business trends)
that are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, and are subject to the safe harbor created by those
sections. Our actual results may differ materially from those projected as a
result of certain risks and uncertainties. These risks and uncertainties
include, but are not limited to: the cyclical nature of the semiconductor
industry and the markets addressed by our products and our customers products;
demand for and market acceptance of new and existing products; successful
development of new products; the timing of new product introductions; the
availability of manufacturing capacity; pricing pressures and other competitive
factors; changes in our product mix; fluctuations in manufacturing yields;
product obsolescence; our ability to develop and implement new technologies and
to obtain protection of the related intellectual property; our ability to
attract and retain qualified personnel; the uncertainties of litigation; costs
related to our proposed merger with GlobespanVirata, Inc.; failure to obtain
required approvals of the merger by the Conexant and GlobespanVirata
shareholders; risks that the closing of the merger is substantially delayed or
that the merger does not close; and the risk that our and GlobespanViratas
businesses will not be successfully integrated, 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.

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|                                           |                                                                                               |                                                                        |  |  |  |  |  | 
|------------------------------------------ | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- |  |  |  |  |  | 
|PART I                                    
|                                           | Item 1. Business                                                                             
|                                           | Item 2. Properties                                                                           
|                                           | Item 3. Legal Proceedings                                                                    
|                                           | Item 4. Submission of Matters to Vote of Security Holders                                    
|PART II                                   
|                                           | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|                                           | Item 6. Selected Financial Data                                                              
|                                           | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                           | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                                           | Item 8. Financial Statements and Supplementary Data                                          
|                                           |                                                                                               | CONSOLIDATED BALANCE SHEETS                                           
|                                           |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS                                 
|                                           |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS                                 
|                                           |                                                                                               | CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE LOSS
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|INDEPENDENT AUDITORS REPORT              
|                                           | Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 
|                                           | Item 9A. Controls and Procedures                                                             
|PART III                                  
|                                           | Item 10. Directors and Executive Officers of the Registrant                                  
|                                           | Item 11. Executive Compensation                                                              
|                                           | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                           | Item 13. Certain Relationships and Related Transactions                                      
|                                           | Item 14. Principal Accountant Fees and Services                                              
|PART IV                                   
|                                           | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES                                
|                                           | SCHEDULE II                                                                                  
|EXHIBIT INDEX                             
|EXHIBIT 3-A-1                             
|EXHIBIT 10-B-11                           
|EXHIBIT 10-B-12                           
|EXHIBIT 10.E.1                            
|EXHIBIT 10-F-2                            
|EXHIBIT 10-F-5                            
|EXHIBIT 10-F-6                            
|EXHIBIT 10-F-7                            
|EXHIBIT 21                                
|EXHIBIT 23                                
|EXHIBIT 24                                
|EXHIBIT 31.1                              
|EXHIBIT 31.2                              
|EXHIBIT 32                                



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PART I




Item 1. Business

General

Conexant Systems, Inc. (we, Conexant or the Company) designs, develops and
sells semiconductor system solutions for use in products driving broadband
digital home information and entertainment applications. Our solutions connect
the client, or end-customer, side of personal communications access products
such as personal computers (PCs), set-top boxes, and game consoles to audio,
video, voice and data services over broadband and dial-up Internet connections.
In addition, our media processing products enable the capture, display,
storage, playback and transfer of audio and video content in applications
throughout the digital home and small office environments.

On December 31, 1998, we became an independent publicly held company when
Rockwell International Corporation (Rockwell) spun off the Company, then a
wholly owned subsidiary of Rockwell, by means of a distribution (the
Distribution) of all the outstanding shares of our common stock to the
shareholders of Rockwell in a tax-free spin-off. Prior to the Distribution,
the Company (formerly named Rockwell Semiconductor Systems, Inc.), together
with certain other subsidiaries of Rockwell, operated Rockwells semiconductor
systems business (Semiconductor Systems). As part of the Distribution,
Rockwell transferred to us the assets and liabilities of Semiconductor Systems
not already owned by us, including the stock of certain subsidiaries, and we
transferred to Rockwell all assets and liabilities not constituting part of
Semiconductor Systems, including all assets and liabilities of Rockwells
electronic commerce business. We were incorporated as Rockwell Semiconductor
Systems, Inc. in Delaware on September 16, 1996, and changed our name to
Conexant Systems, Inc. on October 14, 1998. All references herein to us,
Conexant or the Company for periods prior to the Distribution include
Semiconductor Systems.

On June 27, 2003, we completed the distribution to our shareholders of all
outstanding shares of our wholly owned subsidiary Mindspeed Technologies, Inc.
(Mindspeed), to which we contributed our Internet infrastructure business,
including the stock of certain subsidiaries, and certain other assets and
liabilities, including $100.0 million in cash (hereinafter, the Mindspeed
Spin). In the Mindspeed Spin, Conexant shareholders received one share of
Mindspeed common stock for every three Conexant shares held and the Conexant
shareholders continued to hold their Conexant shares. Mindspeed issued us
a warrant to purchase 30 million shares of Mindspeed common stock, representing
approximately 20 percent of Mindspeeds outstanding common stock on a fully
diluted basis. The warrant is exercisable for a period of ten years, commencing
one year after the completion of the Mindspeed Spin, at an exercise price of
$3.408 per share. The warrant, at fair value, is recorded as a long-term asset
on our consolidated balance sheet. Additionally, we entered into a senior
secured revolving credit facility pursuant to which Mindspeed may borrow up to
$50.0 million for working capital and general corporate purposes.

On June 25, 2002, we completed the distribution to our shareholders of
outstanding shares of our wholly owned subsidiary Washington Sub, Inc.
(Washington), to which we contributed our wireless communications business,
other than certain assets and liabilities which we retained. (the Spin-off
Transaction). Immediately thereafter, Washington merged with and into Alpha
Industries, Inc. (Alpha), with Alpha the surviving corporation (the Merger). As
a result of the Spin-off Transaction and the Merger, Conexant shareholders
received 0.351 of a share of Alpha common stock for each Conexant share held
and the Conexant shareholders continued to hold their Conexant shares. Upon
completion of the Merger, Alpha and its subsidiaries purchased our
semiconductor assembly and test facility located in Mexicali, Mexico and our
package design team that supports the Mexicali facility (together, the Mexicali
operations) for $150 million. Effective June 26, 2002, Alpha changed its name
to Skyworks Solutions, Inc. (Skyworks).

In March 2002, we and The Carlyle Group formed a new specialty foundry company
named Jazz Semiconductor, Inc. (Jazz). We contributed our Newport Beach,
California wafer fabrication operations and related assets and liabilities and
certain intellectual property to Jazz in exchange for $19.3 million in cash and
a 45% equity interest in Jazz, having an estimated fair value of $42.5 million.
In fiscal 2003, another party made an additional investment in Jazz thereby
reducing our equity interest to 39%. We also entered into a long-term supply
arrangement with Jazz

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under which it provides capacity to meet a portion of our requirements for
complementary metal-oxide semiconductor (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. We purchase a
substantial portion of our requirements for silicon-based semiconductor
products from Jazz.

On November 3, 2003, we entered into a definitive merger agreement with
GlobespanVirata, Inc., a provider of broadband communications solutions for
consumer, enterprise, personal computer and service provider markets. In the
merger, GlobespanVirata shareholders will receive 1.198 shares of our common
stock for each share of GlobespanVirata common stock. This transaction will be
accounted for under the purchase method of accounting with Conexant as the
acquiror for accounting purposes. The closing of this transaction is subject
to customary regulatory and shareholder approvals. We expect that the
transaction will close in the quarter ending March 31, 2004.

During fiscal 2003 we completed our strategic transformation from a broad-based
communications semiconductor supplier into a focused supplier of broadband
access and media processing solutions for applications for the broadband
digital home.

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

Our net revenues in fiscal 2003 and 2002 were $600.0 million and $521.7
million, respectively. We incurred net losses of $705.3 million in fiscal 2003
and $880.8 million in fiscal 2002. These losses include losses from
discontinued operations of $728.9 million in fiscal 2003 and $737.0 million in
fiscal 2002. As a result of our cost reduction initiatives, including the
closure of certain facilities, in fiscal 2003 and 2002 we recorded special
charges of $18.4 million and $30.5 million, respectively, for asset impairments
and restructuring and other costs. We achieved income from continuing
operations of $23.6 million in fiscal 2003 and a loss from continuing
operations of $143.8 million in fiscal 2002.

Our Strategy

Our strategy is to create a portfolio of technologies which, in various
combinations, can be integrated to create solutions for broadband digital home
products that improve consumer entertainment and productivity applications.
Improvements may take the form of convenience, portability, cost reductions,
size, power or space savings, ease of installation, versatility or enabling
functionality that would otherwise be economically impractical.
Key elements in our strategy include the following:

Target High-Growth Communications Markets

An important aspect of our strategy is to identify segments of the broadband
digital home marketplace offering the potential for high growth and to develop
semiconductor system solutions for applications in these markets.

Focus on System Solutions

We seek to capitalize on our design capabilities and communications systems
knowledge and experience by providing suppliers of personal communications and
media processing products with complete semiconductor system solutions. High
levels of integration enhance the benefits of our products by reducing
production costs through fewer external components, reduced power consumption,
reduced board space and improved system assembly yields. These semiconductor
system solutions provide our original equipment manufacturer (OEM) and original
design manufacturer (ODM) customers with hardware, software and, in many cases,
a complete reference design.

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Leverage Our Core Technology

We deploy technology building blocks such as digital signal processors,
mixed-signal processing cores and software modules across multiple product
platforms. This technology reuse creates economies of scale in research and
development and facilitates a reduction in the time-to-market for key products.
As we extend our own core technology portfolio and, in parallel, seek
alliances to gain access to emerging intellectual property, we will
seek to maintain
our agility and flexibility to meet changing market and technology
requirements.

Build Upon Strategic Customer Relationships

We believe a business partnership approach yields maximum value to the customer
through multilevel organizational engagement and product roadmap alignment.
Further, we believe that the strength of our relationships with leading
customers in each of our markets is a competitive advantage that enables us to
more effectively target our research and development investments. We have
demonstrated our success in building strategic customer relationships within
our long-standing dial-up modem customer base. Our relationships have helped to
provide us with rapid feedback from our customers during the design process and
have increased the likelihood that our products satisfy our customers cost
and performance requirements.

Operate as a Fabless Semiconductor Company

We operate as a fabless semiconductor company and outsource all of our
manufacturing needs. This allows us to focus our resources on the design,
development and marketing of our products while minimizing operating
infrastructure and capital requirements. As a result, we maintain maximum
flexibility in operations so that we can more rapidly adapt to changes in our
customers needs and our target markets. We enter into strategic agreements
with third parties, including Jazz and Skyworks, to gain access to wafer
fabrication capacity, including the advanced process technologies, and assembly
and test services we require.

Our Business

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

Dial-Up Access Solutions

Our dial-up access products consist of Internet access solutions including 56
kilobits per second (Kbps) dial-up modem chipsets utilizing the V.90 and V.92
standards. We supply mixed-signal intensive, controllerless modem chipsets and
software modem solutions that take advantage of the increasing power of PC
central processors and use software to perform functions traditionally enabled
by semiconductor components. In addition, we have extended sales of our modem
portfolio beyond PC-related products to other end-user products and we offer
embedded modem solutions for a host of products including fax machines, MFPs,
POS terminals, set-top boxes, personal digital
assistants (PDAs), and Internet appliances including Internet-connected
televisions, digital picture frames, gaming consoles and web phones.

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During fiscal 2003, we acquired the soft modem business of PCTEL, Inc. (PCTEL),
which enhances our portfolio of soft modem products. We also cross-licensed
certain PCTEL technology, strengthening both companies
intellectual property portfolios.

Broadband Data Access Solutions

Our broadband data access business is comprised of semiconductor solutions that
connect personal communications access devices to broadband networks. Our
portfolio of ADSL and cable modem semiconductor system solutions permits high
speed transmission of data, voice, audio and video over existing standard
copper wire telephone lines and cable operators coaxial cable facilities.
Additionally, our portfolio includes networking processor semiconductor
solutions that enable the networking of several computing or communications
devices to share broadband access as well as media content.

During fiscal 2003, we increased unit shipments of our entire Broadband Data
Access product portfolio led by continuing worldwide ADSL Customer Premises
Equipment (CPE) deployments, notably in Korea, China and in Europe. Our highly
integrated single-package ADSL CPE modem provided a cost-effective and highly
interoperable solution for our customers around the world, many of whom were
ODM customers who had benefited from our high levels of service and support
when they began to market their dial-up modem products in the past.
Our engineering support includes our advanced software-based development tools which allow
ODMs, service providers and telecom companies to analyze, configure and troubleshoot
their ADSL networks remotely, saving precious time and expense.

Early in fiscal 2003, we introduced our single-package cable modem solution
containing an embedded microprocessor-based media access controller for North
American Data Over Cable Service Interface Specification (DOCSIS), European
DOCSIS and digital video broadcasting (DVB) applications. Later in the year,
we introduced our single-chip silicon-based digital tuner, which supports both
DOCSIS and DVB/Digital Audio Visual Council (DAVIC) standards for computer
cable modems and set-top boxes. This device seamlessly interfaces with our
digital cable transceiver solutions. Our cable modem technology is capable of
delivering data, video, telephony and Internet access over existing coaxial
cable networks at speeds up to 1,000 times faster than a standard voiceband
analog modem. In addition, our solution supports the Peripheral Component
Interconnect (PCI), Universal Serial Bus (USB) and Ethernet interfaces for
connection with a PC and has successfully completed the rigorous North American
CableLabs and European tComLabs certifications with numerous customers. These
certifications give consumers and cable operators the assurance that systems
comply with DOCSIS specifications and will be interoperable among multiple
cable modem vendors.

To support the distribution of broadband content throughout the digital home,
we offer home networking products that enable personal communications devices
to share data, voice, audio and video using existing telephone line, coaxial
cable, power line and wireless links. We have developed a portfolio of home
network processors which can be used at the core of a variety of devices, such
as residential gateways, that consumers may use to access the Internet and
share content using a wide range of existing and emerging connectivity
technologies to link a network of home PCs and peripheral devices. In addition
to connecting broadband services to networks inside the home, these processors
offer processing power sufficient to implement a full-featured Statefull Packet
Inspection (SPI)-based firewall. The importance of a secure firewall is greater
than ever with the increasing use of always on Internet access in both the
home and small office environments. The scalable system architecture of our
home network processor product portfolio has also enabled digital voice
terminals for voice-over-internet protocol applications, internet
protocol-media terminals for video
distribution, wireless data networking and other emerging connectivity
applications.

We
have also developed physical layer (PHY) and analog front-end (AFE)
products to support networking in the home. In fiscal 2003, we
introduced a highly integrated, single-chip HomePlug
semiconductor solution for Ethernet bridges, HomePlug wireless bridges and
routers, and a variety of embedded applications such as media adaptors for PCs.
HomePlug powerline technology uses the existing home electrical wiring to
network devices such as PCs, providing Internet access and home connectivity
through power outlets

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within the home. And because this solution was designed using our building
block software platform approach, our HomePlug device can also be combined with
Conexants home network processors, ADSL and cable modem solutions to allow
designers to seamlessly incorporate HomePlug technology into a variety of
multi-functional products.

Broadband Media Access Solutions

Our broadband media access business offers an extensive portfolio of components
and system level solutions enabling digital cable, satellite and terrestrial
set-top boxes as well as an extensive suite of components and system level
solutions for a wide range of major video applications ranging from standard and
high-definition video to interactive consumer entertainment services delivered
through set-top boxes, PCs, digital video recorders (DVRs) and game consoles.

A typical set-top box is comprised of front-end
components and back-end components. Among the front-end components, tuners and
demodulators are designed to receive and prepare signals from a satellite,
cable or terrestrial network and back-channel modems are used to communicate
with the service provider. In the back-end, integrated Motion Picture Experts
Group (MPEG) decoders are designed to process the audio and video signals and
to control the set-top box application software while video encoders format the
video signal for display on an analog television.

In
fiscal 2003 we built upon our customer relationships established through our leadership
front-end products to win back-end product opportunities. We introduced and
began shipments of our new single-chip solution incorporating demodulation,
MPEG processing, audio and video outputs, graphic processing, back-channel
communications capability and a control processor. Combined with one of our
silicon tuner devices, this product offers a complete cost-effective set-top
box solution for satellite, cable and terrestrial networks. In fiscal 2003 we
also introduced and began shipping our new complete solution for cable set-top
boxes, developed in conjunction with Motorola. In addition, we introduced
fourth-generation highly-integrated satellite set-top box silicon tuner and
demodulator component products, offering our customers a tightly integrated
path for their next generation products. We also introduced our new octal
phase shift keying (8PSK) demodulator for satellite networks employing this
advanced modulation scheme. Late in fiscal 2003, we began sampling
our new high-performance low-cost silicon germanium (SiGe) tuner.

Our digital video encoder integrated circuits (ICs) provide a combination of
features, video performance and flexibility for todays set-top box, PC video,
DVD and other video systems. These video encoder ICs convert digital video
stored on DVDs or on other digital media, or digitally transmitted to a set-top
box, into the analog signals which drive both standard and high definition
televisions. In addition, our line of stand-alone video decoders and integrated
PCI video decoders combine worldwide video standard support, integration and
software support. Our analog video decoders are designed to convert analog
signals received by a set-top box, PC video system or other consumer electronic
analog video device into digital streams that can be displayed by a digital
video monitor or saved using a form of digital recording media.

As a result of our acquisition in fiscal 2002 of GlobespanViratas video
compression business (iCompression), fiscal 2003 saw the emergence of our
stand-alone MPEG video encoders and decoders as well as an accelerated pace of
development of other advanced MPEG video products on our roadmap. This
strategic acquisition enhanced our portfolio by adding MPEG-2 and advanced
MPEG-4 digital media compression technologies, which we believe are important
to our long-term product strategy in the PC and set-top box markets.

Research and Development

We have significant research, development, engineering and product design
capabilities. At September 30, 2003, we had approximately 815 employees engaged
in research and development activities at 16 design centers worldwide. Our
design centers provide design engineering and product application support as
well as after-sales customer service. The design centers are strategically
located around the world to be in close proximity to our OEM customers and to
take advantage of key technical and engineering talent.

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We incurred research and development expenses of $159.4 million, $156.4 million
and $175.0 million in fiscal 2003, 2002 and 2001, respectively.

Manufacturing

In 2002, we contributed our Newport Beach, California wafer fabrication
operations to Jazz, a joint venture in which we hold a minority ownership, and
we contributed our Newbury Park, California gallium arsenide wafer fabrication
facility to Washington as part of the Spin-off Transaction and the Merger.
These transactions completed our transition to a fully fabless business model.

Under our fabless business model, we no longer operate wafer fabrication
facilities (known as foundries or fabs) and we use third parties for wafer
fabrication services. We use complementary metal-oxide semiconductor
(CMOS) process technology for the majority of our
products. Jazz, Taiwan Semiconductor Manufacturing Corporation (TSMC) and
United Microelectronics Corporation (UMC) are our principal suppliers of CMOS
products. We also use bipolar and bipolar CMOS (BiCMOS) process technology for
certain mixed-signal devices. These products are supplied primarily by Jazz and
TSMC.

To obtain external wafer manufacturing capacity, we entered into a five-year
supply arrangement with Jazz in March 2002 under which we purchase a
substantial portion of our requirements for silicon wafers. During the first
two years of our supply arrangement with Jazz, our cost of wafers is an amount
which approximates our historical cost. Thereafter, the cost of wafers will be
based on market prices. Additionally, we are obligated to purchase (and Jazz is
obligated to supply) certain minimum annual volumes of wafers during the first
three years of the arrangement. In the event our actual wafer purchases are
less than the required minimum volumes, we will be required to make additional
payments to Jazz. Our expected minimum purchase obligations under the supply
agreement with Jazz, net of a portion of the wafer purchase obligations assumed
by a third party, will be approximately $43.0 million and $14.0 million in
fiscal 2004 and 2005, respectively. Our arrangements with other foundries
generally do not provide us with any guaranteed levels of supply.

Upon completion of the Spin-off Transaction and the Merger, Skyworks purchased
our Mexicali, Mexico assembly and test facility. We use third parties,
including Skyworks, for the assembly and test of all of our products. We
entered into a three-year supply agreement with Skyworks in June 2002, under
which Skyworks provides us semiconductor assembly and test services at our
former Mexicali, Mexico facility. Under this supply agreement, we have minimum
purchase obligations of $26.6 million and $10.9 million with Skyworks in fiscal
2004 and 2005, respectively.

We currently anticipate meeting the annual minimum purchase obligations under
the long-term supply agreements with both Jazz and Skyworks.

Customers, Marketing and Sales

We market and sell our semiconductor products and system solutions directly to
leading OEMs of communication electronics products and indirectly through
electronic components distributors. We also sell our products to third-party
electronic manufacturing service providers, who manufacture products
incorporating our semiconductor products for OEMs.

Sales to distributors accounted for approximately 40% of our fiscal 2003 net
revenues. In fiscal 2003, one distributor accounted for 11% of our net revenues
and no other customer accounted for 10% or more of our net revenues. Our top
20 customers accounted for 73% of our fiscal 2003 net revenues.

Our top five direct OEM customers in fiscal 2003 were Hewlett-Packard,
Matsushita Electric Industrial Co. Ltd., Microsoft Corporation, Samsung
Electronics Co., Ltd., and Thomson Corporation. We believe that significant
indirect OEM customers include Apple Computer, Inc., Dell Computer Corporation,
Motorola, Inc. and Sony Corporation.

Revenues derived from customers located in the Americas, the Asia-Pacific
region and Europe were 12%, 80% and 8%, respectively, of our net revenues in
fiscal 2003. We believe a substantial portion of the products we sell to

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OEMs and third-party manufacturing service providers in the Asia-Pacific region
are ultimately shipped to end markets in the Americas and Europe. See Note 17
of Notes to Consolidated Financial Statements.

We have a worldwide sales organization comprised of approximately 172 employees
as of September 30, 2003, with 9 domestic and 8 international sales offices. To
complement our direct sales and customer support efforts, we also sell our
products through approximately 15 independent manufacturers representatives
and approximately 34 distributors and dealers. In addition, our design and
applications engineering staff is actively involved with customers during all
phases of design and production and provides customer support through our
worldwide sales offices, which are generally in close proximity to customers
facilities.

Backlog

Our sales are made primarily pursuant to standard purchase orders for delivery
of products, with such purchase orders officially acknowledged by us according
to our own terms and conditions. Because industry practice allows customers to
cancel orders with limited advance notice to us prior to shipment, we believe
that backlog as of any particular date is not indicative of our future revenue
levels.

Competition

The communications semiconductor industry in general, and the markets in which
we compete in particular, are intensely competitive. We compete worldwide with
a number of U.S. and international suppliers that are both larger and smaller
than us in terms of resources and market share. We anticipate that additional
competitors will enter our markets and expect intense price and product
competition to continue.

We compete primarily with Agere Systems, Inc., Analog Devices, Inc., Broadcom
Corporation, Centillium Communications, Inc., GlobespanVirata, Inc., Infineon
Technologies A.G., LSI Logic Corporation, Microtune, Inc., Philips Electronics
N.V., Samsung Electronics Co. Ltd., STMicroelectronics N.V. and Texas
Instruments Incorporated.

Intellectual Property and Proprietary Rights

We own or license a number of United States and foreign patents and patent
applications related to our products, processes and technologies. We also
cross license portions of our intellectual property and are also cross-licensed
under a number of intellectual property portfolios in the industry that are
relevant to our technologies and products. We have filed and received federal
and international trademark registrations of our Conexant trademarks. In
addition, we have registered or applied to register a number of additional
trademarks applicable to our products. We believe that intellectual property,
including patents, patent applications, licenses and trademarks are of material
importance to our business. In addition to protecting our proprietary
technologies and processes, we constantly strive to strengthen and enhance our
intellectual property portfolio. We use the portfolio to seek licensing
opportunities, to negotiate cross-licenses with other intellectual property
portfolios, to gain access to intellectual property of others and to avoid,
defend against, or settle litigation. While in the aggregate our patents,
patent applications, licenses and trademarks are considered important to our
operations, they are not considered of such importance that the loss or
termination of any one of them would materially affect our business or
financial condition.

Various claims of patent infringement have been made against us. We believe
that none of these claims will have a material adverse effect on our financial
position or results of operations. In connection with our spin-off from
Rockwell, we assumed all liabilities in respect of intellectual property
matters related to current and former operations of Semiconductor Systems.

Environmental Regulation

Federal, state and local requirements relating to the discharge of substances
into the environment, the disposal of hazardous wastes, and other activities
affecting the environment have had, and will continue to have, an impact on our
former manufacturing operations. To date, compliance with environmental
requirements and resolution of environmental claims have been accomplished
without material effect on our liquidity and capital resources, competitive
position or financial condition. See Certain Business Risks  We may be
liable for penalties under environmental laws, rules and regulations, which
could adversely impact our business.

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We believe that our expenditures necessary for the resolution of environmental
claims will not have a material adverse effect on our liquidity and capital
resources, competitive position or financial condition. We cannot assess the
possible effect of compliance with future requirements.

Cyclicality; Seasonality; Possible Significant Downturns

We operate in a highly cyclical industry. See Certain Business Risks We
operate in the highly cyclical semiconductor industry, which is subject to
significant downturns.

Sales of our products are subject to seasonal fluctuation related to the
increase in sales of end-user products which include our products, such as PCs,
set-top boxes, game consoles and facsimile machines, generally associated with
the holiday season in December. Our sales of semiconductor products and system
solutions used in these products generally increase beginning in August and
September and continue at a higher level through the end of the calendar year.

Employees

As of September 30, 2003, we had approximately 1,450 employees. Approximately
915 of our employees are engineers. None of our employees are covered by
collective bargaining agreements. We believe our future success will depend in
large part upon our continued ability to attract, motivate, develop and retain
highly skilled and dedicated employees.

Certain Business Risks

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

You should carefully consider and evaluate all of the information in this
Annual 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 losses.

Our net revenues in fiscal 2003 were $600.0 million compared to $521.7 million
in fiscal 2002 and $541.7 million in fiscal 2001. Although we had income from
continuing operations of $23.6 million in fiscal 2003, we incurred losses from
continuing operations of $143.8 million in fiscal 2002 and $660.9 million in
fiscal 2001. Including our discontinued operations, we incurred net losses of
$705.3 million in fiscal 2003, $880.8 million in fiscal 2002, and $1.4 billion
in fiscal 2001.

Beginning in fiscal 2001, we have implemented a number of expense reduction and
restructuring initiatives to improve our operating cost structure. While our
continuing business has achieved income from continuing operations starting
with the third quarter of fiscal 2003, we cannot assure you as to whether we
will be able to sustain such profitability.

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

The semiconductor industry is highly cyclical and is characterized by constant
and rapid technological change, rapid product obsolescence and price erosion,
evolving technical standards, short product life cycles and wide fluctuations
in product supply and demand. From time to time these and other factors,
together with changes in general economic conditions, cause significant upturns
and downturns in the industry, and in our business in particular. Periods of
industry downturns have been characterized by diminished product demand,
production overcapacity, high inventory levels and accelerated erosion of
average selling prices. These factors have caused substantial fluctuations in
our revenues and our results of operations. We have experienced these cyclical
fluctuations in our business in the past and may experience cyclical
fluctuations in the future.

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

We are subject to intense competition.

The communications semiconductor industry in general and the markets in which
we compete in particular are intensely competitive. We compete worldwide with a
number of United States and international semiconductor manufacturers that are
both larger and smaller than us in terms of resources and market share. We
currently face significant competition in our markets and expect that intense
price and product competition will continue. This competition has resulted and
is expected to continue to result in declining average selling prices for our
products. We also anticipate that additional competitors will enter our markets
as a result of expected growth opportunities in communications electronics, the
trend toward global expansion by foreign and domestic competitors,
technological and public policy changes and relatively low barriers to entry in
certain markets of the industry. Moreover, as with many companies in the
semiconductor industry, customers for certain of our products offer other
products that compete with similar products offered by us. Many of our
competitors have certain advantages over us, such as significantly greater
sales and marketing, manufacturing, distribution, technical and other
resources.

We believe that the principal competitive factors for semiconductor suppliers
in our addressed markets are:



| |  |  | time-to-market;
| | - |  | ---------------



| |  |  | product quality, reliability and performance;
| | - |  | ---------------------------------------------



| |  |  | level of integration;
| | - |  | ---------------------



| |  |  | price and total system cost;
| | - |  | ----------------------------



| |  |  | compliance with industry standards;
| | - |  | -----------------------------------



| |  |  | design and engineering capabilities;
| | - |  | ------------------------------------



| |  |  | strategic relationships with customers;
| | - |  | ---------------------------------------



| |  |  | customer support; and
| | - |  | ---------------------



| |  |  | new product innovation.
| | - |  | -----------------------

We cannot assure you that we will be able to successfully address these
factors.

Current and potential competitors also have established or may establish
financial or strategic relationships among themselves or with our existing or
potential customers, resellers or other third parties. These relationships may
affect customers purchasing decisions. Accordingly, it is possible that new
competitors or alliances among competitors could emerge and rapidly acquire
significant market share. We cannot assure you that we will be able to compete
successfully against current and potential competitors.

Our success depends on our ability to timely develop competitive new products and reduce costs.

Our operating results will depend largely on our ability to continue to
introduce new and enhanced semiconductor products on a timely basis. Successful
product development and introduction depends on numerous factors, including,
among others:



| |  |  | our ability to anticipate customer and market requirements and
changes in technology and industry standards;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | our ability to accurately define new products;
| | - |  | ----------------------------------------------



| |  |  | our ability to timely complete development of new products and bring
our products to market on a timely basis;
| | - |  | --------------------------------------------------------------------------------------------------------------

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| |  |  | our ability to differentiate our products from offerings of our competitors; and
| | - |  | --------------------------------------------------------------------------------



| |  |  | overall market acceptance of our products.
| | - |  | ------------------------------------------

We cannot assure you that we will have sufficient resources to make the
substantial investment in research and development in order to develop and
bring to market new and enhanced products. Furthermore, we are required to
continually evaluate expenditures for planned product development and to choose
among alternative technologies based on our expectations of future market
growth. We cannot assure you that we will be able to develop and introduce new
or enhanced products in a timely and cost-effective manner, that our products
will satisfy customer requirements or achieve market acceptance, or that we
will be able to anticipate new industry standards and technological changes. We
also cannot assure you that we will be able to respond successfully to new
product announcements and introductions by competitors.

In addition, prices of established products may decline, sometimes
significantly and rapidly, over time. We believe that in order to remain
competitive we must continue to reduce the cost of producing and delivering
existing products at the same time that we develop and introduce new or
enhanced products. We cannot assure you that we will be able to continue to
reduce the cost of our products to remain competitive.

We may not be able to keep abreast of the rapid technological changes in our markets.

The demand for our products can change quickly and in ways we may not
anticipate because our markets generally exhibit the following characteristics:



| |  |  | rapid technological developments;
| | - |  | ---------------------------------



| |  |  | rapid changes in customer requirements;
| | - |  | ---------------------------------------



| |  |  | frequent new product introductions and enhancements;
| | - |  | ----------------------------------------------------



| |  |  | short product life cycles with declining prices over the life cycle of the product; and
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | evolving industry standards.
| | - |  | ----------------------------

Our products could become obsolete sooner than anticipated because of a faster
than anticipated change in one or more of the technologies related to our
products or in market demand for products based on a particular technology,
particularly due to the introduction of new technology that represents a
substantial advance over current technology. Currently accepted industry
standards are also subject to change, which may contribute to the obsolescence
of our products.

We may not be able to attract and retain qualified personnel necessary for the
design, development and sale of our products. Our success could be negatively
affected if key personnel leave.

Our future success depends on our ability to attract, retain and motivate
qualified personnel, including executive officers and other key management and
technical personnel. As the source of our technological and product
innovations, our key technical personnel represent a significant asset. The
competition for such personnel can be intense in the semiconductor industry. We
cannot assure you that we will be able to attract and retain qualified
management and other personnel necessary for the design, development and sale
of our products.

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

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If OEMs of communications electronics products do not design our products into
their equipment, we will be unable to sell those products. Moreover, a design
win from a customer does not guarantee future sales to that customer.

Our products are not sold directly to the end-user but are components of other
products. As a result, we rely on OEMs of communications electronics products
to select our products from among alternative offerings to be designed into
their equipment. We may be unable to achieve these design wins. Without
design wins from OEMs, we would be unable to sell our products. Once an OEM
designs another suppliers semiconductors into one of its product platforms, it
will be more difficult for us to achieve future design wins with that OEMs
product platform because changing suppliers involves significant cost, time,
effort and risk. Achieving a design win with a customer does not ensure that we
will receive significant revenues from that customer and we may be unable to
convert design wins into actual sales. Even after a design win, the customer is
not obligated to purchase our products and can choose at any time to stop using
our products if, for example, it or its own products are not commercially
successful.

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

Our customers may need six months or longer to test and evaluate our products
and an additional six months or more to begin volume production of equipment
that incorporates our products. 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 a right to return unsold products to us. Sales to distributors accounted
for approximately 40% of our net revenues for fiscal 2003. We routinely
purchase inventory based on estimates of end-market demand for our customers
products, which is difficult to predict. This difficulty may be compounded when
we sell to OEMs indirectly through distributors or contract manufacturers, or
both, as our forecasts of demand are then based on estimates provided by
multiple parties. In addition, our customers may change their inventory
practices on short notice for any reason. The cancellation or deferral of
product orders, the return of previously sold products or overproduction due to
the failure of anticipated orders to materialize could result in our holding
excess or obsolete inventory, which could result in write-downs of inventory.

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

We are entirely dependent upon outside wafer fabrication facilities (known as
foundries), including Jazz, in which we hold a minority interest. Under our fabless business model, our long-term
revenue growth is dependent on our ability to obtain sufficient external
manufacturing capacity, including wafer production capacity. If the
semiconductor industry experiences a shortage of wafer fabrication capacity in
the future, we may experience delays in shipments or increased manufacturing
costs.

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



| |  |  | the lack of assured wafer supply, potential wafer shortages and higher wafer prices;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | limited control over delivery schedules, manufacturing yields, production costs and product quality; and
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | the unavailability of, or delays in obtaining, access to key process technologies.
| | - |  | ----------------------------------------------------------------------------------

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

We are also dependent upon third parties, including Skyworks, for the assembly
and test of our products. Our reliance on others to assemble and test our
products subjects us to many of the same risks as are described above with
respect to our reliance on outside wafer fabrication facilities.

Wafer fabrication processes are subject to obsolescence, and foundries may
discontinue a wafer fabrication process used for certain of our products. In
such event, we generally offer our customers a last time buy program to
satisfy their anticipated requirements for our products. The unanticipated
discontinuation of wafer fabrication processes on which we rely may adversely
affect our revenues and our customer relationships.

The foundries and other suppliers on whom we rely may experience financial
difficulties or suffer disruptions in their operations due to causes beyond our
control, including labor strikes, work stoppages, electrical power outages,
fire, earthquake, flooding or other natural disasters. Certain of our
suppliers manufacturing facilities are located near major earthquake fault
lines in California, Mexico and the Asia-Pacific region. In the event of a
disruption of the operations of one or more of our suppliers, we may not have a
second manufacturing source immediately available. Such an event could cause
significant delays in shipments until we could shift the products from an
affected facility or supplier to another facility or supplier. The
manufacturing processes we rely on are specialized and are available from a
limited number of suppliers. Alternate sources of manufacturing capacity,
particularly wafer production capacity, may not be available to us on a timely
basis. Even if alternate wafer production capacity is available, we may not be
able to obtain it on favorable terms, or at all. Difficulties or delays in
securing an adequate supply of our products on favorable terms, or at all,
could impair our ability to meet our customers requirements and have a
material adverse effect on our operating results.

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

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 initial one-time write-offs of in-process research and development;
| | - |  | -------------------------------------------------------------------------



| |  |  | 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.
| | - |  | ---------------------------------------------------------------------

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Additionally, in periods subsequent to an acquisition, we must evaluate
goodwill and acquisition-related intangible assets for impairment. When such
assets are found to be impaired, they will be written down to estimated fair
value, with a charge against earnings.

Integrating acquired organizations and their products and services may be
expensive, time-consuming and a strain on our resources and our relationships
with employees and customers, and ultimately may not be successful.

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

We believe that our existing sources of liquidity together with cash expected
to be generated from product sales will be sufficient to fund our operations,
research and development, anticipated capital expenditures, working capital and
other financing requirements for at least the next twelve months. However, we
cannot assure you that this will be the case and we may need to obtain
alternate sources of financing in the future. We cannot assure you that we will
have access to additional sources of capital on favorable terms or at all.

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

We are subject to the risks of doing business internationally.

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



| |  |  | currency exchange rate fluctuations;
| | - |  | ------------------------------------



| |  |  | local economic and political conditions;
| | - |  | ----------------------------------------



| |  |  | disruptions of capital and trading markets;
| | - |  | -------------------------------------------



| |  |  | restrictive governmental actions, such as restrictions on the
transfer or repatriation of funds and trade protection measures,
including export duties and quotas and customs duties and tariffs;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in legal or regulatory requirements;
| | - |  | --------------------------------------------



| |  |  | difficulty in obtaining distribution and support;
| | - |  | -------------------------------------------------



| |  |  | the laws and policies of the United States and other countries
affecting trade, foreign investment and loans, and import or export
licensing requirements;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | tax laws; and
| | - |  | -------------



| |  |  | limitations on our ability under local laws to protect our intellectual property.
| | - |  | ---------------------------------------------------------------------------------

Because most of our international sales, other than sales to Japan (which are
denominated principally in Japanese yen), are currently denominated in U.S.
dollars, our products could become less competitive in international markets if
the value of the U.S. dollar increases relative to foreign currencies. We
cannot assure you that the factors described above will not have a material
adverse effect on our ability to increase or maintain our foreign sales.

From time to time, we may enter into foreign currency forward exchange
contracts to minimize risk of loss from currency exchange rate fluctuations for
foreign currency commitments entered into in the ordinary course of business.
We have not entered into foreign currency forward exchange contracts for other
purposes. Our financial condition and results of operations could be affected
(adversely or favorably) by currency fluctuations.

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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 timing of receipt, reduction or cancellation of significant orders by customers;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | seasonal customer demand;
| | - |  | -------------------------



| |  |  | the gain or loss of significant customers;
| | - |  | ------------------------------------------



| |  |  | market acceptance of our products and our customers products;
| | - |  | --------------------------------------------------------------



| |  |  | our ability to develop, introduce and market new products and technologies on a timely basis;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | the timing and extent of product development costs;
| | - |  | ---------------------------------------------------



| |  |  | new product and technology introductions by competitors;
| | - |  | --------------------------------------------------------



| |  |  | changes in the mix of products we develop and sell;
| | - |  | ---------------------------------------------------



| |  |  | fluctuations in manufacturing yields;
| | - |  | -------------------------------------



| |  |  | availability and cost of products from our suppliers;
| | - |  | -----------------------------------------------------



| |  |  | intellectual property disputes; and
| | - |  | -----------------------------------



| |  |  | the effects of competitive pricing pressures, including decreases
in average selling prices of our products.
| | - |  | ------------------------------------------------------------------------------------------------------------

The foregoing factors are difficult to forecast, and these as well as other
factors, could materially adversely affect our quarterly or annual operating
results. If our operating results fail to meet the expectations of analysts or
investors, it could materially and adversely affect the price of our common
stock and other securities.

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

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



| |  |  | our operating and financial performance and prospects;
| | - |  | ------------------------------------------------------



| |  |  | the depth and liquidity of the market for our common stock;
| | - |  | -----------------------------------------------------------



| |  |  | investor perception of us and the industry and markets in which we operate;
| | - |  | ---------------------------------------------------------------------------



| |  |  | our inclusion in, or removal from, any equity market indices;
| | - |  | -------------------------------------------------------------



| |  |  | the level of research coverage of our common stock;
| | - |  | ---------------------------------------------------



| |  |  | changes in earnings estimates or buy/sell recommendations by analysts; and
| | - |  | --------------------------------------------------------------------------



| |  |  | general financial, domestic, international, economic and other market conditions.
| | - |  | ---------------------------------------------------------------------------------

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

We may be subject to claims of infringement of third-party intellectual
property rights or demands that we license third-party technology, which could
result in significant expense and loss of our ability to use, make, sell,
export or import our products or one or more components comprising our
products.

The semiconductor industry is characterized by vigorous protection and pursuit
of intellectual property rights. From time to time, third parties have asserted
and may in the future assert patent, copyright, trademark and other
intellectual property rights to technologies that are important to our business
and have demanded and may in the future demand that we license their patents
and technology. Any litigation to determine the validity of claims that our
products infringe or may infringe these rights, including claims arising
through our contractual indemnification of our customers, regardless of their
merit or resolution, could be costly and divert the efforts and attention of our

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management and technical personnel. We cannot assure you that we would prevail
in litigation given the complex technical issues and inherent uncertainties in
intellectual property litigation. If litigation results in an adverse ruling we
could be required to:



| |  |  | pay substantial damages;
| | - |  | ------------------------



| |  |  | cease the manufacture, use or sale of infringing products;
| | - |  | ----------------------------------------------------------



| |  |  | discontinue the use of infringing technology;
| | - |  | ---------------------------------------------



| |  |  | expend significant resources to develop non-infringing technology; or
| | - |  | ---------------------------------------------------------------------



| |  |  | license technology from the third party claiming infringement, which
license may not be available on commercially reasonable terms, or at
all.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------

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

We rely primarily on patent, copyright, trademark and trade secret laws, as
well as nondisclosure and confidentiality agreements and other methods, to
protect our proprietary technologies and processes. At times we incorporate the
intellectual property of our customers into our designs, and we have
obligations with respect to the non-use and non-disclosure of their
intellectual property. In the past, we have engaged in litigation to enforce
our intellectual property rights, to protect our trade secrets or to determine
the validity and scope of proprietary rights of others, including our
customers. We may engage in future litigation on similar grounds, which may
require us to expend significant resources and to divert the efforts and
attention of our management from our business operations. We cannot assure you
that:



| |  |  | the steps we take to prevent misappropriation or infringement of our
intellectual property or the intellectual property of our customers will
be successful;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | any existing or future patents will not be challenged, invalidated or circumvented; or
| | - |  | --------------------------------------------------------------------------------------



| |  |  | any of the measures described above would provide meaningful protection.
| | - |  | ------------------------------------------------------------------------

Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use our technology without authorization, develop similar
technology independently or design around our patents. If any of our patents
fails to protect our technology it would make it easier for our competitors to
offer similar products. In addition, effective patent, copyright, trademark and
trade secret protection may be unavailable or limited in certain countries.

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

Our former manufacturing operations used a variety of chemicals and were
subject to a wide range of environmental protection regulations in the United
States and Mexico. In connection with our spin-off from Rockwell, we assumed
all liabilities in respect of environmental matters related to the former
operations of our business. We have been designated as a potentially
responsible party and are engaged in groundwater remediation at one Superfund
site located at a former silicon wafer manufacturing facility and steel
fabrication plant in Parker Ford, Pennsylvania formerly occupied by us. In
addition, we are engaged in remediations of groundwater contamination at our
former Newport Beach, California wafer fabrication facility. We currently
estimate the remaining costs for these remediations to be approximately $3.3
million and have accrued for these costs as of September 30, 2003.

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

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

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



| |  |  | the division of our board of directors into three classes to be
elected on a staggered basis, one class each year;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | the ability of our board of directors to issue shares of our
preferred stock in one or more series without further authorization of
our shareholders;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a prohibition on shareholder action by written consent;
| | - |  | -------------------------------------------------------



| |  |  | a requirement that shareholders provide advance notice of any
shareholder nominations of directors or any proposal of new business to
be considered at any meeting of shareholders;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a requirement that a supermajority vote be obtained to remove a
director for cause or to amend or repeal certain provisions of our
restated certificate of incorporation or by-laws;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | elimination of the right of shareholders to call a special meeting of shareholders; and
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | a fair price provision.
| | - |  | -----------------------

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

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

Executive Officers

Our executive officers are:

Name
    
    Age
    
    PositionDwight W. Decker
    
    
    53
    
    
    Chairman of the Board and Chief Executive OfficerF. Matthew Rhodes
    
    
    46
    
    
    PresidentLewis C. Brewster
    
    
    39
    
    
    Executive Vice President and Chief Operating OfficerJ. Scott Blouin
    
    
    53
    
    
    Senior Vice President and Chief Financial OfficerScott L. Allen
    
    
    47
    
    
    Senior Vice President, CommunicationsDennis E. OReilly
    
    
    59
    
    
    Senior Vice President, General Counsel and SecretaryKerry K. Petry
    
    
    54
    
    
    Vice President and TreasurerAshwin Rangan
    
    
    44
    
    
    Senior Vice President and Chief Information OfficerMichael H. Vishny
    
    
    40
    
    
    Senior Vice President, Human ResourcesDavid C. Olsen
    
    
    41
    
    
    Vice President and Controller


There are no family relationships among our directors or executive officers.
Set forth below are the name, office and position held with the Company and
principal occupations and employment during the past 5 years of each of our
executive officers.

18



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##### Table of Contents



Dwight W. Decker  Chairman of the Board and Chief Executive Officer since
December 1998; and Senior Vice President of Rockwell International Corporation
(electronic controls and communications) and President, Rockwell Semiconductor
Systems prior thereto. Mr. Decker received a Ph.D. in applied mathematics from
the California Institute of Technology and a B.Sc. in mathematics and physics
from McGill University.

F. Matthew Rhodes  President since June 2003; Senior Vice President and
President of our former Broadband Communications segment from May 2002 to June
2003; Senior Vice President and General Manager, Personal Computing from
December 1998 to May 2002; and Vice President and General Manager, Personal
Computing Division of Rockwell Semiconductor Systems prior thereto. Mr. Rhodes
received an M.B.A. from the Anderson Graduate School of Management of the
University of California, Los Angeles, a M.S. in electrical engineering from
Lehigh University and a B.S. in physics from The Pennsylvania State University.

Lewis C. Brewster  Executive Vice President and Chief Operating Officer since
June 2003; Senior Vice President, Worldwide Sales from December 1998 to June
2003; and Vice President, Worldwide Sales of Rockwell Semiconductor Systems
prior thereto. Mr. Brewster received an M.B.A. from Stanford University and a
B.S. in electrical engineering and biomedical engineering from Duke University.

J. Scott Blouin  Senior Vice President and Chief Financial Officer since June
2003; Senior Vice President, Chief Accounting Officer and Controller from March
2002 to June 2003; Senior Vice President and Chief Accounting Officer from
January 2001 to March 2002; Chief Financial Officer of Burr-Brown Corporation
(semiconductors) from February 1996 to August 2000. Mr. Blouin received an
M.B.A. from Wake Forest University and a B.S. in administration from the
University of New Hampshire at Durham.

Scott L. Allen  Senior Vice President, Communications since June 2003; Vice
President, Communications from February 2001 to June 2003; Executive Director
of Public Relations from February 2000 to February 2001; and Director of
Worldwide Public Relations of Advanced Micro Devices (semiconductors) prior
thereto. Mr. Allen holds a B.A. in journalism from San Jose State University.

Dennis E. OReilly  Senior Vice President, General Counsel and Secretary
since December 1998; and Director of Business Development of Intel
Corporations Mobile and Handheld Products Group (semiconductors) prior
thereto. Mr. OReilly received a J.D. from Boston University School of Law and
a B.A. from the State University of New York at Binghamton.

Kerry K. Petry  Vice President and Treasurer since December 1998; and Vice
President and Treasurer of Rockwell Semiconductor Systems prior thereto. Mr.
Petry received an M.B.A. from Virginia Polytechnic Institute & State University
and a B.S. in accounting from West Virginia University.

Ashwin Rangan  Senior Vice President and Chief Information Officer since
December 1998; and Senior Vice President and Chief Information Officer of
Rockwell Semiconductor Systems prior thereto. Mr. Rangan received an M.S. in
industrial engineering and management with an emphasis in operations management
and information systems from the National Institute of Industrial Engineering
in Bombay, India, a B. Engr. in mechanical engineering and an A.A. from
Bangalore University.

Michael H. Vishny  Senior Vice President, Human Resources since January 2002;
Vice President and Chief Human Resources Officer for U.S. Robotics Corporation
(semiconductors) from January 2001 to July 2001; and Vice President of Human
Resources and Internal Communications for the Business Segment of Gateway
Computers (personal computers) prior thereto. Mr. Vishny received an M.A. in
labor and industrial relations and a B.S. in business administration from the
University of Illinois at Urbana-Champaign.

David C. Olsen  Vice President and Controller since July 2003; Executive
Director of Accounting and Finance since March 1999; and Director, Finance at
Toyota Motors U.S.A. prior thereto. Mr. Olsen received an executive M.B.A.
from the University of Southern California and a B.A. in Business
Administration from California State University- Fullerton. Mr. Olsen is a
Certified Public Accountant.

19



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Available Information

We maintain an Internet website at http://www.conexant.com. Our annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to such reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended, along with our annual
report to shareowners and other information related to our company, are
available free of charge on this site. Our Internet website and the
information contained therein or connected thereto are not intended to be
incorporated into this Annual Report on Form 10-K.




Item 2. Properties

Our headquarters and principal design center in Newport Beach, California
consist of approximately 116,000 square feet of owned and approximately 411,000
square feet of leased floor space. An additional 334,000 square feet of owned
floor space at our Newport Beach facility is leased to Jazz, 6,000 square feet
of owned floor space at our Newport Beach facility is leased to Skyworks, and
190,000 square feet of leased floor space is sub-leased to Mindspeed. At
September 30, 2003, we also operated 16 design centers and 17 sales offices at
locations in North America, Europe and the Asia-Pacific region. These
facilities had an aggregate of approximately 378,000 square feet of leased
floor space, including approximately 180,000 square feet in San Diego,
California. As a result of our various restructuring related activities, at
September 30, 2003 we have an additional 315,000 square feet of unused and
vacant leased space, with approximately 46% of it being sub-leased. We believe
our properties have been well maintained, are in sound operating condition and
contain all the equipment and facilities necessary to operate at present
levels.

Our California facilities, including our headquarters and principal design
center, are located near major earthquake fault lines. We maintain no
earthquake insurance with respect to these facilities. Certain of our
facilities are located in countries that may experience civil unrest, including
Israel.




Item 3. Legal Proceedings

Plasma Physics Corporation (Plasma) sued the Company and alleged that the
Company was, and in the past has been, infringing two patents by making and/or
importing into the United States or offering to sell, selling, and/or using
within the United States semiconductor wafer products made by processes claimed
in one or more claims of the patents. In August 2003, the Company and Plasma
settled this matter and the Company paid Plasma an amount that was not material to the
operations, financial condition, or cash flow of the Company. The Company
demanded indemnification from Novellus Corporation (Novellus), the manufacturer
of the equipment that allegedly employs the methods claimed to infringe the
Plasma patents. The Company and Novellus agreed to mediate this dispute and
settled the matter in the Companys favor in September 2003.

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 Semiconductor Systems.

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.




Item 4. Submission of Matters to Vote of Security Holders

No matters were submitted to a vote of our shareholders during the quarter
ended September 30, 2003.

20



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##### Table of Contents






PART II




Item 5. Market for Registrants Common Equity and Related Stockholder Matters

Our common stock is traded on the Nasdaq National Market under the symbol
CNXT. The following table lists the high and low per share sale prices for
our common stock as reported by the Nasdaq National Market for the periods
indicated.

High
    
    LowFiscal year ended September 30, 2002:First quarter
    
    $
    18.11
    
    
    $
    6.57Second quarter
    
    
    16.51
    
    
    
    9.21Third quarter (1)
    
    
    13.63
    
    
    
    1.03Fourth quarter
    
    
    2.74
    
    
    
    1.03Fiscal year ended September 30, 2003:First quarter
    
    $
    2.35
    
    
    $
    0.53Second quarter
    
    
    2.09
    
    
    
    1.20Third quarter (2)
    
    
    4.75
    
    
    
    1.49Fourth quarter
    
    
    6.77
    
    
    
    4.02




---

|(1) |  | Sales prices for our common stock beginning in the third quarter of
fiscal 2002 reflect the completion of the Spin-off Transaction and the
Merger on June 25, 2002. As a result of the Spin-off Transaction and
the Merger, Conexant shareholders received 0.351 of a share of common
stock of Skyworks Solutions, Inc. for each Conexant share held and the
Conexant shareholders continued to hold their Conexant shares.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Sales prices for our common stock beginning in the third quarter of
fiscal 2003 reflect the completion of the Mindspeed Spin on June 27,
2003. As a result of the Mindspeed Spin, Conexant shareholders received
one share of common stock of Mindspeed Technologies, Inc. for every
three Conexant shares held and the Conexant shareholders continued to
hold their Conexant shares.                                     

At
November 28, 2003, there were approximately 45,400 holders of record of our
common stock.

We have never paid cash dividends on our capital stock. We currently intend to
retain any earnings for use in our business, and do not anticipate paying cash
dividends in the foreseeable future.

21



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##### Table of Contents






Item 6. Selected Financial Data

The following selected financial data for the five years ended September 30,
2003 was derived from the audited consolidated financial statements of Conexant
and its subsidiaries, and its predecessor Rockwell Semiconductor Systems, Inc.,
representing the semiconductor systems business of Rockwell International
Corporation (Rockwell) and subsidiaries. In June 2002, Conexant completed the
spin-off of its wireless communications business and the sale of its Mexicali
Operations, and in June 2003, Conexant completed the spin-off of its Mindspeed
Technologies Internet infrastructure business. The selected financial data for
all periods have been restated to reflect these businesses as discontinued
operations.

The fiscal 1999 selected financial data include the operating results of
Conexant while it was part of Rockwell prior to January 1, 1999. The financial
data for the period prior to January 1, 1999 are not necessarily indicative of
what the financial position or results of operations would have been had
Conexant been an independent public company during that period. The selected
financial data should be read in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations and the consolidated
financial statements and notes thereto appearing elsewhere in this report.

2003
    
    2002
    
    2001
    
    2000
    
    1999Net revenues
    
    $
    599,977
    
    
    $
    521,726
    
    
    $
    541,688
    
    
    $
    1,211,410
    
    
    $
    990,486Cost of goods sold
    
    
    338,161
    
    
    
    317,921
    
    
    
    522,560
    
    
    
    692,551
    
    
    
    638,950Gross margin
    
    
    261,816
    
    
    
    203,805
    
    
    
    19,128
    
    
    
    518,859
    
    
    
    351,536Operating expenses:Research and development
    
    
    159,354
    
    
    
    156,350
    
    
    
    175,026
    
    
    
    186,618
    
    
    
    157,039Selling, general and administrative
    
    
    93,426
    
    
    
    95,750
    
    
    
    141,276
    
    
    
    154,992
    
    
    
    156,914Amortization of intangible assets
    
    
    3,437
    
    
    
    19,489
    
    
    
    19,814
    
    
    
    11,508
    
    
    
    3,109Special charges (1)
    
    
    18,379
    
    
    
    30,499
    
    
    
    369,258
    
    
    
    35,000
    
    
    
    34,274Total operating expenses
    
    
    274,596
    
    
    
    302,088
    
    
    
    705,374
    
    
    
    388,118
    
    
    
    351,336Operating income (loss)
    
    
    (12,780
    )
    
    
    (98,283
    )
    
    
    (686,246
    )
    
    
    130,741
    
    
    
    200Debt conversion costs
    
    
    
    
    
    
    (10,435
    )
    
    
    (42,584
    )
    
    
    
    
    
    
    Gain on extinguishment of debt
    
    
    42,021
    
    
    
    
    
    
    
    11,710
    
    
    
    
    
    
    
    Other income (expense), net
    
    
    (5,808
    )
    
    
    (36,870
    )
    
    
    837
    
    
    
    4,896
    
    
    
    5,647Income (loss) before income taxes
    
    
    23,433
    
    
    
    (145,588
    )
    
    
    (716,283
    )
    
    
    135,637
    
    
    
    5,847Provision (benefit) for income taxes
    
    
    (129
    )
    
    
    (1,838
    )
    
    
    (55,373
    )
    
    
    35,985
    
    
    
    5,286Income (loss) from continuing
operations
    
    
    23,562
    
    
    
    (143,750
    )
    
    
    (660,910
    )
    
    
    99,652
    
    
    
    561Income (loss) from discontinued
operations (2)
    
    
    (728,877
    )
    
    
    (737,017
    )
    
    
    (784,424
    )
    
    
    (290,579
    )
    
    
    12,368Net income (loss)
    
    $
    (705,315
    )
    
    $
    (880,767
    )
    
    $
    (1,445,334
    )
    
    $
    (190,927
    )
    
    $
    12,929Income (loss) from continuing
operations per share :Basic
    
    $
    0.09
    
    
    $
    (0.56
    )
    
    $
    (2.70
    )
    
    $
    0.47
    
    
    $
    
    (3)Diluted
    
    
    0.09
    
    
    
    (0.56
    )
    
    
    (2.70
    )
    
    
    0.47
    
    
    
    
    (3)Balance Sheet DataWorking capital
    
    $
    233,017
    
    
    $
    443,948
    
    
    $
    444,974
    
    
    $
    1,319,638
    
    
    $
    604,453Total assets
    
    
    931,707
    
    
    
    1,911,035
    
    
    
    2,815,480
    
    
    
    4,416,197
    
    
    
    1,841,950Long-term obligations
    
    
    643,260
    
    
    
    743,523
    
    
    
    761,927
    
    
    
    1,054,934
    
    
    
    432,076Shareholders equity
    
    
    166,766
    
    
    
    947,827
    
    
    
    1,773,176
    
    
    
    2,906,759
    
    
    
    1,035,153




---

|(1) |  | In fiscal 2003 and fiscal 2002, we recorded special charges of $18.4
million and $30.5 million, respectively, principally related to the
impairment of certain assets and restructuring activities. In fiscal 2001,
we recorded special charges of $369.3 million, principally related to the
impairment of certain manufacturing assets and restructuring activities.
In fiscal 2000, we recorded special charges of $35.0 million related to
the settlement of certain litigation. In fiscal 1999, we recorded
additional special charges of $34.3 million related to the restructuring
actions we initiated in fiscal 1998.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Income (loss) from discontinued operations (net of income taxes) for all
periods represents the operating results of our former wireless
communications business and our Mexicali Operations which we disposed of
in June 2002 and the Mindspeed Technologies Internet infrastructure
business which we disposed of in June 2003.                                                                                                                                                                                                                                                                                             

22



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|(3) |  | Income from continuing operations per share for this period reflects our
October 1999 2-for-1 stock split. Because we were not an independent
company during all of fiscal year 1999, per share amounts for that year
were calculated as if our spin-off from Rockwell had occurred on October
1, 1998.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations

Except where otherwise noted, this discussion of our financial condition and
results of operations represents our continuing operations, excluding our
discontinued wireless communications business and Mexicali Operations which we
disposed of in June 2002, and our discontinued Mindspeed Technologies business
which we disposed of in June 2003.

Recent Development

On November 3, 2003, we entered into a definitive merger agreement with
GlobespanVirata, Inc., a provider of broadband communications solutions for
consumer, enterprise, personal computer and service provider markets. In the
merger, GlobespanVirata shareholders will receive 1.198 shares of our common
stock for each share of GlobespanVirata common stock. This transaction will be
accounted for under the purchase method of accounting with Conexant as the
acquiror for accounting purposes. The closing of this transaction is subject
to customary regulatory and shareholder approvals. We expect that the
transaction will close in the quarter ending March 31, 2004.

Spin-off of Mindspeed Technologies Business

On June 27, 2003, we completed the distribution to Conexant shareholders of all
outstanding shares of Mindspeed, our wholly owned subsidiary, to which we
contributed our Internet infrastructure business, including the stock of
certain subsidiaries, and certain other assets and liabilities, including
$100.0 million in cash. In the Mindspeed Spin, Conexant shareholders received
one share of Mindspeed common stock for every three Conexant shares held and
the Conexant shareholders continued to hold their Conexant shares. Mindspeed
issued us a warrant to purchase 30 million shares of Mindspeed common stock,
representing approximately 20 percent of Mindspeeds outstanding common stock
on a fully diluted basis. The warrant is exercisable for a period of ten years,
commencing one year after the completion of the Mindspeed Spin, at an exercise
price of $3.408 per share. The warrant, at fair value, is presented as a
long-term asset on our consolidated balance sheet. Additionally, we entered
into a senior secured revolving credit facility pursuant to which Mindspeed may
borrow up to $50.0 million for working capital and general corporate purposes
(see Note 12 of Notes to Consolidated Financial Statements).

Spin-off and Merger of Wireless Communications Business

On June 25, 2002, we completed the distribution to Conexant shareholders (the
Spin-off Transaction) of outstanding shares of our wholly owned subsidiary
Washington Sub, Inc. (Washington), to which we contributed our wireless
communications business, other than certain assets and liabilities which we
retained. Immediately thereafter, Washington merged with and into Alpha
Industries, Inc. (Alpha), with Alpha the surviving corporation (the Merger). As
a result of the Spin-off Transaction and the Merger, Conexant shareholders
received 0.351 of a share of Alpha common stock for each Conexant share held
and the Conexant shareholders continued to hold their Conexant shares.

Upon completion of the Merger, Alpha and its subsidiaries purchased our
semiconductor assembly and test facility located in Mexicali, Mexico and our
package design team that supports the Mexicali facility. In connection with the
purchase, we, Alpha and certain subsidiaries of Alpha entered into a financing
agreement pursuant to which Alpha and a subsidiary of Alpha delivered to us
promissory notes for $150.0 million (the Term Notes) guaranteed by Alpha and
certain Alpha subsidiaries and secured by substantially all assets of Alpha in
payment of the purchase price for the Mexicali facility and the package design
team. The financing agreement also provided for a revolving credit facility
under which Alpha could borrow up to $100.0 million, less specified reserves,
for one year at the same interest rate and with the same security applicable to
the Term Notes. Alpha subsequently changed their name to Skyworks Solutions,
Inc. (Skyworks).

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In November 2002, we entered into a refinancing agreement with Skyworks
pursuant to which Skyworks repaid $105.0 million of the principal amount and
all accrued interest owed to us under the Term Notes, and the remaining
principal balance of the Term Notes was exchanged for $45.0 million principal
amount of a new 15% convertible note with a maturity date of June 30, 2005.
Skyworks also paid us all amounts outstanding under the credit facility, the
credit facility was cancelled and we released all security interests in
Skyworks assets and properties. See Managements Discussion and Analysis of
Financial Condition and Results of OperationsLiquidity and Capital Resources.

Newport Foundry Joint Venture

In March 2002, we and The Carlyle Group formed a new specialty foundry company
named Jazz Semiconductor, Inc. (Jazz). We contributed our Newport Beach,
California wafer fabrication operations and related assets and liabilities and
certain intellectual property to Jazz. We also issued to Jazz a warrant to
purchase 2.9 million shares of Conexant common stock (with a current exercise
price of $3.76 per share, subject to adjustment). In connection with this
transaction, we received $19.3 million in cash and a 45% equity interest in
Jazz, having an estimated fair value of $42.5 million. We recognized a $2.6
million gain on the transaction. In fiscal 2003, an unrelated party made an
additional investment in Jazz thereby reducing our equity interest to 39%. In
accordance with Staff Accounting Bulletin No. 51, we recognized a $0.3 million
gain upon this additional investment. Through September 30, 2003, Jazz has
purchased approximately 132,000 shares under the warrant. Of the outstanding
balance of approximately 2.7 million shares subject to the warrant,
approximately 2.0 million may be purchased currently and the remainder become
purchasable in March 2004. The warrant expires in January 2005.

We purchase a substantial portion of our requirements for silicon-based
semiconductor products from Jazz. We entered into a long-term supply
arrangement with Jazz under which it provides 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. We expect our minimum purchase obligations under the long-term
supply agreement with Jazz, net of a portion of the wafer purchase obligations
assumed by a third party, will be approximately $43.0 million and $14.0 million
in fiscal 2004 and 2005, respectively.

Digital Imaging Divestiture

In July 2002, we merged our digital imaging business with Zing Network, Inc., a
developer of advanced connectivity and imaging software, to create a new
privately held company named Pictos Technologies, Inc. (Pictos). In connection
with this transaction, we contributed assets with a carrying value of $17.3
million to Pictos in exchange for shares of Pictos stock. In June 2003, we
sold our investment in Pictos as part of ESS Technologys acquisition of
Pictos.

Acquisition of Video Compression Business

In June 2002, we acquired the video compression business of iCompression, Inc.
(iCompression), a wholly owned subsidiary of GlobespanVirata, Inc. The
acquisition enables us to accelerate the development of video products for the
encoder markets including PCs and cable set-top boxes. Total consideration
(including amounts paid out of escrow in June 2003) for the acquisition
consisted of 1.25 million shares of our common stock and promissory notes for
$21.0 million. In September 2003, because we guaranteed the value of the shares
we issued to iCompression, we made an additional cash payment of $0.7 million
to iCompression. We paid the amounts owed under the promissory notes in July
2002.

Results of Operations

Net Revenues(in millions)
    
    2003
    
    Change
    
    2002
    
    Change
    
    2001Net revenues
    
    $
    600.0
    
    
    
    15
    %
    
    $
    521.7
    
    
    
    (4
    )%
    
    $
    541.7


We recognize revenues from product sales upon shipment and transfer of title,
in accordance with the shipping terms specified in the arrangement with the
customer. Revenue recognition is deferred in all instances where the earnings

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process is incomplete. We sell a portion of our products to electronic
component distributors under agreements allowing for a right to return unsold
products. We defer the recognition of revenue on all sales to these
distributors until the products are sold by the distributors to a third party.
We record a reserve for sales returns and allowances for other customers based
on historical experience or specific identification of an event necessitating a
reserve. Development revenue is recognized when services are performed and was
not significant for any of the periods presented.

Our net revenues for fiscal 2003 increased 15% over fiscal 2002. The increase
primarily reflects higher demand for our ADSL customer premises modems,
increased revenue from set-top box designs comprised of a richer mix of our
back-end and complete system level content as well as substantially increased
sales volume from dial-up modems embedded in consumer products such as gaming
consoles. Our revenues also were higher as a result of incremental sales of
new stand-alone MPEG audio and video processing devices from our acquisition of
GlobespanViratas video compression business as well as soft modem revenues
from products acquired from PCTEL in the third quarter of fiscal 2003. In
total, these increased revenue levels more than offset the loss of revenues in
fiscal 2003 resulting from the divestiture of Pictos CMOS sensors and image
processing products in late fiscal 2002 and substantially lower video encoder
sales resulting from an industry-wide transition toward integrated encoding
functionality within more powerful video system graphics processors.

Our net revenues for fiscal 2002 were 4% lower than fiscal 2001. The decline
reflects lower sales volume in our legacy cordless telephone chipset products
and the divestiture of our global positioning system receiver product line
during the fourth quarter of fiscal 2001. The decline also reflects relatively
lower demand for our embedded modem solutions, primarily as a result of a large
customers exit from the production of video game hardware during fiscal 2001,
and lower average selling prices in our dial-up modem portfolio resulting from
the continued shift in our product mix toward lower-priced soft modem solutions
which use software to perform functions traditionally executed by semiconductor
components. These decreases were partially offset by higher sales of ADSL
customer premises modems and media processing products, including our broadcast
video solutions.

Gross Margin(in millions)
    
    2003
    
    Change
    
    2002
    
    Change
    
    2001Gross margin
    
    $
    261.8
    
    
    
    28
    %
    
    $
    203.8
    
    
    
    965
    %
    
    $
    19.1Percent of net revenues
    
    
    44
    %
    
    
    
    
    
    
    39
    %
    
    
    
    
    
    
    4
    %


Gross margin represents revenues less cost of goods sold. As a fabless
semiconductor company, we use third parties for wafer production, assembly and
test services. Our costs of goods sold consist predominately of purchased
finished wafers, assembly and test services, royalty and other intellectual
property costs, and labor and overhead associated with product procurement.
Prior to the divestiture of our manufacturing operations in March 2002, our
cost of goods sold consisted primarily of purchased materials, labor and
overhead (including depreciation) associated with product manufacturing and
procurement, and sustaining engineering expenses.

Gross margin for fiscal 2001 includes inventory write-downs of $105.4 million.
For fiscal 2003 and 2002, our gross margins reflect the favorable impact of
cost reductions we initiated beginning in fiscal 2001 and lower depreciation
expense which resulted from the write-down of manufacturing assets in fiscal
2001. Our gross margin for fiscal 2003 and 2002 also benefited from the
elimination of the burden of our underutilized former manufacturing operations
(which we contributed to Jazz in the second quarter of fiscal 2002).

Gross margin increased from 39% in 2002 to 44% in 2003. This increase resulted
from the elimination of the burden of our underutilized former manufacturing
operations and the favorable impact of our cost reduction actions. Gross
margin for 2003 also benefited from a slightly improved product mix and the
redeployment of our product and test engineering teams previously assigned to
our former manufacturing operations and included in cost of goods sold and now
redeployed to product development efforts and part of research and development
costs.

Our gross margin for fiscal 2003 and 2002 also benefited from the sale of
inventories with an original cost of $10.9 million and $45.6 million,
respectively, that we had written down to a zero cost basis during fiscal year
2001. These sales resulted from renewed demand for certain products that was
not anticipated at the time of the write-downs. The previously written-down
inventories were generally sold at prices which exceeded their original cost.
Had we not

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previously written down the cost basis of these goods, our cost of goods sold
would include the original cost of these items, and our gross margin for 2003
would have been $250.9 million (42% of our net revenues) compared to $158.2
million (30% of our net revenues) for fiscal 2002. As of September 30, 2003,
all such inventories have been scrapped or sold.

Our gross margin for fiscal 2001 reflects a sharp decline in sales volume on a
base of relatively fixed manufacturing support costs. Gross margin for fiscal
2001 also reflects inventory write-downs of $105.4 million, partially offset by
the sale of $6.9 million of these written-down goods in the fiscal 2001 fourth
quarter. The fiscal 2001 inventory write-downs resulted from the sharply
reduced end-customer demand for our products 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 our first quarter revenues decreased 42% compared with
the immediately preceding quarter. The reduced global demand for our products
and system solutions continued into the second quarter of fiscal 2001, and we
experienced further sequential decreases in our quarterly revenues of 30%. As a
result of our ongoing assessment of the recoverability of our inventories, we
recorded inventory write-downs of $36.3 million, $51.2 million and $17.9
million in the first, second and third quarters, respectively, of fiscal 2001.
The inventories written down in fiscal 2001 principally consisted of voiceband
processors, multi-megabit DSL transceivers, satellite set-top box tuners and
demodulators, ADSL modems and analog modems for non-PC applications.

We assess the recoverability of our inventories at least quarterly through a
review of inventory levels in relation to foreseeable demand, generally over
six months. Foreseeable demand is based upon all available information,
including sales backlog and forecasts, product marketing plans and product life
cycle information. When the inventory on hand exceeds the foreseeable demand,
we write down the value of those inventories which, at the time of our review,
we expect to be unable to sell. The amount of the inventory write-down is the
excess of historical cost over estimated realizable value. Once established,
these write-downs are considered permanent adjustments to the cost basis of the
excess inventory.

Our products are used by communications electronics OEMs that have designed our
products into communications equipment. For many of our products, we gain these
design wins through a lengthy sales cycle, which often includes providing
technical support to the OEM customer. Moreover, once a customer has designed a
particular suppliers components into a product, substituting another
suppliers components often requires substantial design changes which involve
significant cost, time, effort and risk. In the event of the loss of business
from existing OEM customers, we may be unable to secure new customers for our
existing products without first achieving new design wins. When the quantities
of inventory on hand exceed foreseeable demand from existing OEM customers into
whose products our products have been designed, we generally will be unable to
sell our excess inventories to others, and the estimated realizable value of
such inventories to us is generally zero.

From the time of the $105.4 million inventory write-downs in fiscal 2001 and
through September 30, 2003, we scrapped inventories having an original cost of
$42.0 million and sold $63.4 million of inventories previously written down to
a zero cost basis. The sales resulted from increased demand beginning in the
fourth quarter of fiscal 2001 which was not anticipated at the time of the
write-downs.

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.

Under our long-term supply arrangement with Jazz, we are obligated to purchase
certain minimum annual volumes of wafers during fiscal years 2004 and 2005.
Additionally, under a long-term supply agreement with Skyworks, we are
obligated to purchase certain minimum amounts of assembly and test services
during fiscal years 2004 and 2005. In the event our actual purchases under
these arrangements are less than the required minimum volumes, we will be
required to make additional payments, which would adversely affect our gross
margin. We currently anticipate meeting the annual minimum purchase
obligations under both of these agreements.

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##### Table of Contents



Research and Development(in millions)
    
    2003
    
    Change
    
    2002
    
    Change
    
    2001Research and development
    
    $
    159.4
    
    
    
    2
    %
    
    $
    156.4
    
    
    
    (11
    )%
    
    $
    175.0Percent of net revenues
    
    
    27
    %
    
    
    
    
    
    
    30
    %
    
    
    
    
    
    
    32
    %


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

The increase in R&D expenses for fiscal 2003 compared to fiscal 2002 primarily
reflects the higher costs of acquired technology, the 2003 addition of product
and test engineering teams and the additional week of activity to accommodate
our 52/53 week fiscal year. These increases were partially offset by workforce
reductions in our 2002 and 2003 restructuring actions and the contribution of a
majority of our advanced process development efforts to Jazz in March 2002.

The decrease in R&D expenses for fiscal 2002 compared to fiscal 2001 primarily
reflects lower headcount and personnel-related costs resulting from the expense
reduction and restructuring actions initiated during fiscal 2001 and from the
contribution of the majority of our advanced process development efforts to
Jazz in connection with the formation of Jazz in the second quarter of fiscal
2002.

Selling, General and Administrative(in millions)
    
    2003
    
    Change
    
    2002
    
    Change
    
    2001Selling, general and administrative
    
    $
    93.4
    
    
    
    (2
    )%
    
    $
    95.8
    
    
    
    (32
    )%
    
    $
    141.3Percent of net revenues
    
    
    16
    %
    
    
    
    
    
    
    18
    %
    
    
    
    
    
    
    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 decrease in SG&A expenses for fiscal 2003 compared to fiscal 2002 primarily
reflects lower headcount and personnel-related costs resulting from the expense
reduction and restructuring actions initiated during fiscal 2003 and 2002,
partially offset by the additional week of activity in fiscal 2003 to
accommodate our 52/53 week fiscal year.

The decrease in SG&A expenses for fiscal 2002 compared to fiscal 2001 primarily
reflects lower headcount and personnel-related costs resulting from the expense
reduction and restructuring actions initiated during fiscal 2002 and 2001 and
lower provisions for uncollectible accounts receivable. The provision for
uncollectible accounts receivable of $(5.8) million for fiscal 2002 resulted
from accounts receivable collections more favorable than previously estimated;
in fiscal 2001 the provision for uncollectible accounts receivable of $10.1
million reflected an increase in past-due accounts which management estimated
would ultimately be uncollectible. Excluding the effect of the provisions for
uncollectible accounts, our SG&A expenses for fiscal 2002 decreased by $29.6
million.

Amortization of Intangible Assets(in millions)
    
    2003
    
    Change
    
    2002
    
    Change
    
    2001Amortization of intangible assets
    
    $
    3.4
    
    
    
    (82
    )%
    
    $
    19.5
    
    
    nm
    
    $
    19.8


nm = not meaningful

The lower amortization expenses in fiscal 2003 primarily resulted from the
adoption of SFAS 141 and SFAS 142 as of the beginning of fiscal 2003. SFAS 141
requires that all business combinations be accounted for using the

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purchase method and provides new criteria for recording intangible assets
separately from goodwill. Upon adoption, we evaluated our existing goodwill and
intangible assets against the new criteria, which resulted in certain
intangible assets with a carrying value of $0.4 million being subsumed into
goodwill. SFAS 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets, and requires that we no longer amortize
goodwill into our results of operations. Instead, goodwill must be tested at
least annually for impairment and written down when impaired. See Note 2 of
Notes to Consolidated Financial Statements for the impact of this new
accounting standard in fiscal 2002 and 2001. We expect that amortization of
intangible assets will be approximately $3.8 million for fiscal 2004.

During the second quarter of fiscal 2003, we completed the transition
impairment test of our goodwill (as of the beginning of fiscal 2003) required
by SFAS 142. Management determined that it has a single reporting unit (as
defined in SFAS 142). For purposes of the impairment test, the fair value of
the reporting unit was determined considering both an income approach and a
market approach. Management determined that the recorded value of its goodwill
at the transition date was not impaired. See Note 2 of Notes to Consolidated
Financial Statements for further information. In addition, future periodic
impairment tests may result in significant write-downs of the value of
goodwill.

Special Charges

Special charges consist of the following:(in millions)
    
    2003
    
    Change
    
    2002
    
    Change
    
    2001Asset impairments
    
    $
    9.6
    
    
    nm
    
    $
    13.5
    
    
    nm
    
    $
    342.8Restructuring charges
    
    
    5.2
    
    
    nm
    
    
    16.1
    
    
    nm
    
    
    16.9Separation costs
    
    
    
    
    
    nm
    
    
    0.9
    
    
    nm
    
    
    Other special charges
    
    
    3.6
    
    
    nm
    
    
    
    
    
    nm
    
    
    9.6$
    18.4
    
    
    
    
    
    
    $
    30.5
    
    
    
    
    
    
    $
    369.3


nm = not meaningful

Asset Impairments

For a discussion of our asset impairment charges, see Note 16 of Notes to
Consolidated Financial Statements.

Restructuring Charges

In fiscal 2001 and continuing into fiscal 2003, we implemented a number of cost
reduction initiatives to improve our operating cost structure. For a discussion
of our cost reduction initiatives and activity under our restructuring plans,
including remaining liabilities at September 30, 2003, see Note 16 of Notes to
Consolidated Financial Statements.

Separation Costs

In fiscal 2002, we incurred separation costs of approximately $0.9 million in
connection with the divestiture of our Newport Beach wafer fabrication
operations and our digital imaging business.

Other Special Charges

In connection with the fiscal 2001 restructuring actions and realigned
manufacturing and procurement strategies, we recorded other special charges
aggregating $9.6 million related to the loss on disposal and write-off of
certain assets.

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

Debt Conversion Costs

In fiscal 2002, we exchanged 2.2 million shares of our common stock for
approximately $28.0 million principal amount of our 41/4% Convertible
Subordinated Notes due 2006. In connection with this transaction, we recognized

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debt conversion costs of $10.4 million for the fair value of the shares we
issued in excess of the number of shares issuable in a conversion of the notes
pursuant to their original terms.

During fiscal 2001, approximately $255.2 million principal amount of our
41/4% Convertible Subordinated Notes due 2006 were converted into
approximately 11.0 million shares of our common stock at a cost to us of $42.6
million.

Gain on Extinguishment of Debt

During
fiscal 2003 and 2001, we purchased $100.0 million and
$35.0 million, respectively, principal amount of our 4%
Convertible Subordinated Notes due 2007 at prevailing market prices, resulting
in a net gain of $42.0 million and $11.7 million,
respectively.

Other Income (Expense), Net(in millions)
    
    2003
    
    Change
    
    2002
    
    Change
    
    2001Other income (expense), net
    
    $
    (5.8
    )
    
    nm
    
    $
    (36.9
    )
    
    nm
    
    $
    0.8


Other expense, net for fiscal 2003 was comprised of a $30.2 million increase in
the fair value of the Mindspeed warrant, a $9.4 million increase in the fair
value of the conversion right under the Skyworks 15% convertible senior
subordinated notes, and $15.6 million of investment income and interest income
on invested cash balances, offset by $28.1 million of interest expense on our
convertible subordinated notes, a $39.4 million write-down of certain
non-marketable investments, and $3.1 million of losses in our equity method
investments. Due to variations in the fair values of the common stock
underlying the Skyworks 15% convertible senior subordinated notes and the
Mindspeed warrant, we expect that other income (expense) may fluctuate in
future periods until these derivative instruments are liquidated.

Other expense, net for fiscal 2002 was comprised of $31.1 million of interest
expense on our convertible subordinated notes, a $21.2 million write-down of
certain non-marketable investments and $2.7 million of losses in our equity
method investments, partially offset by $13.1 million of investment income and
interest income on invested cash balances.

Other income, net for fiscal 2001 was comprised of $29.4 million of investment
income, interest income on invested cash balances and a $23.3 million gain on
sale of marketable securities. Such other income was partially offset by $33.6
million of interest expense on our convertible subordinated notes, a $4.1
million write-off of costs associated with a terminated credit facility, and a
$13.1 million write-down of certain non-marketable investments.

The carrying values of certain non-marketable investments were written down to
their estimated fair values (in most cases, zero). These investments consist of
equity interests in early stage technology companies which we had accounted for
under the cost method. We estimated the fair value of these investments based
upon available financial and other information, including the then-current and
projected business prospects for the subject companies, and determined that the
decline in the fair value of these investments was other than temporary.

Benefit for Income Taxes

In fiscal 2003 and 2002, we recorded income tax benefits of $0.1 million and
$1.8 million, respectively. These benefits relate to tax refunds received
offset by foreign income taxes incurred by certain of our international
subsidiaries. As a result of our recent operating losses and our expectation of
future operating results, we determined that it is more likely than not that
the additional income tax benefits (principally net operating losses we can
carry forward to future years) which arose during these years will not be
realized. Accordingly, we increased our valuation allowance by approximately
$6.4 million during fiscal 2003 for the deferred tax assets which we do not
expect to realize through the reduction of future income tax payments. We
believe the remaining portion of our deferred tax assets will be realized based
on our current expectations of future earnings and tax planning strategies
available to us. We do not expect to recognize any income tax benefits
relating to future operating losses until we believe that such tax benefits are
more likely than not to be realized. While we will continue to be subject to
foreign income

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##### Table of Contents



taxes and federal alternative minimum tax, we expect those taxes will be
insignificant. We evaluate the realizability of our deferred tax assets
quarterly and in the event that we determine that we will not be able to
realize all or part of our deferred tax assets in the future, an adjustment to
the deferred tax assets would be charged against income in the period such
determination is made.

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Quarterly Results of Operations

The following table presents our operating results for each of the eight fiscal
quarters in the period ended September 30, 2003. The information for each of
these quarters is derived from our unaudited interim financial
statements which
have been prepared on the same basis as the audited consolidated financial
statements included in this report. In our opinion, all necessary adjustments,
which consist only of normal and recurring accruals as well as the special
charges, debt conversion costs and the gain on extinguishment of debt have been
included to fairly present our unaudited quarterly results. The quarterly
financial data for all periods have been restated to reflect the wireless
communications business and Mexicali Operations and the Mindspeed Technologies
business as discontinued operations. This data should be read together with our
consolidated financial statements and the notes thereto included in this
report.

Three months endedDec. 31,
    
    Mar. 31,
    
    June 30,
    
    Sept. 30,
    
    Dec. 31,
    
    Mar. 31,
    
    June 30,
    
    Sept. 30,2001
    
    2002
    
    2002
    
    2002
    
    2002
    
    2003
    
    2003
    
    2003(in thousands, except per share amounts)Statement of Operations DataNet revenues
    
    $
    126,937
    
    
    $
    129,728
    
    
    $
    131,999
    
    
    $
    133,062
    
    
    $
    144,201
    
    
    $
    140,123
    
    
    $
    150,950
    
    
    $
    164,703Cost of goods sold
    
    
    86,364
    
    
    
    82,473
    
    
    
    74,191
    
    
    
    74,893
    
    
    
    81,462
    
    
    
    78,107
    
    
    
    86,000
    
    
    
    92,592Gross margin
    
    
    40,573
    
    
    
    47,255
    
    
    
    57,808
    
    
    
    58,169
    
    
    
    62,739
    
    
    
    62,016
    
    
    
    64,950
    
    
    
    72,111Research and development
    
    
    37,009
    
    
    
    37,782
    
    
    
    40,557
    
    
    
    41,002
    
    
    
    40,237
    
    
    
    38,741
    
    
    
    38,849
    
    
    
    41,527Selling, general and
administrative
    
    
    23,586
    
    
    
    25,513
    
    
    
    24,324
    
    
    
    22,327
    
    
    
    22,779
    
    
    
    23,777
    
    
    
    22,915
    
    
    
    23,955Amortization of intangible
assets
    
    
    5,366
    
    
    
    5,603
    
    
    
    4,440
    
    
    
    4,080
    
    
    
    799
    
    
    
    799
    
    
    
    925
    
    
    
    914Special charges
    
    
    1,000
    
    
    
    14,465
    
    
    
    14,702
    
    
    
    332
    
    
    
    6,774
    
    
    
    285
    
    
    
    6,526
    
    
    
    4,794Total operating expenses
    
    
    66,961
    
    
    
    83,363
    
    
    
    84,023
    
    
    
    67,741
    
    
    
    70,589
    
    
    
    63,602
    
    
    
    69,215
    
    
    
    71,190Operating income (loss)
    
    
    (26,388
    )
    
    
    (36,108
    )
    
    
    (26,215
    )
    
    
    (9,572
    )
    
    
    (7,850
    )
    
    
    (1,586
    )
    
    
    (4,265
    )
    
    
    921Debt conversion costs
    
    
    
    
    
    
    
    
    
    
    (10,435
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain on debt extinguishment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,645
    
    
    
    7,376
    
    
    
    Other income (expense), net
    
    
    (8,693
    )
    
    
    (6,245
    )
    
    
    (5,558
    )
    
    
    (16,374
    )
    
    
    3,403
    
    
    
    (44,732
    )
    
    
    544
    
    
    
    34,977Income (loss) before income taxes
    
    
    (35,081
    )
    
    
    (42,353
    )
    
    
    (42,208
    )
    
    
    (25,946
    )
    
    
    (4,447
    )
    
    
    (11,673
    )
    
    
    3,655
    
    
    
    35,898Provision (benefit) for income
taxes
    
    
    (2,693
    )
    
    
    257
    
    
    
    (116
    )
    
    
    714
    
    
    
    316
    
    
    
    381
    
    
    
    488
    
    
    
    (1,314
    )Income (loss) from continuing
operations
    
    
    (32,388
    )
    
    
    (42,610
    )
    
    
    (42,092
    )
    
    
    (26,660
    )
    
    
    (4,763
    )
    
    
    (12,054
    )
    
    
    3,167
    
    
    
    37,212Discontinued operations, net of
income tax
    
    
    (172,102
    )
    
    
    (158,092
    )
    
    
    (257,307
    )
    
    
    (149,516
    )
    
    
    (620,610
    )
    
    
    (55,970
    )
    
    
    (52,297
    )
    
    
    Net income (loss)
    
    $
    (204,490
    )
    
    $
    (200,702
    )
    
    $
    (299,399
    )
    
    $
    (176,176
    )
    
    $
    (625,373
    )
    
    $
    (68,024
    )
    
    $
    (49,130
    )
    
    $
    37,212Income (loss) per share, basic:Continuing operations
    
    $
    (0.13
    )
    
    $
    (0.17
    )
    
    $
    (0.16
    )
    
    $
    (0.10
    )
    
    $
    (0.02
    )
    
    $
    (0.05
    )
    
    $
    0.01
    
    
    $
    0.14Discontinued operations
    
    
    (0.67
    )
    
    
    (0.61
    )
    
    
    (0.99
    )
    
    
    (0.56
    )
    
    
    (2.33
    )
    
    
    (0.21
    )
    
    
    (0.19
    )
    
    
    Net income (loss)
    
    $
    (0.80
    )
    
    $
    (0.78
    )
    
    $
    (1.15
    )
    
    $
    (0.66
    )
    
    $
    (2.35
    )
    
    $
    (0.26
    )
    
    $
    (0.18
    )
    
    $
    0.14Income (loss) per share, diluted:Continuing operations
    
    $
    (0.13
    )
    
    $
    (0.17
    )
    
    $
    (0.16
    )
    
    $
    (0.10
    )
    
    $
    (0.02
    )
    
    $
    (0.05
    )
    
    $
    0.01
    
    
    $
    0.12Discontinued operations
    
    
    (0.67
    )
    
    
    (0.61
    )
    
    
    (0.99
    )
    
    
    (0.56
    )
    
    
    (2.33
    )
    
    
    (0.21
    )
    
    
    (0.19
    )
    
    
    Net income (loss)
    
    $
    (0.80
    )
    
    $
    (0.78
    )
    
    $
    (1.15
    )
    
    $
    (0.66
    )
    
    $
    (2.35
    )
    
    $
    (0.26
    )
    
    $
    (0.18
    )
    
    $
    0.12Shares used in computing
diluted loss per share-basic
    
    
    254,362
    
    
    
    256,135
    
    
    
    260,414
    
    
    
    265,085
    
    
    
    265,714
    
    
    
    266,543
    
    
    
    268,489
    
    
    
    273,241Shares used in computing
diluted loss per share-diluted
    
    
    254,362
    
    
    
    256,135
    
    
    
    260,414
    
    
    
    265,085
    
    
    
    265,714
    
    
    
    266,543
    
    
    
    271,051
    
    
    
    303,488


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Beginning in the second quarter of fiscal 2001 and continuing through fiscal
2003 we recorded special charges for our restructuring initiatives. We also
recorded special charges for asset impairments.

In the past, our quarterly operating results have fluctuated due to a number of
factors, many of which are outside our control. These include changes in the
overall demand for communications electronics equipment, changes in product
mix, the timing of new product introductions, the timing of receipt, reduction
or cancellation of significant orders by customers, and other factors that have
had a significant impact on our revenues and gross margins. In addition, the
level of utilization of former manufacturing facilities affected our gross
margins. Significant quarterly fluctuations in results of operations have also
caused significant fluctuations in our liquidity and working capital, including
our cash and cash equivalents, accounts receivable and payable and inventories.

Liquidity and Capital Resources

Cash used in operating activities was $32.2 million in fiscal 2003 compared to
$11.6 million in fiscal 2002. Fiscal 2003 operating cash flows reflect our
income from continuing operations of $23.6 million, offset by noncash charges
(including depreciation and amortization, special charges, unrealized gains on the
Mindspeed warrant and the Skyworks notes and other) of $0.5 million and a net
decrease in the cash components of our working capital of approximately
$55.2 million.

The fiscal 2003 changes in the cash components of working capital include a
$14.6 million increase in accounts receivable, principally due to our increased
sales in the fourth fiscal quarter, a $10.8 million decrease in accrued
expenses and other current liabilities, a $27.2 million decrease in accounts
payable, a $21.9 million increase in inventories due to the growth in our
business, and a $19.3 million decrease in other assets related to the use of
advance payments to vendors and the timing of prepaid expenses and collection
of other receivables. Total inventories, net of provisions, increased
$7.1 million in fiscal 2003.

Cash provided by investing activities of $183.7 million in fiscal 2003 includes
the net repayment of the Term Notes and credit facility by Skyworks in the
amount of $135.0 million, proceeds from the sale of assets of $18.2 million and
net sales of marketable securities of $62.5 million. These sources of cash were
partially offset by capital expenditures of $19.8 million and payments of $12.2
million for acquisitions and investments in early stage technology companies.

Cash used by financing activities of $34.1 million in fiscal 2003 consisted of
proceeds from the exercise of stock options and warrants of $22.3 million,
offset by $56.4 million paid in connection with the repurchase of a portion of
our convertible subordinated notes. In fiscal 2002, cash provided by financing
activities of $14.7 million consisted of proceeds from the exercise of stock
options.

Cash used in the discontinued operations of Mindspeed in fiscal 2003 was $202.3
million, which includes the $100.0 million of cash contributed to Mindspeed
prior to the Mindspeed Spin. Cash used in discontinued operations in fiscal
2002 of $222.6 million, and in fiscal 2001 of $128.3 million, represents the
funding of the discontinued wireless communications business, the Mexicali
Operations and the Mindspeed Technologies business.

As of September 30, 2003, we held $45.0 million principal amount of Skyworks
15% convertible senior subordinated notes with a maturity date of June 30,
2005. Skyworks may redeem the notes at any time after May 12, 2004, subject to
a redemption premium of 3% of the outstanding principal amount. We may, at our
option, convert the outstanding principal amount of the notes into shares of
Skyworks common stock based upon the current conversion price of $7.87 per
share, subject to adjustment under certain circumstances. At maturity, Skyworks
must pay the outstanding principal amount by delivering to us a number of
shares of its common stock based upon the conversion price. Skyworks has
granted us certain registration rights relating to the notes and the shares of
Skyworks common stock underlying the notes. We have the ability and intent to
liquidate the $45.0 million 15% convertible senior subordinated notes or shares
underlying the notes within the next twelve months.

As of September 30, 2003, our principal sources of liquidity are our existing
cash reserves and short-term investments (including the Skyworks 15%
convertible senior subordinated notes) and cash generated from product sales.
Combined cash and cash equivalents and short-term investments (including the
Skyworks 15% convertible senior subordinated notes) at September 30, 2003
totaled $175.5 million compared to $440.5 million at September

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30, 2002. Our working capital at September 30, 2003 was $233.0 million compared
to $443.9 million at September 30, 2002. The overall working capital change
principally reflects cash used in operations, cash payments to repurchase debt,
and cash used in the discontinued operations of Mindspeed.

In connection with the Mindspeed Spin in June 2003, we entered into a senior
secured revolving credit facility with Mindspeed, pursuant to which Mindspeed
may borrow up to $50.0 million from us for working capital and general
corporate purposes. Mindspeed may borrow under the credit facility only to
restore its cash balance to $25.0 million. The credit facility is available
through June 29, 2007. As of September 30, 2003, no amounts were outstanding
under the credit facility.

We believe that our existing sources of liquidity, along with cash expected to
be generated from product sales, will be sufficient to fund our operations,
research and development efforts, anticipated capital expenditures, remaining
accrued restructuring balance of $12.1 million, and other capital requirements,
including our commitment under the credit facility with Mindspeed, for at least
the next twelve months. We will need to continue a focused program of capital
expenditures to meet our research and development and corporate requirements.
We may also consider acquisition opportunities to extend our technology
portfolio and design expertise and to expand our product offerings. In order to
fund capital expenditures, increase our working capital or complete any
acquisitions, we may seek to obtain additional debt financing or issue
additional shares of our common stock. However, we cannot assure you that such
financing will be available to us on favorable terms, or at all.

Commitments

Operating Leases

We lease certain facilities and equipment under non-cancelable operating
leases. The leases expire at various dates through 2017 and contain various
provisions for rental adjustments including, in certain cases, adjustments
based on increases in the Consumer Price Index. The leases generally contain
renewal provisions for varying periods of time. At September 30, 2003, minimum
future lease payments under these leases, excluding any sublease income,
totaled $85.2 million, including $15.6 million due within one year; $20.0
million due in one to three years; $9.9 million due in three to five years; and
$39.7 million due after five years. Rental expense under operating leases was
approximately $16.8 million during fiscal 2003.

Convertible Debt

As of September 30, 2003, $515.0 million principal amount of our 4% Convertible
Subordinated Notes due 2007 and $66.8 million principal amount
of our 4 1/4%
Convertible Subordinated Notes due 2006 were outstanding. The notes are general
unsecured obligations. We pay interest on the notes in arrears semiannually and
during fiscal 2003, we paid interest of $25.9 million. Both the 4% Convertible
Subordinated Notes and the 4 1/4% Convertible Subordinated Notes are
convertible, at the option of the holder, at any time prior to redemption or
maturity into shares of our common stock at conversion prices of $42.432 and
$9.075, respectively. At our option, we may redeem the 4 1/4% Convertible
Subordinated Notes and the 4% Convertible Subordinated Notes, in each case at a
declining premium to par.

Capital Commitments

We have certain non-marketable equity investments in early stage technology
companies. In connection with two of these investments, we may be required to
invest up to an additional $13.3 million.

Purchase Commitments

We purchase a substantial portion of our requirements for silicon wafers from
Jazz. During the first two years of the long-term supply arrangement with Jazz,
our cost of wafers is an amount which approximates our historical cost.
Thereafter, our cost of wafers will be based on market prices. Additionally, we
are obligated to purchase certain minimum annual volumes of wafers during the
first three years of the arrangement. In the event our actual wafer purchases
are less than the required minimum volumes, we will be required to make
additional payments to Jazz. Our expected minimum purchase obligations under
the long-term supply agreement with Jazz, net of a portion of the wafer
purchase obligations assumed by a third party, will be approximately $43.0
million and $14.0 million in fiscal 2004 and 2005, respectively.

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Additionally, we entered into a long-term supply agreement with Skyworks in
June 2002, under which Skyworks provides semiconductor assembly and test
services at our former Mexicali, Mexico facility. Under this supply agreement,
we are obligated to purchase certain minimum amounts of assembly and test
services during fiscal 2004 and 2005 in the amounts of $26.6 million and $10.9
million, respectively. In the event our purchases of assembly and test services
are less than the required minimum amounts, we will be required to make
additional payments to Skyworks.

We currently anticipate meeting each of the annual minimum purchase obligations
under the long-term supply agreements with Jazz and Skyworks.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements consist of operating leases, capital
commitments and purchase commitments as described above.

Recent Accounting Standards

See Note 2 of Notes to Consolidated Financial Statements.

Critical Accounting Policies

The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Among the significant estimates affecting our
consolidated financial statements are those relating to allowances for doubtful
accounts, inventories, long-lived assets, income taxes, valuation of derivative
instruments, restructuring costs, long-term employee benefit plans and other
contingencies. We regularly evaluate our estimates and assumptions based upon
historical experience and various other factors that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. To the extent actual results differ
from those estimates, our future results of operations may be affected.

Impairment of long-lived assets

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

Goodwill is tested for impairment annually, or when a possible impairment is
indicated, using the fair value based test prescribed by SFAS 142. The
estimates and assumptions described above (along with other factors such as
discount rates) will affect the outcome of our impairment tests and the amounts
of any resulting impairment losses.

Deferred income taxes

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

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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.

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.

Non-Marketable Equity Securities

We have a portfolio of strategic investments in non-marketable equity
securities. Our ability to recover our investments in private, non-marketable
equity securities and to earn a return on these investments is primarily
dependent on how successfully these companies are able to execute to their
business plans and how well their products are accepted, as well as their
ability to obtain venture capital funding to continue operations and to grow.
We review all of our investments periodically for impairment and an impairment
analysis of non-marketable equity securities requires significant judgment.
This analysis includes assessment of each investees financial condition, the
business outlook for its products and technology, its projected results and
cash flows, the likelihood of obtaining subsequent rounds of financing and the
impact of any relevant contractual equity preferences held by us or by others.
Equity prices, including non-marketable equity securities, have declined
significantly over the past two years and we have experienced substantial
impairments in the value of non-marketable equity securities investments we
hold. Future adverse changes in market conditions or poor operating results of
underlying investments could result in an inability to recover the carrying
value of our investments that may not be reflected in their current carrying
values, which could require additional impairment charges to write down the
carrying values of such investments.

Revenue Recognition

Revenue from product sales is recognized upon shipment to the customer, when
the risk of loss has been transferred to the customer, price and terms are
fixed, no significant vendor obligation exists and collection of the resulting
receivable is reasonably assured. Our revenue recognition policy is
significant because our revenue is a key component of our operations and the
timing of revenue recognition determines the timing of certain expenses, such
as sales commissions. In addition, we record reductions to revenue for
estimated product returns, and allowances such as competitive pricing programs
and rebates. We follow very specific and detailed guidelines in measuring
revenue. Revenue results are difficult to predict, and any shortfall in
revenues could cause our operating results to vary significantly from period to
period.

Valuation of Derivative Instruments

We have two primary types of derivatives- our warrant to purchase shares of
common stock of Mindspeed and the conversion right of the Skyworks 15%
convertible senior subordinated notes. We determine the fair value of the
conversion right of the Skyworks notes using the actual trading price of the
underlying shares of Skyworks common stock. We determine the fair value of the
Mindspeed warrant using a standard Black-Scholes pricing model with assumptions
consistent with current market conditions and our current intent to liquidate
the warrant over a specified time period. The Black-Scholes pricing
model requires the input of highly subjective assumptions including
expected stock price volatility. Changes in these assumptions could
cause the fair value of the Mindspeed warrant to vary significantly
from period to period.

Restructuring Charges

We have recorded $5.2 million, $16.1 million and $16.9 million of restructuring
charges in fiscal years 2003, 2002 and 2001, respectively. These charges
relate primarily to reductions in our workforce and related impact on the use
of facilities. The estimated charges contain estimates and assumptions made by
management about matters which are uncertain at the time, for example the
timing and amount of sublease income that will be achieved on vacated property
and the operating costs to be paid until lease termination. While we have used
our best estimates based on

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facts and circumstances available at the time, different estimates reasonably
could have been used in the relevant periods, and the actual results may be
different, and those differences could have a material impact on the
presentation of our financial condition or results of operations. Our policies
require us to review the estimates and assumptions periodically and reflect the
effects of those revisions in the period that they are determined to be
necessary.

Employee Benefit Plans

We have long-term liabilities recorded for a retirement medical plan and a
pension plan. These obligations and the related effects on operations are
determined using actuarial valuations. There are critical assumptions used in
these valuation models such as the discount rate, expected return on assets,
compensation levels, turnover rates and mortality rates. The discount rate
used is representative of a high-quality fixed income investment. The other
assumptions do not tend to change materially over time. We evaluate all
assumptions annually and they are updated to reflect our experience.




Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Our financial instruments include cash and cash equivalents, marketable debt
securities, the Skyworks notes, the Mindspeed warrants, marketable equity
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 September 30, 2003, the
carrying value of our cash and cash equivalents approximates fair value. Our
marketable debt securities (consisting of asset-backed securities, corporate
bonds and government securities) principally have remaining terms of two years
or less. Such securities are not subject to significant interest rate risk. Our
marketable equity securities consist of shares in publicly traded companies.
All of our marketable securities are classified as available for sale and, as
of September 30, 2003, unrealized gain of $3.1 million on these securities is
included in accumulated other comprehensive income. As of September 30, 2003, a
10% adverse change in equity prices would result in a decrease of $0.5 million
in the fair value of our marketable equity securities.

We hold Skyworks 15% convertible senior subordinated notes having an aggregate
principal amount of $45 million. The conversion right is considered an
embedded derivative for financial accounting purposes and the value of the
Skyworks 15% convertible senior subordinated notes is subject to significant
risk related to changes in the market price of Skyworks common stock. As of
September 30, 2003, a 10% decrease in the market price of Skyworks common
stock would decrease the fair value of the Skyworks 15% convertible senior
subordinated notes by $5.7 million. At September 30, 2003,
the market price of Skyworks common stock was $9.84 per share.
For fiscal 2003, the market price of Skyworks common stock has
ranged from a low of $5.15 per share to a high of $12.22 per share. The Skyworks 15% convertible senior
subordinated notes are also subject to interest rate risk.

We hold a warrant to purchase 30 million shares of common stock of Mindspeed.
For financial accounting purposes, this is a derivative instrument and the fair
value of the warrant is subject to significant risk related to changes in the
market price of Mindspeeds common stock. As of September 30, 2003, a 10%
decrease in the market price of Mindspeeds common stock would decrease the
fair value of this warrant by approximately $14.2 million. At
September 30, 2003, the market price of Mindspeeds common
stock was $5.37 per share. Since the Mindspeed Spin on June 27,
2003, the market price of Mindspeeds common stock has ranged
from a low of $2.00 per share to a high of $6.20 per share.

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.

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The following table shows the fair values of our investments and long-term debt
as of September 30, 2003:

(in millions)
    
    Carrying Value
    
    Fair ValueCash and cash equivalents
    
    $
    76.2
    
    
    $
    76.2Marketable debt securities
    
    
    21.6
    
    
    
    21.6Marketable equity securities
    
    
    5.4
    
    
    
    5.4Notes receivable from Skyworks
    
    
    55.6
    
    
    
    55.6Mindspeed warrant
    
    
    119.2
    
    
    
    119.2Long-term debt
    
    
    581.8
    
    
    
    511.0


We transact business in various foreign currencies, and we have established a
foreign currency hedging program utilizing foreign currency forward exchange
contracts to hedge certain foreign currency transaction exposures. Under this
program, we seek to offset foreign currency transaction gains and losses with
gains and losses on the forward contracts, so as to mitigate our overall risk
of foreign transaction gains and losses. We do not enter into forward
contracts for speculative or trading purposes. At September 30, 2003, we held
no foreign currency forward exchange contracts. Based on our overall currency
rate exposure at September 30, 2003, a 10 percent change in currency rates
would not have a material effect on our consolidated financial position,
results of operations or cash flows.

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Item 8. Financial Statements and Supplementary Data




CONEXANT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)

September 30,2003
    
    2002ASSETSCurrent AssetsCash and cash equivalents
    
    $
    76,186
    
    
    $
    161,088Short-term investments
    
    
    99,283
    
    
    
    99,466Notes receivable from Skyworks
    
    
    
    
    
    
    180,000Receivables, net of allowance of $1,547 (2003) and $6,508 (2002)
    
    
    79,557
    
    
    
    60,984Inventories
    
    
    59,548
    
    
    
    52,488Deferred income taxes
    
    
    13,600
    
    
    
    32,233Other current assets
    
    
    26,524
    
    
    
    47,382Current assets of discontinued operations
    
    
    
    
    
    
    29,992Total current assets
    
    
    354,698
    
    
    
    663,633Property, plant and equipment, net
    
    
    36,310
    
    
    
    51,140Goodwill
    
    
    56,865
    
    
    
    46,426Intangible assets, net
    
    
    12,506
    
    
    
    14,244Deferred income taxes
    
    
    241,260
    
    
    
    224,168Mindspeed warrant
    
    
    119,230
    
    
    
    Other assets
    
    
    110,838
    
    
    
    155,179Non-current assets of discontinued operations
    
    
    
    
    
    
    756,245Total assets
    
    $
    931,707
    
    
    $
    1,911,035LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    55,909
    
    
    $
    82,653Accrued compensation and benefits
    
    
    28,865
    
    
    
    21,401Other current liabilities
    
    
    36,907
    
    
    
    50,209Current liabilities of discontinued operations
    
    
    
    
    
    
    65,422Total current liabilities
    
    
    121,681
    
    
    
    219,685Convertible subordinated notes
    
    
    581,825
    
    
    
    681,825Other liabilities
    
    
    61,435
    
    
    
    60,332Non-current liabilities of discontinued operations
    
    
    
    
    
    
    1,366Total liabilities
    
    
    764,941
    
    
    
    963,208Commitments and contingencies
    
    
    
    
    
    
    Shareholders EquityPreferred and junior preferred stock, no par value: 25,000 shares authorized;
no shares issued or outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value (2003) and $1.00 (2002): 1,000,000 authorized
shares; 276,134 (2003) and 265,676 (2002) issued shares
    
    
    2,761
    
    
    
    265,676Additional paid-in capital
    
    
    3,506,070
    
    
    
    3,219,044Accumulated deficit
    
    
    (3,332,527
    )
    
    
    (2,507,407
    )Accumulated other comprehensive loss
    
    
    (9,496
    )
    
    
    (28,077
    )Unearned compensation
    
    
    (42
    )
    
    
    (1,409
    )Total shareholders equity
    
    
    166,766
    
    
    
    947,827Total liabilities and shareholders equity
    
    $
    931,707
    
    
    $
    1,911,035


See accompanying notes to consolidated financial statements.

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CONEXANT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

Years Ended September 30,2003
    
    2002
    
    2001Net revenues
    
    $
    599,977
    
    
    $
    521,726
    
    
    $
    541,688Cost of goods sold
    
    
    338,161
    
    
    
    317,921
    
    
    
    522,560Gross margin
    
    
    261,816
    
    
    
    203,805
    
    
    
    19,128Operating expenses:Research and development
    
    
    159,354
    
    
    
    156,350
    
    
    
    175,026Selling, general and administrative
    
    
    93,426
    
    
    
    95,750
    
    
    
    141,276Amortization of intangible assets
    
    
    3,437
    
    
    
    19,489
    
    
    
    19,814Special charges
    
    
    18,379
    
    
    
    30,499
    
    
    
    369,258Total operating expenses
    
    
    274,596
    
    
    
    302,088
    
    
    
    705,374Operating loss
    
    
    (12,780
    )
    
    
    (98,283
    )
    
    
    (686,246
    )Debt conversion costs
    
    
    
    
    
    
    (10,435
    )
    
    
    (42,584
    )Gain on extinguishment of debt
    
    
    42,021
    
    
    
    
    
    
    
    11,710Other income (expense), net
    
    
    (5,808
    )
    
    
    (36,870
    )
    
    
    837Income (loss) before income taxes
    
    
    23,433
    
    
    
    (145,588
    )
    
    
    (716,283
    )Benefit for income taxes
    
    
    (129
    )
    
    
    (1,838
    )
    
    
    (55,373
    )Income (loss) from continuing operations
    
    
    23,562
    
    
    
    (143,750
    )
    
    
    (660,910
    )Loss from discontinued operations, net of income taxes
    
    
    (728,877
    )
    
    
    (737,017
    )
    
    
    (784,424
    )Net loss
    
    $
    (705,315
    )
    
    $
    (880,767
    )
    
    $
    (1,445,334
    )Income (loss) per share, basic:Continuing operations
    
    $
    0.09
    
    
    $
    (0.56
    )
    
    $
    (2.70
    )Discontinued operations
    
    
    (2.72
    )
    
    
    (2.84
    )
    
    
    (3.21
    )Net loss
    
    $
    (2.63
    )
    
    $
    (3.40
    )
    
    $
    (5.91
    )Income (loss) per share, diluted:Continuing operations
    
    $
    0.09
    
    
    $
    (0.56
    )
    
    $
    (2.70
    )Discontinued operations
    
    
    (2.65
    )
    
    
    (2.84
    )
    
    
    (3.21
    )Net loss
    
    $
    (2.56
    )
    
    $
    (3.40
    )
    
    $
    (5.91
    )Number of shares used in per share computation-basic
    
    
    268,586
    
    
    
    258,998
    
    
    
    244,711Number of shares used in per share computation-diluted
    
    
    275,230
    
    
    
    258,998
    
    
    
    244,711


See accompanying notes to consolidated financial statements.

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CONEXANT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

Years Ended September 30,2003
    
    2002
    
    2001Cash Flows From Operating ActivitiesIncome (loss) from continuing operations
    
    $
    23,562
    
    
    $
    (143,750
    )
    
    $
    (660,910
    )Adjustments required to reconcile income (loss) from continuing
operations to net cash used in operating activities, net of
effects of acquisition/dispositions of businesses:Depreciation
    
    
    16,828
    
    
    
    29,144
    
    
    
    97,434Amortization of intangible assets
    
    
    3,437
    
    
    
    19,489
    
    
    
    19,814Asset impairments
    
    
    10,281
    
    
    
    13,522
    
    
    
    342,791Write-down of non-marketable investments
    
    
    39,402
    
    
    
    21,207
    
    
    
    13,051Provision for losses on accounts receivable
    
    
    (3,958
    )
    
    
    (5,814
    )
    
    
    10,116Inventory provisions
    
    
    14,451
    
    
    
    14,364
    
    
    
    103,783Deferred income taxes
    
    
    682
    
    
    
    3,667
    
    
    
    (95,108
    )Stock compensation
    
    
    2,520
    
    
    
    9,196
    
    
    
    15,168Debt conversion costs
    
    
    
    
    
    
    10,435
    
    
    
    42,584Gain on extinguishment of debt
    
    
    (42,021
    )
    
    
    
    
    
    
    (11,710
    )Change in fair value of Skyworks note and Mindspeed warrant
    
    
    (39,632
    )
    
    
    
    
    
    
    Other non-cash charges, net
    
    
    (2,515
    )
    
    
    (1,632
    )
    
    
    (7,491
    )Changes in assets and liabilities, net of acquisitions/dispositions:Receivables
    
    
    (14,621
    )
    
    
    21,428
    
    
    
    150,596Inventories
    
    
    (21,910
    )
    
    
    2,800
    
    
    
    (9,391
    )Accounts payable
    
    
    (27,166
    )
    
    
    5,293
    
    
    
    (137,052
    )Accrued expenses and other current liabilities
    
    
    (10,810
    )
    
    
    13,589
    
    
    
    (25,000
    )Other
    
    
    19,313
    
    
    
    (24,532
    )
    
    
    (43,161
    )Net cash used in operating activities
    
    
    (32,157
    )
    
    
    (11,594
    )
    
    
    (194,486
    )Cash Flows From Investing ActivitiesPurchase
of marketable securities
    
    
    (79,632
    )
    
    
    (334,461
    )
    
    
    (531,201
    )Sale of marketable securities
    
    
    142,143
    
    
    
    392,902
    
    
    
    417,456Refundable deposit
    
    
    
    
    
    
    150,000
    
    
    
    (75,000
    )Proceeds from sale of assets and investments
    
    
    18,228
    
    
    
    72,927
    
    
    
    2,522Capital expenditures
    
    
    (19,844
    )
    
    
    (13,058
    )
    
    
    (70,665
    )Advances to Skyworks
    
    
    (35,000
    )
    
    
    (30,000
    )
    
    
    Repayment of Term Notes and advances by Skyworks
    
    
    170,000
    
    
    
    
    
    
    
    Acquisitions of businesses, net of cash acquired
    
    
    (7,714
    )
    
    
    (21,000
    )
    
    
    Investments in and advances to businesses
    
    
    (4,500
    )
    
    
    (9,800
    )
    
    
    (25,612
    )Net cash provided by (used in) investing activities
    
    
    183,681
    
    
    
    207,510
    
    
    
    (282,500
    )Cash Flows From Financing ActivitiesProceeds from exercise of stock options and warrants
    
    
    22,293
    
    
    
    14,733
    
    
    
    20,216Payment of debt conversion costs
    
    
    
    
    
    
    
    
    
    
    (42,584
    )Repurchase of convertible subordinated notes
    
    
    (56,378
    )
    
    
    
    
    
    
    (22,400
    )Net cash provided by (used in) financing activities
    
    
    (34,085
    )
    
    
    14,733
    
    
    
    (44,768
    )Net cash used in discontinued operations
    
    
    (202,341
    )
    
    
    (222,569
    )
    
    
    (128,259
    )Net decrease in cash and cash equivalents
    
    
    (84,902
    )
    
    
    (11,920
    )
    
    
    (650,013
    )Cash and cash equivalents at beginning of year
    
    
    161,088
    
    
    
    173,008
    
    
    
    823,021Cash and cash equivalents at end of year
    
    $
    76,186
    
    
    $
    161,088
    
    
    $
    173,008


40



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##### Table of Contents






CONEXANT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE LOSS
(in thousands)

Common Stock
    
    
    
    
    
    
    
    
    
    AccumulatedAdditional
    
     
    
    
   
    Other
    
    
    
    
    
    
    
    
    
    TotalOutstanding
    
    
    
    
    
    Paid-In
    
    Accumulated
    
    Comprehensive
    
    Treasury
    
    Unearned
    
    Shareholders'Shares
    
    Amount
    
    Capital
    
    Deficit
    
    Income (Loss)
    
    Stock
    
    Compensation
    
    EquityBalance at September 30, 2000
    
    
    231,134
    
    
    $
    231,164
    
    
    $
    2,775,115
    
    
    $
    (120,875
    )
    
    $
    47,295
    
    
    $
    (1,619
    )
    
    $
    (24,321
    )
    
    $
    2,906,759Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,445,334
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,445,334
    )Currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,362
    )
    
    
    
    
    
    
    
    
    
    
    (18,362
    )Change in unrealized gains on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (46,094
    )
    
    
    
    
    
    
    
    
    
    
    (46,094
    )Unrealized loss on forward exchange contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (43
    )
    
    
    
    
    
    
    
    
    
    
    (43
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,509,833
    )Purchase acquisitions
    
    
    7,494
    
    
    
    7,494
    
    
    
    66,653
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,819
    
    
    
    77,966Conversion of debt
    
    
    11,046
    
    
    
    11,046
    
    
    
    237,896
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    248,942Issuance of common stock
    
    
    4,196
    
    
    
    4,196
    
    
    
    29,788
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,106
    )
    
    
    32,878Tax benefits from stock plans
    
    
    
    
    
    
    
    
    
    
    1,484
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,484Purchase of treasury stock
    
    
    (11
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (188
    )
    
    
    
    
    
    
    (188
    )Compensation expense related to
employee stock plans
    
    
    
    
    
    
    
    
    
    
    2,269
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,899
    
    
    
    15,168Balance at September 30, 2001
    
    
    253,859
    
    
    
    253,900
    
    
    
    3,113,205
    
    
    
    (1,566,209
    )
    
    
    (17,204
    )
    
    
    (1,807
    )
    
    
    (8,709
    )
    
    
    1,773,176Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (880,767
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (880,767
    )Currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,195
    )
    
    
    
    
    
    
    
    
    
    
    (4,195
    )Change in unrealized gains on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,072
    )
    
    
    
    
    
    
    
    
    
    
    (1,072
    )Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,649
    )
    
    
    
    
    
    
    
    
    
    
    (5,649
    )Unrealized loss on forward exchange contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    43Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (891,640
    )Purchase acquisitions
    
    
    1,420
    
    
    
    1,420
    
    
    
    16,658
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,078Conversion of debt
    
    
    2,233
    
    
    
    2,233
    
    
    
    35,720
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,953Issuance of common stock and warrants
    
    
    7,939
    
    
    
    7,939
    
    
    
    52,303
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (459
    )
    
    
    59,783Tax benefits from stock plans
    
    
    
    
    
    
    
    
    
    
    1,175
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,175Cancellation of treasury stock
    
    
    
    
    
    
    (41
    )
    
    
    (1,766
    )
    
    
    
    
    
    
    
    
    
    
    1,807
    
    
    
    
    
    
    
    Compensation expense related to
employee stock plans
    
    
    225
    
    
    
    225
    
    
    
    1,749
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,609
    
    
    
    9,583Distribution of business (discontinued
operations)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60,431
    )
    
    
    
    
    
    
    
    
    
    
    150
    
    
    
    (60,281
    )Balance at September 30, 2002
    
    
    265,676
    
    
    
    265,676
    
    
    
    3,219,044
    
    
    
    (2,507,407
    )
    
    
    (28,077
    )
    
    
    
    
    
    
    (1,409
    )
    
    
    947,827Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (705,315
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (705,315
    )Currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,211
    
    
    
    
    
    
    
    
    
    
    
    2,211Change in unrealized gains on investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,388
    
    
    
    
    
    
    
    
    
    
    
    1,388Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,731
    )
    
    
    
    
    
    
    
    
    
    
    (2,731
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (704,447
    )Effect of change in par value
    
    
    
    
    
    
    (263,779
    )
    
    
    263,779
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase acquisitions
    
    
    150
    
    
    
    2
    
    
    
    812
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    814Issuance of common stock
    
    
    10,308
    
    
    
    862
    
    
    
    21,971
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (154
    )
    
    
    22,679Tax benefits from stock plans
    
    
    
    
    
    
    
    
    
    
    464
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    464Compensation expense related to
employee stock plans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,521
    
    
    
    1,521Distribution of business (discontinued
operations)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (119,805
    )
    
    
    17,713
    
    
    
    
    
    
    
    
    
    
    
    (102,092
    )Balance at September 30, 2003
    
    
    276,134
    
    
    $
    2,761
    
    
    $
    3,506,070
    
    
    $
    (3,332,527
    )
    
    $
    (9,496
    )
    
    $
    
    
    
    $
    (42
    )
    
    $
    166,766


See accompanying notes to consolidated financial statements.

41



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##### Table of Contents






CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business

Conexant Systems, Inc. (Conexant or the Company) designs, develops and sells
semiconductor system solutions for use in products driving broadband digital
home information and entertainment applications. The Companys solutions
connect the client, or end-customer, side of personal communications access
products such as personal computers (PCs), set-top boxes, and game consoles to
audio, video, voice and data services over broadband and dial-up Internet
connections. In addition, the Companys media processing products enable the
capture, display, storage, playback and transfer of audio and video content in
applications throughout the digital home and small office environments. The
Company operates in one segment.

On December 31, 1998, Conexant became an independent publicly held company when
Rockwell International Corporation (Rockwell) spun off Conexant, then a wholly
owned subsidiary of Rockwell, by means of a distribution (the Distribution) of
all the outstanding shares of common stock of Conexant to the shareholders of
Rockwell in a tax-free spin-off. Prior to the Distribution, Conexant (formerly
named Rockwell Semiconductor Systems, Inc.), together with certain other
subsidiaries of Rockwell, operated Rockwells semiconductor systems business
(Semiconductor Systems). Conexant was incorporated as Rockwell Semiconductor
Systems, Inc. in Delaware on September 16, 1996 and changed its name to
Conexant Systems, Inc. on October 14, 1998.

2. Summary of Significant Accounting Policies

Basis of Presentation The consolidated financial statements, prepared in
accordance with accounting principles generally accepted in the United States
of America, include the accounts of the Company and each of its subsidiaries.
All intercompany accounts and transactions have been eliminated in
consolidation.

Fiscal Year The Company maintains a fifty-two/fifty-three week fiscal year
ending on the Friday closest to September 30. Fiscal year 2003 comprised 53
weeks and ended on October 3. Fiscal years 2002 and 2001 each comprised 52
weeks and ended on September 27 and September 28, respectively. For
convenience, the accompanying consolidated financial statements have been shown
as ending on the last day of the calendar month.

Use of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles accepted in the United States of
America requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying
notes. Among the significant estimates affecting the financial statements are
those related to the allowance for doubtful accounts, inventories, long-lived
assets, valuation of derivative financial instruments and investments,
restructuring reserves, long-term employee benefit plans, income taxes and
litigation. On an ongoing basis, management reviews its estimates based upon
currently available information. Actual results could differ materially from
those estimates.

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

Cash and Cash Equivalents The Company considers all highly liquid investments
with insignificant interest rate risk and original maturities of three months
or less from the date of purchase to be cash equivalents. The carrying amounts
of cash and cash equivalents approximate their fair values.

Inventories Inventories are stated at the lower of cost or market. Cost is
computed using the average cost method on a currently adjusted standard basis
(which approximates actual cost); market is based upon estimated net realizable
value. The valuation of inventories at the lower of cost or market requires the
use of estimates as to the amounts of current inventories that will be sold.
These estimates are dependent on the Companys assessment of
current and expected orders from its customers, and orders generally are
subject to cancellation with limited advance notice prior to shipment.

42



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##### Table of Contents



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

Property, Plant and Equipment Property, plant and equipment are stated at
cost. Depreciation is based on estimated useful lives (principally 10 to 27
years for buildings and improvements; 3 to 5 years for machinery and equipment;
and the shorter of the remaining terms of the leases or the estimated economic
useful lives of the improvements for land and leasehold improvements).
Significant renewals and betterments are capitalized and replaced units are
written off. Maintenance and repairs are charged to expense.

Investments The Company accounts for non-marketable investments using the
equity method of accounting if the investment gives the Company the ability to
exercise significant influence, but not control, over an investee. Significant
influence generally exists if the Company has an ownership interest
representing between 20% and 50% of the voting stock of the investee. Under the
equity method of accounting, investments are stated at initial cost and are
adjusted for subsequent additional investments and the Companys proportionate
share of income or losses and distributions. The Company records its share of
the investees earnings or losses in other income (expense) in the consolidated
statement of operations. Additional investments by other parties in the
investee will result in a reduction in the Companys ownership interest, and
the resulting gain or loss will be recorded in other income (expense) in the
consolidated statement of operations. Where the Company is unable to exercise
significant influence over the investee, investments are accounted for under
the cost method. Under the cost method, investments are carried at cost and
adjusted only for other-than-temporary declines in fair value, distributions of
earnings or additional investments.

Impairment of Long-Lived Assets Long-lived assets, including fixed assets and
intangible assets (other than goodwill), are continually monitored and are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of any such asset may not be recoverable. The
determination of recoverability is based on an estimate of undiscounted cash
flows expected to result from the use of an asset and its eventual disposition.
The estimate of cash flows is based upon, among other things, certain
assumptions about expected future operating performance, growth rates and other
factors. Estimates of undiscounted cash flows may differ from actual cash flows
due to, among other things, technological changes, economic conditions, changes
to the business model or changes in operating performance. If the sum of the
undiscounted cash flows (excluding interest) is less than the carrying value,
an impairment loss will be recognized, measured as the amount by which the
carrying value exceeds the fair value of the asset. See Notes 5 and 16 for
discussion of impairment charges for long-lived assets in fiscal years 2003,
2002 and 2001.

Goodwill is tested for impairment annually, or when a possible impairment is
indicated, using the fair value based test prescribed by SFAS 142. The
estimates and assumptions described above (along with other factors such as
discount rates) will affect the outcome of the impairment tests and the amounts
of any resulting impairment losses.

Foreign Currency Translation and Remeasurement The Companys foreign
operations are subject to exchange rate fluctuations and foreign currency
transaction costs. The functional currency of the Companys principal foreign
subsidiaries is the local currency. Assets and liabilities denominated in
foreign functional currencies are translated into U.S. dollars at the rates of
exchange in effect at the balance sheet dates and income and expense items are
translated at the average exchange rates prevailing during the period. The
resulting foreign currency translation adjustments are accumulated as a
component of other comprehensive income. For the remainder of the Companys
foreign subsidiaries, the functional currency is the U.S. dollar. Inventories,
property, plant and equipment, cost of goods sold, and depreciation for those
operations are remeasured from foreign currencies into U.S. dollars at
historical exchange rates; other accounts are translated at current exchange
rates. Gains and losses resulting from those remeasurements are included in
earnings. Gains and losses resulting from foreign currency transactions are
recognized currently in earnings.

Derivative Financial Instruments Derivative financial instruments are
recognized as either assets or liabilities in the balance sheet and are
measured at fair value. The Companys derivative financial instruments
principally consist of foreign currency forward exchange contracts which the
Company uses to manage its exposure to foreign currency risks, the conversion
rights of the Skyworks notes, and the Mindspeed warrant. The Companys
objectives are to

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##### Table of Contents



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

reduce the volatility of earnings and cash flows associated with changes in
foreign currency exchange rates. The Company may use other derivatives from
time to time to manage its exposure to changes in interest rates, equity prices
or other risks. The Company does not enter into derivative financial
instruments for speculative or trading purposes.

The Company designates certain forward contracts as hedges of forecasted
intercompany transactions. Unrealized gains and losses on these contracts are
recorded as a component of accumulated other comprehensive income. Other
forward contracts are designated as hedges of intercompany accounts of the
Companys foreign subsidiaries. Unrealized gains and losses on these forward
contracts are recorded currently through earnings and offset the corresponding
losses and gains on the assets and liabilities being hedged. At September 30,
2003, the Company had no foreign currency forward contracts outstanding. During
fiscal 2003, 2002 and 2001, there were no significant gains or losses
recognized in earnings for hedge ineffectiveness.

The Company accounts for the right to convert the Skyworks 15% convertible
senior subordinated notes into shares of Skyworks common stock as an embedded
derivative instrument. Changes in the fair value of the Skyworks 15%
convertible senior subordinated notes resulting from changes in the value of
the conversion right are included in other income (expense), net each period.
The Company also accounts for the Mindspeed warrant as a derivative instrument,
and changes in the fair value of the warrant are included in other income
(expense), net each period.

Stock-Based CompensationThe Company accounts for employee stock-based
compensation in accordance with the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and
therefore no compensation expense has been recognized for fixed stock option
plans as options are granted at fair market value on the date of grant. The
Company also has an employee stock purchase plan for all eligible employees.
The Company has adopted the pro forma disclosure provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation- Transition and Disclosure.

Had stock-based compensation been determined based on the fair value at the
grant date for awards consistent with the provisions of SFAS 123, the Companys
pro forma income (loss) from continuing operations and pro forma income (loss)
from continuing operations per share would have been the amounts indicated
below (in thousands, except per share amounts):

2003
    
    2002
    
    2001Income (loss) from continuing
operations, as reported
    
    $
    23,562
    
    
    $
    (143,750
    )
    
    $
    (660,910
    )Add: total expense determined under fair
value accounting for all awards
    
    
    (58,356
    )
    
    
    (106,993
    )
    
    
    (144,897
    )Pro forma loss from continuing operations
    
    $
    (34,794
    )
    
    $
    (250,743
    )
    
    $
    (805,807
    )Income (loss) from continuing operations
per share- basic, as reported
    
    $
    0.09
    
    
    $
    (0.56
    )
    
    $
    (2.70
    )Pro forma loss from continuing
operations per share- basic
    
    $
    (0.13
    )
    
    $
    (0.97
    )
    
    $
    (3.29
    )Income (loss) from continuing operations
per share-diluted, as reported
    
    $
    0.09
    
    
    $
    (0.56
    )
    
    $
    (2.70
    )Pro forma loss from continuing
operations per share- diluted
    
    $
    (0.13
    )
    
    $
    (0.97
    )
    
    $
    (3.29
    )


For purposes of pro forma disclosures under SFAS 123, the estimated fair value
of the stock-based awards is assumed to be amortized to expense over the
instruments vesting period. The fair value has been estimated at the date of
grant using the Black-Scholes option valuation model with the following
assumptions:

2003
    
    2002
    
    2001Risk-free interest rate
    
    
    3.2
    %
    
    
    2.9
    %
    
    
    3.8
    %Expected volatility
    
    
    97
    %
    
    
    100
    %
    
    
    85
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    Expected life (years)
    
    
    4.5
    
    
    
    4.5
    
    
    
    4.5Weighted-average fair value
of options granted
    
    $
    2.27
    
    
    $
    8.65
    
    
    $
    8.50


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

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because awards held by employees and directors have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in the opinion of management, the existing models do not necessarily provide a
reliable single measure of the fair value of these options.

Income Taxes The benefit for income taxes is determined in
accordance with SFAS No. 109, Accounting for Income Taxes. Deferred tax
assets and liabilities are determined based on the temporary differences
between the financial reporting and tax bases of assets and liabilities,
applying enacted statutory tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is recorded when it
is more likely than not that some or all of the deferred tax assets will not be
realized.

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

2003
    
    2002
    
    2001Stock options and warrant (under the treasury stock method)
    
    
    
    
    
    
    4,616
    
    
    
    9,3404-1/4% Convertible Subordinated Notes due 2006
    
    
    6,242
    
    
    
    7,342
    
    
    
    5,6364% Convertible Subordinated Notes due 2007
    
    
    11,178
    
    
    
    11,607
    
    
    
    5,747Restricted stock
    
    
    
    
    
    
    230
    
    
    
    1,955


ConcentrationsFinancial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash and cash equivalents,
investments, trade accounts receivable and notes receivable from Skyworks. The
Company invests its cash balances through high-credit quality financial
institutions. The Company places its investments in investment-grade debt
securities and limits its exposure to any one issuer. The Companys trade
accounts receivable primarily are derived from sales to manufacturers of
communications products, consumer products and personal computers. Management
believes that credit risks on trade accounts receivable are moderated by the
diversity of its products, end customers and geographic sales areas. The
Company performs ongoing credit evaluations of its customers financial
condition and requires collateral, such as letters of credit and bank
guarantees, whenever deemed necessary.

At September 30, 2003, four customers accounted for 15%, 14%, 13% and 11% of
the Companys accounts receivable; at September 30, 2002, four customers
accounted for 19%, 14%, 12% and 10% of the Companys accounts receivable. In
fiscal 2003, one customer (a distributor) accounted for 11% of net revenues and
no other customer accounted for 10% or more of net revenues. In fiscal 2002,
one customer (a distributor) accounted for 12% of net revenues and no other
customer accounted for 10% or more of net revenues. In fiscal 2001, no customer
accounted for 10% or more of net revenues.

Supplemental Cash Flow Information Interest paid, net of amounts capitalized,
was $25.9 million, $28.6 million and $35.1 million during fiscal 2003, 2002 and
2001, respectively. Income taxes paid, net of refunds received, were $2.5
million, $(9.1) million and $6.5 million during fiscal 2003, 2002 and 2001,
respectively.

Non-cash activities: The Company satisfied $2.1 million, $31.2 million and
$21.2 million of liabilities from employee payroll deductions by issuing shares
of its common stock in connection with its Employee Stock Purchase Plan (see
Note 14) and its Retirement Savings Plan (see Note 15), in fiscal years ended
2003, 2002 and 2001, respectively.

Comprehensive Income (Loss)Other comprehensive income (loss) includes foreign
currency translation adjustments, unrealized holding gains on
available-for-sale marketable securities, unrealized gains (losses) on

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

forward exchange contracts, and minimum pension liability adjustments, net of
applicable income taxes. Foreign currency translation adjustments are not
presented net of any tax effect as the Company does not expect to incur any tax
liability or benefit related thereto. The components of accumulated other
comprehensive loss at fiscal year-ends are as follows (in thousands):

2003
    
    2002Foreign currency translation adjustments
    
    $
    (3,023
    )
    
    $
    (22,947
    )Unrealized gains on available-for-sale securities, net of tax
    
    
    1,907
    
    
    
    519Minimum pension liability adjustments
    
    
    (8,380
    )
    
    
    (5,649
    )Accumulated other comprehensive loss
    
    $
    (9,496
    )
    
    $
    (28,077
    )


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

During the second quarter of fiscal 2003, the Company completed the transition
impairment test of its goodwill (as of the beginning of fiscal 2003) required
by SFAS 142. The Company determined that it has a single reporting unit (as
defined in SFAS 142). For purposes of the impairment test, the fair value of
the reporting unit was determined considering both an income approach and a
market approach. Management determined that the recorded value of its goodwill
at the transition date was not impaired. See Note 3 for the transitional
impairment charge recorded by Mindspeed and included in the Companys loss from
discontinued operations of Mindpseed in fiscal 2003.

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

2003
    
    2002
    
    2001Net loss, as reported
    
    $
    (705,315
    )
    
    $
    (880,767
    )
    
    $
    (1,445,334
    )Amortization of goodwill
    
    
    
    
    
    
    277,388
    
    
    
    271,562Amortization of assembled workforce previously
classified as an intangible asset
    
    
    
    
    
    
    1,899
    
    
    
    2,010Adjusted net loss
    
    $
    (705,315
    )
    
    $
    (601,480
    )
    
    $
    (1,171,762
    )Loss per share, basic:Net loss, as reported
    
    $
    (2.63
    )
    
    $
    (3.40
    )
    
    $
    (5.91
    )Adjusted net loss
    
    
    (2.63
    )
    
    
    (2.32
    )
    
    
    (4.79
    )Loss per share, diluted:Net loss, as reported
    
    $
    (2.56
    )
    
    $
    (3.40
    )
    
    $
    (5.91
    )Adjusted net loss
    
    
    (2.56
    )
    
    
    (2.32
    )
    
    
    (4.79
    )


Recent Accounting Standards In January 2003, the FASB issued FASB
Interpretation No. (FIN) 46, Consolidation of Variable Interest Entities. The
Company must adopt FIN 46 in the first quarter of fiscal 2004 and does not
expect such adoption to have a significant impact on its financial position or
results of operations.

During fiscal 2003, the Company adopted the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, and FIN 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect

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

Guarantees of Indebtedness of Others with no material impact to the
consolidated financial statements. The disclosure requirements of FIN 45 are
addressed in Note 13.

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

3. Discontinued Operations

Mindspeed Technologies

On June 27, 2003, Conexant completed the distribution to Conexant shareholders
of all outstanding shares of Mindspeed Technologies, Inc. (Mindspeed), a
wholly owned subsidiary of Conexant to which Conexant contributed its Internet
infrastructure business, including the stock of certain subsidiaries, and
certain other assets and liabilities, including $100.0 million in cash
(hereinafter, the Mindspeed Spin). In the Mindspeed Spin, Conexant
shareholders received one share of Mindspeed common stock for every three
Conexant shares held and the Conexant shareholders continued to hold their
Conexant shares. Mindspeed issued to Conexant a warrant to purchase 30 million
shares of Mindspeed common stock, representing approximately 20 percent of
Mindspeeds outstanding common stock on a fully diluted basis. The warrant is
exercisable for a period of ten years, commencing one year after the completion
of the Mindspeed Spin, at an exercise price of $3.408 per share (the fair
market value on the date of grant of the warrant). The warrant was initially
assigned a fair value of $89.0 million (recorded as a return of capital to
Conexant) using the Black-Scholes option pricing model (assuming volatility of
90%, a risk-free interest rate of 3.5%, and no dividend yield), and is
presented as a long-term asset on the consolidated balance sheet. The carrying
value of the net assets which the Company contributed to Mindspeed in June 2003
was $193.4 million. Additionally, Conexant entered into a senior secured
revolving credit facility pursuant to which Mindspeed may borrow up to $50.0
million for working capital and general corporate purposes (see Note 12).

Wireless Communications and Mexicali Operations

On June 25, 2002, Conexant completed the distribution to Conexant shareholders
of outstanding shares of Washington Sub, Inc. (Washington), a wholly owned
subsidiary of Conexant to which Conexant contributed its wireless
communications business, other than certain assets and liabilities which
Conexant retained (together, the Spin-off Transaction). Immediately thereafter,
Washington merged with and into Alpha Industries, Inc. (Alpha), with Alpha the
surviving corporation (the Merger). As a result of the Spin-off Transaction and
the Merger, Conexant shareholders received 0.351 of a share of Alpha common
stock for each Conexant share held and the Conexant shareholders continued to
hold their Conexant shares. Effective June 26, 2002, Alpha changed its name to
Skyworks Solutions, Inc. (Skyworks).

Upon completion of the Merger, Alpha and its subsidiaries purchased Conexants
semiconductor assembly and test facility located in Mexicali, Mexico including
Conexants package design team that supports the Mexicali facility (together,
the Mexicali Operations) for $150.0 million. In connection with the purchase,
Conexant, Alpha and certain subsidiaries of Alpha entered into a financing
agreement pursuant to which Alpha and a subsidiary of Alpha delivered to
Conexant promissory notes for $150.0 million (the Term Notes) guaranteed by
Alpha and certain Alpha subsidiaries and secured by substantially all assets of
Alpha in payment of the purchase price for the Mexicali Operations. The
financing agreement also provided for a revolving credit facility under which
Alpha could borrow up to $100.0 million, less specified reserves, for one year
at the same interest rate and with the same security applicable to the Term
Notes. As of September 30, 2002, borrowings of $30.0 million were outstanding
under the credit facility.

In November 2002, the Company restructured the financing agreements with
Skyworks. Skyworks repaid $105.0 million of the principal amount and all
accrued interest owed to the Company under the Term Notes and the remaining
principal amount of the Term Notes was exchanged for $45.0 million principal
amount of the Skyworks 15% convertible senior subordinated notes with a
maturity date of June 30, 2005. Skyworks also repaid all amounts
outstanding under the credit facility, the credit facility was cancelled and
the Company released all security interests in Skyworks assets and properties.

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

The Spin-off Transaction and the Merger were completed pursuant to the
Contribution and Distribution Agreement and the Agreement and Plan of
Reorganization entered into as of December 16, 2001 (the measurement date for
financial accounting purposes), as amended. The carrying value of the net
assets which the Company contributed to Washington (including the Mexicali
Operations) in June 2002 was $210.4 million.

The accompanying consolidated financial statements have been restated to
reflect the wireless communications business, Mexicali Operations, and the
Mindspeed Technologies business as discontinued operations. For financial
accounting purposes, the sale of the Mexicali Operations by Conexant to
Skyworks was treated as if Conexant had contributed the Mexicali Operations to
Washington as part of the Spin-off Transaction, and the $150 million purchase
price was treated as a return of capital to Conexant.

The operating results of the discontinued wireless communications business,
Mexicali Operations and the discontinued Mindspeed Technologies business,
including the separation costs paid by the Company, included in the
accompanying consolidated statements of operations were as follows (in
thousands):

2003
    
    2002
    2001Net revenues
    
    $
    58,719
    
    
    $
    352,967
    
    
    $
    520,870Loss before income taxes
    
    $
    (155,231
    )
    
    $
    (733,169
    )
    
    $
    (875,963
    )Provision (benefit) for income taxes
    
    
    462
    
    
    
    3,848
    
    
    
    (91,539
    )Cumulative effect of change in accounting for goodwill
    
    
    (573,184
    )
    
    
    
    
    
    
    Loss from discontinued operations
    
    $
    (728,877
    )
    
    $
    (737,017
    )
    
    $
    (784,424
    )


Loss from discontinued operations:
    2003
    
    2002
    
    2001Wireless communications business and Mexicali Operations
    
    $
    
    
    
    $
    (68,431
    )
    
    $
    (275,064
    )Mindspeed Technologies business
    
    
    (728,877
    )
    
    
    (668,586
    )
    
    
    (509,360
    )Loss from discontinued operations
    
    $
    (728,877
    )
    
    $
    (737,017
    )
    
    $
    (784,424
    )


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

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


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

4. Acquisitions

During fiscal 2003, 2002 and 2001, the Company completed the following
acquisitions that were accounted for using the purchase method of accounting.

Fiscal 2003

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

The tangible assets of the acquired business totaled $2.5 million. Assumed
liabilities totaled $0.5 million. Identifiable intangible assets, principally
consisting of developed technology and customer-related intangibles, total $3.1
million and are being amortized over estimated lives of five years. The
residual amount of $6.2 million is classified as goodwill and is deductible for
income tax purposes.

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

Fiscal 2002

In June 2002, the Company acquired the video compression business of
iCompression, Inc. (iCompression), a wholly owned subsidiary of
GlobespanVirata, Inc. Consideration for the acquisition consisted of 1.25
million shares of the Companys common stock and promissory notes for $21.0
million, of which 150,000 shares of common stock and a promissory note for $1.8
million were held in a one-year escrow for the settlement of any contingent
indemnity claims. The Company paid the amounts owed under the promissory notes
in July 2002. The escrow settled in June 2003 and all funds were released to
iCompression.

Under the asset purchase agreement, the Company guaranteed the value of the
shares issued to iCompression for a defined period through September 2003
(subject to certain conditions and elections). The guaranty is subject to
adjustment for any stock split, stock dividend, recapitalization, merger or
similar transaction (including the Spin-off Transaction and the Merger). In the
event that the common stock delivered to iCompression (including the shares of
Skyworks common stock received in respect thereof) did not maintain a market
value per share equal to or greater than $12.00 for at least seven consecutive
trading days during the guaranty period, Conexant would be required to make an
additional cash payment to iCompression for the difference between $12.00 and
the market value per share of such shares as of specified dates. Consequently,
the Company has valued the shares delivered to iCompression at the guaranteed
value of $12.00 per share. In September 2003, the Company paid $0.7 million
cash to iCompression in full settlement of this guaranty. The payment was
recorded as a reduction of shareholders equity in accordance with SFAS No.
141.

The tangible assets of the acquired video compression business totaled $0.3
million, net of liabilities of $1.6 million. The results of operations of the
video compression business are included in the consolidated financial
statements
from the date of acquisition. The pro forma effect of this acquisition was not
material to the Companys results of operations in fiscal 2002 or 2001.

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

Fiscal 2001

In February 2001, the Company acquired HyperXS Communications, Inc. (HyperXS),
a developer of semiconductors and related software products for high-speed
Internet access devices.

Consideration for the acquisitions in fiscal 2003, 2002 and 2001 consisted of
cash, shares of the Companys common stock or a combination of cash and stock
and the fair value of outstanding stock options of the acquired companies
converted into options to purchase shares of the Companys common stock. The
value of the common stock issued was based on market prices at the time of
announcement of the acquisition.

The Companys acquisitions are summarized below (in thousands):

Shares ofConexant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Identifiedcommon stock
    
    Options
    
    
    
    
    
    Total value of
    
    
    
    
    
    intangibleissued
    
    converted
    
    Cash paid
    
    consideration
    
    Goodwill
    
    assetsFiscal 2003PCTEL
    
    
    
    
    
    
    
    
    
    $
    6,796
    
    
    $
    6,796
    
    
    $
    6,206
    
    
    $
    3,120iCompression
    
    
    150
    
    
    
    
    
    
    $
    1,800
    
    
    $
    3,600
    
    
    $
    3,600
    
    
    $
    Fiscal 2002iCompression
    
    
    1,100
    
    
    
    
    
    
    $
    19,200
    
    
    $
    32,400
    
    
    $
    23,557
    
    
    $
    8,851Fiscal 2001HyperXS
    
    
    300
    
    
    
    210
    
    
    $
    7,500
    
    
    $
    14,627
    
    
    $
    12,730
    
    
    $
    


The value of the consideration for each acquisition was allocated among the
assets and liabilities acquired, including identified intangible assets, based
upon estimated fair values. The excess of the value of the consideration over
the net assets acquired is allocated to goodwill.

Identified intangible assets, principally consisting of developed technology,
are being amortized over estimated lives of two to seven years (principally
five years).

5. Sales of Assets

In March 2002, the Company and The Carlyle Group formed a new specialty foundry
company named Jazz Semiconductor, Inc. (Jazz). In the transaction, Conexant
contributed its Newport Beach, California wafer fabrication operations and
certain intellectual property to Jazz and the Company received $19.3 million in
cash and a 45% equity interest in Jazz, having an estimated fair value of $42.5
million. In addition to contributing its Newport Beach wafer fabrication
operations (with a carrying value of approximately $43.2 million) and certain
related assets and liabilities (with carrying values of $7.4 million and $7.8
million, respectively), the Company also issued to Jazz a warrant to purchase
2.9 million shares of Conexant common stock at a price of $13.05 per share (the
fair market value on the date of grant of the warrant) exercisable through
January 2005. The warrant had a fair value of $14.2 million, determined by
management using the Black-Scholes option pricing model (assuming volatility of
68.5%, a risk-free interest rate of 4.1%, and no dividend yield) and discounted
20% for the lack of marketability. At September 30, 2003, the exercise price of
the warrant is $3.76 per share, and is subject to adjustment for certain events. Through
September 30, 2003, Jazz has purchased 132,222 shares under the warrant. Of
the approximately 2.7 million shares outstanding subject to the warrant,
approximately 2.0 million may be purchased currently, and the remainder become
purchasable in March 2004.

This transaction resulted in a $2.6 million gain, which represented the
difference between the Companys carrying value and the fair value of the net
assets deemed to have been sold by the Company to Jazz. The Company accounts
for its investment in Jazz under the equity method of accounting. In fiscal
2003, an unrelated party made an
additional investment in Jazz thereby reducing the Companys equity interest in
Jazz to 39%. In accordance with Staff Accounting Bulletin No. 51, a gain of
$0.3 million was recognized upon this additional investment.

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

In July 2002, the Company completed the planned divestiture of its digital
imaging business and merged the business with Zing Network, Inc. to create a
new privately held company named Pictos Technologies, Inc. (Pictos). The
Company contributed assets to Pictos in exchange for shares of Pictos stock.

During fiscal 2002, the Company sold four buildings for net proceeds of $46.8
million. A $2.4 million gain arising from the sale of one building was
recognized upon completion of the transaction. The Company will continue to
occupy the remaining three buildings under 15-year leases. Consequently, gains
of $19.6 million arising from the sale of the leased-back buildings have been
deferred and will be recognized ratably over the term of the leases.

In fiscal 2003, the Company sold certain manufacturing assets to Jazz for $1.0
million payable over four quarters. A $4.8 million impairment loss was
recognized on these assets.

In fiscal 2003, the Company sold two of its investments in early stage
technology companies (Pictos and Pixo, Inc.) for cash of $15.0 million, with an
additional $2.1 million to be held in escrow for a period of twelve to eighteen
months for potential buyer indemnity claims. A total gain of $8.6 million was
recognized on these sales. In addition, the Company accrued $2.0 million for
non-cancelable commitments related to one of these transactions for losses to
complete the production of certain inventory items and the rendering of future
services.

6. Marketable Securities

Marketable securities include asset-backed securities, corporate bonds,
government securities and marketable equity securities. All of the Companys
marketable securities are classified as available for sale and are recorded at
fair value, based upon quoted market prices. As of September 30, 2003, net
unrealized gains of $1.9 million, net of income tax, on these securities are
included in accumulated other comprehensive income. The Companys
available-for-sale marketable securities are classified as short-term
investments in the consolidated balance sheets as the Company intends to sell
these securities as necessary to meet its liquidity requirements.

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

Available-for-sale securities consist of the following (in thousands):

Gross
    
    GrossUnrealized
    
    UnrealizedAmortized
    
    Holding
    
    Holding
    
    FairCost
    
    Gains
    
    Losses
    
    ValueSeptember 30, 2003:U.S. government agencies
    
    $
    14,640
    
    
    $
    25
    
    
    $
    (18
    )
    
    $
    14,647Foreign government securities
    
    
    2,044
    
    
    
    15
    
    
    
    
    
    
    
    2,059Corporate debt securities
    
    
    21,625
    
    
    
    74
    
    
    
    (59
    )
    
    
    21,640Skyworks 15% convertible senior subordinated notes
    
    
    46,542
    
    
    
    9,024
    
    
    
    
    
    
    
    55,566Equity securities
    
    
    2,320
    
    
    
    3,051
    
    
    
    
    
    
    
    5,371$
    87,171
    
    
    $
    12,189
    
    
    $
    (77
    )
    
    $
    99,283September 30, 2002:U.S. government agencies
    
    $
    24,686
    
    
    $
    257
    
    
    $
    
    
    
    $
    24,943Foreign government securities
    
    
    8,446
    
    
    
    102
    
    
    
    
    
    
    
    8,548Corporate debt securities
    
    
    65,493
    
    
    
    517
    
    
    
    (35
    )
    
    
    65,975$
    98,625
    
    
    $
    876
    
    
    $
    (35
    )
    
    $
    99,466


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

The amortized cost and estimated fair value of debt securities at September 30,
2003, by contractual maturity, are shown below (in thousands). Expected
maturities will differ from contractual maturities because the issuers of the
securities may have the right to prepay obligations without prepayment
penalties.

Amortized
    
    FairCost
    
    ValueDue in 1 year or less
    
    $
    6,474
    
    
    $
    6,525Due in 1  2 years
    
    
    66,528
    
    
    
    75,576Due in 2  5 years
    
    
    11,296
    
    
    
    11,265Due after 5 years
    
    
    553
    
    
    
    546$
    84,851
    
    
    $
    93,912


7. Skyworks Notes

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

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

As of September 30, 2003, the 15% convertible senior subordinated notes are
carried at their fair value of $55.6 million (including the $11.5 million fair
value of the related conversion right) and are included in short-term
investments because the Company has the ability and intent to liquidate the 15%
convertible senior subordinated notes or shares underlying the notes within the
next twelve months.

8. Supplemental Financial Statement Data

Inventories at fiscal year-ends consist of the following (in thousands):

2003
    
    2002Raw material
    
    $
    
    
    
    $
    363Work-in-process
    
    
    42,662
    
    
    
    36,493Finished goods
    
    
    16,886
    
    
    
    15,632$
    59,548
    
    
    $
    52,488


The Company assesses the recoverability of inventories through an ongoing
review of inventory levels in relation to sales backlog and forecasts, product
marketing plans and product life cycles. When the inventory on hand exceeds

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

the foreseeable demand, the value of inventory that at the time of the review
is not expected to be sold is written down. 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.

The assessment of the recoverability of inventories, and the amounts of any
write-downs, is based on currently available information and assumptions about
future demand (generally over six months) and market conditions. Demand for the
Companys 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.

The Company may retain and make available for sale some or all of the
inventories which have been written down. In the event that actual demand is
higher than originally projected, the Company may be able to sell a portion of
these inventories in the future. The Company generally scraps inventories which
have been written down and are identified as obsolete.

Property, plant and equipment at fiscal year-ends consist of the following (in
thousands):

2003
    
    2002Land
    
    $
    1,663
    
    
    $
    1,663Land and leasehold improvements
    
    
    10,477
    
    
    
    10,548Buildings
    
    
    34,799
    
    
    
    35,465Machinery and equipment
    
    
    121,162
    
    
    
    145,177Construction in progress
    
    
    3,330
    
    
    
    4,152171,431
    
    
    
    197,005Accumulated depreciation and amortization
    
    
    (135,121
    )
    
    
    (145,865
    )$
    36,310
    
    
    $
    51,140


Other assets at fiscal year-ends consist of the following (in thousands):

2003
    
    2002Advance payments to vendors
    
    $
    
    
    
    $
    6,592Investments
    
    
    80,353
    
    
    
    122,173Other
    
    
    30,485
    
    
    
    26,414$
    110,838
    
    
    $
    155,179


The advance payments to vendors were paid to wafer suppliers under agreements
for foundry capacity. Investments consist of non-marketable equity interests in
early stage technology companies and the Companys investment in Jazz. In
connection with certain of these investments, the Company may be required to
invest up to an additional $13.3 million.

During fiscal 2003, goodwill was adjusted as follows (in thousands):

Goodwill, September 30, 2002
    
    $
    46,426Assembled workforce reclassified to goodwill
    
    
    397Settlement of iCompression escrow
    
    
    3,600Acquisition of PCTEL
    
    
    6,206Other adjustments
    
    
    236Goodwill, September 30, 2003
    
    $
    56,865


Intangible assets at fiscal year-ends consist of the following (in thousands):

2003
    
    2002Gross
    
    Accumulated
    
    
    
    
    
    Gross
    
    AccumulatedAsset
    
    Amortization
    
    Net
    
    Asset
    
    Amortization
    
    NetDeveloped technology
    
    $
    15,904
    
    
    $
    (7,456
    )
    
    $
    8,448
    
    
    $
    14,413
    
    
    $
    (5,500
    )
    
    $
    8,913Customer base
    
    
    2,050
    
    
    
    (358
    )
    
    
    1,692
    
    
    
    590
    
    
    
    (49
    )
    
    
    541Assembled workforce
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    993
    
    
    
    (596
    )
    
    
    397Other intangible assets
    
    
    7,443
    
    
    
    (5,077
    )
    
    
    2,366
    
    
    
    8,298
    
    
    
    (3,905
    )
    
    
    4,393$
    25,397
    
    
    $
    (12,891
    )
    
    $
    12,506
    
    
    $
    24,294
    
    
    $
    (10,050
    )
    
    $
    14,244


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

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

2004
    
    2005
    
    2006
    
    2007
    
    2008Amortization expense
    
    $
    3,822
    
    
    $
    2,627
    
    
    $
    1,804
    
    
    $
    1,805
    
    
    $
    1,564


The Company accounts for the Mindspeed warrant as a derivative instrument, and
changes in the fair value of the warrant are included in other income
(expense), net each period. At September 30, 2003, the fair value of the
Mindspeed warrant was $119.2 million and was determined using a Black-Scholes
model with the term of the warrant varying from 2 to 7 years to coincide with
the Companys intent and ability to liquidate the warrant in installments,
volatility of 90%, a risk-free interest rate of 3.5%, and no dividend yield.

Other current liabilities at fiscal year-ends consist of the following (in
thousands):

2003
    
    2002Restructuring
    
    $
    12,091
    
    
    $
    16,185Interest
    
    
    4,747
    
    
    
    5,436Royalties and technology licenses
    
    
    9,156
    
    
    
    1,822Other
    
    
    10,913
    
    
    
    26,766$
    36,907
    
    
    $
    50,209


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

2003
    
    2002
    
    2001Investment and interest income
    
    $
    15,622
    
    
    $
    13,116
    
    
    $
    29,429Interest expense
    
    
    (28,120
    )
    
    
    (31,069
    )
    
    
    (33,597
    )Change in the fair value of the
conversion right under the Skyworks 15%
convertible senior subordinated notes
    
    
    9,402
    
    
    
    
    
    
    
    Change in the fair value of the
Mindspeed warrant
    
    
    30,230
    
    
    
    
    
    
    
    Gain on sale of investments
    
    
    8,618
    
    
    
    
    
    
    
    23,251Write-down of non-marketable investments
    
    
    (39,402
    )
    
    
    (21,207
    )
    
    
    (13,051
    )Other
    
    
    (2,158
    )
    
    
    2,290
    
    
    
    (5,195
    )$
    (5,808
    )
    
    $
    (36,870
    )
    
    $
    837


In fiscal 2003, the Company sold two of its investments in early stage
technology companies for cash of $15.0 million, with an additional $2.1 million
to be held in escrow for a period of twelve to eighteen months for potential
buyer indemnity claims. A gain of $8.6 million was recognized on these sales.
In fiscal 2001, the $23.3 million gain is attributable to the sale of
marketable securities.

During fiscal 2003, 2002 and 2001, the Company recorded charges of $39.4
million, $21.2 million and $13.1 million, respectively, to write down the
carrying values of certain non-marketable investments to their estimated fair
values (in most cases, zero). The investments consisted of equity interests in
early stage technology companies which the Company had accounted for under the
cost method. Management estimated the fair value of these investments based
upon available financial and other information, including then-current and
projected business prospects for the subject companies, and determined that the
decline in the fair value of these investments was other than temporary.

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

9. Income Taxes

The components of the benefit for income taxes on continuing operations are as
follows (in thousands):

2003
    
    2002
    
    2001Current:United States
    
    $
    (668
    )
    
    $
    (2,767
    )
    
    $
    (8,000
    )Foreign
    
    
    457
    
    
    
    673
    
    
    
    1,214State and local
    
    
    (134
    )
    
    
    409
    
    
    
    (102
    )Total current
    
    
    (345
    )
    
    
    (1,685
    )
    
    
    (6,888
    )Deferred:United States
    
    
    
    
    
    
    
    
    
    
    (45,055
    )Foreign
    
    
    216
    
    
    
    (153
    )
    
    
    4,282State and local
    
    
    
    
    
    
    
    
    
    
    (7,712
    )Total deferred
    
    
    216
    
    
    
    (153
    )
    
    
    (48,485
    )$
    (129
    )
    
    $
    (1,838
    )
    
    $
    (55,373
    )


The total provision (benefit) for income taxes is recorded as follows (in
thousands):

2003
    
    2002
    
    2001Continuing operations
    
    $
    (129
    )
    
    $
    (1,838
    )
    
    $
    (55,373
    )Discontinued operations
    
    
    462
    
    
    
    3,848
    
    
    
    (91,539
    )$
    333
    
    
    $
    2,010
    
    
    $
    (146,912)


Deferred income tax assets and liabilities at fiscal year-ends consist of the
tax effects of temporary differences related to the following (in thousands):

2003
    
    2002Deferred tax assets:Inventories
    
    $
    17,002
    
    
    $
    33,785Property, plant and equipment
    
    
    33,602
    
    
    
    44,065Investments
    
    
    64,781
    
    
    
    69,371Deferred revenue
    
    
    7,059
    
    
    
    8,124Accrued compensation and benefits
    
    
    6,747
    
    
    
    3,645Product returns and allowances
    
    
    13,219
    
    
    
    12,879Retirement benefits and deferred compensation
    
    
    16,621
    
    
    
    23,552Intangible assets
    
    
    10,234
    
    
    
    13,008Capitalized research and development
    
    
    65,060
    
    
    
    20,643Net operating losses
    
    
    364,866
    
    
    
    361,080Research and development and investment
credits
    
    
    120,748
    
    
    
    106,407Other, net
    
    
    9,107
    
    
    
    10,951Valuation allowance
    
    
    (413,049
    )
    
    
    (406,600
    )Total deferred tax assets
    
    
    315,997
    
    
    
    300,910Deferred tax liabilities:Unrealized gains on investments
    
    
    17,088
    
    
    
    321Deferred state taxes
    
    
    44,049
    
    
    
    44,188Total deferred tax liabilities
    
    
    61,137
    
    
    
    44,509Net deferred tax assets
    
    $
    254,860
    
    
    $
    256,401


Based upon the Companys recent operating losses and expected future operating
results, management determined that it is more likely than not that a portion
of the deferred tax assets as of September 30, 2003 and 2002 will not be
realized. Consequently, the Company established a valuation allowance for the
portion of its deferred tax assets that is not expected to be realized through
the reduction of future income tax payments. Management believes the remaining
portion of the deferred tax assets is more likely than not to be realized based
on current expectations of future earnings and available tax planning
strategies.

The valuation allowance as of September 30, 2003 and 2002 was $413.0 million
and $406.6 million, respectively. The net change in the valuation allowance
for fiscal 2003 was $6.4 million which includes $3.0 million related to stock
option exercises. To the extent the Company obtains a tax benefit for the net
operating losses attributable to the stock option exercises, such amounts will
be recorded to shareholders equity.

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

As of September 30, 2003, the Company has U.S. Federal net operating loss
carryforwards of approximately $1.02 billion which expire at various dates
through 2024 and aggregate state net operating loss carryforwards of
approximately $141.0 million which expire at various dates through 2014. The
Company also has U.S. Federal and state income tax credit carryforwards of
approximately $57.0 million and $64.0 million, respectively. The U.S. Federal
credits expire at various dates through 2024. The state credit carryforwards
include California Manufacturers Investment Credits of approximately $24.0
million which expire at various dates through 2010, while the remaining state
credits have no expiration date. Approximately $19.0 million of additional
California Manufacturers Investment Credit carryforward was
generated while the
Company was part of Rockwell. Under the terms of the tax allocation agreement
with Rockwell, Conexant must pay Rockwell the benefits from such portion of the
credit carryforwards if they are realized.

Tax benefits from the exercise of stock options (including payments received
under the tax allocation agreement with Rockwell) totaling $0.4 million, $1.2
million and $1.5 million for fiscal 2003, 2002 and 2001, respectively, were
credited directly to shareholders equity.

A reconciliation of income taxes computed at the U.S. Federal statutory income
tax rate to the benefit for income taxes on continuing operations follows (in
thousands):

2003
    
    2002
    
    2001U.S. Federal statutory tax at 35%
    
    $
    8,202
    
    
    $
    (50,956
    )
    
    $
    (250,699
    )State taxes, net of federal effect
    
    
    (3,444
    )
    
    
    (8,110
    )
    
    
    (32,894
    )Foreign income taxes in excess of U.S
    
    
    (822
    )
    
    
    5,831
    
    
    
    (6,991
    )Research and development credits
    
    
    (7,876
    )
    
    
    (9,453
    )
    
    
    (8,075
    )Nondeductible amortization of intangible assets
    
    
    
    
    
    
    3,038
    
    
    
    14,117Valuation allowance
    
    
    3,569
    
    
    
    53,902
    
    
    
    229,731Other
    
    
    242
    
    
    
    3,910
    
    
    
    (562
    )Benefit for income taxes
    
    $
    (129
    )
    
    $
    (1,838
    )
    
    $
    (55,373
    )


Income (loss) before income taxes from continuing operations consists of the
following components (in thousands):

2003
    
    2002
    
    2001United States
    
    $
    19,160
    
    
    $
    (130,416
    )
    
    $
    (755,414
    )Foreign
    
    
    4,273
    
    
    
    (15,172
    )
    
    
    39,131$
    23,433
    
    
    $
    (145,588
    )
    
    $
    (716,283
    )


Certain of the Companys United States, state and foreign income tax returns
for the years 1999 through 2001 are currently under examination. Management
believes that adequate provision for income taxes has been made for all years,
and the results of the examinations will not have a material impact on the
Companys financial position, cash flows or results of operations.

No provision has been made for U.S. Federal, state or additional foreign income
taxes which would be due upon the actual or deemed distribution of
approximately $34.0 million and $32.0 million of undistributed earnings of
foreign subsidiaries as of September 30, 2003 and 2002, respectively, which
have been or are intended to be permanently reinvested.

10. Long-Term Debt

In February 2000, the Company issued $650.0 million principal amount of its 4%
Convertible Subordinated Notes due 2007 for net proceeds (after costs of
issuance) of approximately $631.0 million. The notes are general unsecured
obligations of the Company. Interest on the notes is payable in arrears
semiannually on each February 1 and August 1. The notes are convertible, at
the option of the holder, at any time prior to redemption or maturity into
shares of the Companys common stock at a current conversion price of $42.432
per share, subject to adjustment for certain events. The notes may be redeemed
at the Companys option at a declining premium to par. During fiscal 2001 and
2003, the Company purchased $35.0 million and $100.0 million, respectively,
principal amount of its 4% Convertible Subordinated Notes at prevailing market
prices, resulting in net gains of $11.7 million, and $42.0 million,
respectively. At September 30, 2003, $515.0 million principal amount of the 4%
Convertible Subordinated Notes was outstanding.

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

In May 1999, the Company issued $350.0 million principal amount of its 41/4%
Convertible Subordinated Notes due 2006 for net proceeds (after costs of
issuance) of approximately $339.6 million. The notes are general unsecured
obligations of the Company. Interest on the notes is payable in arrears
semiannually on each May 1 and November 1. The notes are convertible, at the
option of the holder, at any time prior to redemption or maturity into shares
of the Companys common stock at a current conversion price of $9.075 per
share, subject to adjustment for certain events. The notes may be redeemed at
the Companys option at a declining premium to par. During fiscal 2001,
approximately $255.2 million principal amount of the Companys 41/4%
Convertible Subordinated Notes was converted into approximately 11.0 million
shares of common stock at a cost to the Company of $42.6 million. During fiscal
2002, the Company exchanged 2.2 million shares of its common stock for
approximately $28.0 million principal amount of its 41/4% Convertible
Subordinated Notes. In connection with the exchanges in fiscal 2002, the
Company recognized debt conversion costs of $10.4 million for the fair value of
the shares issued in excess of the number of shares issuable in a conversion of
the notes pursuant to their original terms. At September 30, 2003, $66.8
million principal amount of the 41/4% Convertible Subordinated Notes was
outstanding.

At September 30, 2003, the fair value of the convertible subordinated notes
(based on quoted market prices) was approximately $511.0 million compared to
their carrying value of $581.8 million.

The Company adopted SFAS No. 145, Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections in the first
quarter of fiscal 2003. SFAS 145 rescinds SFAS 4, which required gains and
losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of the related income tax effect. The
adoption of SFAS 145 resulted in the reclassification of fiscal 2001 gains of
$11.7 million from extraordinary gain on extinguishment of debt to income from
continuing operations (and income tax provision of $4.4 million) in the
consolidated statements of operations.

11. Commitments

The Company leases certain facilities and equipment under non-cancelable
operating leases which expire at various dates through 2017 and contain various
provisions for rental adjustments including, in certain cases, adjustments
based on increases in the Consumer Price Index. The leases generally contain
renewal provisions for varying periods of time. Rental expense under operating
leases was approximately $16.8 million, $13.0 million and $10.5 million during
fiscal 2003, 2002 and 2001, respectively.

At September 30, 2003, future minimum lease payments under operating leases,
excluding any sublease income, were as follows (in thousands):

Fiscal Year2004
    
    $
    15,5782005
    
    
    12,2532006
    
    
    7,7242007
    
    
    5,1202008
    
    
    4,754Thereafter
    
    
    39,741Total future minimum lease payments
    
    $
    85,170


The summary of future minimum lease payments includes an aggregate of $10.8
million of lease obligations that principally expire through fiscal 2006, which
have been accrued for in connection with the Companys restructuring actions
(see Note 16).

The Company purchases a substantial portion of its requirements for
silicon-based semiconductor products from Jazz. During the first two years of
the long-term supply arrangement with Jazz, the Companys cost of wafers is an
amount which approximates its historical cost. Thereafter, the cost of wafers
will be based on market prices. Additionally, the Company is obligated to
purchase certain minimum annual volumes of wafers during the first three years
of the arrangement. In the event the Companys actual wafer purchases are less
than the required minimum volumes, it will be required to make additional
payments to Jazz. The Companys expected minimum purchase obligations under the
long-term supply agreement with Jazz, net of a portion of the wafer purchase
obligations assumed by a third party, will be approximately $43.0 million and
$14.0 million in fiscal 2004 and 2005, respectively.

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

Additionally, the Company entered into a long-term supply agreement with
Skyworks in June 2002, under which Skyworks provides semiconductor assembly and
test services at the Companys former Mexicali, Mexico facility. Under this
supply agreement, the Company is obligated to purchase certain minimum amounts
of assembly and test services during fiscal 2004 and fiscal 2005 in the amounts
of $26.6 million and $10.9 million, respectively. In the event the Companys
purchases of assembly and test services are less than the required minimum
amounts, it will be required to make additional payments to Skyworks.

The Company currently anticipates meeting each of the annual minimum purchase
obligations under the long-term supply agreements with Jazz and Skyworks.

12. Mindspeed Credit Facility

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

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

13. Contingencies

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

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 of
the Company believes the disposition of such matters will not have a material
adverse effect on the financial condition or results of operations of the
Company.

Conexant has been designated as a potentially responsible party and is 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 the Company. In addition, the Company is
engaged in remediation of groundwater contamination at its former Newport
Beach, California wafer fabrication facility. Management currently estimates
the aggregate remaining costs for these remediations to be approximately $3.3
million and has accrued for these costs as of September 30, 2003.

The Company has made guarantees and indemnities, under which it may be required
to make payments to a guaranteed or indemnified party, in relation to certain
transactions. In connection with the Companys spin-off from Rockwell, the
Company assumed responsibility for all contingent liabilities and then-current
and future litigation (including environmental and intellectual property
proceedings) against Rockwell or its subsidiaries in respect of the

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

operations of the semiconductor systems business of Rockwell. In connection
with the Companys contribution of certain of its manufacturing operations to
Jazz, the Company agreed to indemnify Jazz for certain environmental matters
and other customary divestiture-related matters. In connection with the sales
of its products, the Company provides intellectual property indemnities to its
customers. In connection with certain facility leases, the Company has
indemnified its lessors for certain claims arising from the facility or the
lease. The Company indemnifies its directors and officers to the maximum extent
permitted under the laws of the State of Delaware. The duration of the
guarantees and indemnities varies, and in many cases is indefinite. The
guarantees and indemnities to customers in connection with product sales
generally are subject to limits based upon the amount of the related product
sales. The majority of other guarantees and indemnities do not provide for any
limitation of the maximum potential future payments the Company could be
obligated to make. The Company has not recorded any liability for these
guarantees and indemnities in the accompanying consolidated balance sheets.
Product warranty costs are not significant.

14. Stock Plans

The Companys authorized capital consists of 1,000,000,000 shares of common
stock, par value $0.01 per share, and 25,000,000 shares of preferred stock,
without par value, of which 1,500,000 shares are designated as Series A junior
participating preferred stock (the Junior Preferred Stock).

The Company has a preferred share purchase rights plan to protect shareholders
rights in the event of a proposed takeover of the Company. A preferred share
purchase right (a Right) is attached to each share of common stock pursuant to
which the holder may, in certain takeover-related circumstances, become
entitled to purchase from the Company 1/200th of a share of Junior Preferred
Stock at a price of $300, subject to adjustment. Also, in certain
takeover-related circumstances, each Right (other than those held by an
acquiring person) will generally be exercisable for shares of the Companys
common stock or stock of the acquiring person having a market value of twice
the exercise price. In certain events, each Right may be exchanged by the
Company for one share of common stock or 1/200th of a share of Junior Preferred
Stock. The Rights expire on December 31, 2008, unless earlier exchanged or
redeemed at a redemption price of $0.01 per Right, subject to adjustment.

Stock Options

The Company has stock option plans and long-term incentive plans under which
employees and directors may be granted options to purchase shares of the
Companys common stock. As of September 30, 2003, approximately 15.9 million
shares are available for grant under the stock option and long-term incentive
plans. Stock options are generally granted with exercise prices at not less
than the fair market value at grant date, generally vest over four years and
expire eight or ten years after the grant date. The Company has also assumed
stock option plans in connection with the business acquisitions completed
during fiscal 2001.

In September 2001, the Company commenced an offer to its employees to
voluntarily exchange certain outstanding stock options. Under the terms of the
offer, employees holding stock options having an exercise price equal to or
greater than $25.00 per share could exchange their options for new options to
purchase an equal number of shares of the Companys common stock (subject to
adjustment in certain circumstances). Employees accepting the exchange offer
were also required to exchange all options granted within six months of the
exchange offer. Approximately 27.5 million options, with a weighted-average
exercise price of $50.89 per share, were tendered by employees and on October
2, 2001 those options were accepted and cancelled by the Company. The Company
undertook to grant new stock options to the affected employees, on a
one-for-one basis, at least six months and one day after the acceptance of the
old options for exchange and cancellation. In April 2002, the Company granted
new options to purchase an aggregate of 26.7 million shares of its common stock
at an exercise price of $11.71 per share (based upon the closing market price
of the Companys common stock on the grant date), with vesting and other
provisions substantially the same as the old options.

In connection with the Spin-off Transaction in June 2002, each option holder,
other than holders of options granted to employees of the former Mindspeed
Technologies segment on March 30, 2001 and options held by persons in certain
foreign locations (Mindspeed March 30 options), received an option to purchase
an equal number of shares

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

of Washington common stock. The exercise prices of the outstanding Conexant
options and the Washington options were adjusted so that the aggregate
intrinsic value of the options was equal to the intrinsic value of the Conexant
option immediately prior to the Spin-off Transaction and the ratio of the
exercise price per share to the market value per share of each option was the
same immediately before and after the Spin-off Transaction. In the Merger, each
outstanding Washington option was converted into an option to purchase Skyworks
common stock based upon the exchange ratio in the Merger. Mindspeed March 30
options remained exercisable only for shares of Conexant common stock, with
appropriate adjustment to the number of shares and exercise prices thereof such
that the aggregate intrinsic value of the options was equal to the intrinsic
value of the options immediately prior to the Spin-off Transaction and the
ratio of the exercise price per share to the market value per share of each
option was the same immediately before and after the Spin-off Transaction.

In connection with the Mindspeed Spin in June 2003, holders of options to
purchase Conexant common stock received options to purchase shares of Mindspeed
common stock. The number and exercise prices of the outstanding Conexant
options and the new Mindspeed options were adjusted so that the aggregate
intrinsic value of the options was equal to the intrinsic value of the Conexant
options immediately prior to the Mindspeed Spin.

A summary of stock option activity follows (shares in thousands):

2003
    
    2002
    
    2001Weighted-
    
    
    
    
    
    Weighted-
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    Average
    
    
    
    
    
    AverageNumber of
    
    Exercise
    
    Number of
    
    Exercise
    
    Number of
    
    ExerciseShares
    
    Price
    
    Shares
    
    Price
    
    Shares
    
    PriceOutstanding at beginning of year
    
    
    88,805
    
    
    $
    3.90
    
    
    
    80,029
    
    
    $
    25.36
    
    
    
    60,679
    
    
    $
    32.51Granted
    
    
    16,529
    
    
    
    3.13
    
    
    
    31,762
    
    
    
    11.16
    
    
    
    28,880
    
    
    
    12.48Assumed in connection
with acquisitions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,138
    
    
    
    1.00Adjustments for the Spin-off Transaction
    
    
    
    
    
    
    
    
    
    
    17,029
    
    
    
    3.23
    
    
    
    
    
    
    
    Adjustments for the Mindspeed Spin
    
    
    (1,451
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (8,320
    )
    
    
    2.85
    
    
    
    (2,775
    )
    
    
    5.15
    
    
    
    (1,998
    )
    
    
    6.08Cancelled
    
    
    (14,474
    )
    
    
    4.78
    
    
    
    (37,240
    )
    
    
    41.33
    
    
    
    (8,670
    )
    
    
    34.44Outstanding at end of year
    
    
    81,089
    
    
    
    3.02
    
    
    
    88,805
    
    
    
    3.90
    
    
    
    80,029
    
    
    
    25.36Exercisable at end of year
    
    
    52,109
    
    
    
    3.13
    
    
    
    50,683
    
    
    
    3.75
    
    
    
    23,889
    
    
    
    22.05


The following table summarizes stock options outstanding at September 30, 2003
(shares in thousands):

Outstanding
    
    ExercisableAverage
    
    Weighted-
    
    
    
    
    
    Weighted-Remaining
    
    Average
    
    
    
    
    
    AverageRange of
    
    Number
    
    Contractual
    
    Exercise
    
    Number
    
    ExerciseExercise Prices
    
    of Shares
    
    Life (Years)
    
    Price
    
    of Shares
    
    Price$0.20 - 2.62
    
    
    19,604
    
    
    
    5.3
    
    
    $
    1.70
    
    
    
    7,514
    
    
    $
    2.022.63
    
    
    20,865
    
    
    
    4.9
    
    
    
    2.63
    
    
    
    15,527
    
    
    
    2.632.64 - 3.44
    
    
    10,974
    
    
    
    4.5
    
    
    
    2.80
    
    
    
    9,909
    
    
    
    2.783.45
    
    
    19,023
    
    
    
    5.9
    
    
    
    3.45
    
    
    
    14,321
    
    
    
    3.453.46 -5.21
    
    
    1,840
    
    
    
    5.4
    
    
    
    4.06
    
    
    
    920
    
    
    
    4.075.22
    
    
    4,252
    
    
    
    7.8
    
    
    
    5.22
    
    
    
    
    
    
    
    5.26 - 34.03
    
    
    4,531
    
    
    
    4.1
    
    
    
    6.71
    
    
    
    3,918
    
    
    
    6.740.20 - 34.03
    
    
    81,089
    
    
    
    5.4
    
    
    
    3.02
    
    
    
    52,109
    
    
    
    3.13


At September 30, 2003, of the 81.1 million stock options outstanding,
approximately 34.6 million were held by current employees of the Company, and
approximately 46.5 million were held by employees of Rockwell, a
former Rockwell business, or a former business of the Company (i.e.
Mindspeed, Skyworks, etc.) who remain employed by one of these businesses.

Restricted Stock

The Companys long-term incentive plans also provide for awards of restricted
shares of common stock and other stock-based incentive awards to officers and
other employees and certain non-employees of the Company.

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

Restricted stock awards are subject to forfeiture if employment terminates
during the prescribed retention period (generally within two years of the date
of award) or, in certain cases, if prescribed performance criteria are not met.
During fiscal 2003, 2002 and 2001, the Company issued approximately 22,000,
37,000 and 106,000 restricted shares of common stock at weighted-average fair
values per share of $2.06, $9.14 and $9.29, respectively. The fair value of
restricted stock awards is charged to expense over the vesting period. In
fiscal 2003, 2002 and 2001, the Company recorded compensation expense of $0.7
million, $2.8 million and $2.0 million, respectively, for the value of
restricted stock awards.

Directors Stock Plan

The Company has a Directors Stock Plan which provides for each non-employee
director to receive specified levels of stock option grants upon election to
the Board of Directors and periodically thereafter. Under the Directors Stock
Plan, each non-employee director may elect to receive all or a portion of the
cash retainer to which the director is entitled through the issuance of common
stock. During fiscal 2003, 2002 and 2001, the Company issued approximately
60,000, 29,000 and 10,000 shares, respectively, of common stock and
approximately 460,000, 80,000 and 80,000 stock options, respectively, under the
Director Stock Plan. As of September 30, 2003, an aggregate of approximately
25,000 shares of the Companys common stock are available for grant under the
Directors Stock Plan.

Employee Stock Purchase Plan

The Company has an employee stock purchase plan (ESPP) which allows eligible
employees to purchase shares of the Companys common stock at six-month
intervals during an offering period at 85% of the lower of the fair market
value on the first day of the offering period or on the purchase date. The
Company has reserved 15.4 million shares for delivery under the ESPP. Under
the ESPP, employees may authorize the Company to withhold up to 10% of their
compensation for each pay period to purchase shares under the plan, subject to
certain limitations, and employees are limited to the purchase of 1,500 shares
per offering period. Offering periods generally commence on the first trading
day of February and August of each year and are generally 24 months in
duration, but may be terminated earlier under certain circumstances. During
fiscal 2003, 2002 and 2001, the Company issued 1.7 million, 3.4 million, and
1.7 million shares of common stock under the ESPP at weighted-average prices
per share of $1.19, $5.07, and $10.32, respectively. The weighted
average per share fair
values of the employees purchase rights granted in fiscal 2003, 2002 and 2001
were $1.12, $1.80, and $4.34 using the Black-Scholes model. Other than an
expected life of six months, assumptions used are consistent with those used
for the Companys stock options plans (see Note 2). At September 30, 2003, an
aggregate of 7.4 million shares of the Companys common stock are available for
future purchases under the ESPP.

Performance Plan Shares

In fiscal 2002, the Company reserved 4.0 million shares of common stock for
issuance under various employee performance plans. During fiscal 2003 and
2002, the Company issued 75,674 and 225,143 shares of common stock at
weighted-average per share prices of $1.25 and $5.73, respectively, under
employee performance plans. At September 30, 2003, approximately 3.7 million
shares of the Companys common stock are available for future
grant. Awards granted under the performance plans are subject to
variable accounting.

15. Employee Benefit Plans

Retirement Savings Plans

The Company sponsors 401(k) retirement savings plans that allow eligible U.S.
employees to contribute a portion of their compensation, on a pre-tax or
after-tax basis, subject to annual limits. The Company may match employee
contributions in whole or part up to specified levels, and the Company may make
an additional discretionary contribution at fiscal year-end, based on the
Companys performance. All Company contributions to the retirement savings
plans are invested in shares of the Companys common stock and are vested
immediately. Participants may also choose to purchase shares of Company common
stock as one of their investment options in the plan. During fiscal 2002 and
2001, the Company issued 1.7 million and 0.3 million shares of common stock
under the retirement savings plan at weighted-average prices per share of $8.07
and $9.88, respectively. No new shares were issued in

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

fiscal 2003. Expense under the retirement savings plans was $3.7 million, $5.5
million and $7.3 million for fiscal 2003, 2002 and 2001, respectively.

Retirement Medical Plan

The Company has a retirement medical plan which covers certain of its employees
and provides for medical payments to eligible employees and dependents upon
retirement. At the time of the spin-off from Rockwell, the Company ceased
offering retirement medical coverage to active salaried employees. Effective
January 1, 2003, the Company elected to wind-down this plan and it will be
phased out after December 31, 2007. Retirement medical expense, consisting
principally of interest accrued on the accumulated retirement medical
obligation and in fiscal 2003 the effects of the wind-down of the plan, was
approximately $(1.5) million, $1.9 million and $2.9 million in fiscal 2003,
2002 and 2001, respectively.

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

The changes in the retirement medical obligation for the fiscal years ending
September 30 are as follows (in millions):

2003
    
    2002Change in benefit obligation:Benefit obligation at beginning of year
    
    $
    20.7
    
    
    $
    35.6Service cost
    
    
    
    
    
    
    0.3Interest cost
    
    
    0.8
    
    
    
    2.4Plan participants contributions
    
    
    0.7
    
    
    
    0.3Curtailments
    
    
    
    
    
    
    (8.0
    )Effect of wind-down
    
    
    (22.6
    )
    
    
    Actuarial (gain) loss
    
    
    6.9
    
    
    
    (6.4
    )Benefits paid
    
    
    (2.7
    )
    
    
    (3.5
    )Benefit obligation at end of year
    
    
    3.8
    
    
    
    20.7Change in plan assets:Fair value of plan assets at beginning of year
    
    
    
    
    
    
    Actual return on plan assets
    
    
    
    
    
    
    Employer contribution
    
    
    2.0
    
    
    
    3.2Plan participants contributions
    
    
    0.7
    
    
    
    0.3Benefits paid
    
    
    (2.7
    )
    
    
    (3.5
    )Fair value of plan assets at end of year
    
    
    
    
    
    
    Funded status
    
    
    (3.8
    )
    
    
    (20.7
    )Unrecognized net actuarial loss
    
    
    9.0
    
    
    
    3.1Unrecognized prior service cost
    
    
    (23.8
    )
    
    
    (3.5
    )Accrued benefit cost
    
    $
    (18.6
    )
    
    $
    (21.1
    )


The accrued benefit obligation is based on discount rates of 3.25% (2003) and
7.0% (2002), with the change attributable to the wind-down of the plan.
Increasing the health care cost trend rate by 1% would not increase the
accumulated retirement medical obligation at September 30, 2003 and would not
increase retirement medical expense due to the wind-down of the plan.

Pension Plans

In connection with a restructuring plan initiated in September 1998, the
Company offered a voluntary early retirement program (VERP) to certain salaried
employees. Pension benefits under the VERP are paid from a newly established
pension plan (the VERP Plan) of Conexant. Benefits payable under the VERP Plan
are equal to the excess of the total early retirement pension benefit over the
vested benefit obligation retained by Rockwell under a pension plan sponsored
by Rockwell prior to the Distribution. The Company also has certain pension
plans covering its non-U.S. employees and retirees. Prior to the formation of
Jazz in March 2002, the Company also had a pension plan covering certain hourly
employees, principally in its manufacturing operations, which was assumed by
Jazz.

Net pension expense was approximately
$1.1 million, $1.2 million and $1.6
million for fiscal 2003, 2002 and 2001, respectively. As of September 30, 2003
and 2002, the aggregate projected benefit obligation included in the
consolidated balance sheet was approximately $11.7 million and $11.1 million,
respectively. The pension obligations are based on a discount rate of 6.0%
(2003) and 7.0% (2002). The accrued pension liability at September 30, 2003
includes $8.4 million of additional minimum liability, not yet recognized in
net pension expense, which has been charged against accumulated other
comprehensive loss.

16. Special Charges

Special charges consist of the following (in thousands):

2003
    
    2002
    
    2001Asset impairments
    
    $
    9,575
    
    
    $
    13,523
    
    
    $
    342,791Restructuring charges
    
    
    5,215
    
    
    
    16,098
    
    
    
    16,887Separation costs
    
    
    
    
    
    
    878
    
    
    
    Other special charges
    
    
    3,589
    
    
    
    
    
    
    
    9,580$
    18,379
    
    
    $
    30,499
    
    
    $
    369,258


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

Asset Impairments

2003 Impairments- During fiscal 2003, the Company recorded impairment charges
of $4.8 million, related to leasehold improvements associated with properties
no longer occupied by the Company and other assets that management determined
to abandon or scrap.

In fiscal 2003, the Company sold certain manufacturing assets to Jazz
Semiconductor for $1.0 million. A $4.8 million impairment loss on these assets
held for sale was recognized in the quarter ended June 30, 2003.

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

2001 Impairments During fiscal 2001, the Company recorded impairment charges
totaling $342.8 million associated with manufacturing assets in connection with
its decision to realign its manufacturing and procurement strategies,
accelerating its transition from volume digital CMOS manufacturing to a fabless
CMOS business model.

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

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

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

Restructuring Charges

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

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

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

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

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


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

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

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

As part of the 2002 Corporate and Manufacturing Restructuring Plan, during the
first quarter of fiscal 2003, the Company initiated a further workforce
reduction affecting 58 employees and recorded additional charges of $1.9
million based upon estimates of the cost of severance benefits for the affected
employees. During the third quarter of fiscal 2003, the Company revised its
estimate of liabilities for severance benefits and facility costs due to
unfavorable sublease experience to date, and charged an additional $1.5 million
to restructuring. In the fourth quarter of 2003, the Company reversed $1.1
million of our estimated cost to settle the remaining commitment under a
license obligation after its favorable resolution, and increased the estimate
of remaining facility costs due to unfavorable sublease experience.

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

Workforce
    
    Facilityreductions
    
    and other
    
    TotalCharged to costs and expenses
    
    $
    2,437
    
    
    $
    12,519
    
    
    $
    14,956Cash payments
    
    
    (1,664
    )
    
    
    (431
    )
    
    
    (2,095
    )Restructuring balance, September 30, 2002
    
    
    773
    
    
    
    12,088
    
    
    
    12,861Charged to costs and expenses
    
    
    2,898
    
    
    
    888
    
    
    
    3,786Expense reversal
    
    
    
    
    
    
    (1,100
    )
    
    
    (1,100
    )Cash payments
    
    
    (3,173
    )
    
    
    (3,930
    )
    
    
    (7,103
    )Restructuring balance, September 30, 2003
    
    $
    498
    
    
    $
    7,946
    
    
    $
    8,444


2003 Corporate Restructuring PlanIn the fourth quarter of fiscal 2003, the
Company initiated another workforce reduction, closed a design center and
consolidated some facilities. The Company involuntarily terminated employees in
the sales and administration areas and recorded charges aggregating $1.2
million based upon estimates of the cost of severance benefits for the affected
employees. The Company also recorded restructuring costs of $2.8 million
relating to the consolidation of certain facilities under non-cancelable leases
which were vacated.

Activity and liability balances related to the 2003 Corporate Restructuring
Plan through September 30, 2003 were as follows (in thousands):

Workforce
    
    Facilityreductions
    
    and other
    
    TotalCharged to costs and expenses
    
    $
    1,181
    
    
    $
    2,830
    
    
    $
    4,011Cash payments
    
    
    (364
    )
    
    
    
    
    
    
    (364
    )Restructuring balance, September 30, 2003
    
    $
    817
    
    
    $
    2,830
    
    
    $
    3,647


Through September 30, 2003, the Company has paid an aggregate of $26.1 million
in connection with its fiscal 2001, 2002 and 2003 restructuring plans and has a
remaining accrued restructuring balance of $12.1 million. The Company expects
to pay the amounts accrued for the workforce reductions during fiscal 2004 and
expects to pay the obligations for the non-cancelable lease and other
commitments over their respective terms, which expire through fiscal 2006. Cash
payments to complete the restructuring actions will be funded from available
cash reserves and funds from product sales, and are not expected to
significantly impact the Companys liquidity.

Separation Costs

In fiscal 2002, the Company incurred separation costs of approximately $0.9
million in connection with the divestiture of its Newport Beach wafer
fabrication operations and its digital imaging business.

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

Other Special Charges

In connection with the fiscal 2001 restructuring actions and realigned
manufacturing and procurement strategies, the Company recorded other special
charges aggregating $9.6 million related to the loss on disposal and write-off
of certain assets.

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

17. Segment Information

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

Net revenues by geographic area are presented based upon the country of
destination. No other foreign country represented 10% or more of net revenues
for any of the fiscal years presented. Revenues by geographic area were as
follows (in thousands):

2003
    
    2002
    
    2001United States
    
    $
    57,652
    
    
    $
    59,324
    
    
    $
    97,711Other Americas
    
    
    11,086
    
    
    
    23,633
    
    
    
    8,773Total Americas
    
    
    68,738
    
    
    
    82,957
    
    
    
    106,484Taiwan
    
    
    88,369
    
    
    
    125,151
    
    
    
    151,575China
    
    
    211,642
    
    
    
    133,801
    
    
    
    76,509Other Asia-Pacific
    
    
    96,101
    
    
    
    81,094
    
    
    
    76,612Total Asia-Pacific
    
    
    396,112
    
    
    
    340,046
    
    
    
    304,696Japan
    
    
    84,943
    
    
    
    41,735
    
    
    
    58,374Europe, Middle East and Africa
    
    
    50,184
    
    
    
    56,988
    
    
    
    72,134$
    599,977
    
    
    $
    521,726
    
    
    $
    541,688


The Company believes a substantial portion of the products sold to original
equipment manufacturers (OEMs) and third-party manufacturing service providers
in the Asia-Pacific region are ultimately shipped to end-markets in the
Americas and Europe. For fiscal 2003, one customer (a foreign distributor)
accounted for 11% of net revenues, and for fiscal 2002, one customer (a foreign
distributor) accounted for 12% of net revenues. No other customer accounted for
10% or more of the Companys net revenues for fiscal 2003, 2002 or 2001.

Long-lived assets consist of property, plant and equipment, goodwill,
intangible assets, the Mindspeed warrant and other assets. Long-lived assets by
geographic area at fiscal year ends were as follows (in thousands):

2003
    
    2002United States
    
    $
    323,918
    
    
    $
    254,301Europe, Middle East and Africa
    
    
    10,222
    
    
    
    10,470Other
    
    
    1,609
    
    
    
    2,218$
    335,749
    
    
    $
    266,989


18. Subsequent Event

On November 3, 2003, the Company entered into a definitive merger agreement
with GlobespanVirata, Inc., a provider of broadband communications solutions
for consumer, enterprise, personal computer and service provider markets. In
the merger, GlobespanVirata shareholders will receive 1.198 shares of Conexant
common stock for each share of GlobespanVirata common stock. This transaction
will be accounted for under the purchase method of accounting with the Company
as the acquiror for accounting purposes. The closing of this transaction is
subject to customary regulatory and shareholder approvals, and is expected to
be completed in the quarter ending March 31, 2004.

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INDEPENDENT AUDITORS REPORT

To The Board of Directors and Shareholders of  Conexant
Systems, Inc.:

We have audited the accompanying consolidated balance sheets of Conexant
Systems, Inc. and subsidiaries (the Company) as of September 30, 2003 and
2002, and the related consolidated statements of operations, cash flows, and
shareholders equity and comprehensive loss for each of the three years in the
period ended September 30, 2003. Our audits also included the financial
statement schedule listed at Item 15(a)(2). These financial statements and the
financial statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company and its
subsidiaries at September 30, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2003, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and intangible assets during the
year ended September 30, 2003 as a result of adopting Statement of Financial
Accounting Standards No. 142, Goodwill and Intangible Assets.

As discussed in Note 3 to the consolidated financial statements, on June 27,
2003, the Company completed the spin-off of its Mindspeed Technologies
business. The consolidated financial statements referred to above have been
restated to report the Mindspeed Technologies business as a discontinued
operation for all periods presented.

/s/ DELOITTE & TOUCHE LLP

Costa Mesa, California
October 27, 2003, except for Note 18, as to which the
date is November 3, 2003

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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

Not applicable.




Item 9A. Controls and Procedures

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

There were no changes in the Companys internal control over financial
reporting during the fiscal quarter ended September 30, 2003 that have
materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.




PART III

Certain information required by Part III is omitted from this Annual Report in
that the Registrant will file its definitive Proxy Statement for the Annual
Meeting of Shareowners to be held on February 25, 2004 pursuant to Regulation
14A of the Securities Exchange Act of 1934 (the Proxy Statement) not later than
120 days after the end of the fiscal year covered by this Annual Report, and
certain information included in the Proxy Statement is incorporated herein by
reference.




Item 10. Directors and Executive Officers of the Registrant



|(a) |  | Executive Officers  See Executive Officers in Part I, Item 1 hereof.
|--- |  | -----------------------------------------------------------------------



|(b) |  | Directors  The information required by this Item is incorporated herein
by reference to the section entitled Election of Directors in the Proxy
Statement.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) |  | Audit Committee Financial Expert  The board of directors has determined
that D. Scott Mercer, Chairman of the Audit Committee, is an audit
committee financial expert and independent as defined under applicable
SEC and Nasdaq rules. The boards affirmative determination was
based, among other things, upon
his extensive experience as chief financial officer of Western Digital
Corporation and, prior to that, as Vice President, Finance, European
Operations of Dell Inc.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(d) |  | The Company has adopted its Standards of Business Conduct, a code of
ethics that applies to all employees, including its executive officers. A
copy of the Standards of Business Conduct is posted on the Companys
Internet site at
http://www.conexant.com. In the event that the Company
makes any amendment to, or grants any waivers of, a provision of the
Standards of Business Conduct that applies to the principal executive
officer, principal financial officer, or principal accounting officer that
requires disclosure under applicable SEC rules, the Company intends to
disclose such amendment or waiver and the reasons therefor on its Internet
site.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Item 11. Executive Compensation

The information required by this Item is incorporated herein by reference to
the sections entitled Executive Compensation and Directors Compensation in
the Proxy Statement.

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Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by this Item is incorporated herein by reference to
the sections entitled Security Ownership of Certain Beneficial Owners and
Management and Equity Compensation Plan Information in the Proxy Statement.




Item 13. Certain Relationships and Related Transactions

The information required by this Item is incorporated herein by reference to
the section entitled Certain Relationships and Related Transactions in the
Proxy Statement.




Item 14. Principal Accountant Fees and Services

The information required by this Item is incorporated herein by reference to
the section entitled Principal Accountant Fees and Services in the Proxy
Statement.




PART IV




Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)(1) Financial Statements

The following consolidated financial statements of the Company for the fiscal
year ended September 30, 2003 are included herewith:

Consolidated Balance Sheets, Consolidated Statements of Operations,
Consolidated Statements of Cash Flows, Consolidated Statements of Shareholders
Equity and Comprehensive Loss, Notes to Consolidated Financial Statements, and
Report of Deloitte & Touche LLP, Independent Auditors

(2) Supplemental Schedules

Schedule II  Valuation and Qualifying Accounts

All other schedules have been omitted since the required information is not
present in amounts sufficient to require submission of the schedule, or because
the required information is included in the consolidated financial statements
or notes thereto.

(3) Exhibits

Exhibits
    
    Description2
    
    Agreement and Plan of Reorganization dated as of November 3, 2003
by and among the Company, Concentric Sub, Inc. and
GlobespanVirata (excluding exhibits), filed as Exhibit 2 to the
Companys Current Report on Form 8-K dated November 4, 2003, is
incorporated herein by reference.3-a-1
    
    Amended and Restated Certificate of Incorporation of the Company.3-a-2
    
    Amended By-Laws of the Company, filed as Exhibit 3-a-3 to the
Companys Annual Report on Form 10-K for the year ended September
30, 2001, is incorporated herein by reference.4-a-1
    
    Rights Agreement, dated as of November 30, 1998, by and between
the Company and Mellon Investor Services (formerly ChaseMellon
Shareholder Services, L.L.C.), as rights agent, filed as Exhibit
4.4 to the Companys Registration Statement on Form S-8
(Registration No. 333-68755), is incorporated herein by
reference.


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Exhibits
    
    Description4-a-2
    
    First Amendment to Rights Agreement, dated as of December 9,
1999, filed as Exhibit 4.1 to the Companys Quarterly Report on
Form 10-Q for the quarter ended December 31, 1999, is
incorporated herein by reference.4-b-1
    
    Indenture, dated as of May 1, 1999, between the Company and Bank
One Trust Company, National Association, as successor to The
First National Bank of Chicago, as trustee, including the form of
the Companys 4 1/4% Convertible Subordinated Notes Due May 1,
2006 attached as Exhibit A thereto, filed as Exhibit 4.1 to the
Companys Registration Statement on Form S-3 (Registration No.
333-82399), is incorporated herein by reference.4-b-2
    
    Indenture, dated as of February 1, 2000, between the Company and
Bank One Trust Company, National Association, as trustee,
including the form of the Companys 4% Convertible Subordinated
Notes Due February 1, 2007 attached as Exhibit A thereto, filed
as Exhibit 4.04 to the Companys Registration Statement on Form
S-4 (Registration No. 333-96033), is incorporated herein by
reference.*10-a-1
    
    Conexant Systems, Inc. 1998 Stock Option Plan, filed as Exhibit
10.6 to the Companys Registration Statement on Form 10 (File No.
000-24923), is incorporated herein by reference.*10-a-2
    
    Copy of resolution of the Board of Directors of the Company,
adopted March 1, 1999, amending the Companys 1998 Stock Option
Plan, filed as Exhibit 10-b-2 to the Companys Annual Report on
Form 10-K for the year ended September 30, 1999, is incorporated
herein by reference.*10-a-3
    
    Forms of Stock Option Agreements under Rockwells 1988 Long-Term
Incentives Plan for options granted after November 1, 1993 and
prior to December 1, 1994, filed as Exhibit 10-d-6 to Rockwells
Annual Report on Form 10-K for the year ended September 30, 1993
(File No. 1-1035), are incorporated herein by reference.*10-a-4
    
    Forms of Stock Option Agreements under Rockwells 1988 Long-Term
Incentives Plan for options granted after December 1, 1994, filed
as Exhibit 10-d-7 to Rockwells Annual Report on Form 10-K for
the year ended September 30, 1994 (File No. 1-1035), are
incorporated herein by reference.*10-a-5
    
    Forms of Stock Option Agreements under Rockwells 1995 Long-Term
Incentives Plan for options granted prior to December 3, 1997,
filed as Exhibit 10-e-2 to Rockwells Annual Report on Form 10-K
for the year ended September 30, 1994 (File No. 1-1035), are
incorporated herein by reference.*10-a-6
    
    Forms of Stock Option Agreements under Rockwells 1995 Long-Term
Incentives Plan for options granted between December 3, 1997 and
August 31, 1998, filed as Exhibit 10-b-3 to Rockwells Annual
Report on Form 10-K for the year ended September 30, 1998 (File
No. 1-12383), are incorporated herein by reference.*10-a-7
    
    Form of Stock Option Agreement under Rockwells 1995 Long-Term
Incentives Plan for options granted on April 23, 1998, filed as
Exhibit 10-b-4 to Rockwells Annual Report on Form 10-K for the
year ended September 30, 1998 (File No. 1-12383), is incorporated
herein by reference.*10-a-8
    
    Form of Stock Option Agreement under Rockwells 1995 Long-Term
Incentives Plan for options granted on August 31, 1998, filed as
Exhibit 10-b-5 to Rockwells Annual Report on Form 10-K for the
year ended September 30, 1998 (File No. 1-12383), is incorporated
herein by reference.*10-a-9
    
    Form of Stock Option Agreement under Rockwells Directors Stock
Plan, filed as Exhibit 10-d to Rockwells Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996 (File No. 1-1035),
is incorporated herein by reference.*10-a-10
    
    Copy of resolution of the Board of Directors of Rockwell, adopted
November 6, 1996, adjusting outstanding awards under Rockwells
(i) 1988 Long-Term Incentives Plan, (ii) 1995 Long-Term
Incentives Plan and (iii) Directors Stock Plan, filed as Exhibit
4-g-2 to Rockwells Registration Statement on Form S-8
(Registration No. 333-17055), is incorporated herein by
reference.


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Exhibits
    
    Description*10-a-11
    
    Copy of resolution of the Board of Directors of Rockwell, adopted
September 3, 1997, adjusting outstanding awards under Rockwells
(i) 1988 Long-Term Incentives Plan, (ii) 1995 Long-Term
Incentives Plan and (iii) Directors Stock Plan, filed as Exhibit
10-e-3 to Rockwells Annual Report on Form 10-K for the year
ended September 30, 1997 (File No. 1-12383), is incorporated
herein by reference.*10-a-12
    
    Copy of resolution of the Board of Directors of Rockwell, adopted
December 2, 1998, assigning to the Company outstanding options to
purchase shares of Company Common Stock, filed as Exhibit 4.f.4
to the Companys Registration Statement on Form S-3 (Registration
No. 333-70085), is incorporated herein by reference.*10-a-13
    
    Copy of resolution of the Board of Directors of the Company,
adopted November 30, 1998, assuming outstanding options to
purchase shares of Company Common Stock, filed as Exhibit 4.f.5
to the Companys Registration Statement on Form S-3 (Registration
No. 333-70085), is incorporated herein by reference.*10-b-1
    
    Conexant Systems, Inc. 1999 Long-Term Incentives Plan, as
amended, filed as Exhibit 4.7 to the Companys Registration
Statement on Form S-8 (Registration No. 333-37918), is
incorporated herein by reference.*10-b-2
    
    Copy of resolution of the Board of Directors of the Company,
adopted April 20, 1999, amending the Companys 1999 Long-Term
Incentives Plan, filed as Exhibit 10-c-2 to the Companys Annual
Report on Form 10-K for the year ended September 30, 1999, is
incorporated herein by reference.*10-b-3
    
    Form of Stock Option Agreement under the Companys 1999 Long-Term
Incentives Plan, filed as Exhibit 10.1 to the Companys Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999, is
incorporated herein by reference.*10-b-4
    
    Form of Restricted Stock Agreement (Performance Vesting) under
the Companys 1999 Long-Term Incentives Plan, filed as Exhibit
10.2 to the Companys Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999, is incorporated herein by
reference.*10-b-5
    
    Form of Restricted Stock Agreement (Time Vesting) under the
Companys 1999 Long-Term Incentives Plan, filed as Exhibit 10.3
to the Companys Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999, is incorporated herein by reference.*10-b-6
    
    Copy of resolutions of the Board of Directors of the Company,
adopted July 2, 1999, accelerating the vesting of certain
outstanding restricted stock awards under the Companys 1999
Long-Term Incentives Plan to October 1, 1999, subject to the
satisfaction of certain conditions precedent, filed as Exhibit
10-c-6 to the Companys Annual Report on Form 10-K for the year
ended September 30, 1999, is incorporated herein by reference.*10-b-7
    
    Copy of resolutions of the Board of Directors of the Company,
adopted September 8, 1999, approving the repurchase by the
Company of shares of Common Stock from certain executives and
employees of the Company or loans to such executives or
employees, in each case, in an amount sufficient to pay the
required withholding tax in connection with the acceleration of
the vesting of certain outstanding restricted stock awards under
the Companys 1999 Long-Term Incentives Plan, filed as Exhibit
10-c-7 to the Companys Annual Report on Form 10-K for the year
ended September 30, 1999, is incorporated herein by reference.*10-b-8
    
    Copy of resolution of the Special Committee of the Board of
Directors of the Company, adopted September 22, 1999, determining
that the conditions precedent to the acceleration of the vesting
of certain outstanding restricted stock awards under the
Companys 1999 Long-Term Incentives Plan have been satisfied,
filed as Exhibit 10-c-8 to the Companys Annual Report on Form
10-K for the year ended September 30, 1999, is incorporated
herein by reference.*10-b-9
    
    Memorandum of Adjustments to Outstanding Options Under the
Conexant Stock Plans approved and adopted by the Board of
Directors of the Company on May 9, 2002, as amended June 13,
2002, in connection with the Spin-off Transaction and the Merger,
filed as Exhibit 10-b-9 to the Companys Annual Report on Form
10-K for the year ended September 30, 2002, is incorporated
herein by reference.


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Exhibits
    
    Description*10-b-10
    
    Memorandum of Proposed Amendments to the Conexant Systems, Inc.
Stock Option Plans adopted by the Board of Directors of the
Company on June 13, 2002 in connection with the Spin-off
Transaction and the Merger, filed as Exhibit 10-b-10 to the
Companys Annual Report on Form 10-K for the year ended September
30, 2002, is incorporated herein by reference.*10-b-11
    
    Memorandum of Adjustments to Outstanding Options Under the
Conexant Stock Plans approved and adopted by the Board of
Directors of the Company on June 5, 2003 in connection with the
Mindspeed Spin.*10-b-12
    
    Memorandum of Proposed Amendments to the Conexant Systems, Inc.
Stock Option Plans adopted by the Board of Directors of the
Company on June 5, 2003 in connection with the Mindspeed Spin.*10-c-1
    
    Conexant Systems, Inc. Retirement Savings Plan, as amended, filed
as Exhibit 4.5 to the Companys Registration Statement on Form
S-8 (Registration No. 333-73142), is incorporated herein by
reference.*10-d-1
    
    Copy of resolutions of the Board of Directors of the Company,
adopted August 13, 1999 amending, among other things, the
Companys 1999 Long-Term Incentives Plan, filed as Exhibit 10-e-1
to the Companys Annual Report on Form 10-K for the year ended
September 30, 1999, is incorporated herein by reference.*10-e-1
    
    Conexant Systems, Inc. Directors Stock Plan, as amended.*10-f-1
    
    Employment Agreement dated December 15, 1998 filed as Exhibit
10.5 to the Companys Quarterly Report on Form 10-Q for the
quarter ended December 31, 1998, is incorporated herein by
reference.*10-f-2
    
    Schedule identifying agreements substantially identical to the
Employment Agreement constituting Exhibit 10-f-1 hereto entered
into by the Company with L.C. Brewster, D.E. OReilly, A. Rangan,
and F.M. Rhodes.*10-f-3
    
    Employment Agreement dated December 15, 1998 between the Company
and D.W. Decker, filed as Exhibit 10.7 to the Companys Quarterly
Report on Form 10-Q for the quarter ended December 31, 1998, is
incorporated herein by reference.*10-f-4
    
    Agreement dated March 28, 2003 between the Company and
Balakrishnan S. Iyer, filed as Exhibit 10.1 to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31,
2003, is incorporated herein by reference.***10-f-5
    
    Employment Agreement dated as of December 18, 2002 by and between
the Company and J.S. Blouin*10-f-6
    
    General Agreement dated as of September 30, 2003 by and between
the Company and D.E. OReilly*10-f-7
    
    Employment and Change of Control Agreement dated as of January
14, 2002 by and between the Company and M.H. Vishny.10-g-1
    
    Distribution Agreement dated as of December 31, 1998 by and
between the Company and Rockwell International Corporation, filed
as Exhibit 2.1 to the Companys Current Report on Form 8-K dated
January 12, 1999, is incorporated herein by reference.10-h-1
    
    Amended and Restated Employee Matters Agreement dated as of
December 31, 1998 by and between the Company and Rockwell
International Corporation, filed as Exhibit 2.2 to the Companys
Current Report on Form 8-K dated January 12, 1999, is
incorporated herein by reference.10-i-1
    
    Tax Allocation Agreement dated as of December 31, 1998 by and
between the Company and Rockwell International Corporation, filed
as Exhibit 2.3 to the Companys Current Report on Form 8-K dated
January 12, 1999, is incorporated herein by reference.10-j-1
    
    Contribution and Distribution Agreement dated as of December 16,
2001, as amended as of June 25, 2002, by and between the Company
and Washington (excluding schedules) filed as Exhibit 2.2 to the
Companys Current Report on Form 8-K dated July 1, 2002, is
incorporated herein by reference.


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##### Table of Contents



Exhibits
    
    Description10-j-2
    
    Employee Matters Agreement dated as of June 25, 2002 by and among
the Company, Washington and Alpha (excluding schedules) filed as
Exhibit 2.3 to the Companys Current Report on Form 8-K dated
July 1, 2002, is incorporated herein by reference.10-j-3
    
    Tax Allocation Agreement dated as of June 25, 2002 by and among
the Company, Washington and Alpha (excluding schedules) filed as
Exhibit 2.4 to the Companys Current Report on Form 8-K dated
July 1, 2002, is incorporated herein by reference.10-k-1
    
    Distribution Agreement dated as of June 25, 2003, by and between
the Company and Mindspeed Technologies, Inc. (excluding
schedules) filed as Exhibit 2.1 to the Companys Current Report
on Form 8-K dated July 1, 2003, is incorporated herein by
reference.10-k-2
    
    Employee Matters Agreement dated as of June 27, 2003 by and
between the Company and Mindspeed (excluding schedules) filed as
Exhibit 2.2 to the Companys Current Report on Form 8-K dated
July 1, 2003, is incorporated herein by reference.10-k-3
    
    Tax Allocation Agreement dated as of June 27, 2003 by and between
the Company and Mindspeed (excluding schedules) filed as Exhibit
2.3 to the Companys Current Report on Form 8-K dated July 1,
2003, is incorporated herein by reference.10-k-4
    
    Credit Agreement dated as of June 27, 2003 by and among
Mindspeed, the subsidiaries of Mindspeed from time to time
parties thereto and the Company, filed as Exhibit 2.5 to the
Companys Current Report on Form 8-K dated July 1, 2003, is
incorporated herein by reference.10-l-1
    
    Capacity & Reservation Deposit Agreement dated as of March 20,
2000 by and between the Company and UMC Group (USA), filed as
Exhibit 10-k-1 to the Companys Annual Report on Form 10-K for
the year ended September 30, 2002, is incorporated herein by
reference. **10-l-2
    
    Amendment No. 1 to Capacity & Reservation Deposit Agreement dated
as of March 24, 2000 between the Company and UMC Group (USA),
filed as Exhibit 10-k-2 to the Companys Annual Report on Form
10-K for the year ended September 30, 2002, is incorporated
herein by reference. **10-l-3
    
    Amendment No. 2 to Capacity & Reservation Deposit Agreement dated
as of August 1, 2000 between the Company and UMC Group (USA),
filed as Exhibit 10-k-3 to the Companys Annual Report on Form
10-K for the year ended September 30, 2002, is incorporated
herein by reference. **10-l-4
    
    Amendment No. 3 to Capacity & Reservation Deposit Agreement dated
as of May 17, 2001 between the Company and UMC Group (USA), filed
as Exhibit 10-k-4 to the Companys Annual Report on Form 10-K for
the year ended September 30, 2002, is incorporated herein by
reference. **10-l-5
    
    Amendment No. 4 to Capacity & Reservation Deposit Agreement dated
as of August 24, 2001 between the Company and UMC Group (USA),
filed as Exhibit 10-k-5 to the Companys Annual Report on Form
10-K for the year ended September 30, 2002, is incorporated
herein by reference. **10-l-7
    
    Foundry Agreement dated as of July 27, 2000 by and between the
Company and UMC Group (USA), filed as Exhibit 10-k-6 to the
Companys Annual Report on Form 10-K for the year ended September
30, 2002, is incorporated herein by reference. **10-m-1
    
    Wafer Supply and Services Agreement dated as of March 30, 2002 by
and between Specialtysemi, Inc. (now named Jazz Semiconductor,
Inc.) and the Company, filed as Exhibit 10.1 to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31,
2002, is incorporated herein by reference. **21
    
    List of Subsidiaries of the Company.23
    
    Independent Auditors Consent.24
    
    Power of Attorney authorizing certain persons to sign this Annual
Report on Form 10-K on behalf of certain directors and officers
of the Company.


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##### Table of Contents



Exhibits
    
    Description31.1
    
    Certification of Chief Executive Officer of Periodic Report
Pursuant to Rule 13a-15(e) or Rule 15d-15(e)31.2
    
    Certification of Chief Financial Officer of Periodic Report
Pursuant to Rule 13a-15(e) or Rule 15d-15(e)32
    
    Certification by Chief Executive Officer and Chief Financial
Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350.




---

|*  |  | Management contract or compensatory plan or arrangement.                                                                                                                                                  
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|** |  | 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 July 1, 2003 reporting the completion of the
spin-off transaction of Mindspeed Technologies, Inc. (Items 2 and 7).

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

Current Report on Form 8-K dated October 31, 2003, furnishing the Companys
press release dated October 30, 2003, announcing its financial results for the
fiscal year ended September 30, 2003 (Item 12).

Current Report on Form 8-K dated November 3, 2003, announcing the signing of a
definitive merger agreement with GlobespanVirata, Inc. (Items 5 and 7).

Current Report on Form 8-K dated November 4, 2003, filing the definitive merger
agreement with GlobespanVirata, Inc. (Items 5 and 7).

(c) Exhibits

See subsection (a) (3) above.

(d) Financial Statement Schedules

See subsection (a) (1) and (2) above.

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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Newport Beach, State of California, on this 3rd day of December, 2003.

CONEXANT SYSTEMS, INCBy:
    
    /s/ DWIGHT W. DECKERDwight W. DeckerChairman of the Board and
Chief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed on the 3rd day of December, 2003 by the
following persons on behalf of the Registrant and in the capacities indicated:

Signature
    
    Title/s/ DWIGHT W. DECKER
Dwight W. Decker
    
    Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)J. SCOTT BLOUIN*
J.Scott Blouin
    
    Senior Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)DONALD R. BEALL*
Donald R. Beall
    
    DirectorBALAKRISHNAN S. IYER*
Balakrishnan S. Iyer
    
    DirectorRALPH J. CICERONE*
Ralph J. Cicerone
    
    DirectorD. SCOTT MERCER*
D. Scott Mercer
    
    DirectorF. CRAIG FARRILL*
F. Craig Farrill
    
    DirectorJERRE L. STEAD*
Jerre L. Stead
    
    Director




|*By: |  | /s/ DENNIS E. OREILLY

Dennis E. OReilly, Attorney-in-Fact** | 
|---- |  | -------------------------------------------------------------- | 



|** |  | By authority of the power of attorney filed as
Exhibit 24 hereto
|-- |  | ----------------------------------------------------------------

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SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS
(In thousands)

AdditionsBalance at
    
    Charged to
    
    
    
    
    
    Balance atBeginning
    
    Costs and
    
    Deductions
    
    End ofDescription
    
    of Year
    
    Expenses
    
    (1)
    
    YearYear ended September 30, 2003:Allowance for doubtful accounts
    
    $
    6,508
    
    
    $
    (3,958
    )(2)
    
    $
    (1,003
    )
    
    $
    1,547Reserve for sales returns
and allowances
    
    
    2,660
    
    
    
    3,636
    
    
    
    (4,405
    )
    
    
    1,891Allowance for excess and
obsolete inventories
    
    
    23,401
    
    
    
    14,451
    
    
    
    (12,675
    )
    
    
    25,177Year ended September 30, 2002:Allowance for doubtful accounts
    
    $
    10,970
    
    
    $
    (5,814
    )(2)
    
    $
    1,352
    
    
    $
    6,508Reserve for sales returns
and allowances
    
    
    2,521
    
    
    
    10,373
    
    
    
    (10,234
    )
    
    
    2,660Allowance for excess and
obsolete inventories
    
    
    21,326
    
    
    
    14,364
    
    
    
    (12,289
    )
    
    
    23,401Year ended September 30, 2001:Allowance for doubtful accounts
    
    $
    1,791
    
    
    $
    10,116
    
    
    $
    (937
    )
    
    $
    10,970Reserve for sales returns
and allowances
    
    
    3,051
    
    
    
    20,896
    
    
    
    (21,426
    )
    
    
    2,521Allowance for excess and
obsolete inventories
    
    
    28,406
    
    
    
    (1,579
    )(3)
    
    
    (5,501
    )
    
    
    21,326




---

|(1) |  | Deductions in the allowance for doubtful accounts reflect amounts written
off. In fiscal 2002, amounts represent recoveries of accounts receivable
previously valued at zero associated with a discontinued business.                                                                                                                                                                                                                                                                                                                                                                                            
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Additions charged to costs and expenses in the allowance for doubtful
accounts reflect a credit balance recorded in each of fiscal 2003 and fiscal
2002 resulting from reductions in the allowance account associated with overall
collections experience more favorable than previously estimated.                                                                                                                                                                                                                                                                                                              
|   
|(3) |  | Additions charged to costs and expenses in the allowance for excess and
obsolete inventories in fiscal 2001 exclude inventory write-downs of $105.4
million relating to inventory that the Company expected to be unable to sell.
During fiscal 2003, 2002 and 2001, the Company sold $10.9 million, $45.6
million and $6.9 million, respectively, of inventories previously written down
to a zero cost basis and scrapped $10.5 million, $9.1 million and $22.4
million, respectively, of previously written-down inventories. As of September
30, 2003, the Company had sold or scrapped all such inventories.

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##### Table of Contents






EXHIBIT INDEX

Exhibits
    
    Description3-a-1
    
    Amended and Restated Certificate of Incorporation of the Company.*10-b-11
    
    Memorandum of Adjustments to Outstanding Options Under the
Conexant Stock Plans approved and adopted by the Board of
Directors of the Company on June 5, 2003 in connection with the
Mindspeed Spin.*10-b-12
    
    Memorandum of Proposed Amendments to the Conexant Systems, Inc.
Stock Option Plans adopted by the Board of Directors of the
Company on June 5, 2003 in connection with the Mindspeed Spin.*10-e-1
    
    Conexant Systems, Inc. Directors Stock Plan, as amended.*10-f-2
    
    Schedule identifying agreements substantially identical to the
Employment Agreement constituting Exhibit 10-f-1 hereto entered
into by the Company with L.C. Brewster, D.E. OReilly, A. Rangan,
and F.M. Rhodes.*10-f-5
    
    Employment Agreement dated as of December 18, 2002 by and between
the Company and J.S. Blouin.*10-f-6
    
    General Agreement dated as of September 30, 2003 by and between
the Company and D.E. OReilly.*10-f-7
    
    Employment and Change of Control Agreement dated as of January
14, 2002 by and between the Company and M.H. Vishny.21
    
    List of Subsidiaries of the Company.23
    
    Independent Auditors Consent.24
    
    Power of Attorney authorizing certain persons to sign this Annual
Report on Form 10-K on behalf of certain directors and officers
of the Company.31.1
    
    Certification of Chief Executive Officer of Periodic Report
Pursuant to Rule 13a-15(e) or Rule 15d-15(e)31.2
    
    Certification of Chief Financial Officer of Periodic Report
Pursuant to Rule 13a-15(e) or Rule 15d-15(e)32
    
    Certification by Chief Executive Officer and Chief Financial
Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350.




---

|* |  | Management contract or compensatory plan or arrangement.
|- |  | --------------------------------------------------------

78