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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                   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, 2000*

                       COMMISSION FILE NUMBER: 000-24923

                             CONEXANT SYSTEMS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                            <C>
                   DELAWARE                                      25-1799439
           (STATE OF INCORPORATION)                 (I.R.S. EMPLOYER IDENTIFICATION NO.)
4311 JAMBOREE ROAD, NEWPORT BEACH, CALIFORNIA                    92660-3095
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)
</TABLE>

       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, $1.00 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 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. [X]

     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 November 30, 2000) was approximately $4.9 billion.
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 30, 2000 was 242,623,951.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant's Proxy Statement for the 2001 Annual Meeting of
Shareowners to be held on February 28, 2001, are incorporated by reference into
Part III of this Form 10-K.
---------------
* For presentation purposes of this Form 10-K, references made to the September
  30, 2000 period relate to the actual fiscal year ended September 29, 2000.

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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. 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, global economic and market conditions,
including the cyclical nature of the semiconductor industry and the markets
addressed by the Company's and its customers' products; demand for and market
acceptance of new and existing products; successful development of new products;
the timing of new product introductions; the successful integration of
acquisitions; the availability and extent of utilization of manufacturing
capacity and raw materials; pricing pressures and other competitive factors;
changes in product mix; fluctuations in manufacturing yields; product
obsolescence; the ability to develop and implement new technologies and to
obtain protection of the related intellectual property; the announced spin-off
of the Internet infrastructure business; labor relations of the Company, its
customers and suppliers; the Company's ability to attract and retain qualified
personnel; and the uncertainties of litigation, as well as other risks and
uncertainties including those set forth herein and those detailed from time to
time in the filings of the Company with the Securities and Exchange Commission.
These forward-looking statements are made only as of the date hereof, and the
Company undertakes no obligation to update or revise the forward-looking
statements, whether as a result of new information, future events or otherwise.

     Access Runner(TM), AnyPort(TM) and K56Flex(TM) are trademarks of Conexant
Systems, Inc. Other brands, names and trademarks contained in this Annual Report
are the property of their respective owners.
<PAGE>   3

                                     PART I

ITEM 1. BUSINESS

GENERAL

     Conexant Systems, Inc. ("Conexant" or the "Company") is the world's largest
independent company focused exclusively on providing semiconductor products and
system solutions for a wide variety of communications electronics. With more
than 30 years of experience in developing communications products, Conexant
draws upon its expertise in mixed-signal processing technology to deliver
semiconductor integrated circuit products and system-level solutions for a broad
range of communications applications. These products facilitate communications
worldwide through wireline voice and data communications networks, cordless and
cellular wireless telephony systems, personal imaging devices and equipment, and
emerging cable and wireless broadband communications networks. The Company
operates in two business segments: the Personal Networking business and the
Internet Infrastructure business.

     On December 31, 1998, Conexant became an independent, separately traded,
publicly-held company when Rockwell International Corporation ("Rockwell") spun
off its wholly-owned subsidiary, Conexant, 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"). As part of the Distribution,
Rockwell transferred to the Company the assets and liabilities of Semiconductor
Systems not already owned by the Company, including the stock of certain
subsidiaries, and Conexant transferred to Rockwell all assets and liabilities
not constituting part of Semiconductor Systems, including all assets and
liabilities of Rockwell's electronic commerce business. 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.
All references herein to Conexant or the Company for periods prior to the
Distribution include Semiconductor Systems.

     On September 13, 2000, Conexant announced a plan to spin off its Internet
Infrastructure business ("Spinco") through a two-step process. The first step
will consist of an initial public offering of common stock of Spinco targeted
for January 2001. After completion of the initial public offering, Conexant will
continue to own a majority of Spinco's outstanding common stock and a majority
of the voting power of Spinco's outstanding common stock. In the second step,
Conexant intends, within several months after Spinco's initial public offering,
subject to the satisfaction of certain conditions, to distribute to its
shareholders all of the shares of Spinco's common stock that Conexant owns.
However, there can be no assurance that the initial public offering or the
spin-off will be successfully completed.

PERSONAL NETWORKING BUSINESS

     The Personal Networking business designs, develops and sells semiconductor
products and system solutions in four general personal communications
applications markets -- Personal Computing, Personal Imaging, Digital
Infotainment and Wireless Communications. Personal Computing products include
telephony-based communications solutions for personal computing terminals and
other communication devices such as gaming consoles, web browsers and handheld
devices. Personal Imaging products consist of semiconductor and software
products that enable image capture, processing and output for fax machines,
printers and digital still and video cameras. Digital Infotainment products
include semiconductor solutions that perform communication and media processing
functions within a variety of information and entertainment platforms. Wireless
Communications products are comprised of components, subsystems and system-level
semiconductor solutions for wireless voice and data communication applications,
including digital cellular handsets and base stations, cordless telephones and
global positioning system ("GPS") receivers.

                                        1
<PAGE>   4

  Personal Computing

     Personal Computing products include telephony-based communications
solutions for personal computing terminals and other communications devices such
as gaming consoles, web browsers and handheld devices.

     The Company is the world's leading supplier of V.90 dial-up modem chipsets
to modem subsystem manufacturers who supply modems to personal computer ("PC")
original equipment manufacturers ("OEMs") and retail modem markets. To provide a
broader range of modem products to its customers, the Company is supplying
mixed-signal intensive, controllerless modem chipsets and software modem
solutions which take advantage of the increasing power of PC central processors
and use software to perform functions traditionally enabled by semiconductor
components. In addition, the Company has transitioned its V.90 dial-up modem
technology to other end-user products and is a leading supplier of embedded
modems for a host of emerging Internet appliances.

     Further, Cisco Systems and Conexant each contributed key technologies
toward the new V.92 modem specification. The V.92 standard provides a number of
features including QuickConnect(TM) which improves how quickly users can connect
with internet service providers ("ISPs") and modem-on-hold, which enables users
to suspend and re-activate their dial-up connection to either receive or
initiate a call, without having to implement the entire dial-up sequence. The
V.92 standard also includes a capability called pulse code modulation ("PCM")
upstream, which boosts the upstream data rates from the user to the ISP to
reduce transfer times for large files and e-mail attachments sent by the user.
In November 2000, the Company endorsed the International Telecommunications
Union ("ITU") ratification in favor of a final set of V.92 modem specifications.

     The Company has also developed integrated audio/modem solutions which
combine highly-integrated semiconductor hardware solutions with audio software
products. Additionally, Personal Computing offers home networking products that
enable personal communications devices to share data, voice and video utilizing
existing telephone lines, coaxial cable, power line and wireless links.

     Capitalizing on its core mixed-signal processing technologies and its
digital subscriber line ("DSL") technology, the Company has begun volume
shipments of full rate and G.lite asymmetric DSL ("ADSL") modem chipsets
permitting broadband digital transmission of data, voice and video over existing
standard telephone lines at speeds of up to 8 megabits per second ("Mbps").

  Personal Imaging

     Personal Imaging products consist of semiconductor and software products
that enable image capture, processing and output for fax machines, printers and
digital still and video cameras. The market for integrated image-communications
systems is rapidly emerging, driven by increased demand for color documents,
print quality improvements, new digital-video applications and integration with
the Internet. The Company provides system-level solutions in support of these
applications.

     The Company's fax modem products, which are found in three out of every
four fax machines in the world, include the industry's broadest portfolio of
highly integrated single-chip fax modems and engines. The Company has expanded
its fax modem product line to address multifunction peripheral systems ("MFPs")
by combining fax, print, copy and scan capabilities into a highly-integrated
chipset. This complete, scalable solution supports the full range of
capture-to-copy functionality, including a MFP controller, a fax modem and a
printer interface application specific integrated circuit ("ASIC"), along with
comprehensive reference designs and a full suite of embedded firmware and
software.

     Capitalizing on core imaging technologies originally developed by
Rockwell's Science Center, the Company offers a family of complementary metal
oxide semiconductor ("CMOS") image sensors, camera engines, software, and
reference designs for PC teleconferencing and digital still and video cameras.
In May 2000, the Company acquired Sierra Imaging, Inc. ("Sierra") to accelerate
participation in the CMOS imaging market. The combination of Sierra's "back-end"
digital image processors and image management software, together with Conexant's
"front-end" CMOS image sensors, offers digital camera manufacturers the
industry's first complete silicon-based digital camera solution. The Company's
solutions also provide the
                                        2
<PAGE>   5

enabling technology for new imaging functionality in personal communications
platforms such as personal digital assistants ("PDAs"), web browsers and cell
phones, each of which draws on the Company's broad portfolio of core
communications technologies. In addition to CMOS imaging sensors and back-end
processors, Personal Imaging is investing in next generation MFP chipsets.

  Digital Infotainment

     Digital Infotainment products include semiconductor solutions that perform
communication and media processing functions within a variety of information and
entertainment platforms. The Company offers a variety of key silicon-based
products including video encoders/decoders, MPEG processors and single-chip
cable modems, as well as satellite, cable and fixed wireless receiver tuners and
demodulators.

     The Company is a leading supplier of semiconductor system solutions that
deliver television and radio broadcasts to mainstream PCs. The Company's video
encoder and decoder portfolio has enabled millions of analog PC video and
television cards. More recent products are turning the PC into an interactive
platform for true high-definition TV ("HDTV") applications. In January 2000, the
Company acquired the wireless broadband business unit of Oak Technology, Inc. to
extend its reach into the digital terrestrial TV broadband communications arena.
Additionally, the Company provides a significant portion of the electronics and
software contained in set-top box receivers that can operate in multiple
interactive network environments. The Company's set-top box-oriented portfolio
includes tuners, demodulators, encoders, decoders and back channel telephony
solutions.

     Further, the Company has developed and commenced volume shipment of the
industry's first North American Data Over Cable Service Interface Specification
("DOCSIS") certified single chip cable modem architecture supporting the
peripheral component interconnect ("PCI") interface. The Company's cable modem
portfolio also supports the universal serial bus ("USB") and Ethernet
interfaces, as well as solutions for European DOCSIS and digital video
broadcasting ("DVB") applications.

     The Company is building a comprehensive broadband portfolio for a range of
new applications including interactive digital set-top boxes and telephony over
cable. Digital Infotainment is positioned to address these applications as a
variety of broadband access, delivery and display technologies converge on the
PC and other consumer-electronics platforms.

  Wireless Communications

     Wireless Communications products are comprised of components, subsystems
and system-level semiconductor solutions for wireless voice and data
communication applications, including digital cellular handsets and base
stations, cordless telephones and GPS receivers. The Company's solutions span
the full range of the world's most widely adopted wireless protocols in both
multiband and multimode configurations, including:

     - Global System for Mobile Communications ("GSM");

     - Code Division Multiple Access ("CDMA"); and

     - Time Division Multiple Access ("TDMA").

     Within GSM, the world's most prevalent cellular standard, the Company
offers power amplifiers, radio frequency subsystems and complete
antenna-to-microphone system solutions supporting both the 900 MHz and 1800 MHz
GSM bands. The Company's GSM system solution combines a power amplifier and
controller, a radio frequency ("RF") transceiver, a power management integrated
circuit ("IC"), a signal converter and a baseband processor, all in a single
solution along with GSM protocol stack software, an applications programming
interface, a real-time operating system, a complete man-machine interface and
device drivers. Additionally, the Company provides GSM RF components for
wireless infrastructure applications. For CDMA and TDMA protocols, the Company
provides a full suite of power amplifiers and RF subsystems and is an industry
leader in supplying CDMA power amplifiers.

     The Company's complete system chipset for digital spread spectrum cordless
phones has been designed into handsets and base stations of leading cordless
phone manufacturers. The Company has combined its
                                        3
<PAGE>   6

cordless expertise with other wireless data technologies, such as the rapidly
emerging Bluetooth(TM)(1) standard for short-reach wireless connectivity to help
phone manufacturers shape home-based wireless communications. Additionally, the
Company continues to build on its wireless technology leadership by offering GPS
receiver solutions for handheld receivers and advanced emergency locator systems
for automotive and marine applications, as well as for cellular phone
integration.

     In May 2000, the Company acquired Philsar Semiconductor Inc. ("Philsar"), a
developer of RF semiconductor solutions for personal wireless connectivity,
including emerging standards such as Bluetooth(TM) and RF components for third
generation ("3G") digital cellular handsets. Philsar's competencies, augmented
by Conexant's technology portfolio and extensive design and manufacturing
resources position Wireless Communications to address the convergence of voice
and data services in next generation wireless terminals and infrastructure
systems.

INTERNET INFRASTRUCTURE BUSINESS

     The Internet Infrastructure business designs, develops and sells
semiconductor products and system solutions for some of the highest growth
segments of the broadband communications market including broadband access,
multi-service access and wide area network ("WAN") transport. The Company's
broad product portfolio allows it to provide network infrastructure OEMs with
system level semiconductor solutions including multi-service access and
high-speed DSL products used in a variety of network access platforms such as
remote access concentrators, voice gateways, digital loop carriers, DSL access
multiplexers and integrated access devices. The Company also provides network
infrastructure OEMs with an extensive family of communication solutions that
support the aggregation, transmission and switching of data, video and voice
from the edge of the network to the optical backbone, including T/E carrier,
asynchronous transfer mode ("ATM") and synchronous optical networking
("SONET")/synchronous digital hierarchy ("SDH") products and network processors.
These products are used in a variety of network equipment including high-speed
routers, ATM switches, optical switches, add-drop multiplexers and digital
cross-connect systems.

     The Company has developed one of the industry's broadest lines of
multi-megabit DSL transceivers for high bit-rate DSL ("HDSL"), symmetric DSL
("SDSL"), symmetric high bit-rate DSL ("SHDSL"), and ADSL connectivity in
commercial applications. The Company's HDSL products facilitate deployment of
high-speed T/E transmission lines by eliminating the need for repeaters and
other line conditioning equipment. The Company's family of SDSL products
provides incumbent and competitive local exchange carriers the ability to
deliver Internet access at various rates and to support telecommuting and branch
office functions. Additionally, the Company has developed a low-power,
multi-port DSL product utilizing the next generation DSL standard called
G.shdsl, which enables simultaneous voice and data communications for worldwide
DSL applications. This variable rate product is compatible with pre-existing
transport systems based on the prevailing 2B1Q modulation standard. The
AccessRunner(TM) central-office ADSL modem device set offers full-rate and
G.lite functionality with extended reach and full compliance with industry
standards. These products support downstream data rates of up to 8 Mbps
(full-rate) and 1.5 Mbps (G.lite) and upstream data rates of up to 1 Mbps
(full-rate) and 512 kilobits per second ("Kbps") (G.lite).

     The Company is a leading supplier of multi-service access ("MSA")
processors which are used in a variety of access platforms, including remote
access concentrators, voice gateways, private branch exchanges, digital loop
carriers and integrated access devices. The Company's AnyPort(TM) MSA processors
are software configurable to implement a variety of services including dial-up
and dedicated Internet access, wholesale Internet access provisioned for ISPs,
voice-over-Internet Protocol, voice-over-ATM, voice-over-DSL, Internet fax,
wireless and multicast-based services. The AnyPort architecture combines the
performance of digital signal processors with the flexibility of Advanced RISC
Machines' microcontrollers to support the Company's extensive suite of field
proven modulations, echo cancellers, speech coders and communications protocols.

---------------

(1) The Bluetooth(TM) trademarks are owned by Telefonaktiebolaget LM Ericsson,
  Sweden, and licensed to Conexant Systems, Inc. and Philsar Semiconductor Inc.
                                        4
<PAGE>   7

     The Company offers one of the industry's broadest portfolios of WAN
physical and link layer communications products to aggregate and transport data,
video and voice from network access to the optical backbone, including T1/E1 and
T3/E3 carrier, ATM and SONET/SDH products. The Company's T1/E1 and T3/E3 carrier
solutions enable digital communications over twisted copper wire and include
dual, triple and quad framers and line interface units ("LIUs") for 1.5 Mbps to
45 Mbps data transmission as well as multi-channel high-level data link channel
("HDLC") protocol controllers. The Company also provides broadband
internetworking products, including ATM physical layer and segmentation and
reassembly ("SAR") devices supporting 155 and 622 Mbps applications. As the
Company's customers move toward greater levels of product integration,
Conexant's ATM technology is being increasingly combined with its T/E carrier
chipsets, HDLC devices, multi-service access processors and DSL products to
create complete system-level solutions.

     For the WAN core, the Company is aggressively building a broad portfolio of
end-to-end transmission products used in fiber-optic network equipment. The
Company's portfolio of optical networking physical layer solutions spans the
entire spectrum of transceiver products, from 155 Mbps (OC-3) to 10 gigabits per
second ("Gbps") (OC-192) speeds, in support of SONET/SDH applications. Optical
networking products include laser drivers, transimpedance amplifiers, post
amplifiers, clock and data recovery circuits, serializers and deserializers,
cross-point switches and broadband access multiplexers. The Company's physical
and link layer products are complemented by high performance network processors,
which are designed to offer advanced switching and routing capabilities normally
performed by complex ASICs. These software-programmable integrated circuits are
also designed to combine the real-time control and management capabilities of an
embedded processor to support scalable system designs. The advanced capabilities
offered by network processors include multi-protocol switching to enable
integrated local area network ("LAN")/WAN systems, multi-layer programmable
switching and routing capabilities to support policy-based traffic management,
and programmable quality of service for traffic prioritization across disparate
networks.

     The Company also offers a comprehensive set of software subsystems that
support next-generation, carrier-class network infrastructure equipment. These
software subsystems span the technologies of Internet protocol ("IP"), ATM,
multiprotocol label switching ("MPLS") and voice-over-ATM. In addition to
protocol systems, the Company also offers several software infrastructure
modules that improve OEMs' time-to-market. Combined with extensive documentation
and software tooling, this suite of software systems has been deployed by
several OEMs in a number of networks worldwide.

     During fiscal 2000, the Company completed six acquisitions with an
aggregate value of $1.6 billion to accelerate development efforts and fill
technology gaps in its Internet Infrastructure product portfolio. In January
2000, the Company acquired Microcosm Communications Limited ("Microcosm"), a
technology leader in the field of fiber optic communications. In March 2000, the
Company acquired Maker Communications, Inc. ("Maker"), a company that develops
and markets programmable network processors, software solutions and development
tools. In June 2000, the Company acquired HotRail, Inc. ("HotRail"), a developer
of high-speed switching, interconnect and scalable processing solutions for
networking systems. During fiscal 2000, the Company also completed the
acquisitions of Applied Telecom, Inc. ("Applied Telecom") and NetPlane Systems,
Inc. ("NetPlane"), each engaged in the development of communications software,
and Novanet Semiconductor Ltd. ("Novanet"), focused on optical networking
product development.

     Internet Infrastructure research and development investment is focused on
developing solutions to support optical framing/mapping functions, edge and core
network processors, scalable switch fabrics, OC-768 or 40 Gbps transceivers,
multi-port G.shdsl, and next generation multi-service access processors that
offer increased performance, higher density and lower power consumption for
specific target platforms.

COMPANY STRATEGY

     The Company's strategy is to provide highly-valued, differentiated products
for wireline voice and data communications, cordless and cellular wireless
telephony systems and emerging telephony, cable and wireless broadband
communications networks by leveraging competencies in signal conversion, signal
processing,

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communications algorithms and protocols and applications software. Key elements
of the Company's strategy include:

     Core Technology  The Company believes that executing a core technology
strategy, which deploys technology building blocks such as digital signal
processors ("DSPs"), radio frequency integrated circuits ("RFICs"), mixed-signal
processing cores and software across multiple product platforms, is fundamental
to its growth objectives. This strategy enables creation of economies of scale
in research and development and facilitates a reduction in the time-to-market
for its key products. The Company intends to extend its technology portfolio
and, in parallel, seek alliances to gain access to critical intellectual
property, thereby ensuring continued agility and flexibility to meet changing
market and technology requirements.

     Manufacturing Excellence  The Company intends to maintain access to leading
edge, high-volume semiconductor design and wafer manufacturing processes
including CMOS, bipolar, bipolar CMOS ("BiCMOS"), RF CMOS, gallium arsenide
("GaAs") and silicon germanium ("SiGe") that are the driving force behind
today's smaller, more integrated, lower power and lower cost devices. In
addition, the Company will continue to follow a balanced manufacturing strategy
of internal wafer fabrication production augmented by external foundries to
optimize capacity availability while seeking to reduce capital and operating
infrastructure requirements.

     Time-to-Market  Through integrated engineering and manufacturing teams, the
Company pursues the rapid design and cost-effective production of semiconductor
system solutions for its targeted markets. The Company believes that the
combination of design expertise and wafer fabrication and assembly capability
allows the Company to develop prototypes in a shorter amount of time relative to
its competitors.

     System Solution Focus  The Company seeks to capitalize on its design
capabilities and communications systems knowledge by providing suppliers of
communications electronics products with complete semiconductor system
solutions. High levels of integration allow the Company to enhance the benefits
of its products by reducing production costs through fewer external components,
reduced board space and improved system assembly yields. By combining all of the
necessary communication functions for a complete system solution, the Company
can deliver additional semiconductor content, thereby offering its existing and
potential customers more compelling and cost-effective solutions.

     Customer Intimacy  The Company believes a business partnership approach
yields maximum value to the customer through multi-level organizational
engagement and product roadmap alignment. Further, the Company believes that the
strength of its relations with leading customers in each of its markets is a
competitive advantage that enables it to more effectively target its research
and development investments. The Company has established relationships with
market leaders in each of its addressed markets and will seek to build upon its
existing leadership market positions and gain market share in new high-growth
markets by continuing to work closely with industry leading system and service
providers. This strategy provides the Company with rapid feedback from customers
during the design process and increases the likelihood that products will meet
customers' cost and performance requirements for high-volume applications.

RESEARCH AND DEVELOPMENT

     The Company has significant research, development, engineering and product
design capabilities. At September 30, 2000, the Company employed approximately
2,000 engineers working at 28 design centers worldwide. The Company's 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 the Company's OEM customers and to
take advantage of key technical and engineering talent worldwide.

     The Company incurred research and development expenses of approximately
$414.5 million, $310.0 million, and $342.3 million in fiscal 2000, 1999, and
1998, respectively.

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<PAGE>   9

MANUFACTURING

     The Company operates its own manufacturing, assembly and test facilities.
These facilities include two wafer fabrication facilities, an IC assembly and
test facility and a module assembly and test facility. The Company also has
arrangements with third parties, including entities outside the United States,
for the production, assembly and testing of certain semiconductor products. The
Company's assembly and test facility in Mexicali, Mexico and international
subcontract manufacturing arrangements are subject to a number of risks of
operating abroad.

     The Company's major manufacturing facilities include:

<TABLE>
<CAPTION>
              FACILITY                                   FUNCTION
              --------                                   --------
<S>                                    <C>
Newport Beach, California              Wafer fabrication facility
                                       - Class 1 and Class 10 clean rooms
                                       - 21,000 8-inch wafer starts per month
                                       - 0.18 - 0.5 micron
                                       - CMOS RF Bipolar, BiCMOS, SiGe
Newbury Park, California               GaAs wafer fabrication facility
                                       - 5,600 4-inch wafer starts per month
                                       - Heterojunction bipolar transistor ("HBT")
                                       - Metal-semiconductor field effect transistor
                                         ("MESFET")
Mexicali, Mexico                       Assembly and test facility
                                       - High-volume/low-cost multichip modules
El Paso, Texas                         Module design and assembly facility
</TABLE>

     The primary wafer fabrication facility, located in Newport Beach,
California, consists of approximately 130,000 square feet. The Company
manufactures GaAs products at its wafer fabrication facility located in Newbury
Park, California.

     The Company owns an approximately 198,000 square foot assembly and test
facility in Mexicali, Mexico, which has been in operation for over 25 years. The
Mexicali facility assembles semiconductor die from the Company's wafer
fabrication facilities and outside foundry sources into various types of chipset
packages and tests the packages using automatic test equipment with a full range
of analog, digital and radio frequency capability. This facility is ISO 9002
certified and focuses on high-volume, industry standard plastic packaging but
has the capability to manufacture a wide variety of high- and low-volume and
specialized packages using conventional and proprietary assembly techniques.

     The Company operates a fully-integrated electronic module design and
assembly facility in El Paso, Texas, consisting of approximately 133,000 square
feet of leased manufacturing space. This facility provides full turnkey design
capabilities and the ability to manufacture and test standard and custom
products ranging from prototypes to high-volume production. At this facility,
the Company integrates its semiconductor chipset devices into electronic
modules, such as internal cards for PCs and digital infotainment equipment and
standard PCMCIA interface cards, as well as custom products and complete,
market-ready systems. This facility has been ISO 9002 certified since 1993. See
Item 2, "Properties".

RAW MATERIALS AND SUPPLIES

     The Company believes it has adequate sources for the supply of raw
materials and components for its manufacturing needs with suppliers located
around the world. Raw wafers and other raw materials used in the production of
the Company's CMOS products are available from several suppliers. The Company is
currently dependent on two suppliers for epitaxial wafers used in the GaAs
semiconductor manufacturing processes at its Newbury Park, California facility.

CUSTOMERS, MARKETING AND SALES

     The Company markets and sells its semiconductor products and system
solutions directly to leading OEMs of communication electronics products and
third-party electronic manufacturing service providers, and

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indirectly through electronic components distributors. Selected direct and
indirect OEM customers include the following:

  Personal Networking

<TABLE>
<S>                           <C>                                      <C>
Acer Incorporated             Ericsson Inc.                            Nokia Corporation
Apple Computer, Inc.*         Fujitsu Limited                          Pace Micro Technology plc
Askey Computer Corporation    Gateway, Inc.*                           Palm, Inc.*
ATI Technologies Inc.         GVC Corporation                          Philips Electronics N.V.
Best Data Products, Inc.      Hewlett-Packard Company                  Ricoh Company Ltd.
Brother Industries, Ltd.*     Hughes Network Systems, Inc.             Sagem S.A.
Canon Inc.                    Hyundai Corporation                      Samsung Electronics Co., Ltd.
CIDCO, Incorporated           International Business Machines          Sega Enterprises Ltd.
Com 21, Inc.                    Corporation                            Sharp Corporation
Compaq Computer Corporation*  Kyocera Corporation                      Sony Corporation
Daewoo Telecom Ltd.           L.G. International Corporation           Terayon Communication
Dell Computer Corporation*    Lexmark International, Inc.                Systems, Inc.
DENSO Corporation             Matsushita Electric Industrial Co. Ltd.  Thomson Corporation
Eastman Kodak Company*        Motorola, Inc.                           Toshiba Corporation*
EchoStar Communications       NEC Corporation
  Corporation
</TABLE>

  Internet Infrastructure

<TABLE>
<S>                             <C>                             <C>
3Com Corporation                Efficient Networks, Inc.*       Nortel Networks Corporation
ADC Telecommunications, Inc.    Ericsson Inc.                   Redback Networks Inc.*
Alcatel Data Networks, S.A.     Fujitsu Limited                 Sonus Networks, Inc.*
CIENA Corporation               JDS Uniphase Corporation        Sycamore Networks, Inc.*
Cisco Systems, Inc.             Juniper Networks, Inc.*         Tellabs, Inc.*
Copper Mountain Networks,       Lucent Technologies, Inc.       Tellium, Inc.*
  Inc.*                         Nokia Corporation               Zhone Technologies, Inc.*
ECI Telecommunications
</TABLE>

---------------
* Indirect OEM customer

     The Company has a worldwide sales organization comprised of approximately
300 employees as of September 30, 2000, with 13 domestic and 20 international
sales offices. To complement its direct sales and customer support efforts, the
Company also sells its products through approximately 47 independent
manufacturers' representatives and approximately 39 distributors and dealers. In
addition, the Company's design and applications engineering staff is actively
involved with customers during all phases of design and production and provides
customer support through the Company's worldwide sales offices, which are
generally in close proximity to customers' facilities.

     The Company continues to seek close technical collaboration with its
customers during the design phase of new programs to facilitate integration of
the Company's products into such programs, to improve the Company's ability to
rapidly reach high manufacturing volumes, and to position the Company to be a
primary supplier for new programs.

BACKLOG

     The Company's sales are made primarily pursuant to standard purchase orders
for delivery of products, with such purchase orders officially acknowledged by
the Company according to its own terms and conditions. Due to industry practice,
which allows customers to cancel orders with limited advance notice to the
Company prior to shipment, the Company believes that backlog as of any
particular date is not a reliable indicator of future revenue levels.

COMPETITION

     The communications semiconductor industry in general, and the markets in
which the Company competes in particular, are intensely competitive. The Company
competes worldwide with a number of U.S. and international suppliers that are
both larger and smaller than the Company in terms of resources and

                                        8
<PAGE>   11

market share. The Company anticipates that additional competitors will enter its
markets and expects intense product competition to continue.

     The specific bases on which the Company competes vary by market. The
Company believes that the principal competitive factors for semiconductor
suppliers in each of its addressed markets are:

     - time-to-market;

     - product performance;

     - level of integration;

     - price and total system cost;

     - compliance with industry standards;

     - design and engineering capabilities;

     - strategic relationships with customers;

     - customer support; and

     - new product innovation and quality.

     The Company believes it competes favorably with respect to each of these
factors.

     For the Personal Networking business, in Personal Computing applications,
the Company competes primarily with Centillium Communications, Inc., Lucent
Technologies, Inc., Motorola, Inc., PC-Tel, Inc., Texas Instruments Incorporated
and Virata Corporation. The Company's competitors in the Personal Imaging market
include Agilent Technologies, Inc., OmniVision Technologies, Inc., Samsung
Electronics Co., Ltd., Toshiba Corporation and Zoran Corporation. In the Digital
Infotainment market, competitors of the Company include Broadcom, Inc., C-Cube
Microsystems, LSI Logic Corporation, Microtune, Inc., Philips Electronics N.V.,
STMicroelectronics N.V., and Texas Instruments Incorporated. The Company's
competitors in the Wireless Communications market include ANADIGICS, Inc.,
Analog Devices, Inc., Hitachi Ltd., Infineon Technologies A.G., Lucent
Technologies, Inc., Motorola, Inc., Philips Electronics N.V., RF Micro Devices,
Inc. and Texas Instruments Incorporated.

     For the Internet Infrastructure business, the Company's competitors include
Analog Devices, Inc., Applied Micro Circuits Corporation, Centillium
Communications, Inc., GlobeSpan, Inc., IBM Microelectronics Division, Infineon
Technologies A.G., Intel Corporation, Lucent (Microelectronics Group), Metalink
Ltd., Motorola, Inc., PMC-Sierra, Inc., Texas Instruments Incorporated,
TranSwitch Corporation, and Vitesse Semiconductor Corporation.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

     Numerous United States and foreign patents and patent applications are
owned or licensed by the Company related to its manufacturing operations and
other activities. The Company has filed federal and international trademark
applications seeking registered protections of the Conexant name and logo. In
addition, the Company owns a number of other trademarks applicable only to
certain of its products. Management believes that intellectual property,
including patents, patent applications and licenses, and trademarks are of
material importance to the Company. In addition to the protection of its
proprietary technologies and processes, the Company is seeking to strengthen its
intellectual property portfolio to enhance its ability to obtain cross-licenses
of intellectual property from others, whether to obtain access to intellectual
property the Company does not possess or to resolve potential intellectual
property claims against the Company, without the need to make financial
payments.

     Various claims of patent infringement have been made against the Company.
Management believes that none of these claims will have a material adverse
effect on the consolidated financial statements of the Company. Pursuant to the
Distribution, Conexant assumed all liabilities in respect of intellectual
property matters related to current and former operations of Semiconductor
Systems. See Item 3, "Legal Proceedings".

                                        9
<PAGE>   12

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 the Company's manufacturing operations. Thus far, compliance with
environmental requirements and resolution of environmental claims have been
accomplished without material effect on the Company's liquidity and capital
resources, competitive position or financial statements.

     The Company has been designated as a potentially responsible party ("PRP")
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. The site was also formerly occupied by Recticon Corporation and
Allied Steel Products Corporation, each of whom has also been named as a PRP and
each of whom is insolvent. The remediation plan for the site includes
installation of a public water supply line and a groundwater pump and treatment
system, as well as routine groundwater sampling. Management estimates the
remaining costs for the remediation of this Superfund site to be approximately
$2.1 million and has accrued for these costs as of September 30, 2000.

     In addition, the Company is engaged in two other remediations of
groundwater contamination at its Newport Beach and Newbury Park, California
facilities. Management currently estimates the remaining costs for these
remediations to be approximately $3.0 million and has accrued for these costs as
of September 30, 2000.

     In connection with the Distribution, the Company assumed all liabilities in
respect of environmental matters related to then current and former operations
of Conexant.

     Management of the Company believes that the Company's expenditures for
environmental capital investment and remediation necessary to comply with
present regulations governing environmental protection and other expenditures
for the resolution of environmental claims will not have a material adverse
effect on the Company's liquidity and capital resources, competitive position or
financial statements. Management cannot assess the possible effect of compliance
with future requirements.

CYCLICALITY; SEASONALITY

     The semiconductor industry is highly cyclical. Sales of the Company's
Personal Computing, Wireless Communications and Personal Imaging products are
subject to seasonal fluctuation related to the increase in sales of products
which include the Company's products, such as PCs, cordless and cellular
telephones and fax machines, generally associated with the holiday season in
December. The Company's sales of 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, 2000, the Company had approximately 8,800 full-time
employees, of whom approximately 2,000 are engineers. Approximately 550 Conexant
employees in the United States and approximately 2,100 employees in Mexico are
covered by collective bargaining agreements. In July 1998, following a 50-day
strike by members of the International Brotherhood of Electrical Workers (IBEW)
Local 2295, the Company entered into a collective bargaining agreement with that
union covering the union employees at the Company's Newport Beach, California
facility. The agreement will expire in May 2003. No other significant work
stoppages have occurred in the past five years.

     The Company believes its future success will depend in large part upon its
ability to continue to attract, retain, train and motivate highly skilled and
dedicated employees.

                                       10
<PAGE>   13

CERTAIN BUSINESS RISKS

     The Company's business, financial condition and operating results can be
impacted by a number of factors including, but not limited to, those set forth
below, any one of which could cause the Company's actual results to vary
materially from recent results or from the Company's anticipated future results.

     You should carefully consider and evaluate all of the information in this
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 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 standards, short product life cycles and wide fluctuations in
product supply and demand.

     The industry has experienced significant downturns, often in connection
with, or in anticipation of, maturing product cycles (of both semiconductor
companies' and their customers' products) and declines in general economic
conditions. These downturns have been characterized by diminished product
demand, production overcapacity, high inventory levels and accelerated erosion
of average selling prices.

     We have experienced these conditions in our business in the past and may
experience such downturns in the future. Any future downturns of this nature
could have a material adverse effect on our business, financial condition and
results of operations. From time to time the semiconductor industry also has
experienced periods of increased demand and production capacity constraints. We
may experience substantial changes in future operating results due to general
semiconductor industry conditions and general economic conditions.

  We are subject to intense competition and could lose business to our
competitors.

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

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

     - time-to-market;

     - product performance;

     - level of integration;

     - price and total system cost;

     - compliance with industry standards;

     - design and engineering capabilities;

     - strategic relationships with customers;

     - customer support;

     - new product innovation; and

     - quality.
                                       11
<PAGE>   14

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

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

     - longer operating histories and presence in key markets;

     - greater name recognition;

     - access to larger customer bases; and

     - significantly greater financial, sales and marketing, manufacturing,
       distribution, technical and other resources.

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

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

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

     Consolidations by industry participants, including in some cases,
acquisitions of certain of our customers by our competitors, are creating
entities with increased market share, customer base, technology and marketing
expertise in markets in which we compete. These developments may significantly
and adversely affect our current markets, the markets we are seeking to serve
and our ability to compete successfully in those markets.

  Our success is dependent upon our ability to timely develop new products and
reduce costs.

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

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

     - our ability to accurately define new products;

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

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

     - market acceptance of our 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
                                       12
<PAGE>   15

assure you that we will be able to develop and introduce new or enhanced
products in a timely and cost-effective manner, that our products will satisfy
customer requirements or achieve market acceptance, or that we will be able to
anticipate new industry standards and technological changes. We also cannot
assure you that we will be able to respond successfully to new product
announcements and introductions by competitors.

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

  We must incur substantial research and development expenses.

     The semiconductor industry requires substantial investment in research and
development. In order to remain competitive, we must continue to make
substantial investments in research and development to develop new and enhanced
products. We cannot assure you that we will have sufficient resources to develop
new and enhanced technologies and competitive products. Our failure to continue
to make sufficient investments in research and development programs could have a
material adverse effect on our business, financial condition and results of
operations.

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

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

     - rapid technological developments;

     - evolving industry standards;

     - changes in customer requirements;

     - frequent new product introductions and enhancements; and

     - short product life cycles with declining prices over the life cycle of
       the product.

     Our products could become obsolete sooner than anticipated because of a
faster than anticipated change in one or more of the technologies related to our
products or in market demand for products based on a particular technology,
particularly due to the introduction of new technology that represents a
substantial advance over current technology. Currently accepted industry
standards are also subject to change, which may contribute to the obsolescence
of our products. If we are unable to keep abreast of these developments, these
events could have a material adverse effect on our business, financial condition
and results of operations.

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

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

     We may have particular difficulty attracting and retaining key personnel
during periods of poor operating performance, given the significant use of
equity-based compensation by our competitors and us. The loss of the services of
one or more of our key employees, including Dwight W. Decker, our Chairman and
Chief Executive Officer, or certain key design and technical personnel, or our
inability to attract, retain and motivate qualified personnel could have a
material adverse effect on our ability to operate our business and on our
financial condition and results of operations.

                                       13
<PAGE>   16

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

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

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

     Our customers may need six months or longer to test and evaluate our
products and an additional six months or more to begin volume production of
equipment that incorporates our products. The lengthy period of time required
also increases the possibility that a customer may decide to cancel or change
product plans, which could reduce or eliminate sales to that customer. As a
result of this lengthy sales cycle, we may incur significant research and
development, and selling, general and administrative expenses before we generate
the related revenues for these products, and we may never generate the
anticipated revenues if our customer cancels or changes its product plans.

  Uncertainties involving the ordering and shipment of our products could
adversely affect our business.

     Our sales are typically made pursuant to individual purchase orders and we
generally do not have long-term supply arrangements with our customers.
Generally, our customers may cancel orders until 30 days prior to shipment. In
addition, we sell a portion of our products through distributors, some of whom
have rights to return unsold products to us. Sales to distributors accounted for
approximately 19% of fiscal 2000 net revenues. Moreover, we routinely purchase
inventory based on estimates of customer demand for their 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 that would have a material
adverse effect on our operating results.

  Our manufacturing process is extremely complex and specialized.

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

     Our operating results are highly dependent upon our ability to produce
large volumes of integrated circuits at acceptable manufacturing yields. Our
operations may be affected by lengthy or recurring disruptions of operations at
any of our production facilities or those of our subcontractors. These
disruptions may include labor strikes, work stoppages, fire, earthquake,
flooding or other natural disasters. These disruptions could

                                       14
<PAGE>   17

cause significant delays in shipments until we could shift the products from an
affected facility or subcontractor to another facility or subcontractor.

     In the event of these types of delays, we cannot assure you that the
required alternate capacity, particularly wafer production capacity, would be
available on a timely basis or at all. Even if alternate wafer production
capacity is available, we may not be able to obtain it on favorable terms, which
could result in a loss of customers. Any inability to obtain sufficient
manufacturing capacities to meet demand, either at our own facilities or through
foundry or similar arrangements with others, could have a material adverse
effect on our business, financial condition and results of operations. Certain
of our manufacturing facilities are located near major earthquake fault lines,
including our California and Mexico facilities. We maintain only minimal
earthquake insurance coverage on these facilities.

     Due to the highly specialized nature of the gallium arsenide semiconductor
manufacturing process, in the event of a disruption at our Newbury Park,
California wafer fabrication facility, alternate gallium arsenide production
capacity would not be readily available from third-party sources. Although we
recently entered into a multi-year agreement with a foundry that guarantees us
access to additional gallium arsenide wafer production capacity beginning in the
fourth quarter of calendar year 2000, a disruption of operations at our Newbury
Park wafer fabrication facility or the interruption in the supply of epitaxial
wafers used in our gallium arsenide process could have a material adverse effect
on our business, financial condition and results of operations, particularly
with respect to our Wireless Communications products.

     Our ability to sustain our revenue growth is also dependent on our ability
to secure adequate additional manufacturing capacity, including wafer production
capacity. We have recently entered into agreements with outside foundries to
secure additional wafer manufacturing capacity, including additional gallium
arsenide wafer production capacity. In addition, we continue to explore wafer
manufacturing alternatives, which may include increased use of outside
foundries, entering into new or expanded business relationships with respect to
wafer manufacturing or other actions related to our wafer manufacturing
facilities. We cannot assure you that we will be successful in securing adequate
additional manufacturing capacity. Our inability to do so could result in delays
in customer shipments and the possible loss of customers.

  We may not be able to achieve manufacturing yields to maintain our
profitability.

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

  We are dependent upon third parties for the supply of raw materials and
components.

     We believe we have adequate sources for the supply of raw materials and
components for our manufacturing needs with suppliers located around the world.
Although we currently purchase wafers used in the production of our CMOS
products from one major supplier, such wafers are available from several other
suppliers. We are currently dependent on two suppliers for epitaxial wafers used
in the gallium arsenide semiconductor manufacturing processes at our Newbury
Park, California facility and we are in the process of arranging another
supplier for epitaxial wafers. The number of qualified alternative suppliers for
wafers is limited and the process of qualifying a new wafer supplier could
require a substantial lead-time. Although we historically have not experienced
any significant difficulties in obtaining an adequate supply of raw materials

                                       15
<PAGE>   18

and components necessary for our manufacturing operations, the loss of a
significant supplier or the inability of a supplier to meet performance and
quality specifications or delivery schedules could have a material adverse
effect on our business, financial condition and results of operations.

  We must incur significant capital expenditures for manufacturing technology
  and equipment to remain competitive.

     The semiconductor industry is highly capital intensive. Semiconductor
manufacturing requires a constant upgrading of process technology to remain
competitive, as new and enhanced semiconductor processes are developed which
permit smaller, more efficient and more powerful semiconductor devices. We
maintain our own manufacturing, assembly and test facilities, which have
required and will continue to require significant investments in manufacturing
technology and equipment.

     We have made substantial capital expenditures and installed significant
production capacity to support new technologies and increased demand for our
products. We made capital expenditures during fiscal 2000 of approximately $315
million, compared to approximately $214 million during fiscal 1999. We expect
our capital expenditures for fiscal 2001 will exceed $350 million.

     There can be no assurance that we will have sufficient capital resources to
make necessary investments in manufacturing technology and equipment.

  Our success depends on our ability to effect suitable investments, alliances
or acquisitions.

     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. As part of our goal to provide advanced semiconductor product systems, we
have and will continue to review on an ongoing basis investment, alliance and
acquisition prospects that would complement our existing product offerings,
augment our market coverage or enhance our technological capabilities. However,
we cannot assure you that we will be able to identify and consummate suitable
investment, alliance or acquisition transactions in the future.

     Moreover, if we consummate such transactions, they could result in:

     - issuances of equity securities dilutive to our existing shareholders;

     - large one-time write-offs;

     - the incurrence of substantial debt and assumption of unknown liabilities;

     - the potential loss of key employees from the acquired company;

     - amortization expenses related to goodwill and other intangible assets;
       and

     - the diversion of management's attention from other business concerns.

     Any of these events could have a material adverse effect on our business,
financial condition and results of operations and the price of our common stock
or other securities.

     In fiscal 2000, we incurred a net loss of $190.9 million, primarily due to
charges of $215.7 million for purchased in-process research and development and
amortization expenses of $160.2 million for acquisition-related intangible
assets, principally related to the ten acquisitions we completed in fiscal 2000.
In addition, as a result of these acquisitions, we expect to record amortization
expense related to goodwill and intangible assets in excess of $320 million
annually for five years.

                                       16
<PAGE>   19

  We may have difficulty integrating companies we acquire.

     We completed ten acquisitions in fiscal 2000. We evaluate acquisitions on
an ongoing basis and we may make additional acquisitions in the future.
Integrating acquired organizations and their products and services may be
expensive, time-consuming and a strain on our resources. We could face several
challenges integrating current and future acquisitions, including:

     - the difficulty of integrating acquired technology into our product
       offerings;

     - the impairment of relationships with employees and customers;

     - the difficulty of coordinating and integrating overall business
       strategies and worldwide operations;

     - the potential disruption of our ongoing business and distraction of
       management;

     - the inability to maintain brand recognition of acquired businesses;

     - the inability to maintain corporate controls, procedures and policies;

     - the failure of acquired features, functions, products or services to
       achieve market acceptance; and

     - the potential unknown liabilities associated with acquired businesses.

     Our inability to address any of these challenges successfully could have a
material adverse effect on our business, financial condition and results of
operations.

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

     We believe that cash flows from operations, existing cash reserves, and
available borrowings under our $475 million revolving credit facility will be
sufficient to satisfy our future research and development, capital expenditure,
working capital and other financing requirements. However, we cannot assure you
that this will be the case or that we will have access to alternative sources of
capital on favorable terms or at all.

     In addition, we have and will continue to review, on an ongoing basis,
strategic investments and acquisitions, which will help us grow our business.
These investments and acquisitions 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.

  Our credit facility may restrict our operating and financial flexibility.

     We have a $475 million revolving credit facility which expires in 2003.
This credit facility includes covenants that may restrict our operating and
financial flexibility in the future. The credit facility includes restrictions
on capital expenditures, indebtedness, acquisitions, mergers, asset sales and
liens on assets that apply to us and our subsidiaries. We also must meet certain
financial tests and maintain certain financial ratios. Although we believe that
we will be able to comply with these requirements, compliance with these
requirements may restrict our operating and financial flexibility. We cannot
assure you that we will in fact be able to satisfy all of the requirements in
the credit facility. If we do not satisfy the financial ratios or comply with
the other covenants included in the credit facility, the lenders under the
credit facility could declare all amounts owed to them due and payable and
proceed against their collateral. Such a foreclosure on the collateral could
have a material adverse effect on our business, financial condition and results
of operations. The credit facility is secured by a pledge of the stock of our
significant subsidiaries (as that term is defined in the credit facility),
subject to certain exceptions for stock of foreign significant subsidiaries, and
by a pledge of certain intercompany indebtedness owed by any significant
subsidiary to us or any other subsidiary. If there is a downgrading of the
ratings on our long-term, unsecured indebtedness by Standard & Poor's Rating
Services Group to B or less and a rating by Moody's Investor Service of B2 or
less (in the event of a rating by Moody's), we will be required to secure the
credit facility by pledging substantially all of our assets and the assets of
our domestic subsidiaries and the stock of all of our subsidiaries, subject to
certain exceptions. Our obligations under the credit facility must be guaranteed
by any domestic significant subsidiary.

                                       17
<PAGE>   20

  We are subject to the risks of doing business internationally.

     For fiscal 2000, approximately 70 percent of our net revenues were from
customers located outside the United States, primarily in the Asia-Pacific and
European countries. In addition, we have facilities and suppliers located
outside the United States, including our assembly and test facility in Mexicali,
Mexico and third-party foundries located in the Asia-Pacific region. Our
international sales and operations are subject to a number of risks inherent in
selling and operating abroad. These include, but are not limited to, risks
regarding:

     - currency exchange rate fluctuations;

     - local economic and political conditions;

     - disruptions of capital and trading markets;

     - restrictive governmental actions (such as restrictions on transfer of
       funds and trade protection measures, including export duties and quotas
       and customs duties and tariffs);

     - changes in legal or regulatory requirements;

     - limitations on the repatriation of funds;

     - difficulty in obtaining distribution and support;

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

     - tax laws; and

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

     Because most of our international sales, other than sales to Japan (which
are denominated principally in Japanese yen), are currently denominated in U.S.
dollars, our products could become less competitive in international markets if
the value of the U.S. dollar increases relative to foreign currencies. Moreover,
we may be competitively disadvantaged relative to our competitors located
outside the United States who may benefit from a devaluation of their local
currency. We cannot assure you that the factors described above will not have a
material adverse effect on our ability to increase or maintain our foreign sales
or on our business, financial condition and results of operations.

     Our past operating performance has been impacted by adverse economic
conditions in the Asia-Pacific region, which have increased the uncertainty with
respect to the long-term viability of certain of our customers and suppliers in
the region. Sales to customers in Japan and other countries in the Asia-Pacific
region, principally Taiwan, South Korea and Hong Kong, represented approximately
57 percent of net revenues in fiscal 2000.

     We enter into foreign currency forward exchange contracts, principally for
the Japanese yen, to minimize risk of loss from currency exchange rate
fluctuations for foreign currency commitments entered into in the ordinary
course of business. We have not experienced nor do we anticipate any material
adverse effect on our results of operations or financial condition related to
these foreign currency forward exchange contracts. We have not entered into
foreign currency forward exchange contracts for other purposes and our financial
condition and results of operations could be affected (negatively or positively)
by currency fluctuations.

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

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

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

                                       18
<PAGE>   21

     - production capacity levels and fluctuations in manufacturing yields;

     - availability and cost of products from our suppliers;

     - the gain or loss of significant customers;

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

     - new product and technology introductions by competitors;

     - changes in the mix of products produced and sold;

     - market acceptance of our products and our customers' products;

     - intellectual property disputes;

     - seasonal customer demand;

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

     - the timing and extent of product development costs.

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

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

     The trading price of our common stock fluctuates significantly. Since our
common stock began trading publicly, the reported sale price of our common stock
on the NASDAQ National Market has been as high as $132 1/2 and as low as
$6 27/32 per share. This price may be influenced by many factors, including:

     - our performance and prospects;

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

     - investor perception of Conexant and the industry in which we operate;

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

     - general financial and other market conditions; and

     - domestic and international economic conditions.

     In addition, public stock markets have experienced, and are currently
experiencing, extreme price and trading volume volatility, particularly in high
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.

                                       19
<PAGE>   22

  We may be subject to claims of infringement of third-party intellectual
  property rights or demands that we license third-party technology, which could
  result in significant expense and loss of our intellectual property rights.

     The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights. From time to time, third parties may
assert patent, copyright, trademark and other intellectual property rights to
technologies that are important to our business and may demand that we license
their technology. Any litigation to determine the validity of claims that our
products infringe or may infringe these rights, including claims arising through
our contractual indemnification of our customers, regardless of their merit or
resolution, could be costly and divert the efforts and attention of our
management and technical personnel. We cannot assure you that we would prevail
in litigation given the complex technical issues and inherent uncertainties in
intellectual property litigation. If litigation results in an adverse ruling we
could be required to:

     - pay substantial damages;

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

     - discontinue the use of infringing technology;

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

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

Any of the foregoing results could have a material adverse effect on our
business, financial condition and results of operations.

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

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

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

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

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

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

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

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

                                       20
<PAGE>   23

     In the United States, environmental regulations often require parties to
fund remedial action regardless of fault. Consequently, it is often difficult to
estimate the future impact of environmental matters, including potential
liabilities. We cannot assure you that the amount of expense and capital
expenditures that might be required to complete remedial actions and to continue
to comply with applicable environmental laws will not have a material adverse
effect on our business, financial condition and results of operations.

     We have been designated as a potentially responsible party at one Superfund
site located at a former silicon wafer manufacturing facility and steel
fabrication plant in Parker Ford, Pennsylvania formerly occupied by
Semiconductor Systems. The site was also formerly occupied by Recticon
Corporation and Allied Steel Products Corporation, each of whom has also been
named as a potentially responsible party and each of whom is insolvent. We have
accrued approximately $2.1 million at September 30, 2000 for the cost of
groundwater remediation, including installation of a public water supply line
and groundwater pump and treatment system, as well as routine groundwater
sampling. In addition, we are engaged in two other remediations of groundwater
contamination at our Newport Beach and Newbury Park, California facilities for
which we have accrued approximately $3.0 million for the costs of remediation at
September 30, 2000. Pursuant to our agreement with Rockwell, we have assumed
liabilities in respect of environmental matters related to current and former
operations of Conexant.

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

     Our management currently faces a variety of challenges. These include
implementing our ongoing diversification and expansion strategy and continuing
to expand the infrastructure and systems necessary for us to operate as an
independent public company and to integrate our recent acquisitions. While we
believe that we have sufficient management resources to execute each of these
initiatives, we cannot assure you that we will have these resources or that our
initiatives will be successfully implemented. Failure to implement these
initiatives successfully could have a material adverse effect on our business,
financial condition and results of operations.

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

     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 ChaseMellon Shareholder Services, L.L.C.,
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 Conexant in a transaction not approved by
our board of directors. Our restated certificate of incorporation and by-laws
include provisions such as:

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

     - a fair price provision;

     - a prohibition on shareowner action by written consent;

     - a requirement that shareowners provide advance notice of any shareowner
       nominations of directors or any proposal of new business to be considered
       at any meeting of shareowners;

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

     - elimination of the right of shareowners to call a special meeting of
       shareowners; and

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

     We also have a rights agreement which gives our shareowners certain rights
that would substantially increase the cost of acquiring us in a transaction not
approved by our board of directors.

                                       21
<PAGE>   24

     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 provides that, subject to certain exceptions, a corporation
shall not engage in any business combination with any interested shareowner
during the three-year period following the time that such shareowner becomes an
interested shareowner. The restrictions of Section 203 of the Delaware General
Corporation Law, in certain circumstances, make it more difficult for a person
who would be an interested shareowner to effect various business combinations
with a corporation during this three-year period. The provisions of Section 203
of the Delaware General Corporation Law provide that the shareowner approval
requirement may be avoided if a majority of the directors then in office
approved either the business combination or the transaction that resulted in the
shareowner becoming an interested shareowner.

  We may be responsible for certain federal income tax liabilities that relate
to our spin-off from Rockwell.

     In connection with our spin-off from Rockwell, the Internal Revenue Service
issued a tax ruling to Rockwell stating that the spin-off would qualify as a
tax-free reorganization within the meaning of Section 368(a)(1)(D) of the
Internal Revenue Code of 1986, as amended. While the tax ruling generally is
binding on the Internal Revenue Service, the continuing validity of the tax
ruling is subject to certain factual representations and assumptions. We are not
aware of any facts or circumstances that would cause such representations and
assumptions to be untrue.

     The Tax Allocation Agreement dated as of December 31, 1998 between Conexant
and Rockwell provides that we will be responsible for any taxes imposed on
Rockwell, Conexant or Rockwell shareowners as a result of either:

     - the failure of the spin-off from Rockwell to qualify as a tax-free
       reorganization within the meaning of Section 368(a)(1)(D) of the Internal
       Revenue Code or

     - the subsequent disqualification of the spin-off from Rockwell as a
       tax-free transaction to Rockwell under Section 361(c)(2) of the Internal
       Revenue Code,

if the failure or disqualification is attributable to certain post-spin-off
actions by or in respect of Conexant (including our subsidiaries) or our
shareowners, such as our acquisition by a third party at a time and in a manner
that would cause such failure or disqualification.

     The Tax Allocation Agreement also provides, among other things, that
neither Rockwell nor Conexant is to take any action inconsistent with, nor fail
to take any action required by, the request for the tax ruling or the tax ruling
unless:

     - required to do so by law;

     - the other party has given its prior written consent; or

     - in certain circumstances, a supplemental ruling permitting such action is
       obtained.

     Rockwell and Conexant have indemnified each other for any tax liability
resulting from each entity's failure to comply with these provisions.

     In addition, we effected certain tax-free intragroup spin-offs as a result
of Rockwell's spin-off of Meritor Automotive, Inc. (now ArvinMeritor, Inc.) on
September 30, 1997. The Tax Allocation Agreement provides that we will be
responsible for any taxes imposed on Rockwell, Conexant or Rockwell shareowners
in respect of those intragroup spin-offs if such taxes are attributable to
certain actions taken after the spin-off from Rockwell by or in respect of
Conexant (including our subsidiaries) or our shareowners, such as our
acquisition by a third party at a time and in a manner that would cause the
taxes to be incurred.

     If we were required to pay any of the taxes described above, such payment
could have a material adverse effect on our financial position, results of
operations and cash flow.

                                       22
<PAGE>   25

EXECUTIVE OFFICERS

     The Company's executive officers are:

<TABLE>
<CAPTION>
            NAME              AGE                            POSITION
            ----              ---                            --------
<S>                           <C>    <C>
Dwight W. Decker............  50     Chairman of the Board of Directors and Chief Executive
                                     Officer
Moiz M. Beguwala............  54     Senior Vice President and General Manager, Wireless
                                     Communications
Lewis C. Brewster...........  36     Senior Vice President, Worldwide Sales
Terry L. Ellis..............  55     Senior Vice President, Operations
Raouf Y. Halim..............  40     Senior Vice President and General Manager, Network
                                     Access
Balakrishnan S. Iyer........  44     Senior Vice President and Chief Financial Officer
Shu Li......................  42     Senior Vice President, Quality and Supply Chain
                                     Management
Daniel A. Marotta...........  40     Senior Vice President and General Manager, Digital
                                     Infotainment
Dennis E. O'Reilly..........  56     Senior Vice President, General Counsel and Secretary
Kerry K. Petry..............  51     Vice President and Treasurer
Ashwin Rangan...............  41     Senior Vice President and Chief Information Officer
F. Matthew Rhodes...........  43     Senior Vice President and General Manager, Personal
                                     Computing
James P. Spoto..............  50     Senior Vice President, Platform Technologies
Thomas A. Stites............  45     Senior Vice President, Communications
Kevin V. Strong.............  40     Senior Vice President and General Manager, Personal
                                     Imaging
Steven M. Thomson...........  44     Vice President and Controller
Paul D. Walker..............  53     Senior Vice President, Leadership and Team Development
Bradley W. Yates............  42     Senior Vice President, Human Resources
</TABLE>

     Messrs. Halim, Iyer, Petry, Stites and Yates have been, or are expected to
be, named executive officers of Spinco and are expected to cease service as
executive officers of the Company upon completion of the initial public offering
of shares of Spinco.

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

     Dwight W. Decker -- Chairman of the Board and Chief Executive Officer. Mr.
Decker served as Senior Vice President of Rockwell International Corporation
(electronic controls and communications) and President, Rockwell Semiconductor
Systems from July 1998 to December 1998; Senior Vice President of Rockwell and
President, Rockwell Semiconductor Systems and Electronic Commerce from March
1997 to July 1998; President, Rockwell Semiconductor Systems from October 1995
to March 1997; and President, Telecommunications of Rockwell 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.

     Moiz M. Beguwala -- Senior Vice President and General Manager, Wireless
Communications. Mr. Beguwala served as Vice President and General Manager,
Wireless Communications Division of Rockwell Semiconductor Systems from October
1998 to December 1998; Vice President and General Manager, Personal Computing
Division of Rockwell Semiconductor Systems from January 1998 to October 1998;
Vice President, Worldwide Sales of Rockwell Semiconductor Systems from October
1995 to January 1998; and Vice President Worldwide Sales of Rockwell's
Telecommunications Division prior thereto. Mr. Beguwala received an M.B.A. and a
B.S. in engineering from the University of California -- Los Angeles and an M.S.
and a Ph.D. in electrical engineering from the University of Southern
California.

     Lewis C. Brewster -- Senior Vice President, Worldwide Sales. Mr. Brewster
served as Vice President, Worldwide Sales of Rockwell Semiconductor Systems from
January 1998 to December 1998; Executive Director, Americas Sales of Rockwell
Semiconductor Systems from June 1997 to January 1998; Director,

                                       23
<PAGE>   26

Americas Sales of Rockwell Semiconductor Systems from June 1996 to June 1997;
Director, Strategic Sales and Operations of Rockwell Semiconductor Systems from
October 1995 to June 1996; and Director, Strategic Sales and Operations, Digital
Communications Division of Rockwell's Telecommunications Division 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.

Terry L. Ellis -- Senior Vice President, Operations. Mr. Ellis served as Vice
President of Operations of Rockwell Semiconductor Systems from September 1998 to
December 1998; Executive Director, Semiconductor Manufacturing of Rockwell
Semiconductor Systems from August 1997 to August 1998; Director, Die
Manufacturing of Rockwell Semiconductor Systems from October 1995 to August
1997; and Director, Die Manufacturing of Rockwell's Telecommunications Division
prior thereto. Mr. Ellis received a B.S. in electrical engineering from the
University of Texas.

     Raouf Y. Halim -- Senior Vice President and General Manger, Network Access.
Mr. Halim served as Vice President and General Manager, Network Access Division
of Rockwell Semiconductor Systems from February 1997 to December 1998; Vice
President -- VLSI Engineering of Rockwell Semiconductor Systems from October
1995 to February 1997; Vice President -- VLSI Engineering of Rockwell's
Telecommunications Division from September 1995 to October 1995; and Division
Director, VLSI Engineering, Digital Communications of Rockwell's
Telecommunications Division prior thereto. Mr. Halim received an M.S. in
electrical engineering from the Georgia Institute of Technology and a B.Sc. in
electrical engineering from Alexandria University.

     Balakrishnan S. Iyer -- Senior Vice President and Chief Financial Officer.
Mr. Iyer served as Senior Vice President and Chief Financial Officer of Rockwell
Semiconductor Systems from October 1998 to December 1998; Senior Vice President
and Chief Financial Officer of VLSI Technology, Inc. (semiconductors) from
January 1997 to October 1998; and Vice President and Corporate Controller of
VLSI Technology, Inc. prior thereto. Mr. Iyer received an M.B.A. from The
Wharton School of the University of Pennsylvania, an M.S. in industrial
engineering from the University of California, Berkeley and a B.S. in mechanical
engineering from the Indian Institute of Technology.

     Shu Li -- Senior Vice President, Quality and Supply Chain Management. Mr.
Li served as Divisional Vice President and General Manager, Semiconductor
Packaging of AlliedSignal, Inc. (semiconductors) from January 1999 to January
2000; Divisional Vice President and General Manager, Commercial Spares and Total
Logistics Services of AlliedSignal, Inc. from January 1996 to January 1999; and
Vice President, Operations of AlliedSignal Aerospace Marketing, Sales, and
Services, Inc. prior thereto. Mr. Li received a Ph.D. in operations research
from Harvard University, an M.S. in electrical engineering and computer sciences
from the University of Illinois and a B.S. in electrical engineering from the
Huazhong University of Sciences and Technologies in the People's Republic of
China.

     Daniel A. Marotta -- Senior Vice President and General Manager, Digital
Infotainment. Mr. Marotta served as Vice President and General Manager, Digital
Infotainment from March 1999 to January 2000; Vice President of Engineering from
January 1999 to March 1999; Director of Engineering from August 1998 to January
1999; and Integrated Circuit Designer of the Graphic/Imaging Sub-Business Unit
of Conexant's Brooktree subsidiary prior thereto. Mr. Marotta received a B.S. in
electrical engineering from State University of New York in Buffalo.

     Dennis E. O'Reilly -- Senior Vice President, General Counsel and Secretary.
Mr. O'Reilly served as Director of Business Development of Intel Corporation's
Mobile and Handheld Products Group (semiconductors) from September 1997 to
December 1998; Group Counsel of Intel Corporation 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. Mr. Petry served as Vice
President and Treasurer of Rockwell Semiconductor Systems from October 1998 to
December 1998; Assistant Treasurer and Director of Domestic Treasury Operations
of Rockwell 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.

                                       24
<PAGE>   27

     Ashwin Rangan -- Senior Vice President and Chief Information Officer. Mr.
Rangan served as Senior Vice President and Chief Information Officer of Rockwell
Semiconductor Systems from October 1998 to December 1998; Executive Director,
Business Process Re-engineering and Information Technology of Rockwell
Semiconductor Systems from December 1996 to October 1998; and Director, Business
Process Re-engineering and Information Technology 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.

     F. Matthew Rhodes -- Senior Vice President and General Manager, Personal
Computing. Mr. Rhodes served as Vice President and General Manager, Personal
Computing Division of Rockwell Semiconductor Systems from October 1998 to
December 1998; Director, Software Products Marketing of Rockwell Semiconductor
Systems from January 1997 to October 1998; Director, VLSI Technology of Pacific
Communications Sciences Inc. (communications system design) prior thereto. Mr.
Rhodes received an M.B.A. from the Anderson Graduate School of Management of the
University of California, Los Angeles, an M.S. in electrical engineering from
Lehigh University and a B.S. in physics from The Pennsylvania State University.

     James P. Spoto -- Senior Vice President, Platform Technologies. Mr. Spoto
served as Vice President, Platform Technologies of Rockwell Semiconductor
Systems from October 1997 to December 1998; Vice President, Business Development
of Cadence Design Systems, Inc. (software) from March 1996 to July 1997; and
Vice President, Engineering and Mixed-Signal and Physical Design of Cadence
Design Systems, Inc. prior thereto. Mr. Spoto received an M.S. and a B.S. in
electrical engineering from the University of Florida.

     Thomas A. Stites -- Senior Vice President, Communications. Mr. Stites
served as Vice President, Communications of Advanced Micro Devices
(semiconductors) from 1992 to December 1998. Mr. Stites received a B.A. in
journalism from the University of Colorado.

     Kevin V. Strong -- Senior Vice President and General Manager, Personal
Imaging. Mr. Strong served as Vice President and General Manager, Personal
Imaging Division of Rockwell Semiconductor Systems from September 1998 to
December 1998; Division Director, Digital Communications Products, Personal
Computing Division of Rockwell Semiconductor Systems from June 1998 to September
1998; Division Director, Technology Planning, Personal Computing Division of
Rockwell Semiconductor Systems from June 1997 to June 1998; Business Director,
Personal Computing Products, Multimedia Communications Division of Rockwell
Semiconductor Systems from August 1996 to June 1997; Director Technology
Planning of Media Processing, Multimedia Communications Division of Rockwell
Semiconductor Systems from January 1996 to August 1996; Manager of Business
Development, Multimedia Communications Division of Rockwell Semiconductor
Systems prior thereto. Mr. Strong received a B.S. in electronic engineering from
Southampton University.

     Steven M. Thomson -- Vice President and Controller. Mr. Thomson served as
Vice President and Controller of Rockwell Semiconductor Systems from October
1998 to December 1998; Director of Financial Planning and Control of Rockwell
Semiconductor Systems from October 1995 to October 1998; Director, Financial
Planning and Control of Rockwell's Telecommunications Division prior thereto.
Mr. Thomson received an M.S. in financial management from West Coast University
and a B.A. in accounting from California State University, Fullerton.

     Paul D. Walker -- Senior Vice President, Leadership and Team Development.
Mr. Walker served as Senior Vice President and Managing Principal of
Senn-Delaney Leadership Consulting Group (consulting) from October 1984 to May
1999. Mr. Walker received a B.A. from Northern Michigan University.

     Bradley W. Yates -- Senior Vice President, Human Resources. Mr. Yates
served as Vice President, Human Resources of Siebel Systems, Inc. (software)
from September 1999 to December 1999; Vice President, Human Resources of AT&T
Wireless Services' Los Angeles Cellular partnership with Bell South Corporation
from September 1996 to September 1999; and Vice President, Human Resources for
AT&T Global Information Solutions' Americas Region prior thereto. Mr. Yates
received an M.S. in strategic human

                                       25
<PAGE>   28

resource management from the University of Dayton and a B.S. in business
administration from San Diego State University.

ITEM 2. PROPERTIES

     At September 30, 2000, the Company operated three manufacturing facilities
in the United States and one facility in Mexico. It also had 28 design centers
and 33 sales offices. These facilities had an aggregate floor space of
approximately 2.5 million square feet, approximately 45% of which were owned and
approximately 55% of which were leased. In the opinion of management, the
Company's properties have been well maintained, are in sound operating condition
and contain all the equipment and facilities necessary to operate at present
levels. A summary of floor space of the Company's facilities at September 30,
2000 is as follows (in thousands of square feet):

<TABLE>
<CAPTION>
                                                             OWNED         LEASED
                    TYPE OF FACILITY                       FACILITIES    FACILITIES    TOTAL
                    ----------------                       ----------    ----------    -----
<S>                                                        <C>           <C>           <C>
Manufacturing............................................      634           444       1,078
General office space.....................................      475           925       1,400
                                                             -----         -----       -----
          Total..........................................    1,109         1,369       2,478
                                                             =====         =====       =====
</TABLE>

     The Company's headquarters and primary wafer fabrication facility are
located in Newport Beach, California, consisting of approximately 633,000 square
feet of owned and approximately 520,000 square feet of leased floor space. This
location includes an approximately 130,000 square foot wafer fabrication
facility. The Company manufactures GaAs products at its wafer fabrication
facility located in Newbury Park, California.

     Certain of the Company's facilities, including the California and Mexico
facilities are located near major earthquake fault lines. The Company maintains
only minimal earthquake insurance with respect to these facilities. A portion of
the Mexico facility is seismically isolated and the Company has substantially
completed a $36 million program to seismically isolate certain portions of its
California facilities. See Part I, Item 1, "Business -- Manufacturing".

ITEM 3. LEGAL PROCEEDINGS

     On October 14, 1997, Brent Townshend ("Townshend") filed suit against
Rockwell and Conexant in the Superior Court of California for San Mateo County
seeking an injunction to halt the sale of products containing Conexant's
K56Flex(TM) chipsets and requesting unspecified damages, claiming that Conexant
had engaged in unfair competition, misappropriation of trade secrets, breach of
contract and breach of confidence by using technical information allegedly
disclosed in confidence by Townshend to accelerate its development of 56 Kbps
modem technology. In January 1999, Townshend dismissed his State Court action
and re-filed the same claims and three new claims for patent infringement in the
U.S. District Court for the Northern District of California. In the Federal
action, Townshend alleged that each of his patents (the "Townshend Patents")
covers certain aspects of the V.90 standard that are infringed by Conexant's 56
Kbps products. In October 2000, Townshend and Conexant entered into a written
understanding as to settlement of all outstanding litigation. Under the
settlement, Conexant will pay cash, and in certain circumstances non-cash,
consideration, all outstanding litigation will be dismissed with prejudice, and
Townshend will grant to Conexant and certain future spin-off entities of
Conexant a non-exclusive license to the Townshend Patents and other defined
voiceband modem technology. The settlement calls for certain contingent cash
obligations of Conexant, all of which have been accrued as of September 30,
2000.

     On July 29, 1991, Shumpei Yamazaki filed suit against a Japanese subsidiary
of Rockwell in the Tokyo District Court, Twenty-ninth Civil Division for patent
infringement relating to Conexant's facsimile modem chipsets seeking 685 million
yen (approximately $6.2 million based on the exchange rate on November 30, 2000)
and court costs. In October 1998, the District Court rendered its decision
dismissing the suit against Conexant, from which decision Mr. Yamazaki appealed.
On April 12, 1999, Mr. Yamazaki presented his position, as well as additional
causes of action at the first portion of the appellate hearing. The Tokyo High
Court rejected Mr. Yamazaki's additional claims and set the calendar for
appellate hearings, the last of which

                                       26
<PAGE>   29

is scheduled for December 19, 2000, with final disposition expected in the first
calendar quarter of 2001. Conexant believes it has meritorious defenses to these
claims and is vigorously defending this action.

     On May 30, 1997, Klaus Holtz filed suit against Rockwell in the U.S.
District Court for the Northern District of California for patent infringement
relating to Conexant's modem products utilizing the V.42bis standard for data
compression. On September 30, 1998, the Court barred any alleged damages arising
before May 30, 1997. On December 17, 1998, the Court issued an order construing
the claims of the patent. Conexant filed a motion for Summary Judgment of
Non-Infringement on February 22, 1999. A hearing was held thereon on June 14,
1999. On October 25, 1999, the Court found in favor of Conexant and the case was
dismissed. On July 10, 2000 the District Court granted Conexant's motion to
declare the case an exceptional case under 35 U.S.C. 285, and awarded Conexant
$250,000. Holtz filed a notice of appeal to the court of appeals for the Federal
Circuit, challenging the District Court's findings on claim construction,
non-infringement and laches. Conexant began collection efforts on the
approximately $275,000 owed to Conexant by Holtz as a result of the litigation
so far. On August 22, 2000, Holtz filed for bankruptcy protection under Chapter
7 of the bankruptcy laws in the State of California. The Federal Circuit appeals
were placed under the control of the trustee in bankruptcy, and were stayed
pending resolution of the bankruptcy. Conexant was able to reach agreement with
the bankruptcy trustee, wherein Holtz' appeals against Conexant will be
dismissed and Conexant will receive a license under Holtz' patents. This
agreement is subject to approval of the Bankruptcy Court.

     Various other lawsuits, claims and proceedings have been or may be
instituted or asserted against Rockwell or Conexant or their respective
subsidiaries, including those pertaining to product liability, intellectual
property, environmental, safety and health, and employment matters. In
connection with the Distribution, Conexant 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 the Company.
Many intellectual property disputes have a risk of injunctive relief and there
can be no assurance that a license will be granted. Injunctive relief could have
a material adverse effect on the financial condition or results of operations of
the Company. Based on its evaluation of matters which are pending or asserted
and taking into account the Company's reserves for such matters, management
believes the disposition of such matters will not have a material adverse effect
on the Company's financial condition or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of the Company's shareholders during
the quarter ended September 30, 2000.

                                       27
<PAGE>   30

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Conexant Systems, Inc. common stock began trading on the NASDAQ National
Market under the symbol "CNXT" on January 4, 1999. The following table lists the
high and low per share sale prices for the Company's common stock as reported by
the NASDAQ National Market for the periods indicated. These per share sales
prices reflect the 2-for-1 stock split effected in the form of a stock dividend
on October 29, 1999.

<TABLE>
<CAPTION>
                                                              HIGH      LOW
                                                              ----      ---
<S>                                                           <C>       <C>
FISCAL YEAR ENDED SEPTEMBER 30, 1999:
  Second quarter............................................  $ 13 27/32 $ 6 27/32
  Third quarter.............................................    31 15/16  13 3/16
  Fourth quarter............................................    41 17/32  27 5/8

FISCAL YEAR ENDED SEPTEMBER 30, 2000:
  First quarter.............................................  $ 76 3/16 $30 7/8
  Second quarter............................................   132 1/2   53
  Third quarter.............................................    79       31 1/4
  Fourth quarter............................................    57 1/16  26 1/2
</TABLE>

     At November 30, 2000, there were 49,963 holders of record of the Company's
common stock.

     The Company has never paid cash dividends on its capital stock. The Company
currently intends to retain any earnings for use in its business, and does not
anticipate paying cash dividends in the foreseeable future.

                                       28
<PAGE>   31

ITEM 6. SELECTED FINANCIAL DATA

     The following selected financial data was derived from the consolidated
financial statements of Conexant and subsidiaries and its predecessor Rockwell
Semiconductor Systems, Inc., representing the semiconductor systems business of
Rockwell International Corporation and subsidiaries. The financial data as of
and for the years ended September 30, 2000 and 1999 are derived from the audited
consolidated financial statements of Conexant. The financial data as of and for
the years ended September 30, 1998, 1997 and 1996 have been derived from the
audited financial statements of Semiconductor Systems as part of Rockwell. The
fiscal 1999 selected financial data includes the operating results of Conexant
while it was part of Rockwell prior to January 1, 1999. The selected financial
data for periods 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 the those periods. 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 Annual Report
on Form 10-K.

<TABLE>
<CAPTION>
                                                AS OF AND FOR THE YEARS ENDED SEPTEMBER 30,
                                       --------------------------------------------------------------
                                        2000(1)        1999         1998       1997(1)      1996(1)
                                       ----------   ----------   ----------   ----------   ----------
                                                  (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                    <C>          <C>          <C>          <C>          <C>
STATEMENT OF OPERATIONS DATA
Net revenues.........................  $2,103,599   $1,444,114   $1,200,231   $1,412,325   $1,470,455
Cost of goods sold...................   1,133,647      863,252      844,851      733,848      848,994
                                       ----------   ----------   ----------   ----------   ----------
Gross margin.........................     969,952      580,862      355,380      678,477      621,461
Operating Expenses:
  Research and development...........     414,471      310,042      342,349      279,752      155,414
  Selling, general and
     administrative..................     289,411      227,729      251,863      190,858      150,458
  Amortization of intangible
     assets..........................     160,154        8,364       11,020        9,178          488
  Purchased in-process research and
     development.....................     215,710           --           --       29,900      121,000
  Special charges(2).................          --       37,906      147,306           --           --
                                       ----------   ----------   ----------   ----------   ----------
          Total operating expenses...   1,079,746      584,041      752,538      509,688      427,360
                                       ----------   ----------   ----------   ----------   ----------
Operating income (loss)..............    (109,794)      (3,179)    (397,158)     168,789      194,101
Special charges -- litigation........     (35,000)          --      (43,000)          --           --
Other income, net....................       6,471        5,935        9,830       10,973        3,060
                                       ----------   ----------   ----------   ----------   ----------
Income (loss) before provision
  (benefit) for income taxes.........    (138,323)       2,756     (430,328)     179,762      197,161
Provision (benefit) for income
  taxes..............................      52,604      (10,173)    (168,112)      53,938      113,633
                                       ----------   ----------   ----------   ----------   ----------
Net income (loss)....................  $ (190,927)  $   12,929   $ (262,216)  $  125,824   $   83,528
                                       ==========   ==========   ==========   ==========   ==========
Net income (loss) per share(3):
  Basic..............................  $    (0.90)  $     0.07   $    (1.32)  $     0.59   $     0.38
  Diluted............................       (0.90)        0.06        (1.32)        0.59         0.38
BALANCE SHEET DATA
Working capital......................  $1,319,134   $  604,453   $  256,689   $  221,747   $  230,071
Total assets.........................   4,416,197    1,841,950    1,418,530    1,485,759    1,383,055
Long-term obligations................     999,997      350,000           --           --           --
Shareholders' equity.................   2,906,759    1,035,153    1,009,375    1,106,558      899,216
OTHER FINANCIAL DATA(4)
Adjusted operating income (loss).....  $  272,829   $   43,091   $ (238,832)  $  207,867   $  315,589
Adjusted net income (loss)...........     195,517       41,414     (138,159)     149,896      204,827
Adjusted net income (loss) per share:
  Basic..............................  $     0.92   $     0.22   $    (0.70)  $     0.70   $     0.94
  Diluted............................        0.84         0.20        (0.70)        0.69         0.93
</TABLE>

                                       29
<PAGE>   32

---------------
(1) In September 1996, Conexant acquired Brooktree Corporation and in fiscal
    1997 Conexant acquired the Hi-Media broadband communication chipset business
    of ComStream Corporation. In fiscal 2000, Conexant completed the following
    acquisitions: Microcosm Communications Limited and the wireless broadband
    business unit of Oak Technology, Inc. in January, Maker Communications, Inc.
    in March, Applied Telecom, Inc. in April, Philsar Semiconductor Inc. in May,
    HotRail, Inc. in June, and Novanet Semiconductor Ltd. and NetPlane Systems,
    Inc. in September. As a result of these acquisitions, during fiscal 2000 the
    Company recorded $160.2 million in amortization of goodwill and other
    acquisition-related intangible assets and in fiscal 2000, 1997 and 1996 the
    Company recorded charges of $215.7 million, $29.9 million, and $121.0
    million, respectively, related to purchased in-process research and
    development.

(2) In fiscal 1998, the Company recorded special charges of approximately $147.3
    million related to its decision to close and dispose of the wafer
    fabrication facilities in Colorado Springs, Colorado, a worldwide workforce
    reduction and certain other actions. In fiscal 1999, the Company recorded
    additional special charges of approximately $37.9 million related to the
    restructuring actions initiated in fiscal 1998.

(3) Net income (loss) per share for all periods reflects the Company's October
    1999 2-for-1 stock split. Because Conexant was not an independent company
    during all of fiscal years 1996-1999, net income (loss) per share for those
    years is calculated as if the spin-off of Conexant from Rockwell had
    occurred on October 1, 1995.

(4) Adjusted operating income (loss), adjusted net income (loss) and adjusted
    net income (loss) per share exclude the amortization of intangible assets,
    purchased in-process research and development, special charges and, in
    fiscal 2000, a $6.8 million charge for the value of compensatory stock
    options granted to employees. Adjusted net income (loss) also excludes the
    income tax effect of the above items, using the Company's marginal tax rate
    for the periods presented. These measures of earnings are not in accordance
    with, or an alternative for, generally accepted accounting principles and
    may not be consistent with measures used by other companies. However, the
    Company believes these measures of earnings provide its investors additional
    insight on its underlying operating results and the Company uses these
    measures internally to evaluate its operating performance. See "Management's
    Discussion and Analysis of Financial Condition and Results of
    Operations -- Results of Operations -- Adjusted Earnings".

                                       30
<PAGE>   33

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

     Conexant is the world's largest independent company focused exclusively on
providing semiconductor products and system solutions for a wide variety of
communications electronics. The Company's products facilitate communications
worldwide through wireline voice and data communications networks, cordless and
cellular wireless telephony systems, personal imaging devices and equipment, and
emerging cable and wireless broadband communications networks. The Company
operates in two business segments: the Personal Networking business and the
Internet Infrastructure business.

     The Personal Networking business designs, develops and sells semiconductor
products and system solutions in four general personal communications
applications markets -- Personal Computing, Personal Imaging, Digital
Infotainment and Wireless Communications. Personal Computing products include
telephony-based communications solutions for personal computing terminals and
other communication devices such as gaming consoles, web browsers and handheld
devices. Personal Imaging products consist of semiconductor and software
products that enable image capture, processing and output for fax machines,
printers and digital still and video cameras. Digital Infotainment products
include semiconductor solutions that perform communication and media processing
functions within a variety of information and entertainment platforms. Wireless
Communications products are comprised of components, subsystems and system-
level semiconductor solutions for wireless voice and data communication
applications, including digital cellular handsets and base stations, cordless
telephones and GPS receivers.

     The Internet Infrastructure business designs, develops and sells
semiconductor products and system solutions for some of the highest-growth areas
in the broadband communications markets including broadband access,
multi-service access and WAN transport. The Company's broad product portfolio
allows it to provide network infrastructure OEM's with system level
semiconductor solutions including multi-service access and high-speed DSL
products used in a variety of network access platforms such as remote access
concentrators, voice gateways, digital loop carriers, DSL access multiplexers
and integrated access devices. The Company also provides network infrastructure
OEM's with an extensive family of communication solutions that support the
aggregation, transmission and switching of data, video and voice from the edge
of the network to the optical backbone, including T/E carrier, ATM and SONET/SDH
products and network processors. These products are used in a variety of network
equipment including high-speed routers, ATM switches, optical switches, add-drop
multiplexers and digital cross-connect systems.

     The Company markets and sells its semiconductor products and system
solutions directly to leading OEMs of communication electronics products and
third-party electronic manufacturing service providers, and indirectly through
electronic components distributors. Sales to distributors accounted for
approximately 19% of fiscal 2000 net revenues. No one customer accounted for
more than 10% of net revenues in fiscal 2000. The Company's top 20 customers
accounted for approximately 50% of fiscal 2000 net revenues. Revenues derived
from customers located in the Americas, Europe, Japan, and the Asia-Pacific
region were 32%, 11%, 10% and 47%, respectively, of the Company's net revenues
in fiscal 2000.

     The semiconductor industry is highly cyclical and is characterized by
constant and rapid technological change, rapid product obsolescence and price
erosion, evolving standards, short product life cycles and wide fluctuations in
product supply and demand. In addition, the Company's operating results may be
negatively affected by substantial quarterly and annual fluctuations and market
downturns due to a number of factors, such as changes in demand for end-user
equipment, the timing of the receipt, reduction or cancellation of significant
customer orders, the gain or loss of significant customers, market acceptance of
the Company's products and its customer's products, the Company's ability to
develop, introduce and market new products and technologies on a timely basis,
availability and cost of products from the Company's suppliers, new product and
technology introductions by competitors, changes in the mix of products produced
and sold, intellectual property disputes, the timing and extent of product
development costs and general economic conditions. In the past, average selling
prices of established products have generally declined over time and the Company
expects this trend to continue in the future.

                                       31
<PAGE>   34

     The Company believes strategic acquisitions are an important element in
maintaining its competitive and technological position as a leading provider of
semiconductor products and system solutions to communications OEMs. During
fiscal 2000, the Company completed ten acquisitions, with an aggregate value of
$1.8 billion, to accelerate development efforts and fill technology gaps in its
product portfolio. In January 2000, the Company acquired Microcosm, a technology
leader in the field of fiber optic communications and Oak Technology's wireless
broadband unit, a supplier of demodulator/decoder solutions, primarily for
digital TV applications. In March 2000, the Company acquired Maker, a company
that develops and markets programmable network processors, software solutions
and development tools. In May 2000, the Company completed the acquisition of
Philsar, a leading developer of RF semiconductor solutions for personal wireless
connectivity applications including Bluetooth(TM) and third generation digital
cellular handsets. In June 2000, the Company acquired HotRail, a developer of
high-speed switching, interconnect and scalable processing solutions for
networking systems and Sierra, a pioneer in the development of "back-end"
digital image processor solutions for the digital still camera market. Fiscal
2000 acquisitions also included Applied Telecom and NetPlane, each engaged in
the development of communications software. Finally, the Company acquired
Novanet, focused on optical networking product development, and Istari Design,
Inc., a provider of contract engineering services for communications system
design and implementation. Each of these acquisitions was treated as a purchase
for financial accounting purposes and the Company's results of operations
reflect the operations of these businesses after the dates of acquisition. The
Company evaluates opportunities for other strategic acquisitions from time to
time, and may make additional acquisitions in the future.

     On September 13, 2000, the Company announced a plan to spin off its
Internet Infrastructure business through a two-step process. The first step will
consist of an initial public offering of common stock of Spinco targeted for
January 2001. After completion of the initial public offering, Conexant will
continue to own a majority of Spinco's outstanding common stock and a majority
of the voting power of Spinco's outstanding common stock. In the second step,
Conexant intends, within several months after Spinco's initial public offering,
subject to the satisfaction of certain conditions, to distribute to its
shareholders all of the shares of Spinco's common stock that Conexant owns.
However, there can be no assurance that the initial public offering or the
spin-off will be successfully completed.

RESULTS OF OPERATIONS

NET REVENUES

     The Company generally recognizes revenues from product sales directly to
its customers and to certain distributors upon shipment and transfer of title.
The Company provides for warranty costs, sales returns, rebates and other
pricing adjustments at the time of shipment based on prior experience. Some
products are sold to electronic component distributors under agreements allowing
for price protection and/or a right of return on unsold products. Recognition of
revenue is deferred on sales to these distributors until the products are sold
by the distributors.

     The following table summarizes the Company's net revenues by business
segment:

<TABLE>
<CAPTION>
                                                         YEARS ENDED SEPTEMBER 30,
                                            ----------------------------------------------------
                                              2000      CHANGE      1999      CHANGE      1998
                                            --------    ------    --------    ------    --------
                                                               (IN MILLIONS)
<S>                                         <C>         <C>       <C>         <C>       <C>
NET REVENUES:
Personal Networking.......................  $1,524.4      31%     $1,166.5      10%     $1,056.9
Internet Infrastructure...................     579.2     109%        277.6      94%        143.3
                                            --------              --------              --------
                                            $2,103.6      46%     $1,444.1      20%     $1,200.2
                                            ========              ========              ========
AS A PERCENTAGE OF CONEXANT'S TOTAL NET
  REVENUES:
Personal Networking.......................        72%                   81%                   88%
Internet Infrastructure...................        28%                   19%                   12%
                                            --------              --------              --------
                                                 100%                  100%                  100%
                                            ========              ========              ========
</TABLE>

                                       32
<PAGE>   35

     Net revenues for fiscal 2000 include an aggregate of approximately $31.7
million generated by the ten businesses acquired during the year.

  Personal Networking

     The following table summarizes the net revenues of the Personal Networking
segment by product:

<TABLE>
<CAPTION>
                                                         YEARS ENDED SEPTEMBER 30,
                                            ----------------------------------------------------
                                              2000      CHANGE      1999      CHANGE      1998
                                            --------    ------    --------    ------    --------
                                                               (IN MILLIONS)
<S>                                         <C>         <C>       <C>         <C>       <C>
NET REVENUES:
Personal Computing........................  $  722.9      15%     $  626.5      (2)%    $  639.9
Personal Imaging..........................     119.8      33%         89.9     (12)%       102.0
Digital Infotainment......................     290.8      58%        183.5      27%        144.6
Wireless Communications...................     390.9      47%        266.6      56%        170.4
                                            --------              --------              --------
                                            $1,524.4      31%     $1,166.5      10%     $1,056.9
                                            ========              ========              ========
AS A PERCENTAGE OF CONEXANT'S TOTAL NET
  REVENUES:
Personal Computing........................        34%                   43%                   53%
Personal Imaging..........................         5%                    6%                    9%
Digital Infotainment......................        14%                   13%                   12%
Wireless Communications...................        19%                   19%                   14%
                                            --------              --------              --------
                                                  72%                   81%                   88%
                                            ========              ========              ========
</TABLE>

     Personal Computing product revenues for fiscal 2000 grew 15% year-over-year
reflecting continued solid demand for V.90 dial-up modem solutions for personal
computing applications. The business also achieved strong growth in sales of its
embedded modems, which enable communications in a variety of personal
communications devices such as gaming consoles, web browsers, and handheld
devices. Revenues in fiscal 2000 also included initial production shipments of
client ADSL chipset solutions supporting delivery of broadband communication
services for residential applications. The recent weakening worldwide demand for
consumer PCs is expected to negatively affect Personal Computing product
revenues in the near term. Net revenues for Personal Computing products
decreased 2% during fiscal 1999 as compared to fiscal 1998 primarily due to the
shift toward lower-priced modem products.

     Revenues from Personal Imaging products for fiscal 2000 increased 33%
compared to fiscal 1999, driven by strong demand for fax modems and increased
penetration of the expanding multifunction peripheral market. Fiscal 2000
revenues also reflect increased shipments of CMOS imagers and system solutions
for emerging PC camera and digital still camera applications. Net revenues for
Personal Imaging products decreased 12% during fiscal 1999 as compared to fiscal
1998 as a result of the lingering effects of the Asia-Pacific economic recession
that impacted performance during the latter part of 1998.

     For Digital Infotainment products, the 58% increase in revenues for fiscal
2000, as compared to fiscal 1999, reflected the strong demand experienced
throughout the year for video processing solutions used in personal computing
applications as well as increased shipments of tuners, demodulators, encoders,
and back-channel telephony solutions, primarily for satellite set-top box
applications. Fiscal 2000 results also included initial volume shipments of
cable modem products for European digital video broadcast and North American
DOCSIS applications. Net revenues for Digital Infotainment products increased
27% during fiscal 1999 as compared to fiscal 1998 due to solid demand for tuners
and demodulators, video encoders and back channel telephony solutions.

     Wireless Communications product revenues for fiscal 2000 grew 47% over
fiscal 1999, driven by strong overall demand for digital cellular wireless
components, subsystems and system solutions. In particular, significant revenue
growth was derived from accelerating unit shipments of GSM power amplifiers,
radio frequency subsystems and full system solutions. However, revenues derived
from the CDMA product portfolio declined during the second half of the year as a
result of the Korean government's decision to impose a ban on

                                       33
<PAGE>   36

Korean service providers subsidizing new digital cellular handsets. The subsidy
ban curtailed domestic demand for CDMA digital cellular handset production and
attendant semiconductor component supply. The Korean government's action,
coupled with a recent deceleration in overall demand for digital cellular
handsets, is likely to continue to affect Wireless Communications product
revenues in the near term. Net revenues for Wireless Communications products
increased 56% during fiscal 1999 as compared to fiscal 1998 due to strong demand
for CDMA digital cellular handsets worldwide.

  Internet Infrastructure

     In fiscal 2000, Internet Infrastructure segment revenues increased 109%
from fiscal 1999 levels as demand for networking semiconductor products and
system solutions increased significantly due to the need for network
infrastructure OEMs to support the ongoing build-out and upgrade of both public
and private communications networks. Demand increased for optical networking,
ATM, network processor and T/E carrier products, used in network infrastructure
equipment for metropolitan and optical backbone networks. The Company also
experienced greater demand for high-speed DSL products, used by network
infrastructure OEMs in DSL access multiplexers, integrated access devices and
other products for the delivery of SDSL services, as well as increased demand
from network infrastructure OEMs for the AnyPort(TM) family of multi-service
access processors.

     Increased demand for the Company's AnyPort(TM) family of multi-service
access processors was a major contributor to revenue growth of 94% achieved in
fiscal 1999. Revenue growth in fiscal 1999 also resulted from higher demand from
OEMs for high-speed DSL products in response to the rapid expansion of SDSL
services provided by competitive and incumbent local exchange carriers. Revenue
growth during fiscal 1999 also reflected the continued expansion of high-speed
optical networking, with the transition from lower speed OC3/12 to higher speed
OC48/192, which created greater demand for the Company's semiconductor system
solutions used in optical networking equipment.

GROSS MARGIN

<TABLE>
<CAPTION>
                                                           YEARS ENDED SEPTEMBER 30,
                                                 ----------------------------------------------
                                                  2000     CHANGE     1999     CHANGE     1998
                                                 ------    ------    ------    ------    ------
                                                                 (IN MILLIONS)
<S>                                              <C>       <C>       <C>       <C>       <C>
Gross margin...................................  $970.0      67%     $580.9      63%     $355.4
Percent of net revenues........................      46%                 40%                 30%
</TABLE>

     Cost of goods sold consists predominantly of purchased materials, labor and
overhead (including depreciation) associated with product manufacturing, royalty
and other intellectual property costs, warranties and sustaining engineering
expenses pertaining to products sold. The gross margin improvement in fiscal
2000 principally reflects the continued shift in the Company's product mix
toward higher margin products. The gross margin improvement also reflects higher
factory utilization at the Company's wafer fabrication facilities that resulted
from increased unit sales volume. Gross margin for fiscal 1999 was adversely
affected by unusually high inventory costs which resulted from low manufacturing
capacity utilization during the last four months of fiscal 1998.

     The improvement in gross margin as a percentage of net revenues during
fiscal 1999 was mainly due to increased unit sales volume, which allowed for
fixed costs to be allocated over a higher number of semiconductor products
produced. Gross margin improvement also resulted from a continued transition to
a higher-margin product mix, the favorable market environment for purchasing
processed wafers, and the successful implementation of cost reduction
initiatives in the fourth quarter of fiscal 1998, including headcount
reductions. Gross margin in fiscal 1998 was adversely impacted by a $66 million
inventory write-off and $19 million of expenses related to the underutilization
of manufacturing capacity.

                                       34
<PAGE>   37

RESEARCH AND DEVELOPMENT

<TABLE>
<CAPTION>
                                                           YEARS ENDED SEPTEMBER 30,
                                                 ----------------------------------------------
                                                  2000     CHANGE     1999     CHANGE     1998
                                                 ------    ------    ------    ------    ------
                                                                 (IN MILLIONS)
<S>                                              <C>       <C>       <C>       <C>       <C>
Research and development.......................  $414.5      34%     $310.0      (9)%    $342.3
Percent of net revenues........................      20%                 21%                 29%
</TABLE>

     The Company's research and development ("R&D") expenses consist principally
of direct personnel costs, costs for pre-production evaluation and testing of
new devices and design and test tool costs. R&D expenses also include the costs
for advanced semiconductor process development, design automation and advanced
package development for the benefit of each of the Company's businesses.

     The increase in R&D expenses for fiscal 2000 compared to fiscal 1999
primarily reflects higher headcount and personnel-related costs as the Company
expanded its R&D efforts in the areas of the Internet infrastructure, wireless
communications and broadband access. Subsequent to September 1999, the Company's
recruiting programs have increased its engineering team by over 450 engineers,
including approximately 350 engineers joining the Company through the
acquisition of ten businesses. Key product development efforts were targeted at
client and multiport ADSL and G.shdsl products, home networking solutions, cable
modems, CMOS imager solutions, GSM RF subsystems and system solutions, and
broadband optical networking products. The Company expects fiscal 2001 R&D
expenses to increase from fiscal 2000 amounts as it continues to invest in
semiconductor system solutions and products for key high-growth market
opportunities.

     The decrease in R&D expenses during fiscal 1999 compared to fiscal 1998 was
mainly due to cost reduction actions initiated in the fourth quarter of fiscal
1998 to reduce the Company's overall cost structure. These actions included
headcount reductions, design center closures, and project cancellations.

SELLING, GENERAL AND ADMINISTRATIVE

<TABLE>
<CAPTION>
                                                           YEARS ENDED SEPTEMBER 30,
                                                 ----------------------------------------------
                                                  2000     CHANGE     1999     CHANGE     1998
                                                 ------    ------    ------    ------    ------
                                                                 (IN MILLIONS)
<S>                                              <C>       <C>       <C>       <C>       <C>
Selling, general and administrative............  $289.4      27%     $227.7     (10)%    $251.9
Percent of net revenues........................      14%                 16%                 21%
</TABLE>

     The Company's selling, general and administrative ("SG&A") expenses include
personnel costs, sales representative commissions, advertising and other
marketing costs. The 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 increase in SG&A expenses for fiscal 2000 as compared to fiscal 1999
resulted from the Company's continued development of its sales, marketing and
business support functions since the spin-off from Rockwell at the end of the
fiscal 1999 first quarter. In particular, the Company invested in the expansion
of its sales and marketing organizations, increasing its worldwide sales
organization to over 300 personnel to support recent and anticipated sales
growth. The increase also reflected higher sales representative commissions
driven by the Company's revenue growth and the addition of the selling,
marketing and administrative teams of the businesses acquired in fiscal 2000.
The higher SG&A costs also reflected the continued development of corporate
infrastructure, including the Company's information systems, human resources,
and finance teams. These factors were partially offset by lower spending in
fiscal 2000 for co-op advertising programs. The Company expects fiscal 2001 SG&A
expenses to increase from the fiscal 2000 amounts as it continues to invest in
marketing and sales functions in support of anticipated revenue growth.

     The decrease in SG&A expenses in fiscal 1999 compared to fiscal 1998 was
mainly due to reductions in headcount as a result of the Company's efforts to
restructure its business during the fourth quarter of fiscal 1998 in response to
general market conditions, as well as lower advertising and consulting expenses.

                                       35
<PAGE>   38

AMORTIZATION OF INTANGIBLE ASSETS

<TABLE>
<CAPTION>
                                                             YEARS ENDED SEPTEMBER 30,
                                                    -------------------------------------------
                                                     2000     CHANGE    1999    CHANGE    1998
                                                    ------    ------    ----    ------    -----
                                                                   (IN MILLIONS)
<S>                                                 <C>       <C>       <C>     <C>       <C>
Amortization of intangible assets.................  $160.2      nm      $8.4     (24)%    $11.0
</TABLE>

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

     The higher amortization expense in fiscal 2000 resulted from the ten
business acquisitions completed during the year. In connection with these
acquisitions, the Company recorded an aggregate of $1.6 billion of identified
intangible assets and goodwill. These assets are being amortized over their
estimated lives (principally five years), increasing amortization expense by
approximately $151.8 million in fiscal 2000. Consequently, the Company expects
to record amortization expense related to goodwill and intangible assets in
excess of $320 million annually for five years. The Company may make other
business acquisitions in the future, and the completion of any such business
acquisitions may result in further increases in the level of amortization
expense. In addition, the terms of the acquisition agreements relating to the
Company's fiscal 2000 acquisitions provide for additional consideration payable
under earn-outs and under indemnity, escrow or holdback provisions. When issued,
the additional consideration will result in additional goodwill, further
increasing amortization expense. The aggregate amount of such consideration is
approximately $148 million (based on the closing price of the Company's common
stock on November 30, 2000), but is subject to further increases based upon
changes in the market price of the Company's common stock.

     Amortization expense for fiscal 1999 and 1998 principally represents
amortization of developed technology and other intangible assets related to
acquisitions completed in fiscal 1996 and 1997.

PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT

     In connection with its fiscal 2000 business acquisitions, the Company
recorded charges totaling $215.7 million for the fair value of purchased
in-process research and development ("IPRD"). The fair value of the IPRD for
each of the acquisitions was determined using the income approach. Under the
income approach, expected future after-tax cash flows from each of the projects
or product families ("projects") under development are estimated and discounted
to their net present value at an appropriate risk-adjusted rate of return. Each
project was analyzed to determine the technological innovations included in the
project; the existence and utilization of core technology; the complexity, cost
and time to complete the remaining development efforts; the existence of any
alternative future use or current technological feasibility; and the stage of
completion in development. Future cash flows for each project were estimated
based on forecasted revenues and costs, taking into account the expected life
cycles of the products and the underlying technology, relevant market sizes and
industry trends.

     The projects were then classified as developed technology, IPRD or future
development. The estimated future cash flows for each project were discounted to
approximate fair value. Discount rates were derived from a weighted average cost
of capital analysis, adjusted upward to reflect additional risks inherent in the
development process, including the probability of achieving technological
success and market acceptance. The fair value assigned to developed technology
is included in identifiable intangible assets. The IPRD charge includes the fair
value of the portion of IPRD completed as of the date of acquisition. The fair
values assigned to the portion of IPRD to-be-completed and to future development
are included in goodwill. The Company believes the amounts determined for IPRD,
as well as developed technology, are representative of fair values and do not
exceed the amounts an independent party would pay for these projects. Failure to
deliver new projects to the market on a timely basis, or to achieve expected
market acceptance or revenue and expense forecasts, could have a significant
impact on the financial results and operations of the acquired businesses.

     The total charge for IPRD for the acquisition of Maker (which the Company
agreed to acquire in December 1999) was $118.5 million. IPRD projects relating
to seven product families, directed toward the development of high-performance
programmable communications processors and applications software, were
identified and valued. Maker's IPRD projects ranged from 55% to 92% complete and
averaged approximately

                                       36
<PAGE>   39

75% complete, with aggregate estimated costs to complete all of the projects of
$5.7 million. The IPRD projects principally are expected to be completed within
one year of the acquisition date. The average discount rates used were 30% for
IPRD projects and 20% for developed technology, which reflect the specific risks
associated with each of the intangible assets. The weighted average cost of
capital was estimated at 18%.

     The total charge for IPRD for the acquisition of Microcosm (completed in
January 2000) was $27.4 million. IPRD projects relating to four product
families, directed toward the development of high-performance programmable
communications processors, were identified and valued. Microcosm's IPRD projects
ranged from 77% to 90% complete and averaged approximately 84% complete, with
total estimated costs to complete all of the projects of $0.8 million. The IPRD
projects are principally expected to be completed within one year of the
acquisition date. The average discount rates used were 35% for IPRD projects and
25% for developed technology, which reflect the specific risks associated with
each of the intangible assets. The weighted average cost of capital was
estimated at 20%.

     The total charge for IPRD for the Philsar acquisition (completed in May
2000) was $24.4 million. IPRD projects relating to five product families,
directed toward the development of Bluetooth(TM) products including RF
transceivers, a baseband controller, and an integrated single-chip Bluetooth(TM)
solution, were identified and valued. Philsar's IPRD projects ranged from 41% to
78% complete and averaged approximately 60% complete, with total estimated costs
to complete all of the projects of $5.4 million. The IPRD projects are
principally expected to be completed within one year of the acquisition date.
The average discount rates used were 30% for IPRD projects and 25% for developed
technology, which reflect the specific risks associated with each of the
intangible assets. The weighted average cost of capital was estimated at 20%.

     The total charge for IPRD for the HotRail acquisition (completed in June
2000) was $26.1 million. IPRD projects relating to two product families,
directed toward the development of scalable, high-speed switch fabric systems
and the HotRail Channel parallel CMOS transceiver, were identified and valued.
HotRail's IPRD projects ranged from 34% to 95% complete and averaged
approximately 74% complete, with total estimated costs to complete all of the
projects of $11.7 million. The IPRD projects are principally expected to be
completed within one year of the acquisition date. The average discount rates
used were 34% for IPRD projects and 24% for developed technology, which reflect
the specific risks associated with each of the intangible assets. The weighted
average cost of capital was estimated at 24%.

     The total charge for IPRD for the Novanet acquisition (completed in
September 2000) was $17.3 million. Three IPRD projects, directed toward the
development of high-speed semiconductor solutions for asynchronous transfer mode
and packet-over-SONET applications, were identified and valued. Novanet's IPRD
projects ranged from 45% to 90% complete and averaged approximately 70%
complete, with total estimated costs to complete all of the projects of $10.8
million. The IPRD projects are principally expected to be completed within one
year of the acquisition date. The average discount rates used were 22% to 27%
for IPRD projects and 28% for developed technology, which reflect the specific
risks associated with each of the intangible assets. The weighted average cost
of capital was estimated at 20%.

     The total charge for IPRD for the NetPlane acquisition (completed in
September 2000) was $2.0 million. Four IPRD projects, directed toward the
development of network control software and subsystems, including advanced MPLS
for optical Internet backbone equipment and an IP routing protocol product
suite, were identified and valued. NetPlane's IPRD projects ranged from 5% to
60% complete and averaged approximately 30% complete, with total estimated costs
to complete all of the projects of $0.5 million. The IPRD projects are
principally expected to be completed within one year of the acquisition date.
The average discount rates used were 20% to 22% for IPRD projects and 17% for
developed technology, which reflect the specific risks associated with each of
the intangible assets. The weighted average cost of capital was estimated at
17%.

                                       37
<PAGE>   40

SPECIAL CHARGES

<TABLE>
<CAPTION>
                                                             YEARS ENDED SEPTEMBER 30,
                                                    -------------------------------------------
                                                    2000     CHANGE    1999     CHANGE    1998
                                                    -----    ------    -----    ------    -----
                                                                   (IN MILLIONS)
<S>                                                 <C>      <C>       <C>      <C>       <C>
Special charges -- Rockwell-retained assets.......  $  --      nm      $20.0      nm      $95.5
Special charges -- other..........................     --      nm       17.9      nm       51.8
Special charges -- litigation.....................   35.0      nm         --      nm       43.0
</TABLE>

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

     In fiscal 2000, the Company recorded a special charge of $35.0 million in
connection with the settlement of certain litigation.

     In fiscal 1998, the Company recorded special charges of $43.0 million
resulting from litigation, and charges of $147.3 million related to a
restructuring of its business. The special charges include an asset impairment
of approximately $103 million related to the closure and planned disposal of its
wafer fabrication facilities in Colorado Springs, Colorado, approximately $15
million for employee severance and Voluntary Early Retirement Program ("VERP")
costs associated with an approximate 10% worldwide workforce reduction,
approximately $11 million related to intangible asset write-offs and
approximately $18 million for other actions including lease termination costs,
contractual liabilities and other asset write-offs. In connection with the
restructuring, management decided to close and dispose of its wafer fabrication
facilities in Colorado Springs, Colorado. The $103 million charge represents the
excess of the carrying value of the long-lived assets of these facilities over
their estimated fair value as determined by independent appraisal. These
facilities were distributed to Rockwell prior to the Distribution.

     In the first fiscal quarter of 1999, the Company recorded special charges
of $37.9 million. The additional charges include $20.0 million related to the
further write down of the Company's wafer fabrication facilities in Colorado
Springs, Colorado, $17.0 million relating to the VERP, and $0.9 million to
decommission equipment, activities at foreign subsidiaries and contract
cancellations at the Colorado Springs wafer fabrication facilities.

     As of September 30, 2000, the restructuring actions were substantially
complete. The following table summarizes the Company's restructuring activity
for the year ended September 30, 2000 (in thousands):

<TABLE>
<CAPTION>
                                                      FACILITIES    SEVERANCE
                                                         AND           AND        OTHER
                                                      EQUIPMENT     BENEFITS     EXPENSES     TOTAL
                                                      ----------    ---------    --------    -------
<S>                                                   <C>           <C>          <C>         <C>
Restructuring balances at September 30, 1999........   $ 2,002        $ 278      $ 4,976     $ 7,256
Non-cash charges....................................    (1,326)          --       (1,575)     (2,901)
Cash charges........................................      (423)         (22)      (1,114)     (1,559)
Additional charge and change in reserve estimate....      (253)        (256)      (2,287)     (2,796)
                                                       -------        -----      -------     -------
Restructuring balances at September 30, 2000........   $    --        $  --      $    --     $    --
                                                       =======        =====      =======     =======
</TABLE>

OTHER INCOME, NET

<TABLE>
<CAPTION>
                                                              YEARS ENDED SEPTEMBER 30,
                                                       ----------------------------------------
                                                       2000    CHANGE    1999    CHANGE    1998
                                                       ----    ------    ----    ------    ----
                                                                    (IN MILLIONS)
<S>                                                    <C>     <C>       <C>     <C>       <C>
Other income, net....................................  $6.5      9%      $5.9     (40)%    $9.8
</TABLE>

     Other income, net principally consists of interest income on invested cash
balances, offset by interest expense on the Company's $1 billion principal
amount of convertible subordinated notes. In the fiscal 2000 period, other
income, net principally reflects net interest income resulting from both higher
interest rates and larger invested cash balances, including a portion of the
proceeds of the $650 million principal amount of 4% Convertible Subordinated
Notes due 2007 issued in February 2000. The fiscal 1999 period includes net

                                       38
<PAGE>   41

interest expense due to lower invested cash balances, which was more than offset
by gains on the sale of certain investments.

     The decrease in other income, net during fiscal 1999 compared with fiscal
1998 was mainly due to amortization of costs associated with the Company's
spin-off from Rockwell and issuance of the $350 million principal amount of
4 1/4% Convertible Subordinated Notes due 2006, higher interest expense related
to the 4 1/4% Convertible Subordinated Notes, costs associated with the
Company's credit facility, and receipt of a contract cancellation fee in fiscal
1998, partially offset by higher interest income and other non-operating income.

PROVISION FOR INCOME TAXES

     For fiscal 2000, the Company's provision for income taxes was $52.6
million. In fiscal 1999, the Company recorded an income tax benefit of $10.2
million due to a loss from operations. Exclusive of the non-deductible charges
for IPRD and amortization of intangible assets resulting from the Company's
recently-completed acquisitions, the effective tax rate for fiscal 2000 was
approximately 30% of pretax income. This rate reflects the positive impact of
state and federal research and experimentation tax credits available to the
Company. While the Company anticipates that its fiscal 2001 effective tax rate,
exclusive of the non-deductible charges for IPRD and amortization of intangible
assets, will be similar to its effective rate for fiscal 2000, the effective tax
rate may be affected by non-deductible charges related to the spin-off of the
Internet Infrastructure business or other items.

     The Company's effective tax rate in fiscal 1999 was a benefit of 369%
compared to a benefit of 39.1% in fiscal 1998. The 1999 tax rate benefit results
primarily from the significant research and development credits generated in
comparison to pre-tax net income. The Company's 1998 tax benefit also results
primarily from the statutory tax rates plus the benefit of research and
development credits. The change in the effective rate is due to the change in
pre-tax net income in comparison to the tax credits generated. The Company's
results of operations for the quarter ended December 31, 1998 and prior periods
are being included in the federal, state and local, and foreign income tax
returns of Rockwell. The effective tax rate for the period of fiscal 1999 in
which Conexant was an independent company was 30%, which is lower than the
federal statutory tax rate primarily due to the benefits of research and
development credits.

ADJUSTED EARNINGS

     Adjusted operating income (loss), adjusted net income (loss), and adjusted
net income (loss) per share exclude the amortization of intangible assets,
purchased in-process research and development, special charges and, in fiscal
2000, a $6.8 million charge for the value of compensatory stock options granted
to employees. Adjusted net income (loss) also excludes the income tax effect of
the above items, using the Company's marginal tax rate for the periods
presented. These measures of earnings are not in accordance with, or an
alternative for, generally accepted accounting principles and may not be
consistent with measures used by other companies. However, the Company believes
these measures of earnings provide its investors additional insight on its
underlying operating results and the Company uses these measures internally to
evaluate its

                                       39
<PAGE>   42

operating performance. Adjusted net income (loss) and adjusted net income (loss)
per share is calculated as follows (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                               YEARS ENDED SEPTEMBER 30,
                                                           ----------------------------------
                                                             2000         1999        1998
                                                           ---------    --------    ---------
<S>                                                        <C>          <C>         <C>
Net income (loss)........................................  $(190,927)   $ 12,929    $(262,216)
Amortization of intangible assets........................    160,154       8,364       11,020
Purchased in-process research and development............    215,710          --           --
Special charges -- litigation............................     35,000          --       43,000
Special charges -- Rockwell-retained assets..............         --      20,000       95,500
Special charges -- other.................................         --      17,906       51,806
Compensatory stock option grants.........................      6,759          --           --
Tax benefit..............................................    (31,179)    (17,785)     (77,269)
                                                           ---------    --------    ---------
Adjusted net income (loss)...............................  $ 195,517    $ 41,414    $(138,159)
                                                           =========    ========    =========

Adjusted net income (loss) per share:
  Basic..................................................  $    0.92    $   0.22    $   (0.70)
  Diluted................................................  $    0.84    $   0.20    $   (0.70)

Shares used per share computation:
  Basic..................................................    211,840     192,551      197,900
  Diluted................................................    244,970     203,484      197,900
</TABLE>

                                       40
<PAGE>   43

QUARTERLY RESULTS OF OPERATIONS

     The following table presents the Company's operating results for each of
the eight fiscal quarters in the period ended September 30, 2000. The
information for each of these quarters is unaudited and has been prepared on the
same basis as the audited consolidated financial statements included in this
Annual Report on Form 10-K. In the opinion of management, all necessary
adjustments, which consist only of normal and recurring accruals as well as the
write-off of purchased in-process research and development and the special
charges, have been included to fairly present the unaudited quarterly results.
This data should be read together with the consolidated financial statements and
the notes thereto included in this Annual Report on Form 10-K.

<TABLE>
<CAPTION>
                                                                          THREE MONTHS ENDED
                                       ----------------------------------------------------------------------------------------
                                       DEC. 31,   MAR. 31,   JUNE 30,   SEPT. 30,   DEC. 31,   MAR. 31,    JUNE 30,   SEPT. 30,
                                         1998       1999       1999       1999        1999       2000        2000       2000
                                       --------   --------   --------   ---------   --------   ---------   --------   ---------
                                                               (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                    <C>        <C>        <C>        <C>         <C>        <C>         <C>        <C>
STATEMENT OF OPERATIONS DATA
Net revenues.........................  $294,678   $316,932   $380,330   $452,174    $509,963   $ 501,728   $530,474   $561,434
Cost of goods sold...................   216,754    186,677    216,114    243,707     277,446     269,459    282,185    304,557
                                       --------   --------   --------   --------    --------   ---------   --------   --------
Gross margin.........................    77,924    130,255    164,216    208,467     232,517     232,269    248,289    256,877
Research and development.............    71,109     68,802     77,927     92,204      88,477     100,095    106,017    119,882
Selling, general and
  administrative.....................    64,016     48,527     51,780     63,406      68,168      66,024     71,017     84,202
Amortization of intangible assets....     2,064      2,063      2,059      2,178       2,405      25,337     55,861     76,551
Purchased in-process R&D.............        --         --         --         --          --     145,900     50,462     19,348
Special charges......................    37,906         --         --         --          --          --         --         --
                                       --------   --------   --------   --------    --------   ---------   --------   --------
    Total operating expenses.........   175,095    119,392    131,766    157,788     159,050     337,356    283,357    299,983
                                       --------   --------   --------   --------    --------   ---------   --------   --------
Operating income (loss)..............   (97,171)    10,863     32,450     50,679      73,467    (105,087)   (35,068)   (43,106)
Special charges--litigation..........        --         --         --         --          --          --         --    (35,000)
Other income (expense), net..........      (143)        17      2,389      3,672         578         932      2,082      2,879
                                       --------   --------   --------   --------    --------   ---------   --------   --------
Income (loss) before provision
  (benefit) for income taxes.........   (97,314)    10,880     34,839     54,351      74,045    (104,155)   (32,986)   (75,227)
Provision (benefit) for income
  taxes..............................   (40,191)     3,263     10,449     16,306      22,214      28,187     20,335    (18,132)
                                       --------   --------   --------   --------    --------   ---------   --------   --------
Net income (loss)....................  $(57,123)  $  7,617   $ 24,390   $ 38,045    $ 51,831   $(132,342)  $(53,321)  $(57,095)
                                       ========   ========   ========   ========    ========   =========   ========   ========
Net income (loss) per share:
  Basic..............................  $  (0.30)  $   0.04   $   0.13   $   0.19    $   0.26   $   (0.64)  $  (0.24)  $  (0.25)
  Diluted............................     (0.30)      0.04       0.12       0.18        0.24       (0.64)     (0.24)     (0.25)
Shares used in computing net income
  (loss) per share:
  Basic..............................   189,870    189,958    191,570    195,152     196,715     205,207    218,249    227,124
  Diluted............................   189,870    195,464    206,404    225,852     228,974     205,207    218,249    227,124
OTHER FINANCIAL DATA(1)
Adjusted operating income (loss).....  $(57,201)  $ 12,926   $ 34,509   $ 52,857    $ 75,872   $  66,150   $ 71,255   $ 59,552
Adjusted net income (loss)...........   (32,521)     8,887     25,657     39,391      53,318      47,143     51,545     43,511
Adjusted net income (loss) per share:
  Basic..............................  $  (0.17)  $   0.05   $   0.13   $   0.20    $   0.27   $    0.23   $   0.24   $   0.19
  Diluted............................     (0.17)      0.05       0.12       0.18        0.24        0.21       0.22       0.18
Shares used in computing adjusted net
  income (loss) per share:
  Basic..............................   189,870    189,958    191,570    195,152     196,715     205,207    218,249    227,124
  Diluted............................   189,870    195,464    206,404    225,852     228,974     239,644    248,491    257,972
</TABLE>

---------------
(1) Adjusted operating income (loss), adjusted net income (loss) and adjusted
    net income (loss) per share exclude the amortization of intangible assets,
    purchased in-process research and development, special charges and, in the
    fourth quarter of fiscal 2000, a $6.8 million charge for the value of
    compensatory stock options granted to employees. Adjusted net income (loss)
    also excludes the income tax effect of the above items, using the Company's
    marginal tax rate for the periods presented. These measures of earnings are
    not in accordance with, or an alternative for, generally accepted accounting
    principles and may not be consistent with measures used by other companies.
    However, the Company believes these measures of earnings provide its
    investors additional insight on its underlying operating results and the
    Company uses these measures internally to evaluate its operating
    performance.

                                       41
<PAGE>   44

LIQUIDITY AND CAPITAL RESOURCES

     Cash provided by operating activities was $162.1 million for fiscal 2000,
compared to $307.7 million for fiscal 1999 and $98.3 million for fiscal 1998.
Fiscal 2000 operating cash flows reflect the Company's net loss of $190.9
million and a net working capital increase of approximately $232.5 million,
offset by noncash charges (depreciation and amortization, IPRD, special charges
and other) of $585.5 million. Before the effect of working capital changes,
operating cash flow increased to $394.6 million for fiscal 2000, compared to
$299.8 million for fiscal 1999.

     The fiscal 2000 working capital increase includes a $176.9 million increase
in receivables, principally due to higher quarterly sales. The receivables
increase also reflects the strong sales volume experienced near the end of the
fiscal fourth quarter. The Company's allowance for doubtful accounts decreased
by $2.7 million during fiscal 2000 due to the write-off of certain
previously-reserved accounts. The working capital change also included a $114.3
million build-up in inventories, principally reflecting higher inventory levels
in anticipation of increasing shipments of new products and, to a lesser extent,
the impact of lower demand for CDMA products in the Korean market. With industry
wafer fabrication capacity continuing to tighten, the Company also took
advantage of its recently-expanded foundry relationships, drawing on
currently-available wafer fabrication capacity to stage materials for expected
production requirements. The working capital increase also reflects a $48.8
million reduction of accounts payable due to the timing of vendor payments, and
other working capital changes. These amounts were partially offset by a $112.3
million increase in accrued expenses and other current liabilities.

     Investing activities used $477.2 million of cash during fiscal 2000,
compared to $232.2 million for fiscal 1999. Capital expenditures totaled $315.1
million during the fiscal 2000 period, as the Company continued its investment
in new process technologies including its gallium arsenide wafer manufacturing
facility in Newbury Park, California, new silicon-based high-performance RF
specialty processes in Newport Beach, California, and the expansion of assembly
and test operations in Mexicali, Mexico. Cash used for the Company's fiscal 2000
business acquisitions was approximately $1.0 million, net of cash acquired of
$24.8 million. In addition, the Company made investments in, or advances to,
businesses totaling $174.3 million, including advances to vendors of $114.6
million and approximately $59.7 million of equity investments, principally in
early-stage communications technology companies. The vendor advances were made
pursuant to agreements under which the Company will receive foundry capacity to
support future growth. Cash used in investing activities during fiscal 1999
consisted of routine capital expenditures of $213.8 million and equity
investments of $18.4 million. Cash used in investing activities during the
fiscal 1998 period consisted of routine capital expenditures of $269.7 million.

     The Company's financing activities provided cash of $747.7 million during
fiscal 2000, including net proceeds of $631.0 million from the sale of the 4%
Convertible Subordinated Notes due 2007 and proceeds of $116.7 million from the
exercise of stock options. During fiscal 1999, cash provided by financing
activities of $309.0 million consisted of $339.6 million in net proceeds from
the sale of the 4 1/4% Convertible Subordinated Notes due 2006 and proceeds from
the exercise of employee stock options of $23.4 million, partially offset by the
transfer of available cash balances to Rockwell and repayment of a loan at the
Company's Japanese subsidiary. Cash provided by financing activities for fiscal
1998 of $171.4 million consisted of net cash transfers from Rockwell.

     In February 2000, the Company completed the sale of $650 million principal
amount of its 4% Convertible Subordinated Notes for net proceeds (after costs of
issuance) of approximately $631.0 million. The notes are general unsecured
obligations of the Company and 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, into shares of the Company's common stock at a conversion
price of $108 per share, subject to certain adjustments. The notes may be
redeemed, at the Company's option, on or after February 6, 2003 at a declining
premium to par.

     The Company has a $475 million revolving credit facility with a group of
banks which provides for revolving borrowings and the issuance of letters of
credit. The credit facility is secured by a pledge of the stock of Conexant's
significant subsidiaries (as that term is defined in the credit facility),
subject to certain exceptions for stock of foreign significant subsidiaries, and
by a pledge of certain intercompany indebtedness
                                       42
<PAGE>   45

owed by any significant subsidiary to Conexant or any other subsidiary. If there
is a downgrading of the ratings on the Company's long-term, unsecured
indebtedness by Standard & Poor's Rating Services Group to B or less and a
rating by Moody's Investor Service of B2 or less (in the event of a rating by
Moody's), the Company will be required to secure the credit facility by pledging
substantially all of its assets and the assets of its domestic subsidiaries and
the stock of all of its subsidiaries, subject to certain exceptions. The credit
facility includes restrictions on capital expenditures, indebtedness,
acquisitions, mergers, asset sales and liens on assets that apply to Conexant
and its subsidiaries. The Company must also meet certain financial tests and
maintain certain financial ratios. The credit facility expires in July 2003. The
Company made no borrowings under the credit facility during fiscal 2000. As of
September 30, 2000, the Company was in compliance with all covenants under the
credit facility.

     From October 1 through November 30, 2000, $233.7 million principal amount
of the Company's 4 1/4% Convertible Subordinated Notes due 2006 were converted
into 10.1 million shares of common stock at a cost to the Company of $39.1
million. In addition, the Company repurchased $35.0 million principal amount of
its 4% Convertible Subordinated Notes due 2007 at prevailing market prices.

     The Company's principal sources of liquidity are its existing cash
reserves, cash generated from operations, and available borrowings under its
$475 million credit facility. Cash and cash equivalents at September 30, 2000
totaled $831.1 million compared to $398.5 million at September 30, 1999. Working
capital at September 30, 2000 was approximately $1.3 billion compared to $604.5
million at September 30, 1999.

     The Company believes that its existing sources of liquidity, along with
cash expected to be generated from future operations, will be sufficient to fund
operations, research and development efforts, and anticipated capital
expenditures for at least the next twelve months. However, the Company continues
to evaluate acquisition opportunities to expand its technology portfolio, design
expertise and product offerings. The Company's manufacturing operations are
capital intensive, and the Company may need to increase its capital spending to
obtain sufficient manufacturing capacity to support continued revenue growth. In
order to complete any such acquisitions or increased capital expenditures, the
Company may seek to obtain additional borrowings or issue additional shares of
its common stock. There can be no assurance that such financing will be
available on terms favorable to the Company, or at all.

RECENT ACCOUNTING STANDARDS

     See Note 2 of Notes to Consolidated Financial Statements included in Part
II, Item 8, "Financial Statements and Supplementary Data".

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company's financial instruments include cash and cash equivalents,
marketable securities and long-term debt. The Company's main investment
objectives are the preservation of investment capital and the maximization of
after-tax returns on its investment portfolio. Consequently, the Company invests
with only high-credit-quality issuers and limits the amount of credit exposure
to any one issuer. The Company does not use derivative instruments for
speculative or investment purposes.

     The Company's cash and cash equivalents are not subject to significant
interest rate risk due to the short maturities of these instruments. As of
September 30, 2000, the carrying value of the Company's cash and cash
equivalents approximates fair value. The Company's marketable debt securities
(consisting of commercial paper, corporate bonds, and government securities)
principally have remaining terms of one year or less. Consequently, such
securities are not subject to significant interest rate risk. Marketable equity
securities consist of an equity investment in a semiconductor company, initially
made for the promotion of business and strategic objectives, which is subject to
equity price risk.

     All of the Company's marketable securities are classified as available for
sale and, as of September 30, 2000, unrealized gains of $47.7 million (net of
related income taxes of $29.4 million) on these securities are included in other
comprehensive income. A 20% adverse change in equity prices would result in an

                                       43
<PAGE>   46

approximate $18.5 million decrease in the fair value of the Company's marketable
securities as of September 30, 2000.

     The Company's long-term debt consists of convertible subordinated notes
with interest at fixed rates. Consequently, the Company does not have
significant cash flow exposure on its long-term debt. However, the fair value of
the convertible subordinated notes is subject to significant fluctuation due to
their convertibility into shares of the Company's common stock. The Company also
has available a $475 million credit facility which provides for borrowings at
variable rates of interest. Should the Company make borrowings under this credit
facility, such borrowing would be subject to interest rate and cash flow risk.

     The following table shows the fair values of the Company's investments and
long-term debt as of September 30, 2000 (in thousands):

<TABLE>
<CAPTION>
                                                    CARRYING VALUE    FAIR VALUE
                                                    --------------    ----------
<S>                                                 <C>               <C>
Cash and cash equivalents.........................     $831,100       $  831,100
Marketable debt securities........................       20,756           20,692
Marketable equity securities (including unrealized
  gains of $77.2 million).........................       92,581           92,581
Long-term debt....................................      999,997        1,133,179
</TABLE>

     The Company transacts business in various foreign currencies, and is
subject to certain foreign exchange risks, principally arising from customer
accounts receivable at its Japanese subsidiary which are denominated in yen. At
September 30, 2000, such receivables totaled approximately $25.4 million. The
Company has established a foreign currency hedging program utilizing foreign
currency forward exchange contracts to hedge certain foreign currency
transaction exposures (principally the Japanese yen). Under this program, the
Company seeks to offset foreign currency transaction gains and losses with gains
and losses on the forward contracts, so as to mitigate its overall risk of
foreign transaction gains and losses. The Company does not enter into forward
contracts for speculative or trading purposes.

     At September 30, 2000, the Company held foreign currency forward exchange
contracts (principally to sell Japanese yen at specified rates) having an
aggregate notional amount of approximately 2.0 billion yen, at a notional
weighted average exchange rate of approximately 107.0 yen to one dollar. The
gains and losses relating to these forward contracts are deferred and included
in the measurement of the foreign currency transaction subject to the hedge. The
net unrealized gain/loss on the forward contracts outstanding at September 30,
2000 was not material to the Company's consolidated financial statements. Based
on the Company's overall currency rate exposure at September 30, 2000, a 10
percent change in currency rates would not have had a material effect on the
consolidated financial position, results of operations or cash flows of the
Company.

     The table below provides information as of September 30, 2000 about the
Company's foreign currency forward exchange contracts. The table presents the
notional amounts (the U.S. dollar equivalent, based on the contract exchange
rates) and the contract foreign currency exchange rates.

<TABLE>
<CAPTION>
                                                    NOTIONAL    CONTRACT RATE    ESTIMATED
                                                     AMOUNT      PER US$1.00     FAIR VALUE
                                                    --------    -------------    ----------
                                                            (DOLLARS IN THOUSANDS)
<S>                                                 <C>         <C>              <C>
Foreign currency forward exchange contracts:
  Japanese yen....................................  $18,611         106.97         $ 184
  Euro............................................  $ 4,124          1.058         $(290)
</TABLE>

                                       44
<PAGE>   47

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                             CONEXANT SYSTEMS, INC.

                          CONSOLIDATED BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                   SEPTEMBER 30,
                                                              ------------------------
                                                                 2000          1999
                                                              ----------    ----------
<S>                                                           <C>           <C>
CURRENT ASSETS
  Cash and cash equivalents.................................  $  831,100    $  398,516
  Receivables, net of allowance of $6,949 (2000) and $9,658
     (1999).................................................     422,650       238,940
  Inventories, net..........................................     341,002       224,477
  Deferred income taxes.....................................      95,260        81,860
  Other current assets......................................      84,130        35,381
                                                              ----------    ----------
          Total current assets..............................   1,774,142       979,174
Marketable securities.......................................      95,876            --
Property, plant and equipment, net..........................     828,511       723,013
Goodwill and intangible assets, net.........................   1,507,326        47,824
Other assets................................................     209,056        45,770
Deferred income taxes.......................................       1,286        46,169
                                                              ----------    ----------
          Total assets......................................  $4,416,197    $1,841,950
                                                              ==========    ==========

                         LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
  Accounts payable..........................................  $  233,865    $  265,151
  Deferred revenue on shipments to distributors.............      37,586        21,027
  Accrued compensation and benefits.........................      88,399        48,530
  Other current liabilities.................................      95,158        40,013
                                                              ----------    ----------
          Total current liabilities.........................     455,008       374,721
Convertible subordinated notes..............................     999,997       350,000
Other long-term liabilities.................................      54,433        82,076
                                                              ----------    ----------
          Total liabilities.................................   1,509,438       806,797
                                                              ----------    ----------
Commitments and contingencies...............................          --            --
SHAREHOLDERS' EQUITY
  Preferred and junior preferred stock (No par value, 25,000
     shares authorized, no shares issued or outstanding)....          --            --
  Common stock, $1.00 par value: 1,000,000 authorized
     shares; 231,164 (2000) and 196,387 (1999) issued
     shares.................................................     231,164       196,387
  Additional paid-in capital................................   2,775,115       769,563
  Retained earnings (deficit)...............................    (120,875)       70,052
  Accumulated other comprehensive income....................      47,295           149
  Treasury stock, 30 shares at cost.........................      (1,619)           --
  Unearned compensation.....................................     (24,321)         (998)
                                                              ----------    ----------
          Total shareholders' equity........................   2,906,759     1,035,153
                                                              ----------    ----------
          Total liabilities and shareholders' equity........  $4,416,197    $1,841,950
                                                              ==========    ==========
</TABLE>

          See accompanying notes to consolidated financial statements.
                                       45
<PAGE>   48

                             CONEXANT SYSTEMS, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                               YEARS ENDED SEPTEMBER 30,
                                                         --------------------------------------
                                                            2000          1999          1998
                                                         ----------    ----------    ----------
<S>                                                      <C>           <C>           <C>
Net revenues...........................................  $2,103,599    $1,444,114    $1,200,231
Cost of goods sold.....................................   1,133,647       863,252       844,851
                                                         ----------    ----------    ----------
Gross margin...........................................     969,952       580,862       355,380
Operating expenses:
  Research and development.............................     414,471       310,042       342,349
  Selling, general and administrative..................     289,411       227,729       251,863
  Amortization of intangible assets....................     160,154         8,364        11,020
  Purchased in-process research and development........     215,710            --            --
  Special charges -- Rockwell-retained assets..........          --        20,000        95,500
  Special charges -- other.............................          --        17,906        51,806
                                                         ----------    ----------    ----------
          Total operating expenses.....................   1,079,746       584,041       752,538
                                                         ----------    ----------    ----------
Operating loss.........................................    (109,794)       (3,179)     (397,158)
Special charges -- litigation..........................     (35,000)           --       (43,000)
Other income, net......................................       6,471         5,935         9,830
                                                         ----------    ----------    ----------
Income (loss) before provision (benefit) for income
  taxes................................................    (138,323)        2,756      (430,328)
Provision (benefit) for income taxes...................      52,604       (10,173)     (168,112)
                                                         ----------    ----------    ----------
Net income (loss)......................................  $ (190,927)   $   12,929    $ (262,216)
                                                         ==========    ==========    ==========
Net income (loss) per share:
  Basic................................................  $    (0.90)   $     0.07    $    (1.32)
                                                         ==========    ==========    ==========
  Diluted..............................................  $    (0.90)   $     0.06    $    (1.32)
                                                         ==========    ==========    ==========
Number of shares used in per share computation:
  Basic................................................     211,840       192,551       197,900
                                                         ==========    ==========    ==========
  Diluted..............................................     211,840       203,484       197,900
                                                         ==========    ==========    ==========
</TABLE>

          See accompanying notes to consolidated financial statements.
                                       46
<PAGE>   49

                             CONEXANT SYSTEMS, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                               YEARS ENDED SEPTEMBER 30,
                                                          -----------------------------------
                                                            2000         1999         1998
                                                          ---------    ---------    ---------
<S>                                                       <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).......................................  $(190,927)   $  12,929    $(262,216)
Adjustments required to reconcile net income (loss) to
  net cash provided by operations:
  Depreciation..........................................    192,734      204,512      208,624
  Amortization of intangible assets.....................    160,154        8,364       11,020
  Purchased in-process research and development.........    215,710           --           --
  Deferred income taxes.................................    (32,126)       9,940     (108,807)
  Stock compensation....................................      9,491       19,570           --
  Special charges -- litigation.........................     35,000           --       43,000
  Special charges -- Rockwell-retained assets...........         --       20,000       95,500
  Special charges -- other..............................         --       17,906       51,806
  Other noncash charges, net............................      4,533        6,583           --
  Changes in assets and liabilities, net of
     acquisitions:
     Receivables........................................   (176,902)     (72,554)      51,612
     Inventories........................................   (114,267)     (23,551)      21,354
     Accounts payable...................................    (48,840)     114,107      (42,116)
     Accrued expenses and other current liabilities.....    112,300       32,432      128,106
     Other..............................................     (4,757)     (42,564)     (99,578)
                                                          ---------    ---------    ---------
          Net cash provided by operating activities.....    162,103      307,674       98,305
                                                          ---------    ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures....................................   (315,118)    (213,756)    (269,686)
Purchase of marketable securities.......................     (6,011)          --           --
Sale of marketable securities...........................     19,206           --           --
Acquisitions of businesses, net of cash acquired of
  $24,810...............................................     (1,027)          --           --
Investments in and advances to businesses...............   (174,258)     (18,400)          --
                                                          ---------    ---------    ---------
          Net cash used in investing activities.........   (477,208)    (232,156)    (269,686)
                                                          ---------    ---------    ---------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible subordinated
  notes, net of issuance costs..........................    630,992      339,574           --
Proceeds from exercise of stock options.................    116,697       23,408           --
Payment of short-term debt..............................         --      (14,075)          --
Net transfers (to) from Rockwell........................         --      (39,909)     171,381
                                                          ---------    ---------    ---------
          Net cash provided by financing activities.....    747,689      308,998      171,381
                                                          ---------    ---------    ---------
Net increase in cash and cash equivalents...............    432,584      384,516           --
Cash and cash equivalents at beginning of period........    398,516       14,000       14,000
                                                          ---------    ---------    ---------
Cash and cash equivalents at end of period..............  $ 831,100    $ 398,516    $  14,000
                                                          =========    =========    =========
</TABLE>

          See accompanying notes to consolidated financial statements.
                                       47
<PAGE>   50

                             CONEXANT SYSTEMS, INC.

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                          COMMON STOCK                                  ACCUMULATED
                                     ----------------------   ADDITIONAL   RETAINED        OTHER
                                     OUTSTANDING               PAID-IN     EARNINGS    COMPREHENSIVE   TREASURY     UNEARNED
                                       SHARES       AMOUNT     CAPITAL     (DEFICIT)      INCOME        STOCK     COMPENSATION
                                     -----------   --------   ----------   ---------   -------------   --------   ------------
<S>                                  <C>           <C>        <C>          <C>         <C>             <C>        <C>
Balance at September 30, 1997......         --     $     --   $       --   $      --      $    --      $    --      $     --
Net loss...........................         --           --           --          --           --           --            --
Foreign currency translation
  adjustment.......................         --           --           --          --           --           --            --
    Comprehensive loss.............
Net transfers from Rockwell........         --           --           --          --           --           --            --
                                       -------     --------   ----------   ---------      -------      -------      --------
Balance at September 30, 1998......         --           --           --          --           --           --            --
Net loss prior to the
  Distribution.....................         --           --           --          --           --           --            --
Net income subsequent to the
  Distribution.....................         --           --           --      70,052           --           --            --
Foreign currency translation
  adjustment.......................         --           --           --          --          149           --            --
Realized gains on
  available-for-sale investments...         --           --           --          --       (3,589)          --            --
    Comprehensive income...........
Net transfers (to) from Rockwell...         --           --         (796)         --        3,589           --            --
Issuance of common stock:
  In connection with the
    Distribution...................    189,763      189,763      707,309          --           --           --            --
  Restricted stock grants..........      2,162        2,162       18,406          --           --           --       (20,568)
  Exercise of stock options........      4,026        4,026       19,382          --           --           --            --
  Employee stock purchase plan.....        436          436        4,679          --           --           --            --
Tax benefits from stock plans......         --           --       20,583          --           --           --            --
Compensation expense under
  restricted stock plan............         --           --           --          --           --           --        19,570
                                       -------     --------   ----------   ---------      -------      -------      --------
Balance at September 30, 1999......    196,387      196,387      769,563      70,052          149           --          (998)
Net loss...........................         --           --           --    (190,927)          --           --            --
Foreign currency translation
  adjustment.......................         --           --           --          --         (539)          --            --
Change in unrealized gains on
  available-for-sale investments,
  net of tax.......................         --           --           --          --       47,685           --            --
    Comprehensive loss.............
Issuance of common stock:
  In connection with
    acquisitions...................     26,988       26,988    1,761,138          --           --           --        (6,190)
  Restricted stock grants..........         65           65        6,446          --           --           --        (6,511)
  Exercise of stock options........      7,082        7,082       45,137          --           --           --            --
  Employee stock purchase plan.....        641          641       19,877          --           --           --            --
  Conversion of debt...............         --           --            3          --           --           --            --
Deferred compensation resulting
  from acquisitions................         --           --           --          --           --           --       (13,263)
Tax benefits from stock plans......         --           --      166,102          --           --           --            --
Purchase of treasury stock.........        (30)          --           --          --           --       (1,619)           --
Compensation expense related to
  employee stock plans.............          1            1        6,849          --           --           --         2,641
                                       -------     --------   ----------   ---------      -------      -------      --------
Balance at September 30, 2000......    231,134     $231,164   $2,775,115   $(120,875)     $47,295      $(1,619)     $(24,321)
                                       =======     ========   ==========   =========      =======      =======      ========

<CAPTION>

                                     ROCKWELL'S       TOTAL
                                        NET       SHAREHOLDERS'
                                     INVESTMENT      EQUITY
                                     ----------   -------------
<S>                                  <C>          <C>
Balance at September 30, 1997......  $1,106,558    $1,106,558
Net loss...........................    (262,216)     (262,216)
Foreign currency translation
  adjustment.......................      (6,348)       (6,348)
                                                   ----------
    Comprehensive loss.............                  (268,564)
Net transfers from Rockwell........     171,381       171,381
                                     ----------    ----------
Balance at September 30, 1998......   1,009,375     1,009,375
Net loss prior to the
  Distribution.....................     (57,123)      (57,123)
Net income subsequent to the
  Distribution.....................          --        70,052
Foreign currency translation
  adjustment.......................      (3,845)       (3,696)
Realized gains on
  available-for-sale investments...          --        (3,589)
                                                   ----------
    Comprehensive income...........                     5,644
Net transfers (to) from Rockwell...     (51,335)      (48,542)
Issuance of common stock:
  In connection with the
    Distribution...................    (897,072)           --
  Restricted stock grants..........          --            --
  Exercise of stock options........          --        23,408
  Employee stock purchase plan.....          --         5,115
Tax benefits from stock plans......          --        20,583
Compensation expense under
  restricted stock plan............          --        19,570
                                     ----------    ----------
Balance at September 30, 1999......          --     1,035,153
Net loss...........................          --      (190,927)
Foreign currency translation
  adjustment.......................          --          (539)
Change in unrealized gains on
  available-for-sale investments,
  net of tax.......................          --        47,685
                                                   ----------
    Comprehensive loss.............                  (143,781)
Issuance of common stock:
  In connection with
    acquisitions...................          --     1,781,936
  Restricted stock grants..........          --            --
  Exercise of stock options........          --        52,219
  Employee stock purchase plan.....          --        20,518
  Conversion of debt...............          --             3
Deferred compensation resulting
  from acquisitions................          --       (13,263)
Tax benefits from stock plans......          --       166,102
Purchase of treasury stock.........          --        (1,619)
Compensation expense related to
  employee stock plans.............          --         9,491
                                     ----------    ----------
Balance at September 30, 2000......  $       --    $2,906,759
                                     ==========    ==========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       48
<PAGE>   51

                             CONEXANT SYSTEMS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 1. DESCRIPTION OF BUSINESS

     Conexant Systems, Inc. ("Conexant" or the "Company") is the world's largest
independent company focused exclusively on providing semiconductor products and
system solutions for a wide variety of communications electronics. The Company's
products facilitate communications worldwide through wireline voice and data
communications networks, cordless and cellular wireless telephony systems,
personal imaging devices and equipment, and emerging cable and wireless
broadband communications networks.

     On December 31, 1998, Conexant became an independent, separately traded,
publicly-held company when Rockwell International Corporation ("Rockwell") spun
off its wholly-owned subsidiary, Conexant, 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. All references
herein to Conexant or the Company for periods prior to the Distribution include
Semiconductor Systems.

     On September 13, 2000, the Company announced a plan to spin off its
Internet Infrastructure business ("Spinco") through a two-step process. The
first step will consist of an initial public offering of common stock of Spinco
targeted for January 2001. After completion of the initial public offering,
Conexant will continue to own a majority of Spinco's outstanding common stock
and a majority of the voting power of Spinco's outstanding common stock. In the
second step, Conexant intends, within several months after Spinco's initial
public offering, subject to the satisfaction of certain conditions, to
distribute to its shareholders all of the shares of Spinco's common stock that
Conexant owns. However, there can be no assurance that the initial public
offering or the spin-off will be successfully completed.

 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.

     For periods prior to the Distribution, the financial statements include the
operating results of Conexant while it was part of Rockwell. Financial
statements prior to the Distribution are not necessarily indicative of what the
financial position, results of operations, or cash flows would have been had
Conexant been an independent company during such periods. Financial data
included in the accompanying consolidated financial statements, for periods
subsequent to the Distribution, have been prepared on a basis that reflects the
historical assets, liabilities, and operations of the business contributed to
Conexant by Rockwell.

     Stock Split  Common share and per common share amounts for all periods
presented have been restated to reflect the two-for-one stock split (in the form
of a dividend) effected on October 29, 1999 for shareholders of record as of
September 24, 1999.

     Fiscal Year  The Company maintains a fifty-two/fifty-three week fiscal year
cycle ending on the Friday closest to September 30. To conform the Company's
fiscal year ends, a fifty-third week must be added every sixth or seventh fiscal
year. Fiscal years 2000, 1999 and 1998 comprised 52 weeks, 52 weeks, and 53
weeks, and ended on September 29, October 1 and October 2, respectively. For
convenience, the accompanying 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 requires management to make
estimates and assumptions that affect the amounts

                                       49
<PAGE>   52
                             CONEXANT SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

reported in the financial statements and accompanying notes. Actual results
could differ materially from those estimates.

     Risks and Uncertainties  The Company operates in a rapidly changing
environment that involves a number of risks, some of which are beyond the
Company's control and could have a material adverse effect on its business,
operating results, and financial condition. These risks include variability and
uncertainty of revenues and operating results, technological change,
competition, intellectual property litigation, management of growth, access to
manufacturing capacity, customer concentration and labor relations.
Approximately 30% of the Company's workforce is covered by collective bargaining
agreements.

     Revenue Recognition  Revenues from product sales direct to customers and
certain distributors are recognized upon shipment and transfer of title. The
Company provides for warranty costs, sales returns, rebates and other pricing
adjustments at the time of shipment based on its experience. Certain of the
Company's product sales are made to major distributors under agreements allowing
for price protection and/or a right of return on products unsold. The Company
defers the recognition of revenue on sales to these distributors until the
products are sold by the distributors. Development revenue is recognized when
services are performed. To date, development revenue has not been significant.

     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 and prices of current inventories that will
be sold. These estimates are dependent on the Company's assessment of current
and expected orders from its customers, given that orders are subject to
cancellation with limited advance notice prior to shipment. It is reasonably
possible that the recoverability of the Company's investment in inventories will
change in the near term.

     Property, Plant and Equipment  Property, plant and equipment are stated at
cost. Depreciation is based on estimated useful lives (50 years for buildings
and 10 to 30 years for building improvements; 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, as well as renewals of a minor amount, are
charged to expense.

     The Company changed its depreciation method beginning October 1, 1998 from
the double declining balance method to the straight-line method for all
prospective purchases. The change resulted in lower depreciation expense for
fiscal 1999 of approximately $8.5 million or $0.03 per share for both basic and
diluted net income per share.

     Goodwill and Intangible Assets  Goodwill and intangible assets principally
result from business acquisitions. The Company accounts for business
acquisitions by assigning the purchase price to tangible and intangible assets
and liabilities, including purchased in-process research and development
("IPRD") projects which have not yet reached technological feasibility and have
no alternative future use. Assets acquired and liabilities assumed are recorded
at their fair values; the excess of the purchase price over the net assets
acquired is recorded as goodwill. The value of IPRD is immediately charged to
expense upon completion of the acquisition. Goodwill, patents, developed
technology, and other intangibles are amortized on a straight-line basis over
their estimated useful lives, ranging from 2 to 10 years.

     Impairment of Long-Lived Assets  The Company continually monitors events or
changes in circumstances that could indicate that the carrying amount of
long-lived assets, including goodwill and intangible

                                       50
<PAGE>   53
                             CONEXANT SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

assets, may not be recoverable. Long-lived assets held for use are reviewed for
impairment by comparing estimated undiscounted cash flows over remaining useful
lives to net book value. When impairment is indicated for a long-lived asset,
the amount of impairment loss is the excess of net book value over fair value.
At September 30, 2000 and 1999, management determined that no impairments
existed. In fiscal 1998, the Company recorded impairment charges related to
certain assets, as discussed in Note 13.

     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 majority of the Company's
larger foreign subsidiaries is the U.S. dollar. Inventories, property, plant and
equipment, cost of goods sold, and depreciation for those subsidiaries 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 income. For the remainder of
the Company's foreign subsidiaries, the functional currency 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. Gains and losses resulting from foreign currency transactions are
recognized currently in income.

     Derivative Financial Instruments  The Company enters into foreign currency
forward exchange contracts to manage exposure related to certain foreign
currency commitments. The Company does not enter into derivative financial
instruments for speculative or trading purposes.

     These forward contracts qualify as hedges for financial reporting purposes.
The forward contracts at September 30, 2000 consist of contracts to buy or sell
approximately $22.7 million in foreign currency (principally Japanese yen).
These contracts mature through January 2001 and are with major financial
institutions. The fair value of the foreign currency forward contracts at
September 30, 2000 was not material.

     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
related interpretations and has adopted the disclosure provisions of Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation".

     Income Taxes  The provision (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.

     Concentrations  Financial instruments that potentially subject the Company
to concentration of credit risk consist principally of cash equivalents and
trade accounts receivable. The Company invests cash through high-credit quality
financial institutions. The Company performs periodic evaluations of the
relative credit standing of these financial institutions and limits the amount
of its credit exposure with any one institution. At September 30, 2000, the
Company's cash was principally invested with six major financial institutions.
The Company's trade receivables primarily are derived from sales to
manufacturers of communications products, consumer products and personal
computers. Management believes that any risk of a significant accounting loss as
a result of such concentrations is reduced due to 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, 2000, one customer accounted for 10% of the Company's
accounts receivable; no customer accounted for 10% or more of the Company's
accounts receivable at September 30, 1999. No individual customers accounted for
10% or more of net revenues for fiscal years 2000, 1999, or 1998.

                                       51
<PAGE>   54
                             CONEXANT SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     While the Company operates and maintains its own wafer manufacturing and
assembly and test facilities, the Company relies on outside foundries to
supplement its wafer manufacturing capacity. Allocations by these suppliers of
wafer manufacturing capacity to the Company depend on the Company's needs and
capacity availability during periods of capacity shortages. A significant
reduction in allocation from these suppliers could adversely affect the
Company's results of operations. In addition, the Company is currently dependent
on two suppliers for epitaxial wafers used in its gallium arsenide semiconductor
manufacturing processes.

     Comprehensive Income  Other comprehensive income includes foreign currency
translation adjustments and unrealized holding gains on available-for-sale
marketable securities. The amounts of other comprehensive income presented in
the consolidated statements of shareholders' equity are net of tax. 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 income are as follows at
September 30 (in thousands):

<TABLE>
<CAPTION>
                                                              2000      1999
                                                             -------    ----
<S>                                                          <C>        <C>
Unrealized gains on available for sale securities, net of
  tax......................................................  $47,685    $ --
Foreign currency translation adjustments...................     (390)    149
                                                             -------    ----
                                                             $47,295    $149
                                                             =======    ====
</TABLE>

     Recent Accounting Standards  In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS 133 requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Derivatives that are not hedges must be adjusted to fair value through earnings.
If the derivative is a hedge, depending on the nature of the hedge, changes in
fair value of derivatives will either offset the change in fair value of the
hedged assets, liabilities, or firm commitments through earnings, or be
recognized in other comprehensive income until the hedged item is recognized in
earnings. Generally, the change in a derivative's fair value related to the
ineffective portion of a hedge, if any, will be immediately recognized in
earnings. Implementation of SFAS 133 is required as of the beginning of fiscal
year 2001 and will not have a material effect on the Company's financial
position or results of operations.

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements". SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. The Company
will be required to adopt SAB 101 no later than the fourth quarter of fiscal
2001. Management believes that the adoption of SAB 101 will not have a material
effect on its financial position or results of operations.

     In March 2000, the FASB issued Interpretation No. 44 ("FIN 44") "Accounting
for Certain Transactions Involving Stock Compensation", which addresses certain
accounting issues which arose under the previously established accounting
principles relating to stock-based compensation. The adoption of this
interpretation did not have a material effect on the Company's financial
position or results of operations.

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

 3. ACQUISITIONS

     In March 2000, the Company completed its acquisition of Maker
Communications, Inc. ("Maker"), a fabless semiconductor company that develops
and markets high-performance programmable network proces-

                                       52
<PAGE>   55
                             CONEXANT SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

sors, software solutions, and development tools. Consideration for the
acquisition of Maker consisted of 12.7 million shares of common stock and
options to purchase an additional 1.6 million shares of common stock (having an
average fair value of $60.32 per share), based upon an exchange ratio of 0.66 of
a share of Conexant common stock for each share of Maker common stock. The total
value of the consideration for the acquisition of Maker was approximately $979.6
million.

     In January 2000, the Company acquired Microcosm Communications Limited
("Microcosm"), a technology leader in the field of high-speed integrated
circuits for fiber optic communications located in Bristol, England.
Consideration for the acquisition consisted of 1.5 million shares of common
stock, options to purchase an additional 94,000 shares (having an average fair
value of $52.03 per share) and approximately $3.1 million in cash. The total
value of such consideration was approximately $103.8 million. Additional
consideration of up to $18 million, initially held back for the payment of
contingent indemnification obligations, may become payable in April 2001. The
shareholders and optionholders of Microcosm could also receive additional
consideration of up to $51.4 million, payable in the form of shares of common
stock and stock options, if certain performance and technology goals are
achieved.

     In May 2000, the Company acquired Philsar Semiconductor Inc. ("Philsar"), a
developer of radio-frequency ("RF") semiconductor solutions for personal
wireless connectivity, including emerging standards such as Bluetooth(TM), and
RF components for third-generation ("3G") digital cellular handsets. To effect
the acquisition of Philsar by Conexant, all of the then-outstanding capital
stock of Philsar was exchanged for an instrument which provides for
approximately 2.2 million shares of Conexant common stock to be issued on a
delayed basis. As additional consideration for the acquisition, Conexant
converted the outstanding Philsar stock options into options to purchase an
additional 525,000 shares of common stock (having an average fair value of
$36.12 per share). The total value of such consideration was approximately
$107.9 million. The Company may also be required to issue up to an additional
248,000 shares of common stock initially held in escrow for the payment of
contingent indemnification obligations, upon the expiration of an
indemnification period in fiscal 2001.

     In June 2000, the Company acquired HotRail, Inc. ("HotRail"), a fabless
semiconductor company developing advanced, integrated complementary metal-oxide
semiconductor ("CMOS") technologies for high-speed switching, interconnect and
scalable processing for networking systems. Consideration for the acquisition
consisted of 5.9 million shares of common stock and options to purchase an
additional 1.3 million shares (having an average fair value of $45.40 per
share). The total value of such consideration was approximately $349.8 million.
In addition, the Company may deliver up to an additional 652,000 shares,
initially held back for the payment of contingent indemnification obligations,
upon the expiration of an indemnification period in fiscal 2001.

     During fiscal 2000, the Company also completed the acquisitions of Applied
Telecom, Inc. ("Applied Telecom"), Istari Design, Inc. ("Istari"), Novanet
Semiconductor Ltd. ("Novanet"), NetPlane Systems, Inc.("NetPlane"), Sierra
Imaging, Inc. ("Sierra"), and the wireless broadband unit of Oak Technology,
Inc., each engaged in the development and sale of semiconductors and related
software products for communications and imaging applications. Aggregate
consideration for these acquisitions consisted of $9.7 million in cash, 4.7
million shares of common stock, and options to purchase approximately 876,000
shares of common stock (having an average fair value of $38.34 per share). The
aggregate value of such consideration was approximately $261.5 million. Certain
of the acquisitions include provisions under which the former shareholders could
receive additional consideration of up to $50.0 million, payable in a
combination of Conexant common stock and cash, if certain performance and
technology goals are achieved. The Company may be required to issue up to an
additional 518,000 shares of common stock initially held back for the payment of
contingent indemnification obligations, upon the expiration of indemnification
periods.

     The acquisitions have each been recorded under the purchase method of
accounting. The value of the Conexant common stock issued was based on market
prices at the time of the acquisition. The value of the
                                       53
<PAGE>   56
                             CONEXANT SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

options assumed was determined using the Black-Scholes option valuation model.
The value of the consideration for each acquisition has been allocated among the
assets and liabilities acquired, including identified intangible assets and
IPRD, based upon estimated fair values. The excess of the value of the
consideration over the net assets acquired is allocated to goodwill. In
connection with six of the transactions, an aggregate of $215.7 million was
allocated to IPRD, and expensed immediately upon completion of the acquisitions
(as a charge not deductible for tax purposes), because the technological
feasibility of products under development had not been established and no future
alternative uses existed.

     The fair value of the IPRD for each of the acquisitions was determined
using the income approach. Under the income approach, expected future after-tax
cash flows from each of the projects or product families ("projects") under
development are estimated and discounted to their net present value at an
appropriate risk-adjusted rate of return. Each project was analyzed to determine
the technological innovations included in the project; the existence and
utilization of core technology; the complexity, cost and time to complete the
remaining development efforts; the existence of any alternative future use or
current technological feasibility; and the stage of completion in development.
Future cash flows for each project were estimated based on forecasted revenues
and costs, taking into account the expected life cycles of the products and the
underlying technology, relevant market sizes and industry trends.

     The projects were then classified as developed technology, IPRD or future
development. The estimated future cash flows for each project were discounted to
approximate fair value. Discount rates were derived from a weighted average cost
of capital analysis, adjusted upward to reflect additional risks inherent in the
development process, including the probability of achieving technological
success and market acceptance. The fair value assigned to developed technology
is included in identifiable intangible assets. The IPRD charge includes the fair
value of the portion of IPRD completed as of the date of acquisition. The fair
values assigned to IPRD to-be-completed and to future development are included
in goodwill. The Company is responsible for the amounts determined for IPRD, as
well as developed technology, and believes the amounts are representative of
fair values and do not exceed the amounts an independent party would pay for
these projects. Failure to complete the IPRD projects and deliver new products
to the market on a timely basis, or to achieve expected market acceptance or
revenue and expense forecasts, could have a significant impact on the financial
results and operations of the acquired businesses.

     The total charge for IPRD for the acquisition of Maker (which the Company
agreed to acquire in December 1999) was $118.5 million. IPRD projects relating
to seven product families, directed toward the development of high-performance
programmable communications processors and applications software, were
identified and valued. Maker's IPRD projects ranged from 55% to 92% complete and
averaged approximately 75% complete, with aggregate estimated costs to complete
all of the projects of $5.7 million. The IPRD projects principally are expected
to be completed within one year of the acquisition date. The average discount
rates used were 30% for IPRD projects and 20% for developed technology, which
reflect the specific risks associated with each of the intangible assets. The
weighted average cost of capital was estimated at 18%.

     The total charge for IPRD for the acquisition of Microcosm (completed in
January 2000) was $27.4 million. IPRD projects relating to four product
families, directed toward the development of high-performance programmable
communications processors, were identified and valued. Microcosm's IPRD projects
ranged from 77% to 90% complete and averaged approximately 84% complete, with
total estimated costs to complete all of the projects of $0.8 million. The IPRD
projects are principally expected to be completed within one year of the
acquisition date. The average discount rates used were 35% for IPRD projects and
25% for developed technology, which reflect the specific risks associated with
each of the intangible assets. The weighted average cost of capital was
estimated at 20%.

     The total charge for IPRD for the Philsar acquisition (completed in May
2000) was $24.4 million. IPRD projects relating to five product families,
directed toward the development of Bluetooth(TM) products including RF
transceivers, a baseband controller, and an integrated single-chip Bluetooth(TM)
solution, were identified and
                                       54
<PAGE>   57
                             CONEXANT SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

valued. Philsar's IPRD projects ranged from 41% to 78% complete and averaged
approximately 60% complete, with total estimated costs to complete all of the
projects of $5.4 million. The IPRD projects are principally expected to be
completed within one year of the acquisition date. The average discount rates
used were 30% for IPRD projects and 25% for developed technology, which reflect
the specific risks associated with each of the intangible assets. The weighted
average cost of capital was estimated at 20%.

     The total charge for IPRD for the HotRail acquisition (completed in June
2000) was $26.1 million. IPRD projects relating to two product families,
directed toward the development of scalable, high-speed switch fabric systems
and the HotRail Channel parallel CMOS transceiver, were identified and valued.
HotRail's IPRD projects ranged from 34% to 95% complete and averaged
approximately 74% complete, with total estimated costs to complete all of the
projects of $11.7 million. The IPRD projects are principally expected to be
completed within one year of the acquisition date. The average discount rates
used were 34% for IPRD projects and 24% for developed technology, which reflect
the specific risks associated with each of the intangible assets. The weighted
average cost of capital was estimated at 24%.

     The total charge for IPRD for the Novanet acquisition (completed in
September 2000) was $17.3 million. Three IPRD projects, directed toward the
development of high-speed semiconductor solutions for asynchronous transfer mode
and packet over synchronous optical network applications, were identified and
valued. Novanet's IPRD projects ranged from 45% to 90% complete and averaged
approximately 70% complete, with total estimated costs to complete all of the
projects of $10.8 million. The IPRD projects are principally expected to be
completed within one year of the acquisition date. The average discount rates
used were 22% to 27% for IPRD projects and 28% for developed technology, which
reflect the specific risks associated with each of the intangible assets. The
weighted average cost of capital was estimated at 20%.

     The total charge for IPRD for the NetPlane acquisition (completed in
September 2000) was $2.0 million. Four IPRD projects, directed toward the
development of network control software and subsystems, including advanced
multiprotocol label switching software for optical Internet backbone equipment
and an Internet protocol ("IP") routing protocol product suite, were identified
and valued. NetPlane's IPRD projects ranged from 5% to 60% complete and averaged
approximately 30% complete, with total estimated costs to complete all of the
projects of $0.5 million. The IPRD projects are principally expected to be
completed within one year of the acquisition date. The average discount rates
used were 20% to 22% for IPRD projects and 17% for developed technology, which
reflect the specific risks associated with each of the intangible assets. The
weighted average cost of capital was estimated at 17%.

     The Company's fiscal 2000 acquisitions are summarized below (in thousands):

<TABLE>
<CAPTION>
                        SHARES OF       VALUE OF                                                       GOODWILL AND
                         CONEXANT       CONEXANT     VALUE OF                                           IDENTIFIED
                       COMMON STOCK   COMMON STOCK   OPTIONS     CASH     TOTAL VALUE OF                INTANGIBLE
     TRANSACTION        ISSUED(1)      ISSUED(1)     ASSUMED     PAID    CONSIDERATION(1)     IPRD        ASSETS
     -----------       ------------   ------------   --------   ------   ----------------   --------   ------------
<S>                    <C>            <C>            <C>        <C>      <C>                <C>        <C>
Maker................     12,651        $880,852     $98,739    $   --       $979,591       $118,500     $888,923
HotRail..............      5,866         289,143      60,700        --        349,843         26,100      334,380
Philsar..............      2,227          88,932      18,962        --        107,894         24,362       79,103
Microcosm............      1,523          95,869       4,891     3,067        103,827         27,400       86,798
Novanet..............      1,802          81,436      12,185        --         93,621         17,317       76,386
NetPlane.............      1,502          67,873      11,891        --         79,764          2,031       70,185
Other fiscal 2000
  acquisitions.......      1,417          68,825       9,513     9,766         88,104             --       84,051
</TABLE>

---------------
(1) Excludes shares that may be delivered under earn-outs and under indemnity,
    escrow, or holdback provisions of the related acquisition agreements.

                                       55
<PAGE>   58
                             CONEXANT SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Consideration for the fiscal 2000 acquisitions consisted of Conexant common
stock issued and stock options assumed (aggregate value $1.8 billion) and cash
of $12.8 million. The net assets of the acquired businesses totaled $59.4
million, including liabilities of $20.7 million. The fair value of Conexant
common stock subject to repurchase agreements and, for acquisitions completed
after the effective date of FIN 44, the intrinsic value of 599,000 unvested
options assumed by Conexant (an aggregate of $19.5 million) was recorded as
deferred compensation and will be charged to expense over the remaining vesting
periods of the options, ranging up to three years.

     The terms of the acquisition agreements relating to the Company's fiscal
2000 acquisitions provide for additional consideration payable under earn-outs
and under indemnity, escrow or holdback provisions as noted above. When issued,
the additional consideration will result in additional goodwill.

     The results of operations of the acquired companies are included in the
consolidated financial statements from the dates of acquisition. The pro forma
consolidated statement of operations data below assumes that each of the
companies had been acquired at the beginning of each period presented. This pro
forma data includes amortization of goodwill and identified intangibles from
that date. However, the impact of the charges for IPRD has been excluded. This
pro forma data for the years ended September 30, 2000 and 1999 is presented for
informational purposes only, and is not necessarily indicative of the results of
future operations or of the results that would have been achieved had the
acquisitions taken place at the beginning of fiscal 1999.

<TABLE>
<CAPTION>
                                                         2000          1999
                                                      ----------    ----------
                                                       (IN THOUSANDS, EXCEPT
                                                          PER SHARE DATA)
<S>                                                   <C>           <C>
Net revenues........................................  $2,133,281    $1,485,904
Net loss............................................    (168,613)     (308,694)
Net loss per share, basic and diluted...............  $    (0.74)   $    (1.41)
</TABLE>

 4. MARKETABLE SECURITIES

     Marketable securities include commercial paper, corporate bonds, and
government securities, principally having remaining terms of one year or less,
and marketable equity securities. The Company enters into certain equity
investments for the promotion of business and strategic objectives. The
marketable portion of these strategic investments is classified as marketable
securities; non-marketable equity and other investments are included in other
assets. All of the Company's marketable securities are classified as available
for sale and are recorded on the consolidated balance sheet at fair value, based
upon quoted market prices. As of September 30, 2000, unrealized gains of $47.7
million (net of related income taxes of $29.4 million) on these securities are
included in other comprehensive income.

     The Company had no marketable securities at September 30, 1999. Available
for sale securities consisted of the following at September 30, 2000 (in
thousands):

<TABLE>
<CAPTION>
                                                 GROSS         GROSS
                                               UNREALIZED    UNREALIZED
                                  AMORTIZED     HOLDING       HOLDING        FAIR
                                    COST         GAINS         LOSSES       VALUE
                                  ---------    ----------    ----------    --------
<S>                               <C>          <C>           <C>           <C>
U.S. government agencies........   $14,795      $     1         $(60)      $ 14,736
Corporate debt securities.......     5,961            2           (7)         5,956
Equity securities...............    15,374       77,207           --         92,581
                                   -------      -------         ----       --------
                                   $36,130      $77,210         $(67)      $113,273
                                   =======      =======         ====       ========
</TABLE>

                                       56
<PAGE>   59
                             CONEXANT SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The contractual maturities of debt securities at September 30, 2000 are as
follows:

<TABLE>
<CAPTION>
                                                          AMORTIZED     FAIR
                                                            COST        VALUE
                                                          ---------    -------
<S>                                                       <C>          <C>
Due within one year.....................................   $17,461     $17,397
Due after one year through two years....................     3,295       3,295
                                                           -------     -------
                                                           $20,756     $20,692
                                                           =======     =======
</TABLE>

 5. SUPPLEMENTAL FINANCIAL STATEMENT DATA

     Inventories, net consisted of the following at September 30 (in thousands):

<TABLE>
<CAPTION>
                                                           2000        1999
                                                         --------    --------
<S>                                                      <C>         <C>
Raw material...........................................  $ 38,866    $ 29,998
Work-in-process........................................   209,871     160,781
Finished goods.........................................    92,265      33,698
                                                         --------    --------
                                                         $341,002    $224,477
                                                         ========    ========
</TABLE>

     Inventories, net have been presented above inclusive of allowances for
excess and obsolete inventories of approximately $50.2 million and $64.6 million
at September 30, 2000 and 1999, respectively.

     Property, plant and equipment, net consisted of the following at September
30 (in thousands):

<TABLE>
<CAPTION>
                                                        2000           1999
                                                     -----------    ----------
<S>                                                  <C>            <C>
Land...............................................  $    12,087    $   12,087
Land and leasehold improvements....................       21,068        12,636
Buildings..........................................      391,567       318,725
Machinery and equipment............................    1,351,005     1,090,175
Construction in progress...........................       99,334       166,399
                                                     -----------    ----------
                                                       1,875,061     1,600,022
Accumulated depreciation and amortization..........   (1,046,550)     (877,009)
                                                     -----------    ----------
                                                     $   828,511    $  723,013
                                                     ===========    ==========
</TABLE>

     Interest capitalized into construction in progress was $1.3 million and
$1.5 million during fiscal years 2000 and 1999. No interest was capitalized in
fiscal 1998.

     Goodwill and intangible assets, net consisted of the following at September
30 (in thousands):

<TABLE>
<CAPTION>
                                           LIFE IN YEARS       2000        1999
                                           -------------    ----------    -------
<S>                                        <C>              <C>           <C>
Goodwill.................................  3 - 10           $1,323,477    $20,316
Developed technology.....................  5 - 8.5             306,661     40,346
Other intangible assets..................  2 - 10               62,783     12,603
                                                            ----------    -------
                                                             1,692,921     73,265
Accumulated amortization.................                     (185,595)   (25,441)
                                                            ----------    -------
                                                            $1,507,326    $47,824
                                                            ==========    =======
</TABLE>

                                       57
<PAGE>   60
                             CONEXANT SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Other assets consisted of the following at September 30 (in thousands):

<TABLE>
<CAPTION>
                                                            2000       1999
                                                          --------    -------
<S>                                                       <C>         <C>
Advance payments to vendors.............................  $ 96,030    $    --
Investments, at cost....................................    75,942     31,675
Other...................................................    37,084     14,095
                                                          --------    -------
                                                          $209,056    $45,770
                                                          ========    =======
</TABLE>

     The advance payments to vendors were paid to wafer suppliers under
agreements for foundry capacity. An additional $75.0 million was paid in October
2000. These advance payments will be repaid upon the termination of the
agreements, or earlier if certain conditions are met. Investments consist of
equity interests in early stage technology companies, which are accounted for
under the cost method, as the Company has less than 20% of the voting rights of
each of these companies and does not exercise significant influence. In
connection with one of these investments, the Company may be required to invest
up to an additional $8.5 million.

     Other current liabilities consisted of the following at September 30 (in
thousands):

<TABLE>
<CAPTION>
                                                              2000      1999
                                                             -------   -------
<S>                                                          <C>       <C>
Litigation and environmental liabilities...................  $56,463   $ 1,061
Other......................................................   38,695    38,952
                                                             -------   -------
                                                             $95,158   $40,013
                                                             =======   =======
</TABLE>

 6. INCOME TAXES

     The components of the provision (benefit) for income taxes are as follows
for the years ended September 30 (in thousands):

<TABLE>
<CAPTION>
                                              2000        1999        1998
                                            --------    --------    ---------
<S>                                         <C>         <C>         <C>
Current:
  United States...........................  $ 70,304    $(22,604)   $ (66,286)
  Foreign.................................     7,189       6,047        4,621
  State and local.........................     7,237      (3,556)       2,360
                                            --------    --------    ---------
          Total current...................    84,730     (20,113)     (59,305)
                                            --------    --------    ---------
Deferred:
  United States...........................   (17,124)     14,254      (94,116)
  Foreign.................................    (4,527)        478         (591)
  State and local.........................   (10,475)     (4,792)     (14,100)
                                            --------    --------    ---------
          Total deferred..................   (32,126)      9,940     (108,807)
                                            --------    --------    ---------
Provision (benefit) for income taxes......  $ 52,604    $(10,173)   $(168,112)
                                            ========    ========    =========
</TABLE>

                                       58
<PAGE>   61
                             CONEXANT SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Deferred income tax assets and liabilities consist of the tax effects of
temporary differences related to the following at September 30 (in thousands):

<TABLE>
<CAPTION>
                                                            2000       1999
                                                          --------    -------
<S>                                                       <C>         <C>
Accrued compensation and benefits.......................  $  8,701    $ 9,912
Inventories.............................................    36,448     38,006
Product returns and allowances..........................    12,070     13,307
Deferred distributor revenues...........................    12,999      7,448
Research and development credit carryforwards...........        --     14,744
Litigation settlement...................................    21,615         --
Deferred state taxes....................................    (3,714)    (5,245)
Other -- net............................................     7,141      3,688
                                                          --------    -------
Current deferred income taxes...........................  $ 95,260    $81,860
                                                          ========    =======
Retirement benefits and deferred compensation...........  $ 23,749    $25,871
Property, plant and equipment...........................    (2,477)     8,184
Accrued royalties.......................................     2,337     11,962
Net operating loss carryforwards........................    48,809         --
Research and development credit carryforwards...........    52,963         --
State investment credit carryforwards...................    17,199         --
Unrealized gains on investments.........................   (29,481)        --
Intangible assets.......................................   (85,909)        --
Deferred state taxes....................................   (13,266)    (2,099)
Other -- net............................................   (12,638)     2,251
                                                          --------    -------
Long-term deferred income taxes.........................  $  1,286    $46,169
                                                          ========    =======
</TABLE>

     Management believes it is more likely than not that current and long-term
tax assets will be realized through the reduction of future income tax payments.
Significant factors considered by management in its determination of the
probability of the realization of the deferred tax assets include the historical
operating results of the Company, expectations of future earnings, and available
tax planning strategies.

     As of September 30, 2000, the Company has U.S. Federal net operating loss
carryforwards of approximately $122.8 million which expire in 2020 and aggregate
state net operating loss carryforwards of approximately $135.5 million which
expire in 2005. The Company also has U.S. Federal and state income tax credit
carryforwards of approximately $28.0 million and $57.1 million, respectively.
The U.S. credits may be carried forward for 20 years. California Manufacturers'
Investment Credits of approximately $32.2 million expire from 2005 through 2008,
while the remaining state credits of approximately $24.9 million have no
expiration date. Approximately $15.0 million of the California Manufacturers'
Investment Credit carryforward was earned while the Company was part of
Rockwell. Under the terms of the Tax Allocation Agreement with Rockwell,
Conexant must pay Rockwell approximately $15.0 million when the benefits from
such portion of the California Manufacturers' Investment Credit carryforwards
are realized.

     Tax benefits from the exercise of stock options (including payments
received under the tax allocation agreement with Rockwell) totaling $166.1
million and $20.6 million for fiscal years 2000 and 1999, respectively, were
credited directly to shareholders' equity.

     The results of Conexant's operations for the quarter ended December 31,
1998 and fiscal 1998 were included in the federal, state, local and foreign
income tax returns of Rockwell International Corporation. The remaining results
of operations for Conexant are included in separate Conexant income tax returns.
Rockwell has agreed to indemnify Conexant for income tax liabilities and
retained the rights to tax refunds relating to

                                       59
<PAGE>   62
                             CONEXANT SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

any operations included in Rockwell's income tax returns. Accordingly, the
balance sheet does not include current or prior period income tax receivables or
payables related to Conexant operations which are included in the consolidated
or combined Rockwell income tax returns. The income tax provisions included in
the Statements of Operations for periods prior to the spin-off from Rockwell
were determined based on the "separate return" method.

     The provision (benefit) for income taxes differs from the United States
federal statutory tax expense as follows for the years ended September 30 (in
thousands):

<TABLE>
<CAPTION>
                                                      2000        1999        1998
                                                    --------    --------    ---------
<S>                                                 <C>         <C>         <C>
U.S. federal statutory tax at 35%.................  $(48,414)   $    965    $(150,615)
State taxes, net of federal effects...............    (2,105)     (5,426)      (7,631)
Foreign income taxes in excess of (less than)
  U.S.............................................    29,384       1,145         (911)
Nondeductible amortization of intangible assets...    36,706          --           --
Nondeductible IPRD................................    51,321          --           --
Research and development credits..................   (18,936)     (6,941)      (9,321)
Other.............................................     4,648          84          366
                                                    --------    --------    ---------
Provision (benefit) for income taxes..............  $ 52,604    $(10,173)   $(168,112)
                                                    ========    ========    =========
</TABLE>

     Income (loss) before provision (benefit) for income taxes consisted of the
following components for the years ended September 30 (in thousands):

<TABLE>
<CAPTION>
                                                     2000         1999        1998
                                                   ---------    --------    ---------
<S>                                                <C>          <C>         <C>
Domestic.........................................  $ (61,974)   $(12,617)   $(444,446)
Foreign..........................................    (76,349)     15,373       14,118
                                                   ---------    --------    ---------
                                                   $(138,323)   $  2,756    $(430,328)
                                                   =========    ========    =========
</TABLE>

     No provision has been made for United States, state, or additional foreign
income taxes which would be due upon the actual or deemed distribution of
approximately $36.2 million and $15.0 million of undistributed earnings of
foreign subsidiaries as of September 30, 2000 and 1999, respectively, which have
been or are intended to be permanently reinvested.

 7. LONG-TERM DEBT

     In February 2000, the Company issued $650 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 conversion price of $108 per share, subject to
certain adjustments. The notes may be redeemed, at the Company's option, on or
after February 6, 2003 at a declining premium to par.

     In May 1999, the Company issued $350 million principal amount of its 4 1/4%
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 conversion price of $23.098 per share, subject
to certain adjustments. The notes may be redeemed, at the Company's option, on
or after May 6, 2002 at a declining premium to par.

     During fiscal 2000, $3,000 principal amount of the 4 1/4% Convertible
Subordinated Notes were converted into 129 shares of common stock. At September
30, 2000, the fair value of the convertible subordinated notes (based on quoted
market prices) was approximately $1.1 billion compared to its carrying value of
$1.0 billion.

                                       60
<PAGE>   63
                             CONEXANT SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The Company has a $475 million revolving credit facility with a group of
banks which provides for revolving borrowings and the issuance of letters of
credit. The credit facility is secured by a pledge of the stock of the Company's
significant subsidiaries (as that term is defined in the credit facility),
subject to certain exceptions for stock of foreign significant subsidiaries, and
by a pledge of certain intercompany indebtedness owed by any significant
subsidiary to the Company or any other subsidiary. If there is a downgrading of
the ratings on the Company's long-term, unsecured indebtedness by Standard &
Poor's Rating Services Group to B or less and a rating by Moody's Investor
Service of B2 or less (in the event of a rating by Moody's), the Company will be
required to secure the credit facility by pledging substantially all of its
assets and the assets of its domestic subsidiaries and the stock of all of its
subsidiaries, subject to certain exceptions. The credit facility expires in July
2003.

     Borrowings under the credit facility bear interest at a rate per annum
equal to certain published rates (at the election of the Company) plus a
variable margin based on the Company's total debt to capitalization ratio. The
Company pays a facility fee on the unused amount of the credit facility at a per
annum rate that will vary depending on the same criteria used to determine the
interest rate margin and other customary fees. The credit facility includes
restrictions on capital expenditures, indebtedness, acquisitions, mergers, asset
sales and liens on assets that apply to the Company and its subsidiaries. The
Company also must meet certain financial tests and maintain certain financial
ratios. The Company was in compliance with all covenants under the credit
facility for fiscal 2000. At September 30, 2000 there are no borrowings
outstanding under the credit facility.

     Interest expense was approximately $35.9 million, $10.8 million, and $-0-
during fiscal years 2000, 1999, and 1998, respectively.

 8. COMMITMENTS

     The Company leases certain facilities and equipment under non-cancelable
operating leases. Land and facility leases expire at various dates through 2008
and contain various provisions for rental adjustments including, in certain
cases, a provision 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 $17.6 million, $13.5 million, and $17.4
million during fiscal years 2000, 1999, and 1998, respectively.
At September 30, 2000, future minimum payments under operating leases are as
follows (in thousands):

<TABLE>
<CAPTION>
                        FISCAL YEAR
                        -----------
<S>                                                          <C>
2001.......................................................  $18,090
2002.......................................................   15,336
2003.......................................................   13,528
2004.......................................................   12,116
2005.......................................................    8,496
Thereafter.................................................    1,519
                                                             -------
          Total future minimum payments....................  $69,085
                                                             =======
</TABLE>

     Purchase commitments for construction or purchase of plant and equipment
totaled approximately $10.3 million at September 30, 2000.

 9. CONTINGENCIES

     Claims have been asserted against the Company for utilizing 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.

                                       61
<PAGE>   64
                             CONEXANT SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     On October 14, 1997, Brent Townshend ("Townshend") filed suit against
Rockwell and Conexant in the Superior Court of California for San Mateo County
seeking an injunction to halt the sale of products containing Conexant's
K56Flex(TM) chipsets and requesting unspecified damages, claiming that Conexant
had engaged in unfair competition, misappropriation of trade secrets, breach of
contract and breach of confidence by using technical information allegedly
disclosed in confidence by Townshend to accelerate its development of 56 Kbps
modem technology. In January 1999, Townshend dismissed his State Court action
and re-filed the same claims and three new claims for patent infringement in the
U.S. District Court for the Northern District of California. In the Federal
action, Townshend alleges that each of his patents (the "Townshend Patents")
covers certain aspects of the V.90 standard and are infringed by Conexant's 56
Kbps products. In October 2000, Townshend and Conexant entered into a written
understanding as to settlement of all outstanding litigation. Under the
settlement, Conexant will pay cash, and in certain circumstances non-cash
consideration, all outstanding litigation will be dismissed with prejudice, and
Townshend will grant to Conexant and certain future spin-off entities of
Conexant a non-exclusive license to the Townshend Patents and other defined
voiceband modem technology. The settlement calls for certain contingent cash
obligations of Conexant, all of which have been accrued as of September 30,
2000. The liability could be reduced upon the occurrence of certain events.

     In connection with the Distribution, Conexant 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 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
believes the disposition of such matters will not have a material adverse effect
on the Company's financial condition or results of operations.

     The Company has been designated as a potentially responsible party ("PRP")
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. The site was also formerly occupied by Recticon Corporation and
Allied Steel Products Corporation, each of whom has also been named as a PRP and
each of whom is insolvent. The remediation plan for the site includes
installation of a public water supply line and a groundwater pump and treatment
system, as well as routine groundwater sampling. Management estimates the total
costs for the remediation of this Superfund site to be approximately $2.1
million and has accrued for these costs as of September 30, 2000. In addition,
the Company is engaged in two other remediations of groundwater contamination at
its Newport Beach and Newbury Park, California facilities. Management currently
estimates the total costs for these remediations to be approximately $3.0
million and has also accrued for these costs as of September 30, 2000.

10. STOCK AND BENEFIT PLANS

     The Company's authorized capital consists of 1,000,000,000 shares of common
stock, par value $1.00 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. Under
the Rights Agreement dated as of November 30, 1998 between the Company and
ChaseMellon Shareholder Services, L.L.C., as Rights Agent, a preferred share
purchase right (a "Right") is attached to each share of common stock pursuant to
which the holder may, in certain takeover-

                                       62
<PAGE>   65
                             CONEXANT SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 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. An aggregate of 78.6 million shares have been authorized
to be granted under the stock option and long-term incentive plans. As of
September 30, 2000, 7.4 million shares are available for grant. Stock options
are generally granted at not less than the fair market value at grant date,
generally vest over four years and expire eight to ten years after the grant
date. The Company has also assumed stock option plans in connection with the
business acquisitions completed during fiscal 2000; no additional options will
be granted under those plans. A summary of stock option activity is as follows
for the years ended September 30 (shares in thousands):

<TABLE>
<CAPTION>
                                                            2000                     1999
                                                    ---------------------    ---------------------
                                                                 WEIGHTED                 WEIGHTED
                                                                 AVERAGE                  AVERAGE
                                                    NUMBER OF    EXERCISE    NUMBER OF    EXERCISE
                                                     SHARES       PRICE       SHARES       PRICE
                                                    ---------    --------    ---------    --------
<S>                                                 <C>          <C>         <C>          <C>
Outstanding at beginning of year..................   33,350       $ 9.80          --       $   --
Issued with spin-off from Rockwell................       --           --      20,113         6.99
Granted during period.............................   32,404        53.37      18,727        11.91
Outstanding options of acquired companies.........    4,469        11.15          --           --
Exercised.........................................   (7,082)        7.41      (4,026)        5.81
Cancelled.........................................   (2,462)       35.49      (1,464)        9.21
                                                     ------       ------      ------       ------
Outstanding at end of year........................   60,679       $32.51      33,350       $ 9.80
                                                     ======       ======      ======       ======
Exercisable at end of year........................   12,211       $ 8.32       9,910       $ 6.54
                                                     ======       ======      ======       ======
</TABLE>

     The following table summarizes stock options outstanding at September 30,
2000 (shares in thousands):

<TABLE>
<CAPTION>
                              OUTSTANDING                   EXERCISABLE
                  -----------------------------------   --------------------
                                AVERAGE      WEIGHTED               WEIGHTED
                               REMAINING     AVERAGE                AVERAGE
    RANGE OF       NUMBER     CONTRACTUAL    EXERCISE    NUMBER     EXERCISE
EXERCISE PRICES   OF SHARES   LIFE (YEARS)    PRICE     OF SHARES    PRICE
---------------   ---------   ------------   --------   ---------   --------
<S>               <C>         <C>            <C>        <C>         <C>
$ 0.07 - $  8.45   10,522         5.9         $ 6.49      7,415      $ 6.31
$ 8.47 - $  9.05    2,280         6.8           8.85      1,925        8.84
$ 9.23 - $  9.40   12,247         8.3           9.40      2,027        9.39
$ 9.47 - $ 32.79    3,828         8.9          20.82        665       17.95
$33.34 - $ 36.50   16,025         9.8          36.43         40       34.86
$36.65 - $ 63.25   11,322         9.3          58.62        139       38.49
$63.35 - $121.68    4,455         9.4          98.28         --          --
                   ------         ---         ------     ------      ------
$ 0.07 - $121.68   60,679         8.5         $32.51     12,211      $ 8.32
                   ======         ===         ======     ======      ======
</TABLE>

                                       63
<PAGE>   66
                             CONEXANT SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  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.
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 2000, 65,000 restricted shares of common stock were issued at a
weighted-average fair value of $71.84. During fiscal 1999, 2.2 million
restricted shares of common stock were issued at a weighted-average fair value
of $11.84. No shares of restricted stock were issued in 1998. The fair value of
restricted stock awards is charged to expense over the vesting period. In fiscal
years 2000 and 1999, the Company recorded compensation expense of $2.6 million
and $19.6 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.
As of September 30, 2000, 14,000 shares of Company common stock have been issued
under the Directors Plan. An aggregate of 630,000 shares of the Company's common
stock have been authorized for issuance under the Directors Plan.

  Employee Stock Purchase Plans

     The Company has adopted employee stock purchase plans for all eligible
employees to purchase shares of the Company's common stock at 85% of the lower
of the fair market value on the first or the last day of each six-month offering
period. Under the employee stock purchase plans, employees may authorize the
Company to withhold up to 10% of their compensation during any offering period,
subject to certain limitations. Offering periods generally each have a six-month
duration, commencing on March 1 and September 1 of each year. At September 30,
2000, an aggregate of 3.4 million shares of the Company's common stock had been
authorized for issuance and approximately 2.3 million shares of common stock
were available for future purchases under the plans.

  Accounting for Stock-Based Compensation

     As permitted under SFAS 123, the Company has elected to follow APB 25 and
related interpretations in accounting for stock-based awards to employees. Under
APB 25, the Company generally recognizes no compensation expense with respect to
such awards.

     Pro forma information regarding net income (loss) and earnings (loss) per
share is required by SFAS 123. This information is required to be determined as
if the Company had accounted for stock-based awards to its employees under the
fair value method of that Statement. Had compensation cost for fiscal 2000 and
1999 option awards been determined based on the fair value at the grant date for
awards, consistent with the provisions of SFAS 123, the Company's net loss and
net loss per share would have been the pro forma amounts indicated below (in
thousands, except per share data):

<TABLE>
<CAPTION>
                                                          2000         1999
                                                        ---------    --------
<S>                                                     <C>          <C>
Pro forma net loss....................................  $(348,878)   $(19,971)
Pro forma net loss per share, basic and diluted.......  $   (1.65)   $  (0.10)
</TABLE>

     The Company granted no options in fiscal 1998. For purposes of pro forma
disclosures under SFAS 123, the estimated fair value of the options is assumed
to be amortized to expense over the options' vesting period.

                                       64
<PAGE>   67
                             CONEXANT SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The fair value of the options granted in fiscal 2000 and 1999 reported below has
been estimated at the date of grant using the Black-Scholes option pricing model
with the following assumptions:

<TABLE>
<CAPTION>
                                                               2000     1999
                                                              ------    -----
<S>                                                           <C>       <C>
Risk-free interest rate.....................................     5.9%     5.9%
Expected volatility.........................................      60%      60%
Dividend yield..............................................      --       --
Expected life (years).......................................     4.5      5.0
Weighted-average fair value of options granted..............  $28.70    $5.65
</TABLE>

     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 options 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.

11. EMPLOYEE BENEFIT PLANS

  Retirement Savings Plan

     The Company sponsors a 401(k) retirement savings plan that allows eligible
U.S. employees to contribute, on a pre-tax basis or after-tax basis, up to 17%
of their salary, subject to annual limits. The Company matches contributions
dollar for dollar up to specified levels, and the Company may make an additional
discretionary matching contribution at fiscal year-end, based on the Company's
performance. All Company matching contributions are held in a fund which
purchases shares of the Company's common stock, and are vested immediately.
Expense under the retirement savings plan was $13.5 million, $6.7 million, and
$6.0 million for fiscal years 2000, 1999, and 1998, respectively.

  Retirement Medical Plans

     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. Retirement
medical expense, consisting principally of interest accrued on the accumulated
retirement medical obligation, was approximately $3.9 million, $1.6 million, and
$2.7 million in fiscal years 2000, 1999, and 1998, respectively.

                                       65
<PAGE>   68
                             CONEXANT SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The change in the retirement medical obligation is as follows for the years
ended September 30 (in millions):

<TABLE>
<CAPTION>
                                                              2000      1999
                                                             ------    ------
<S>                                                          <C>       <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year....................  $ 27.3    $ 28.9
Service cost...............................................     0.4       0.2
Interest cost..............................................     2.8       1.9
Plan participants' contributions...........................     0.1       0.2
Actuarial loss (gain)......................................     9.4      (1.4)
Benefits paid..............................................    (3.4)     (2.5)
                                                             ------    ------
Benefit obligation at end of year..........................    36.6      27.3
                                                             ------    ------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year.............      --        --
Actual return on plan assets...............................      --        --
Employer contribution......................................     3.3       2.3
Plan participants' contributions...........................     0.1       0.2
Benefits paid..............................................    (3.4)     (2.5)
                                                             ------    ------
Fair value of plan assets at end of year...................      --        --
                                                             ------    ------
Funded status..............................................   (36.6)    (27.3)
Unrecognized net actuarial loss............................    13.7       5.8
Unrecognized prior service cost............................    (8.2)     (9.0)
                                                             ------    ------
Accrued benefit cost.......................................  $(31.1)   $(30.5)
                                                             ======    ======
</TABLE>

     For measurement purposes, a 9.25% annual rate of increase in the per capita
cost of health care benefits was assumed for fiscal 2000, decreasing to 5.75% in
2012 and remaining at that level thereafter. The accrued benefit obligation is
based on discount rates of 7.75% (2000) and 7.25% (1999). Increasing the health
care cost trend rate by 1% would increase the accumulated retirement medical
obligation at September 30, 2000 by approximately $3.4 million and would not
significantly increase retirement medical expense.

  Pension Plans

     Prior to the spin-off from Rockwell, Conexant employees participated in a
Rockwell pension plan which provides for monthly pension payments to eligible
U.S. employees upon retirement. Pension benefits for U.S. salaried employees are
based on years of credited service and compensation. Pension benefits for U.S.
hourly employees are based on years of service and specified benefit amounts. In
connection with the Distribution, Rockwell retained the obligation for vested
benefits earned by Conexant participants in the Rockwell Pension Plan and all
related assets. At the time of the spin-off, Conexant established a pension plan
for certain hourly employees, with benefits substantially similar to the
Rockwell pension plan, and which credits these employees for service earned with
Rockwell. The benefits payable by Conexant under this plan are equal to the
difference between the total benefits earned with both companies and the vested
benefit obligation retained by Rockwell. Conexant also has certain pension plans
covering its non-U.S. employees and retirees.

     In connection with the restructuring plan announced 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 the
Rockwell pension plan. Fiscal 1998 special charges include approximately $6.0
million for costs associated with employees who accepted the VERP on or before

                                       66
<PAGE>   69
                             CONEXANT SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 1998. Fiscal 1999 special charges include an additional charge of
approximately $17.0 million for costs associated with the employees who accepted
the VERP after September 30, 1998.

     Net pension expense was approximately $1.9 million, $17.9 million and $14
million for fiscal 2000, 1999 and 1998, respectively. Net pension expense
consists of service costs for benefits earned during the year and, in fiscal
years 1999 and 1998, the cost of benefits under the VERP. As of September 30,
2000 and 1999, the aggregate projected benefit obligation included in the
consolidated balance sheet for the VERP and hourly pension plans was
approximately $11.6 million and $13.3 million, respectively. The pension
obligations are based on discount rates of 7.75% (2000) and 7.25% (1999).

12. NET INCOME (LOSS) PER SHARE

     Basic net income (loss) per share is based on the weighted average number
of shares of common stock outstanding during the period. Diluted net 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.

     For periods prior to the December 31, 1998 spin-off from Rockwell, net
income (loss) per share represents a pro forma net income (loss) per share,
calculated as if the spin-off had occurred on October 1, 1997. The number of pro
forma weighted average outstanding shares and common share equivalents used in
the pro forma net income (loss) per share calculation set forth below was based
upon the weighted average number of Rockwell shares and share equivalents
outstanding for the applicable periods, adjusted for the distribution ratio in
the Distribution of one share of the Company's common stock for every two shares
of Rockwell common stock. For the year ended September 30, 1999, the pro forma
weighted average common shares was determined based upon the weighted average of
the Rockwell method for the first fiscal quarter, as previously described, and
the actual Conexant share activity for the second through fourth quarters. For
the year ended September 30, 1998 the pro forma weighted average common shares
was determined based upon the weighted average of the Rockwell method for the
entire period.

     The following table sets forth the computation of basic and diluted net
income (loss) per share for the years ended September 30 (in thousands, except
per share data):

<TABLE>
<CAPTION>
                                                     2000         1999        1998
                                                   ---------    --------    ---------
<S>                                                <C>          <C>         <C>
Income:
  Net income (loss) available to common
     shareholders -- basic and diluted...........  $(190,927)   $ 12,929    $(262,216)
                                                   =========    ========    =========
Shares:
  Weighted average shares outstanding -- basic...    211,840     192,551      197,900
  Effect of dilutive securities:
     Stock options...............................         --      10,830           --
     Restricted stock............................         --         103           --
                                                   ---------    --------    ---------
  Weighted average shares
     outstanding -- diluted......................    211,840     203,484      197,900
                                                   =========    ========    =========
Net income (loss) per share
  Basic..........................................  $   (0.90)   $   0.07    $   (1.32)
                                                   =========    ========    =========
  Diluted........................................  $   (0.90)   $   0.06    $   (1.32)
                                                   =========    ========    =========
</TABLE>

     For fiscal 2000, the basic number of weighted average shares outstanding
includes approximately 2.2 million shares of common stock required to be issued
on a delayed basis as part of an acquisition.

                                       67
<PAGE>   70
                             CONEXANT SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     For periods subsequent to the spin-off from Rockwell, the potential
dilutive effect of Conexant's 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):

<TABLE>
<CAPTION>
                                                               2000     1999
                                                              ------    -----
<S>                                                           <C>       <C>
Stock options (under the treasury stock method).............  17,164       --
4 1/4% Convertible Subordinated Notes due 2006..............  15,153    5,953
4% Convertible Subordinated Notes due 2007..................   3,929       --
Restricted stock and other..................................     813       --
</TABLE>

     The 4% Convertible Subordinated Notes due 2007 were issued in February 2000
and are convertible into an aggregate of 6.0 million shares of the Company's
common stock as of September 30, 2000.

13. SPECIAL CHARGES

     In the fourth quarter of fiscal 1998, the Company restructured its business
and recorded special charges of approximately $147 million. The special charges
include an asset impairment of approximately $103 million related to the closure
and planned disposal of its wafer fabrication facilities in Colorado Springs,
Colorado, approximately $15 million for employee severance and VERP costs
associated with an approximate 10% worldwide workforce reduction, approximately
$11 million related to intangible asset write-offs and approximately $18 million
for other actions including lease termination costs, contractual liabilities and
other asset write-offs. In connection with the restructuring, management decided
to close and dispose of the Company's wafer fabrication facilities in Colorado
Springs, Colorado. The $103 million charge represents the excess of the carrying
value of the long-lived assets of these facilities over their estimated fair
value as determined by independent appraisal. These facilities were distributed
to Rockwell prior to the Distribution.

     In the first fiscal quarter of 1999, the Company recorded special charges
of approximately $38 million. The additional charges include approximately $20.0
million related to the further writedown of the Company's wafer fabrication
facilities in Colorado Springs, Colorado, approximately $17.0 million relating
to the VERP, and approximately $0.9 million to decommission equipment,
activities at foreign subsidiaries and contract cancellations at the Colorado
Springs wafer fabrication facilities. As of September 30, 2000, the
restructuring plans were substantially complete. The following table summarizes
the Company's restructuring activity for the year ended September 30, 2000 (in
thousands):

<TABLE>
<CAPTION>
                                                      FACILITIES    SEVERANCE
                                                         AND           AND        OTHER
                                                      EQUIPMENT     BENEFITS     EXPENSES     TOTAL
                                                      ----------    ---------    --------    -------
<S>                                                   <C>           <C>          <C>         <C>
Restructuring balances at September 30, 1999........   $ 2,002        $ 278      $ 4,976     $ 7,256
Non-cash charges....................................    (1,326)          --       (1,575)     (2,901)
Cash charges........................................      (423)         (22)      (1,114)     (1,559)
Additional charge and change in reserve estimate....      (253)        (256)      (2,287)     (2,796)
                                                       -------        -----      -------     -------
Restructuring balances at September 30, 2000........   $    --        $  --      $    --     $    --
                                                       =======        =====      =======     =======
</TABLE>

14. RELATED PARTY TRANSACTIONS

     Prior to the Distribution, Rockwell provided certain services that were
allocated based on sales in proportion to total Rockwell sales. Subsequent to
the Distribution, Rockwell provided certain services to the Company, including
payroll and employee benefits administration, data processing and
telecommunications services, and research and development activities under the
terms of a transition agreement. Costs for these services and programs are
billed to Conexant based on actual usage and are included in the accompanying
consolidated statements of operations. Management believes that the methods of
billing these costs are

                                       68
<PAGE>   71
                             CONEXANT SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

reasonable. These costs totaled approximately $4.5 million, $10 million and $23
million in fiscal 2000, 1999 and 1998, respectively.

     Prior to the Distribution, Rockwell also provided management services to
Conexant, including corporate oversight, financial, legal, tax, corporate
communications, and human resources. The costs of providing these services were
allocated to Conexant based on sales in proportion to total Rockwell sales and
are included in selling, general and administrative expense. These costs totaled
approximately $2 million and $12 million in fiscal 1999 and 1998, respectively.

     During fiscal 1999, the Company transferred its Colorado Springs, Colorado
wafer fabrication facilities (and the related tax benefit) with a book value of
approximately $59 million to Rockwell, as well as certain other tax benefits of
approximately $25 million related to litigation. In addition, Rockwell
transferred $64 million of restricted cash to Conexant to be used to satisfy a
$65 million liability which Conexant recorded in fiscal 1998, related to the
same litigation. During fiscal 1999, Conexant used the restricted cash balance
of $64 million to settle the liability.

NOTE 15. SEGMENT AND OTHER INFORMATION

     The Company operates and tracks its results in two segments -- Personal
Networking and Internet Infrastructure. The Personal Networking segment designs,
develops and sells semiconductor products and system solutions in four general
personal communications applications markets -- personal computing, personal
imaging, digital infotainment and wireless communications. For segment reporting
purposes, these four product groups have been aggregated because of their common
characteristics and their reliance on shared operating functions. The Internet
Infrastructure segment designs, develops and sells semiconductor products and
system solutions for some of the highest-growth areas in the broadband
communications markets including broadband access, multi-service access and wide
area network transport.

     The accounting policies of the segments are the same as those described in
the Note 2. The Company evaluates segment performance based on operating income
(loss) excluding amortization of intangible assets, IPRD, and special charges.
The tables below present information about reported segments for the years ended
September 30 (in thousands):

<TABLE>
<CAPTION>
                                                    NET REVENUES                    OPERATING INCOME (LOSS)
                                        ------------------------------------   ---------------------------------
                                           2000         1999         1998        2000        1999        1998
                                        ----------   ----------   ----------   ---------   ---------   ---------
<S>                                     <C>          <C>          <C>          <C>         <C>         <C>
Personal Networking...................  $1,524,393   $1,166,501   $1,056,961   $ 145,503    $23,240    $(188,878)
Internet Infrastructure...............     579,206      277,613      143,270     127,326     19,851      (49,954)
                                        ----------   ----------   ----------   ---------    -------    ---------
  Segment totals......................  $2,103,599   $1,444,114   $1,200,231     272,829     43,091     (238,832)
                                        ==========   ==========   ==========
Amortization of intangible assets.....                                           160,154      8,364       11,020
IPRD..................................                                           215,710         --           --
Compensatory stock option grants......                                             6,759         --           --
Special charges.......................                                                --     37,906      147,306
                                                                               ---------    -------    ---------
  Operating loss......................                                         $(109,794)   $(3,179)   $(397,158)
                                                                               =========    =======    =========
</TABLE>

<TABLE>
<CAPTION>
                                               DEPRECIATION AND AMORTIZATION         CAPITAL EXPENDITURES
                                               ------------------------------   ------------------------------
                                                 2000       1999       1998       2000       1999       1998
                                               --------   --------   --------   --------   --------   --------
<S>                                            <C>        <C>        <C>        <C>        <C>        <C>
Personal Networking..........................  $202,897   $201,296   $208,503   $299,019   $203,997   $257,665
Internet Infrastructure......................   149,991     11,580     11,141     16,099      9,759     12,021
                                               --------   --------   --------   --------   --------   --------
                                               $352,888   $212,876   $219,644   $315,118   $213,756   $269,686
                                               ========   ========   ========   ========   ========   ========
</TABLE>

                                       69
<PAGE>   72
                             CONEXANT SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Segment total assets are as follows as of September 30 (in thousands):

<TABLE>
<CAPTION>
                                                         2000          1999
                                                      ----------    ----------
<S>                                                   <C>           <C>
Personal Networking.................................  $2,676,836    $1,648,774
Internet Infrastructure.............................   1,739,361       193,176
                                                      ----------    ----------
                                                      $4,416,197    $1,841,950
                                                      ==========    ==========
</TABLE>

     Revenues by product are as follows for the years ended September 30 (in
thousands):

<TABLE>
<CAPTION>
                                            2000          1999          1998
                                         ----------    ----------    ----------
<S>                                      <C>           <C>           <C>
Personal Computing.....................  $  722,929    $  626,534    $  639,925
Personal Imaging.......................     119,818        89,892       102,055
Digital Infotainment...................     290,808       183,522       144,600
Wireless Communications................     390,838       266,553       170,381
Internet Infrastructure................     579,206       277,613       143,270
                                         ----------    ----------    ----------
                                         $2,103,599    $1,444,114    $1,200,231
                                         ==========    ==========    ==========
</TABLE>

     Revenues by geographic area are presented based upon their country of
destination. No other foreign country represented 10% or more of net revenues
for any of the periods presented. Revenues by geographic area are as follows for
the years ended September 30 (in thousands):

<TABLE>
<CAPTION>
                                            2000          1999          1998
                                         ----------    ----------    ----------
<S>                                      <C>           <C>           <C>
United States..........................  $  634,440    $  461,254    $  442,627
Other Americas.........................      49,610        58,769        11,817
                                         ----------    ----------    ----------
          Total Americas...............     684,050       520,023       454,444
Taiwan.................................     426,264       309,112       251,010
South Korea............................     247,040       144,898        71,208
Other Asia-Pacific.....................     312,326       173,705       149,950
                                         ----------    ----------    ----------
          Total Asia-Pacific...........     985,630       627,715       472,168
Japan..................................     200,486       168,919       128,812
Europe.................................     233,433       127,457       144,807
                                         ----------    ----------    ----------
                                         $2,103,599    $1,444,114    $1,200,231
                                         ==========    ==========    ==========
</TABLE>

     Long-lived assets consist of property, plant and equipment, goodwill and
intangible assets, and other assets. Long-lived assets by geographic area are as
follows as of September 30 (in thousands):

<TABLE>
<CAPTION>
                                                          2000         1999
                                                       ----------    --------
<S>                                                    <C>           <C>
United States........................................  $2,265,318    $787,365
Europe...............................................      97,578       2,416
Asia-Pacific.........................................       3,036       2,645
Other................................................     178,961      24,181
                                                       ----------    --------
                                                       $2,544,893    $816,607
                                                       ==========    ========
</TABLE>

16. SUPPLEMENTAL CASH FLOW INFORMATION

     Interest paid, net of amounts capitalized, was approximately $26.0 million,
$0.6 million, and $-0- during fiscal 2000, 1999 and 1998, respectively. Income
taxes paid were $20.6 million and $-0- during fiscal 2000 and 1999,
respectively. Prior to the Distribution, all income tax payments were made by
Rockwell.

                                       70
<PAGE>   73
                             CONEXANT SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

17. SUBSEQUENT EVENTS

     From October 1 through November 30, 2000, $233.7 million principal amount
of the Company's 4 1/4% Convertible Subordinated Notes due 2006 were converted
into 10.1 million shares of common stock at a cost to the Company of $39.1
million. In addition, the Company repurchased $35.0 million principal amount of
its 4% Convertible Subordinated Notes due 2007 at prevailing market prices.

                                       71
<PAGE>   74

                          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, 2000 and
1999, and the related consolidated statements of operations, cash flows and
shareholders' equity for each of the three years in the period ended September
30, 2000. Our audits also included the financial statement schedule listed in
the Index at Item 14(a). 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 consolidated financial position of
the Company and its subsidiaries at September 30, 2000 and 1999, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended September 30, 2000, 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.

/s/  DELOITTE & TOUCHE LLP

Costa Mesa, California
October 16, 2000, except for Note 17,
   as to which the date is November 30, 2000

                                       72
<PAGE>   75

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     Not applicable.

                                    PART III

     Certain information required by Part III is omitted from this Annual Report
on Form 10-K in that the Registrant will file its definitive Proxy Statement for
the Annual Meeting of Shareowners to be held on February 28, 2001 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 on Form 10-K, 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 by
reference to the section entitled "Election of Directors" in the Proxy
Statement.

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.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this Item is incorporated herein by reference
to the section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     In connection with the Distribution, Rockwell and the Company entered into
several agreements, including agreements relating to services to be provided by
Rockwell to the Company following the Distribution, the allocation of
liabilities and obligations with respect to taxes, employee benefit plans and
compensation arrangements, and other matters. At the time these agreements were
negotiated and executed, certain of the Company's directors and executive
officers also served as directors or executive officers of Rockwell. The Company
believes the terms of these agreements to be reasonable.

     Additional information required by this Item is incorporated by reference
to the section entitled "Certain Relationships and Related Transactions" in the
Proxy Statement.

                                    PART IV

ITEM 14. 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, 2000 are included herewith:

     Consolidated Balance Sheets, Consolidated Statements of Operations,
     Consolidated Statements of Cash Flows, Consolidated Statements of
     Shareholders' Equity, Notes to Consolidated Financial Statements, and
     Report of Independent Auditors

                                       73
<PAGE>   76

     (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)(a) EXHIBITS

<TABLE>
<CAPTION>
EXHIBITS                            DESCRIPTION
--------                            -----------
<S>         <C>
  3-a-1     Restated Certificate of Incorporation, as amended, of the
            Company, filed as Exhibit 3.1 to the Company's Quarterly
            Report on Form 10-Q for the quarter ended June 30, 2000, is
            incorporated herein by reference.
  3-a-2     Amended By-Laws of the Company, filed as Exhibit 4.2 to the
            Company's Registration Statement on Form S-8 (Registration
            No. 333-68755), is incorporated herein by reference.
  4-a-1     Rights Agreement, dated as of November 30, 1998, by and
            between the Company and 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.
  4-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
            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     Credit Agreement, dated as of December 21, 1998, as amended
            and restated as of July 27, 2000, among the Company, certain
            of its subsidiaries, the Lenders and the Issuing Banks
            thereunder, and Credit Suisse First Boston, as
            Administrative Agent and Collateral Agent, filed as Exhibit
            10.1 to the Company's Quarterly Report on Form 10-Q for the
            quarter ended June 30, 2000, is incorporated herein by
            reference.
*10-b-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-b-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-b-3     Forms of Stock Option Agreements under Rockwell's 1988
            Long-Term Incentives Plan for options granted prior to May
            1, 1992, filed as Exhibit 10-d-2 to Rockwell's Annual Report
            on Form 10-K for the year ended September 30, 1988 (File No.
            1-1035), are incorporated herein by reference.
*10-b-4     Forms of Stock Option and Stock Appreciation Rights
            Agreements under Rockwell's 1988 Long-Term Incentives Plan
            for options and stock appreciation rights granted prior to
            May 1, 1992, filed as Exhibit 10-d-3 to Rockwell's Annual
            Report on Form 10-K for the year ended September 30, 1988
            (File No. 1-1035), are incorporated herein by reference.
</TABLE>

                                       74
<PAGE>   77

<TABLE>
<CAPTION>
EXHIBITS                            DESCRIPTION
--------                            -----------
<S>         <C>
*10-b-5     Form of Stock Option Agreement under Rockwell's 1988
            Long-Term Incentives Plan for options granted after May 1,
            1992 and prior to March 1, 1993, filed as Exhibit 28-a-1 to
            Rockwell's Quarterly Report on Form 10-Q for the quarter
            ended June 30, 1992 (File No. 1-1035), is incorporated
            herein by reference.
*10-b-6     Forms of Stock Option Agreements under Rockwell's 1988
            Long-Term Incentives Plan for options granted after March 1,
            1993 and prior to November 1, 1993, filed as Exhibit 28-a to
            Rockwell's Quarterly Report on Form 10-Q for the quarter
            ended March 31, 1993 (File No. 1-1035), are incorporated
            herein by reference.
*10-b-7     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-b-8     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-b-9     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-b-10    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-b-11    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-b-12    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-b-13    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-b-14    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.
*10-b-15    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-b-16    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.
</TABLE>

                                       75
<PAGE>   78

<TABLE>
<CAPTION>
EXHIBITS                            DESCRIPTION
--------                            -----------
<S>         <C>
*10-b-17    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-c-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-c-2     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-c-3     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-c-4     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-c-5     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-c-6     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-c-7     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-c-8     Copy of resolution of the Board of Directors of the Company,
            adopted September 13, 1999, approving a stock dividend at
            the rate of one additional share of common stock for each
            share of common stock issued and outstanding (or held in the
            treasury of the Company) payable to shareowners of record at
            the close of business on September 24, 1999 (the "Record
            Date") and to be distributed on October 29, 1999, filed as
            Exhibit 10-c-9 to the Company's Annual Report on Form 10-K
            for the year ended September 30, 1999, 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 and the
            Company's Retirement Savings 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, filed as
            Exhibit 10.2 to the Company's Registration Statement on Form
            10 (File No. 000-24923), is incorporated herein by
            reference.
*10-f-1     Employment Agreement dated December 15, 1998 between the
            Company and B.S. Iyer, 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.
</TABLE>

                                       76
<PAGE>   79

<TABLE>
<CAPTION>
EXHIBITS                            DESCRIPTION
--------                            -----------
<S>         <C>
*10-f-2     Schedule identifying agreements substantially identical to
            the Employment Agreement constituting Exhibit 10-f-1 hereto
            entered into by the Company with M.M. Beguwala, L.C.
            Brewster, T.L. Ellis, R.Y. Halim, D.E. O'Reilly, A. Rangan,
            F.M. Rhodes, J.P. Spoto, T.A. Stites and K.V. Strong.
*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-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.
 12         Statement re: Computation of Ratios.
 21         List of Subsidiaries of the Company.
 23         Independent Auditors' Consent.
 27         Financial Data Schedule.
</TABLE>

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

     (b) REPORTS ON FORM 8-K. The Company filed the following current reports on
Form 8-K during the quarter ended September 30, 2000:

     Report on Form 8-K dated September 28, 2000, reporting the completion of
     the Company's acquisition of NetPlane Systems, Inc. (Item 5).

     Report on Form 8-K dated September 22, 2000, reporting the completion of
     the Company's acquisition of Novanet Semiconductor Ltd. (Item 5).

     Report on Form 8-K dated September 14, 2000, reporting the Company's plan
     to spin-off its Internet Infrastructure business. (Items 5 and 7).

     Report on Form 8-K dated August 8, 2000, with respect to pro forma
     financial statements of the Company in connection with the Company's
     acquisition of Maker Communications, Inc. (Items 5 and 7).

     Report on Form 8-K dated July 19, 2000, reporting the Company's agreement
     to acquire NetPlane Systems, Inc. and the Company's agreement to acquire
     Novanet Semiconductor Ltd. (Items 5 and 7).

     Report on Form 8-K dated June 29, 2000, reporting the completion of the
     Company's acquisition of HotRail, Inc. (Items 2 and 7).

     (c) EXHIBITS

     See subsection (a)(3) above.

     (d) FINANCIAL STATEMENT SCHEDULES

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

                                       77
<PAGE>   80

                                   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 13th day of December, 2000.

                                          CONEXANT SYSTEMS, INC.

                                          By:     /s/ DWIGHT W. DECKER
                                            ------------------------------------
                                                     Dwight W. Decker,
                                            Chairman and Chief Executive Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed on the 13th day of December, 2000 by the
following persons on behalf of the Registrant and in the capacities indicated:

<TABLE>
<CAPTION>
                       SIGNATURE                                             TITLE
                       ---------                                             -----
<S>                                                       <C>
                  /s/ DWIGHT W. DECKER                        Chief Executive Officer and Chairman
--------------------------------------------------------           of the Board of Directors
                    Dwight W. Decker                             (Principal Executive Officer)

                /s/ BALAKRISHNAN S. IYER                        Senior Vice President and Chief
--------------------------------------------------------               Financial Officer
                  Balakrishnan S. Iyer                           (Principal Financial Officer)

                 /s/ STEVEN M. THOMSON
--------------------------------------------------------         Vice President and Controller
                   Steven M. Thomson                             (Principal Accounting Officer)

                  /s/ F. CRAIG FARRILL
--------------------------------------------------------
                    F. Craig Farrill                                        Director

                  /s/ DONALD R. BEALL
--------------------------------------------------------
                    Donald R. Beall                                         Director

                   /s/ JERRE L. STEAD
--------------------------------------------------------
                     Jerre L. Stead                                         Director

                /s/ RICHARD M. BRESSLER
--------------------------------------------------------
                  Richard M. Bressler                                       Director
</TABLE>

                                       78
<PAGE>   81

                                                                     SCHEDULE II

                       VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                            ADDITIONS
                                                      ---------------------
                                        BALANCE AT      CHARGED                              BALANCE AT
                                        BEGINNING     TO COSTS AND                             END OF
             DESCRIPTION                 OF YEAR        EXPENSES      OTHER    DEDUCTIONS       YEAR
             -----------                ----------    ------------    -----    ----------    ----------
<S>                                     <C>           <C>             <C>      <C>           <C>
Year ended September 30, 2000:
  Allowance for doubtful accounts.....   $  9,658       $ 2,066       $351(a)   $ (5,126)     $  6,949
  Allowance for excess and obsolete
     inventories......................     64,582         7,771        313(a)    (22,461)       50,205
Year ended September 30, 1999:
  Allowance for doubtful accounts.....   $  8,975       $ 3,745       $ --      $ (3,062)     $  9,658
  Allowance for excess and obsolete
     inventories......................    105,708        10,067         --       (51,193)       64,582
Year ended September 30, 1998:
  Allowance for doubtful accounts.....   $ 10,102       $ 2,408       $ --      $ (3,535)     $  8,975
  Allowance for excess and obsolete
     inventories......................     65,553        67,069         --       (26,914)      105,708
</TABLE>

---------------
(a) Acquisition date balances of acquired companies.

                                       79
<PAGE>   82

                                 EXHIBIT INDEX

<TABLE>
<S>      <C>
*10-f-2  Schedule identifying agreements substantially identical to
         the Employment Agreement constituting Exhibit 10-f-1 hereto
         entered into by the Company with M.M. Beguwala, L.C.
         Brewster, T.L. Ellis, R.Y. Halim, D.E. O'Reilly, A. Rangan,
         F.M. Rhodes, J.P. Spoto, T.A. Stites and K.V. Strong.
12       Statement re: Computation of Ratios.
21       List of Subsidiaries of the Company.
23       Independent Auditors' Consent.
27       Financial Data Schedule.
</TABLE>

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

                                       80