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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-K

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

For the fiscal year ended September 30, 2001*

Commission file number: 000-24923

CONEXANT SYSTEMS, INC.

(Exact name of registrant as specified in its charter)


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

|                                                                                      |  |                     
|------------------------------------------------------------------------------------- |  | --------------------
|4311 Jamboree Road, Newport Beach, California(Address of principal executive offices) |  | 92660-3095(Zip code)

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

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

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

Common Stock, $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 23, 2001) was approximately
$3.5 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 23, 2001 was 254,814,295.

Documents Incorporated by Reference

Portions of the Registrants Proxy Statement for the 2002 Annual Meeting
of Shareowners to be held on February 27, 2002, are incorporated by reference
into Part III of this Form 10-K.



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|* |  | For presentation purposes of this Form 10-K, references made to the
September 30, 2001 period relate to the actual fiscal year ended September
28, 2001.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



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TABLE OF CONTENTS



|               |                                                                                               |                                                 |  |  |  |  |  | 
|-------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------- |  |  |  |  |  | 
|PART I        
|               | Item 1. Business                                                                             
|               | Item 2. Properties                                                                           
|               | Item 3. Legal Proceedings                                                                    
|               | Item 4. Submission of Matters to Vote of Security Holders                                    
|PART II       
|               | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|               | Item 6. Selected Financial Data                                                              
|               | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|               | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|               | Item 8. Financial Statements and Supplementary Data                                          
|               |                                                                                               | CONSOLIDATED BALANCE SHEETS                    
|               |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS          
|               |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS          
|               |                                                                                               | CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
|               |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     
|               | Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 
|PART III      
|               | Item 10. Directors and Executive Officers of the Registrant                                  
|               | Item 11. Executive Compensation                                                              
|               | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|               | Item 13. Certain Relationships and Related Transactions                                      
|PART IV       
|               | Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES    
|EXHIBIT INDEX 
|EXHIBIT 3-A-2 
|EXHIBIT 3-A-3 
|EXHIBIT 10-F-2
|EXHIBIT 12    
|EXHIBIT 21    
|EXHIBIT 23    
|EXHIBIT 24    
|EXHIBIT 99    



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CAUTIONARY STATEMENT

This Annual Report on Form 10-K contains statements relating to future results
of Conexant Systems, Inc. (including certain projections and business trends)
that are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, and are subject to the safe harbor created by those
sections. Our actual results may differ materially from those projected as a
result of certain risks and uncertainties. These risks and uncertainties
include, but are not limited to: the cyclical nature of the semiconductor
industry and the markets addressed by our products and our customers products;
demand for and market acceptance of new and existing products; successful
development of new products; the timing of new product introductions; the
successful integration of acquisitions; the availability and extent of
utilization of manufacturing capacity and raw materials; pricing pressures and
other competitive factors; changes in our product mix; fluctuations in
manufacturing yields; product obsolescence; our ability to develop and
implement new technologies and to obtain protection of the related intellectual
property; the successful implementation of our strategic manufacturing
realignment, expense reduction and restructuring initiatives; the successful
separation of our Mindspeed Technologies and Personal Networking businesses;
our labor relations and those of our customers and suppliers; our ability to
attract and retain qualified personnel; the safety and security of our
employees and of our facilities; and the uncertainties of litigation, as well
as other risks and uncertainties, including those set forth herein and those
detailed from time to time in our filings with the Securities and Exchange
Commission. These forward-looking statements are made only as of the date
hereof, and we undertake no obligation to update or revise the forward-looking
statements, whether as a result of new information, future events or otherwise.

Mindspeed Technologies, AccessRunner,
AnyPort, iScale, ZipWireMulti and
ZipWirePlus are trademarks of Conexant Systems, Inc. Other brands, names and
trademarks contained in this Annual Report are the property of their respective
owners.





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PART I




Item 1. Business

General

Conexant Systems, Inc. (we, Conexant or the Company) is a worldwide
leader in semiconductor system solutions for communications applications. Our
expertise in mixed-signal processing allows us to deliver integrated systems
and semiconductor products which facilitate communications worldwide through
wireline voice and data communications networks, cellular telephony systems and
emerging cable, satellite and fixed wireless broadband communications networks.
We operate in two business segments: the Personal Networking business and
Mindspeed Technologies, our Internet infrastructure business.

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

During fiscal 2001, welike many of our customers and competitorswere
adversely impacted by a broad slowdown affecting the technology sector,
including most of the communications electronics end-markets that our products
address. Our net revenues for fiscal 2001 were $1.1 billion compared to $2.1
billion for fiscal 2000. We incurred a net loss of $1.4 billion for fiscal
2001.

Fiscal 2001 net revenues for our Personal Networking business reflect
deterioration in the digital cellular handset market resulting from excess
channel inventories due to a slowdown in demand for cellular phones and a
slower transition to next-generation phones. Sales of broadband solutions were
affected by slower than anticipated deployment of broadband services by system
providers. Moreover, weak consumer demand for PCs and related peripheral
devices, facsimile machines and satellite set-top boxes led to lower sales of our
products for these applications. Net revenues in our Mindspeed Technologies
business were affected by slowing investment in communications network capacity
expansion by Internet service providers (ISPs), competitive local exchange
carriers (CLECs) and incumbent local exchange and inter-exchange carriers. In
most cases, the effect of weakened end-customer demand was compounded by higher
than normal levels of equipment and component inventories among our original
equipment manufacturer (OEM), subcontractor and distributor customers.

In response to these weak market fundamentals, during fiscal 2001 we
implemented a number of strategic initiatives to focus investment and resources
in the areas that best support our strategic growth driversthe mobile
communications, broadband access and Internet infrastructure markets. We have
undertaken a realignment of our manufacturing and procurement strategies to
accelerate our transition from volume digital complementary metal-oxide
semiconductor (CMOS) manufacturing to a fabless CMOS business model. We have
discontinued advanced CMOS process technology development efforts beyond
0.13-micron capability, as well as further investments in CMOS manufacturing
capacity. To facilitate our transition to a fabless CMOS business model, we
have entered into long-term supply agreements with major foundry partners to
obtain additional external CMOS wafer fabrication capacity. We recently sold
our photomask operations to a major manufacturer of photomasks and entered
into a long-term supply agreement with the buyer for access to advanced
photomask process technologies and services. We also sold our global
positioning system (GPS) business, while retaining rights to use certain GPS
technology in mobile communications applications. In addition, we are in
negotiations to sell our board-level sub-assembly business and the related
module assembly plant in El Paso, Texas.

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We also implemented a number of expense reduction and restructuring initiatives
to more closely align our cost structure with the current business environment.
The cost reduction initiatives include a worldwide workforce reduction,
temporary shutdowns of our manufacturing facilities, significant reductions in
capital spending, the consolidation of certain facilities and salary reductions
for our senior management team until we return to profitability.

In March 2001, our Board of Directors approved in principle a revised plan for
the separation of our Personal Networking and Mindspeed Technologies
businesses. The separation would now be accomplished by the spin-off of the
Personal Networking business to our shareholders as a new company which will
have the Conexant name. Although current business conditions have delayed the
separation, we remain committed to completing the separation as soon as
business and market conditions permit. The separation is also subject to the
approval of our shareholders and receipt of a ruling from the Internal Revenue
Service (IRS) that the spin-off will qualify as a tax-free distribution. The
IRS ruling has been received. While the ruling is generally binding on the IRS,
the continuing validity of the ruling is subject to certain factual
representations and assumptions. As of the date of this Annual Report, we are
not aware of any facts or circumstances that would cause these representations
and assumptions to be untrue. We cannot assure you that shareholder approval of
the separation will be obtained, or that we will successfully complete the
separation.

Our Strategy

To enhance our position as a leading global provider of semiconductor system
solutions for a variety of communications applications, we pursue the following
major strategies:

Target High-Growth Communications Markets

As the communications electronics markets evolve beyond narrowband wireline
connectivity, we have significantly diversified and expanded our business in
three sectors: mobile communications, broadband access and Internet
infrastructure. Our strategy is to identify rapidly growing communications
markets and to develop semiconductor system solutions for applications in these
markets. Within mobile communications, we focus on providing our customers
components, subsystems and complete system solutions that support the most
widely-adopted wireless standards. For the broadband access markets, our
semiconductor system solutions target new methods of connectivity through
emerging digital subscriber line (DSL), cable and fixed wireless networks. Our
Mindspeed Technologies business offers semiconductor networking solutions for
Internet infrastructure applications that enable high-speed communications from
the edge of the Internet to linked metropolitan area networks and long-haul
networks.

Focus on System Solutions

We seek to capitalize on our design capabilities and communications systems
knowledge by providing suppliers of communications electronics products with
complete semiconductor system solutions. High levels of integration enhance the
benefits of our products by reducing production costs through fewer external
components, reduced board space and improved system assembly yields. These
semiconductor system solutions provide our OEM customers with hardware and
software, and in some cases a complete reference design. By combining all of
the necessary communication functions for a complete system solution, we can
deliver additional semiconductor content, thereby offering our existing and
potential customers more compelling and cost-effective solutions.

Leverage Our Core Technology

Our strategy is to deploy technology building blocks, such as digital signal
processors, radio-frequency integrated circuits, mixed-signal
processing cores and software across multiple product platforms. We believe
that executing this core technology strategy is fundamental to our growth
objectives. This strategy enables creation of economies of scale in research
and development and facilitates a reduction in the time-to-market for key
products. We intend to extend our core 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.

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Accelerate Time-to-Market

Through integrated marketing, product development and manufacturing teams, we
pursue the rapid design and cost-effective production of semiconductor system
solutions for our target markets. By combining our design expertise with our
internal manufacturing capabilities and third party manufacturing
partnerships,
we seek to achieve a shorter, more direct path from concept to production. We
seek to minimize the time to develop prototype products and begin production
so as to enable our customers to introduce new, advanced products ahead of their competitors.

Build Upon Strategic Customer Relationships

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

Personal Networking Business

Our Personal Networking business designs, develops and sells semiconductor
system solutions for mobile communications and broadband access applications.
Our mobile 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, as well as
advanced mobile terminals that support next-generation multimedia and
high-speed web browsing. Our broadband access products include semiconductor
solutions that perform communications and media processing functions within a
variety of information and entertainment platforms, such as PCs, asymmetric
digital subscriber line (ADSL) modems, cable modems, set-top boxes, gaming
consoles, facsimile machines and personal digital assistants (PDAs).

Mobile Communications

The market for mobile communications semiconductor system solutions is driven
by increased demand for digital cellular handsets as a result of lower prices
and the availability of feature-rich wireless phones. In addition, we expect
the replacement market for digital cellular handsets to grow as OEMs continue
to introduce wireless phones with improved battery life and new feature sets.
We also expect Internet applications to contribute to growth in the mobile
communications market. Internet-ready wireless phones are now shipping in
volume and soon, we believe, virtually all new wireless phones sold will be
Internet-enabled and pre-loaded with mini-browsers.

Our mobile communications product portfolio is comprised of components,
subsystems and system-level semiconductor solutions for wireless voice and data
communications applications. Our products support the worlds most
widely-adopted wireless standards, including:



| |  |  | CDMA, or Code Division Multiple Access;         
| | - |  | ------------------------------------------------
|
| |  |  | TDMA, or Time Division Multiple Access; and     
|
| |  |  | GSM, or Global System for Mobile Communications.

A wireless phones power amplifier provides the signal to reach a base station,
and is the most important factor in determining a mobile phones battery life
and talk time. Based on our gallium arsenide (GaAs) heterojunction bipolar
transistor (HBT) process and packaged in state-of-the-art modules, our power
amplifiers are compact, efficient, highly-integrated solutions that enable
digital cellular handsets with extended talk and standby times. In order to
provide our customers with design flexibility, our power amplifiers meet or
exceed stringent performance requirements and may be used with a variety of
handset battery voltages.

Our power amplifiers enabled the first CDMA handsets and our CDMA solutions
continue to lead the market in packaging, efficiency and performance. In
addition, we have developed a complete family of TDMA and GSM

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power amplifier modules, including the worlds first quad-band solution
supporting GSM handset operation in more than 150 countries.

Further, during fiscal 2001 we introduced a suite of power amplifiers for next
generation mobile phones enabling Internet access based on the CDMA2000,
general packet radio services (GPRS) and enhanced data for GSM evolution (EDGE)
wireless standards. Broadly supported around the world, these emerging
standards provide easy migration paths from the current CDMA, TDMA and GSM
standards to future third-generation (3G) standards, including wideband CDMA
(WCDMA), for even higher speed wireless multimedia voice and data services.

We also offer radio frequency subsystems for CDMA, TDMA and GSM, including a
highly-integrated single-chip transceiver targeting GPRS applications. By
eliminating intermediate frequency conversion steps, this direct-conversion
solution significantly reduces the number of external components required to
build a mobile phone. Proprietary design techniques employed in the
transceiver also enable the device to be used with a variety of baseband
processors. In addition, we have developed a portfolio of radio frequency
components for wireless infrastructure applications such as cellular/personal
communications service base stations.

Further, we have developed and launched complete system solutions combining all
key hardware and software functions for GSM and GPRS cellular handsets. The
hardware portion of these solutions implements digital and analog baseband
processing, multi-band power amplification, power management and radio
frequency transceiver functionality. Additionally, our system solution includes
a worldwide, operator-qualified, network-approved protocol stack and other
software required for a complete wireless phone solution. We also provide a
reference design and a comprehensive suite of design support services and tools
to aid our OEM customers through the development process. To date, a number of
our customers wireless phones have been type-certified by various network
service providers around the world.

We have also developed a 2.4 GHz frequency-hopping spread spectrum radio
frequency transceiver optimized for use in Bluetooth-enabled systems
supporting short-range wireless connectivity. Our entire family of Bluetooth
components and systems is compliant with the Bluetooth Special Interest Group
specification 1.1 and is targeted for use in wireless handsets and PDAs that
require extended battery life and small size.

Current research and development in the mobile communications area is focused
on key components, radio frequency subsystems and cellular systems for emerging
CDMA2000, GPRS and EDGE applications as well as 3G WCDMA systems that provide
greater bandwidth and will enable new possibilities for accessing the Internet
using mobile communications platforms.

Broadband Access

Our broadband access semiconductor system solutions enable new methods of
connectivity through telephony, cable and fixed wireless networks. An
increasing amount of network traffic is comprised of bandwidth-intensive
content, such as voice, data, video and other multimedia applications, creating
a need for faster communications processing. Factors propelling this trend
include a significant increase in the number of telecommuters and small
offices/home offices worldwide. As more bandwidth becomes available, the
applications and uses of the external communications network encourage more
online activities, such as shopping, downloading of music, watching and
listening to sporting events on the PC and working from home. As these
applications become more commonplace, we expect opportunities to emerge for
vendors to offer cost-effective home networking solutions. Home networking
allows multiple users to share bandwidth throughout the home, providing cost
savings from sharing hardware, software and high-speed Internet access.

We are a leading supplier of Internet access solutions including V.90 and V.92
dial-up modem chipsets. We supply mixed-signal intensive, controllerless modem
chipsets and software modem solutions that take advantage of the increasing
power of PC central processors and use software to perform functions
traditionally enabled by semiconductor components. In addition, we have
extended sales of our modem portfolio beyond PC-related products to other
end-user products and we are a leading supplier of embedded solutions for a
host of emerging Internet appliances, including set-top boxes,
Internet-connected televisions and game consoles, web phones and PDAs.

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During fiscal 2001, we increased unit shipments of our AccessRunner ADSL
modem solution and recorded a number of design wins in support of service
provider qualifications around the world. ADSL permits broadband transmission
of data, voice and video over existing standard copper wire telephone lines at
speeds of up to 8 megabits per second (Mbps). DSL technologies use a greater
range of frequencies over copper wire than traditional telephone services,
which in turn allows for greater bandwidth with which to send and receive
information. ADSL modems based on our semiconductor solutions have earned key
government certifications in China, and we were the first semiconductor
supplier to ship certified ADSL chipsets into China for peripheral components
interconnect (PCI), universal serial bus (USB) and Ethernet applications.
Further, we have unveiled a complete ADSL router-on-a-chip that can replace up
to four devices, often obtained from multiple vendors. An ADSL router can
support home networking through the shared use of high-speed Internet access
and connectivity of multiple PCs and peripherals. Our scalable system
architecture integrates all of the functions of a high speed ADSL router,
including a high-speed network processor, an ADSL discrete multi-tone engine,
an analog front-end and a line driver as well as the routing protocol stack.

Also during fiscal 2001, we increased shipments of our single-chip cable
modem, the only solution to include an embedded microprocessor-based media
access control for North American Data Over Cable Service Interface
Specification (DOCSIS), European DOCSIS and digital video broadcasting
applications. Cable modem technology is capable of delivering data, video,
telephony and Internet access over existing coaxial cable networks at speeds up
to 1,000 times faster than a standard voice-band analog modem. Our solution
supports the USB, Ethernet and PCI interfaces for connection with a PC and has
successfully completed the rigorous North American CableLabs and European
tComLabs certifications with numerous customers. These certifications give
consumers and cable operators the assurance that systems comply with DOCSIS
specifications and will be interoperable among multiple cable modem vendors.

To support the distribution of broadband content throughout the home, we offer
home networking products that enable personal communications devices to share
data, voice and video using existing telephone line, coaxial cable, power line
and wireless links. We have developed a home network processor which can be
used at the core of a variety of devices, such as residential gateways, that
consumers may use to access the Internet and share content using a wide range
of existing and emerging connectivity technologies to link a network of home
PCs and peripheral devices.

Finally, we offer an extensive portfolio enabling digital cable, satellite and
terrestrial set-top boxes. Our complete reference design incorporates a silicon
tuner, a demodulator, a high-integration media processor and a back-channel
telephony modem. We have also unveiled a single-chip demodulator addressing the
personal video recording market. This device processes two channels of video
streams within satellite set-top boxes, PC receivers and residential gateways
enabling the user to record one channel while simultaneously watching a second
channel.

Our research and development efforts in the broadband access area include
building a comprehensive portfolio of products for the variety of access,
delivery and display technologies converging on the television, PC and other
consumer electronics platforms. Key products in the design stage include
next-generation ADSL routers, cable modems, home network processors and set-top
box systems.

Mindspeed Technologies

Our Mindspeed Technologies business designs, develops and sells semiconductor
networking solutions that facilitate the aggregation, transmission and
switching of data, video and voice from the edge of the Internet to linked
metropolitan area networks and long-haul networks.

During the past decade there has been dramatic growth in the number of Internet
users, which has driven increased consumer and business demand for more
bandwidth-intensive data, video and voice applications and services.
Although the pace of the growth of this demand has slowed in 2001, communication service providers, or
carriers, are continually upgrading and expanding their voice and data network
infrastructure. Network infrastructure OEMs are enabling this expansion and
upgrade process by developing and delivering to their carrier customers increasingly higher-bandwidth and
lower-cost equipment solutions.

Semiconductors play a critical role in allowing network infrastructure OEMs to
meet their customers networking

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equipment needs in terms of system performance, functionality and
time-to-market. Semiconductors are key to enabling network infrastructure OEMs
to offer products with improved bandwidth, speed, reliability, flexibility,
power efficiency, size, scalability and adherence to industry standards. In
addition to these general requirements that all network equipment must satisfy,
equipment designed for the accessand transportsegments of communications
networks have specific semiconductor requirements.

Accessencompasses the last mile of the network infrastructure between a
carrier and the end user, which is typically a residence or business. For
access equipment applications, semiconductors must provide reliable, high-speed
connectivity capable of aggregating or disaggregating data, voice and video
traffic. Transportincludes the network infrastructure that prepares the
diverse data, voice and video traffic for transport within various metropolitan
and long distance networks and then transmits and switches the traffic
throughout those networks. For transport equipment applications, semiconductors
must provide physical-layer connectivity, information segmentation and
classification, traffic management, switching and routing functionality. These
features and functions require signal conversion and signal processing
capabilities that are best addressed by highly-integrated mixed signal devices
that combine analog and digital functions with high performance digital
circuitry and application software.

We provide network infrastructure OEMs a broad portfolio of advanced
semiconductor networking solutions, ranging from physical-layer devices to
higher layer network processors, for their access and transport equipment. Our
products can be classified into two general categories: wide area network (WAN)
access products and WAN transport products. WAN access products include
multi-service access gateway solutions, such as voice-over-Internet
protocol (VoIP), and a broad family of
multi-megabit DSL products that are used in a variety of network access
platforms such as remote access concentrators, voice gateways, digital loop
carriers, DSL access multiplexers and integrated access devices. Our WAN
transport products, focused on packet-based optical networks, include T/E
carrier, asynchronous transfer mode (ATM) and synchronous optical networking
(SONET)/synchronous digital hierarchy (SDH) transceivers, switch products,
network processors and software subsystems. These solutions are used in a
variety of network equipment, including high-speed routers, ATM switches,
optical switches, add-drop multiplexers, digital cross-connect systems and
dense wave division multiplexer equipment.

WAN Access Products

We have developed one of the industrys broadest lines of multi-megabit DSL
transceivers for symmetrical DSL (SDSL) connectivity in commercial
applications. Our symmetrical high-bit rate DSL (HDSL) products facilitate
deployments of high-speed T/E transmission lines by eliminating the need for
repeaters and other line conditioning equipment. Our 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. We recently introduced a family of low-power single
port (ZipWirePlus) and multi-port (ZipWireMulti) DSL products utilizing the
next generation DSL standard called G.shdsl. G.shdsl enables simultaneous voice
and data communications for worldwide DSL applications over longer distances
than SDSL-based solutions. These variable rate products are compatible with
pre-existing transport systems based on prevailing SDSL modulation standards.
In addition, our ZipWireMulti central-office solution incorporates innovative
line testing software that enables service providers to remotely diagnose line
problems and reduce the amount of labor required to establish and service DSL
installations.

Our current research and development efforts in the DSL arena include
developing higher-density, lower-power semiconductor solutions for central
office equipment applications and expanding our portfolio to include very high
speed DSL (VDSL) products that support downstream data rates up to 50 Mbps to
deliver integrated digital television and high-speed Internet access to
residential customers over twisted copper wire. In addition, we are developing
voice-over-DSL solutions for voice gateways and integrated access equipment.

We are a leading supplier of multi-service access (MSA) processor devices which
are used in a variety of network access equipment, including remote access
concentrators, voice gateways, private branch exchanges, digital loop carriers
and integrated access devices. Our AnyPort MSA processor devices are software
configurable and implement a variety of services including dial-up and
dedicated Internet access and wholesale Internet access provisioned for ISPs.
AnyPort MSA processor devices also implement VoIP, voice-over-ATM,
voice-over-DSL, Internet fax, wireless and multicast-based services. Our
AnyPort device architecture combines the performance of

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a digital signal processor device core with the flexibility of ARM Limiteds
microcontroller device core to support our extensive suite of field-proven
modulation techniques, echo cancellers, speech coders and communications
protocols.

Our current research and development efforts in the MSA area include developing
next generation multi-service access processor devices to offer increased
performance, higher density and lower power for specific network access
equipment. In addition, we continue to expand our suite of data modulation
techniques, speech coders and protocol processing software.

WAN Transport Products

We offer one of the industrys broadest portfolios of physical- and link-layer
communications device solutions to aggregate and transport data, video and
voice from network access to the optical backbone of the telecommunications
networks, including T1/E1 and T3/E3 carrier, ATM and SONET/SDH products.

Our T1/E1 and T3/E3 carrier devices enable digital communications over twisted
copper wire and include 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.

We also provide ATM physical layer and segmentation and reassembly (SAR)
devices supporting 155 and 622 Mbps applications. As our customers move toward
greater levels of product integration, our ATM technology is being increasingly
combined with our T/E carrier chipsets, HDLC devices, multi-service access
processor devices and DSL transceiver devices to create complete semiconductor
networking solutions.

For metropolitan and long haul network applications, we are expanding our broad
portfolio of end-to-end transmission and switching products used in fiber-optic
network equipment. Our portfolio of optical networking solutions spans the
entire range of transceiver products from the 155 Mbps data rate called OC-3 to
the 10 gigabits per second (Gbps) data rate called OC-192, in support of
SONET/SDH and packet-over-SONET applications. Our optical transceiver products
include laser drivers, transimpedance amplifiers, post amplifiers, clock and
data recovery circuits, serializers and deserializers and very short reach
converters and high speed channel transceivers. Our optical switch portfolio
includes high-density cross-point switches for digital cross connect systems
applications, and the recently introduced switch fabric family. The iScale
switch fabric chipset, configurable up to 32 OC-192 ports or 128 OC-48 ports,
enables data to be transferred between line cards in high-capacity, high-speed
network equipment. Target equipment applications include high-density Internet
protocol (IP) switches, 10 Gbps Ethernet switches, storage routers and digital
cross-connect systems.

Our physical- and link-layer products are complemented by our high performance
network processor devices, which are designed to offer advanced switching and
routing capabilities normally performed by complex and costly
application-specific integrated circuits (ASICs). These software-programmable
devices operate at data rates from 155 Mbps (OC-3) to 2.4 Gbps (OC-48) and are
designed to combine the real-time control and management capabilities of an
embedded processor to support scalable system designs. The advanced
capabilities offered by our network processor devices include multi-protocol
switching to enable integrated local area network (LAN) and WAN systems. Our
network processor devices also offer multi-layer programmable switching and
routing capabilities to support policy-based traffic management and
programmable quality of service for traffic prioritization across disparate
networks.

In addition, we have expanded our optical networking portfolio with the
introduction of 2.4 Gbps (OC-48) and 10 Gbps (OC-192) framers/mappers for
organizing and identifying packets for transport over high speed SONET-based
networks. System designers can combine these framers/mappers with our switch
fabrics and network processors to provide semiconductor system solutions for
terabit routers, ATM multiservice switches and voice and data gateways to
handle increasing volumes of data traffic in a scalable, cost-effective manner.

We also offer a comprehensive set of software subsystems that support
next-generation, carrier-class network infrastructure equipment. These software
subsystems span the technologies of IP, ATM, multi-protocol label switching
(MPLS) and voice-over-ATM. In addition to protocol systems, we also offer
several software infrastructure modules that improve time-to-market for OEMs.

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Our current research and development initiatives in the WAN transport area
center on expanding our family of network processors and cross-point switches,
developing multi-rate and 40 Gbps transceivers, integrating framing/mapping
functionality with transceiver solutions and expanding our scalable switch
fabric product family.

Research and Development

We have significant research, development, engineering and product design
capabilities. At September 30, 2001, we employed approximately
1,800 engineers in research and development activities at 26 design centers worldwide. Our design centers provide
design engineering and product application support as well as after-sales
customer service. The design centers are strategically located around the world
to be in close proximity to our OEM customers and to take advantage of key
technical and engineering talent worldwide.

We incurred research and development expenses of $483.0 million, $414.5 million
and $310.0 million in fiscal 2001, 2000 and 1999, respectively.

Manufacturing

We currently operate two wafer fabrication facilities and an integrated circuit
(IC) assembly and test facility. We also have arrangements with third parties,
including entities outside the United States, for the production, assembly and
testing of certain semiconductor products. Our assembly and test facility in
Mexicali, Mexico and international subcontract manufacturing arrangements are
subject to a number of risks of operating abroad.

We are currently realigning our manufacturing and procurement strategies to
accelerate our transition from volume digital CMOS manufacturing to a fabless
CMOS business model. We have discontinued advanced CMOS process technology
development efforts beyond 0.13 micron capability, as well as further
investments in CMOS manufacturing capacity. To facilitate our transition to a
fabless CMOS business model, we have entered into long-term supply agreements
with major foundry partners to obtain additional external CMOS wafer
manufacturing capacity. Specialty-process wafer manufacturing remains an
important component of our strategy.

Our principal manufacturing facilities and wafer manufacturing processes
include:

|                          |  |                                                                
|------------------------- |  | ---------------------------------------------------------------
|Facility                  |  | Function                                                       
|                          |  |                                                                
|Newport Beach, California |  | Silicon wafer fabrication facilityCMOS and specialty processes
|                          |  |  8-inch wafers                                                
|                          |  |  Class 1 and Class 10 clean rooms                             
|                          |  |  0.18  0.5 micron CMOS processes                             
|                          |  |  Bipolar CMOS (BiCMOS)                                        
|                          |  |  Radio frequency BiCMOS (RF BiCMOS)                           
|                          |  |  Silicon germanium (SiGe)                                     
|                         
|Newbury Park, California  |  | Gallium arsenide wafer fabrication facility                    
|                          |  |  4-inch wafers                                                
|                          |  |  Heterojunction bipolar transistor (HBT)                      
|                          |  |  Indium gallium phosphide (InGaP) HBT                         
|                          |  |  Metal-semiconductor field effect transistor (MESFET)         
|                         
|Mexicali, Mexico          |  | Assembly and test facility                                     
|                          |  |  High-volume/low-cost multi-chip modules                      

Our primary wafer fabrication facility, located in Newport Beach, California,
consists of approximately 123,000 square feet and is ISO 9002 certified. We are
resizing our manufacturing operations at this facility to match our expected
specialty-process demand over the next several years, which will be
increasingly concentrated on silicon germanium process technology. Silicon
germanium, which enables integrated circuits featuring higher performance and
lower power consumption while retaining the cost and integration benefits of
conventional silicon, is an emerging process technology for mobile
communications and Internet infrastructure applications.

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We will also continue to operate and invest in next-generation technology at
our existing gallium arsenide wafer fabrication facility (consisting of
approximately 30,000 square feet) in Newbury Park, California. Gallium arsenide
is particularly well suited for mobile communications products such as power
amplifiers. This facility is also ISO 9002 certified.

We own an approximately 298,000 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 our wafer fabrication facilities and
outside foundry sources into various types of finished semiconductor products
and tests the products 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.

We are in negotiations to sell our board-level sub-assembly business and the
related module assembly plant in El Paso, Texas. We expect the sale to be
completed by December 31, 2001.

Raw Materials and Supplies

We believe we have adequate sources for the supply of raw materials and
components for our manufacturing needs with suppliers located around the world.
Raw wafers and other raw materials used in the production of our CMOS products
are available from several suppliers.

Customers, Marketing and Sales

We market and sell our semiconductor products and system solutions directly to
leading OEMs of communication electronics products and third-party electronic
manufacturing service providers, and indirectly through electronic components
distributors. Selected direct and indirect OEM customers include the
following:

Personal Networking

|                                    |  |                                             |  |                              
|----------------------------------- |  | ------------------------------------------- |  | -----------------------------
|Acer Incorporated                   |  | Hewlett-Packard Company                     |  | NEC Corporation              
|Apple Computer, Inc.                |  | International Business Machines Corporation |  | Nokia Corporation            
|Compaq Computer Corporation         |  | L.G. International Corporation              |  | Pace Micro Technology plc    
|Dell Computer Corporation           |  | Matsushita Electric Industrial Co. Ltd.     |  | Samsung Electronics Co., Ltd.
|EchoStar Communications
Corporation |  | Microsoft Corporation                       |  | Sharp Corporation            
|Ericsson Inc.                       |  | Mitsubishi Wireless Communications, Inc.    |  | Sony Corporation             
|Gateway, Inc.                       |  | Motorola, Inc.                              |  | Thomson Corporation          

Mindspeed Technologies

|                             |  |                           |  |                            
|---------------------------- |  | ------------------------- |  | ---------------------------
|3Com Corporation             |  | ECI Telecommunications    |  | Nortel Networks Corporation
|ADC Telecommunications, Inc. |  | Ericsson, Inc.            |  | Redback Networks Inc.      
|Alcatel Data Networks, S.A.  |  | Fujitsu Limited           |  | Siemens A.G.               
|Agilent Technologies, Inc.   |  | JDS Uniphase Corporation  |  | Sonus Networks, Inc.       
|Avaya, Inc.                  |  | Juniper Networks, Inc.    |  | Sycamore Networks, Inc.    
|CIENA Corporation            |  | Lucent Technologies, Inc. |  | Tellabs, Inc.              
|Cisco Systems, Inc.          |  | Nokia Corporation         |  | Tellium, Inc.              

We have a worldwide sales organization comprised of
approximately 300 employees as of September 30, 2001, with 13 domestic and 16 international sales
offices. To complement our direct sales and customer support efforts, we also
sell our products through approximately 26 independent manufacturers
representatives and approximately 35 distributors and dealers. In addition,
our design and applications engineering staff is actively involved with
customers during all phases of design and production and provides customer
support through our worldwide sales offices, which are generally in close
proximity to customers facilities.

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Backlog

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

Competition

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

The specific bases on which we compete vary by market. We believe that the
principal competitive factors for semiconductor suppliers in each of our
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;                      
|
| |  |  | new product innovation; and            
|
| |  |  | quality.                               

We believe we compete favorably with respect to these factors.

In the Personal Networking business, our competitors in the mobile
communications market include Agere Systems, Inc., ANADIGICS, Inc., Analog
Devices, Inc., Hitachi Ltd., Infineon Technologies A.G., Motorola, Inc.,
Philips Electronics N.V., RF Micro Devices, Inc. and Texas Instruments
Incorporated. In the broadband access market, we compete primarily with Agere
Systems, Inc., Alcatel, Broadcom, Inc., Centillium Communications, Inc.,
GlobeSpan, Inc., LSI Logic Corporation, Microtune, Inc., PC-Tel, Inc., Philips
Electronics N.V., STMicroelectronics N.V. and Texas Instruments Incorporated.

In our Mindspeed Technologies business, our competitors include Agere Systems,
Inc., Analog Devices, Inc., Applied Micro Circuits Corporation, Broadcom, Inc.,
Exar Corporation, GlobeSpan, Inc., IBM Microelectronics Division, Infineon
Technologies A.G., Intel Corporation, Metalink Ltd., Motorola, Inc.,
PMC-Sierra, Inc., Texas Instruments Incorporated, TranSwitch Corporation and
Vitesse Semiconductor Corporation.

Intellectual Property and Proprietary Rights

We own or license numerous United States and foreign patents and patent
applications related to our manufacturing operations and other activities. We
have filed federal and international trademark applications seeking registered
protections of the Conexant and Mindspeed names and logos. In addition, we own
a number of other trademarks applicable to certain of our products. We believe
that intellectual property, including patents, patent applications and
licenses, and trademarks are of material importance to our business. In
addition to protecting our proprietary technologies and processes, we strive to
strengthen our intellectual property portfolio to enhance our ability to obtain
cross-licenses of intellectual property from others, to obtain access to
intellectual property we do not possess or to more favorably resolve potential
intellectual property claims against us.

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Various claims of patent infringement have been made against us. We believe
that none of these claims will have a material adverse effect on our financial
position or results of operations. In connection with our spin-off from
Rockwell, we assumed all liabilities in respect of intellectual property
matters related to current and former operations of Semiconductor Systems. See
Item 3 Legal Proceedings.

Environmental Regulation

Federal, state and local requirements relating to the discharge of substances
into the environment, the disposal of hazardous wastes, and other activities
affecting the environment have had, and will continue to have, an impact on our
manufacturing operations. Thus far, compliance with environmental requirements
and resolution of environmental claims have been accomplished without material
effect on our liquidity and capital resources, competitive position or
financial condition.

In connection with our spin-off from Rockwell, we assumed all liabilities in
respect of environmental matters related to current and former operations of
the Company. We have been designated as a potentially responsible party and are
engaged in ground water remediation at one Superfund site located at a former
silicon wafer manufacturing facility and steel fabrication plant in Parker
Ford, Pennsylvania formerly occupied by us. In addition, we are engaged in
remediations of groundwater contamination at our Newport Beach and Newbury
Park, California facilities. We currently estimate the remaining costs for
these remediations to be approximately $3.7 million and have accrued for these
costs as of September 30, 2001.

We believe that our 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 our liquidity
and capital resources, competitive position or financial condition. We cannot
assess the possible effect of compliance with future requirements.

Cyclicality; Seasonality

The semiconductor industry is highly cyclical and is characterized by constant
and rapid technological change, rapid product obsolescence and price erosion,
evolving technical standards, short product life cycles and wide fluctuations
in product supply and demand. From time to time these and other factors,
together with changes in general economic conditions, cause significant upturns
and downturns in the industry, and in our business in particular. Periods of
industry downturnsas we experienced in fiscal 2001 and continue to
experiencehave been characterized by diminished product demand, production
overcapacity, high inventory levels and accelerated erosion of average selling
prices. These factors cause substantial fluctuations in our revenues and our
results of operations. We have experienced these cyclical fluctuations in our
business in the past, are currently experiencing a significant downturn, and
may experience cyclical fluctuations in the future.

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

Employees

As of September 30, 2001, we had approximately 6,900 full-time employees, of
whom approximately 2,200 are engineers. Approximately 300 employees in the
United States and approximately 2,000 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 Local 2295, we
entered into a collective bargaining agreement with that union covering the
union employees at our Newport Beach, California facility. The agreement will
expire in May 2003. No other significant work stoppages have occurred in the
past five years.

We believe our future success will depend in large part upon our continued
ability to attract, motivate, develop and retain highly skilled and dedicated
employees.

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Certain Business Risks

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

You should carefully consider and evaluate all of the information in this
Annual Report, including the risk factors listed below. Any of these risks
could materially and adversely affect our business, financial condition and
results of operations, which in turn could materially and adversely affect the
price of our common stock or other securities.

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

Our net revenues for fiscal 2001 were $1.1 billion compared to $2.1 billion for
fiscal 2000 due to sharply reduced end-customer demand in many of the
communications electronics end-markets which our products address. We incurred
a net loss of $1.4 billion for fiscal 2001.

During fiscal 2001, we implemented a number of expense reduction and
restructuring initiatives to more closely align our cost structure with the
current business environment. The cost reduction initiatives include a
worldwide workforce reduction, temporary shutdowns of our manufacturing
facilities, significant reductions in capital spending, the consolidation of
certain facilities and salary reductions for our senior management team until
we return to profitability. However, these expense reduction initiatives alone
will not return us to profitability. We expect that reduced end-customer
demand, underutilization of our manufacturing capacity, changes in our revenue
mix and other factors will continue to adversely affect our operating results
in the near term and we anticipate incurring additional losses in fiscal 2002.
In order to return to profitability, we must achieve substantial revenue growth
and we currently face an environment of uncertain demand in the markets our
products address. We cannot assure you as to whether or when we will return to
profitability or whether we will be able to sustain such profitability, if
achieved.

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

The semiconductor industry is highly cyclical and is characterized by constant
and rapid technological change, rapid product obsolescence and price erosion,
evolving technical standards, short product life cycles and wide fluctuations
in product supply and demand. From time to time these and other factors,
together with changes in general economic conditions, cause significant upturns
and downturns in the industry, and in our business in particular. Periods of
industry downturnsas we experienced in fiscal 2001 and continue to
experiencehave been characterized by diminished product demand, production
overcapacity, high inventory levels and accelerated erosion of average selling
prices. These factors cause substantial fluctuations in our revenues and our
results of operations. We have experienced these cyclical fluctuations in our
business in the past, are currently experiencing a significant downturn, and
may experience cyclical fluctuations in the future.

During the late 1990s and extending into 2000, the semiconductor industry in
general, and communications applications in particular, enjoyed unprecedented
growth, benefiting from the rapid expansion of the Internet and other
communication services worldwide. During fiscal 2001, welike many of our
customers and competitorswere adversely impacted by a global economic slowdown
and an abrupt decline in demand for many of the end-user products that
incorporate our communications semiconductor products and system solutions. The
impact of weakened end-customer demand has been compounded by higher than
normal levels of equipment and component inventories among our OEM,
subcontractor and distributor customers. As a result of this sharply reduced
demand across our product portfolio, we recorded $245.1 million of inventory
write-downs in fiscal 2001. We expect that reduced end-customer demand,
underutilization of our manufacturing capacity, changes in our revenue mix and
other factors will continue to adversely affect our operating results in the
near term.

In addition, the current environment of weak end-customer demand and high
levels of channel inventories has, in some cases, led to delays in payments for
our products. During fiscal 2001, we recorded $22.6 million of additional
provisions for uncollectible accounts receivable from slow-paying customers. In
the event that our customers delay payments to us, or are unable to pay amounts
owed to us, we may incur additional losses on our accounts receivable.

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Demand for our products in each of the communications electronics end-markets
which we address is subject to a unique set of factors, and a downturn in
demand affecting one market may be more pronounced, or last longer, than a
downturn affecting another of our markets. In particular, we expect that demand
for the products sold by our Mindspeed Technologies business, which are
incorporated into telecommunications and data communications infrastructure
equipment, may recover more slowly than demand for products offered by our
Personal Networking business, which are ultimately sold to individual consumers
in products such as PCs and digital cellular handsets.

We are subject to intense competition.

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

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



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

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

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



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

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

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

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

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

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

We may be unable to make the substantial research and development investments
required to remain competitive in our business.

The semiconductor industry requires substantial investment in research and
development in order to develop and bring to market new and enhanced products.
We cannot assure you that we will have sufficient resources to develop new and
enhanced technologies and competitive products.

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

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



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

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

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

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

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

If OEMs of communications electronics products do not design our products into
their equipment, we will 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. We may be unable to achieve design wins or to convert design wins into
actual sales.

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

Our customers may need six months or longer to test and evaluate our products
and an additional six months or more to begin volume production of equipment
that incorporates our products. The lengthy period of time required also
increases the possibility that a customer may decide to cancel or change
product plans, which could reduce or

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eliminate sales to that customer. As a result of this lengthy sales cycle, we
may incur significant research and development, and selling, general and
administrative expenses before we generate the related revenues for these
products, and we may never generate the anticipated revenues if our customer
cancels or changes its product plans.

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

Our sales are typically made pursuant to individual purchase orders and we
generally do not have long-term supply arrangements with our customers.
Generally, our customers may cancel orders until 30 days prior to shipment. In
addition, we sell a portion of our products through distributors, some of whom
have rights to return unsold products to us. Sales to distributors accounted
for approximately 22% and 19% of our net revenues for fiscal 2001 and 2000,
respectively. We routinely purchase and manufacture 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.

During fiscal 2001, the communications electronics markets which we address
were characterized by dramatic changes in end-user demand and continued high
levels of channel inventories which reduced visibility into future demand for
our products. We expect that these and other factors will continue to affect
our revenues in the near term. As a result of sharply reduced demand across
our product portfolio, we recorded $245.1 million of inventory write-downs in
fiscal 2001.

Our manufacturing processes are extremely complex and specialized.

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

Our operating results are highly dependent upon our ability to produce
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, electrical power outages, fire,
earthquake, flooding or other natural disasters. Certain of our manufacturing
facilities are located near major earthquake fault lines, including our
California and Mexico facilities. We maintain no earthquake insurance coverage
on these facilities. Disruptions of our manufacturing operations could cause
significant delays in shipments until we could shift the products from an
affected facility or subcontractor to another facility or subcontractor.

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

We recently decided to realign our manufacturing and procurement strategies,
accelerating our transition from volume digital CMOS manufacturing to a fabless
CMOS business model. Over time, it is expected that the majority of our
requirements for CMOS wafers, previously manufactured internally, will be
sourced from third-party foundries. Specialty-process wafer manufacturing (such
as gallium arsenide and silicon germanium processes) will remain an important
component of our strategy. Under a fabless CMOS business model, our long-term
revenue growth will be dependent on our ability to obtain sufficient external
manufacturing capacity, including wafer production capacity. During times when
the semiconductor industry is experiencing a shortage of wafer fabrication
capacity, we may experience delays in shipments or increased manufacturing
costs. To facilitate our transition to a fabless CMOS business model, we have
entered into long-term supply arrangements with major foundry partners to

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obtain additional external CMOS wafer manufacturing capacity. We cannot assure
you that we will have access to sufficient external CMOS wafer manufacturing
capacity on favorable terms, or at all.

Due to the highly specialized nature of the gallium arsenide semiconductor
manufacturing process, in the event of a disruption at our Newbury Park,
California wafer fabrication facility, alternate gallium arsenide production
capacity would not be readily available from third-party sources. Although we
have a multi-year agreement with a foundry that guarantees us access to
additional gallium arsenide wafer production capacity, 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 mobile communications products.

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

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

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.

Under our realigned manufacturing strategy, we will be increasingly dependent
upon third parties for the manufacture, assembly and test of our products.

As we transition to a fabless CMOS business model, we will obtain an increasing
portion of our CMOS wafer requirements from outside wafer fabrication
facilities, known as foundries. To a lesser extent, we also rely upon
third-party foundries to supplement our specialty-process wafer manufacturing
capacity. There are significant risks associated with our reliance on
third-party foundries, including:



| |  |  | the lack of ensured wafer supply, potential wafer shortages and higher wafer prices;                    
| | - |  | --------------------------------------------------------------------------------------------------------
|
| |  |  | limited control over delivery schedules, manufacturing yields, production costs and product quality; and
|
| |  |  | the unavailability of, or delays in obtaining, access to key process technologies.                      

Although we have entered into long-term supply arrangements with major foundry
partners to obtain additional external CMOS wafer manufacturing capacity, these
and other third-party foundries we use may allocate their limited capacity to
the production requirements of other customers that are larger and better
financed than we. If we choose to use a new foundry, it typically takes several
months to complete the qualification process before we can begin shipping
products from the new foundry. The foundries we use may experience financial
difficulties or suffer damage or destruction to their facilities, particularly
since many of them are located in earthquake zones. If these events or any
other disruption of wafer fabrication capacity occur, we may not have a second
manufacturing source immediately available. We may therefore experience
difficulties or delays in securing an adequate supply of our products, which
could impair our ability to meet our customers needs and have a material
adverse effect on our operating results.

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

Third-party subcontractors also assemble and test a substantial portion of our
products. Because we rely on others to assemble and test our products, we are
subject to many of the same risks as are described above with respect to
independent wafer fabrication facilities.

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. 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 and components necessary for our manufacturing operations, we
cannot assure you that we may not lose a significant supplier or that a
supplier may be unable to meet performance and quality specifications or
delivery schedules.

Our success depends, in part, on our ability to effect suitable investments,
alliances and acquisitions; we may have difficulty integrating companies we
acquire.

Although we invest significant resources in research and development
activities, the complexity and rapidity of technological changes make it
impractical for us to pursue development of all technological solutions on our
own. On an ongoing basis, we review investment, alliance and acquisition
prospects that would complement our existing product offerings, augment our
market coverage or enhance our technological capabilities. However, we cannot
assure you that we will be able to identify and consummate suitable investment,
alliance or acquisition transactions in the future.

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



| |  |  | issuances of equity securities dilutive to our existing shareholders;    
| | - |  | -------------------------------------------------------------------------
|
| |  |  | large one-time write-offs;                                               
|
| |  |  | the incurrence of substantial debt and assumption of unknown liabilities;
|
| |  |  | the potential loss of key employees from the acquired company;           
|
| |  |  | amortization expenses related to intangible assets; and                  
|
| |  |  | the diversion of managements attention from other business concerns.    

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

Integrating acquired organizations and their products and services may be
expensive, time-consuming and a strain on our resources. We could face several
challenges integrating 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;

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| |  |  | 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.                             

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

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

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

We are subject to the risks of doing business internationally.

For fiscal 2001, approximately 71 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.

Our past operating performance has been impacted by adverse economic conditions
in the Asia-Pacific region, which have increased the uncertainty with respect
to the long-term viability of certain of our customers and suppliers in the
region. Sales to customers in Japan and other countries in the Asia-Pacific
region, principally Taiwan, South Korea and Hong Kong, represented
approximately 56 percent of our net revenues in fiscal 2001.

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We enter into foreign currency forward exchange contracts, principally for the
Japanese yen, to minimize risk of loss from currency exchange rate fluctuations
for foreign currency commitments entered into in the ordinary course of
business. We have not entered into foreign currency forward exchange contracts
for other purposes and our financial condition and results of operations could
be affected (negatively or positively) by currency fluctuations.

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

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



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

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

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

The trading price of our common stock fluctuates significantly. Since our
common stock began trading publicly, the reported sale price of our common
stock on the Nasdaq National Market has been as high as $132.50 and as low as
$6.84 per share. This price may be influenced by many factors, including:



| |  |  | our performance and prospects;                                        
| | - |  | ----------------------------------------------------------------------
|
| |  |  | the depth and liquidity of the market for our common stock;           
|
| |  |  | investor perception of us and the industry in which we operate;       
|
| |  |  | changes in earnings estimates or buy/sell recommendations by analysts;
|
| |  |  | general financial and other market conditions; and                    
|
| |  |  | domestic and international economic conditions.                       

In addition, public stock markets have experienced, and are currently
experiencing, extreme price and trading volume volatility, particularly in the
technology sectors of the market. This volatility has significantly affected
the market prices of securities of many technology companies for reasons
frequently unrelated to or disproportionately

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impacted by the operating performance of these companies. These broad market
fluctuations may adversely affect the market price of our common stock.

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

The semiconductor industry is characterized by vigorous protection and pursuit
of intellectual property rights. From time to time, third parties 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.

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
and Mexico. While we have not experienced any material adverse effect on our
operations as a result of such regulations, we cannot assure you that current
or future regulations would not have a material adverse effect on our business,
financial condition and results of operations.

In the United States, environmental regulations often require parties to fund
remedial action regardless of fault. Consequently, it is often difficult to
estimate the future impact of environmental matters, including potential

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

In connection with our spin-off from Rockwell, we assumed all liabilities in
respect of environmental matters related to our current and former operations.
We have been designated as a potentially responsible party and are engaged in
groundwater remediation at one Superfund site located at a former silicon wafer
manufacturing facility and steel fabrication plant in Parker Ford, Pennsylvania
formerly occupied by us. In addition, we are engaged in remediations of
groundwater contamination at our Newport Beach and Newbury Park, California
facilities. We currently estimate the remaining costs for these remediations to
be approximately $3.7 million and have accrued for these costs as of September
30, 2001.

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

Our management currently faces a variety of challenges, including the
implementation of our strategic manufacturing realignment, the implementation
of our expense reduction and restructuring initiatives and the anticipated
separation of the Personal Networking and Mindspeed Technologies businesses.
While we believe that we have sufficient management resources to execute each
of these initiatives, we cannot assure you that we will have these resources or
that our initiatives will be successfully implemented.

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

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



| |  |  | the division of our board of directors into three classes to be
elected on a staggered basis, one class each year;                                                                  
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the ability of our board of directors to issue shares of our
preferred stock in one or more series without further authorization of
our shareowners;                                
|
| |  |  | a prohibition on shareowner action by written consent;                                                                                                                              
|
| |  |  | a requirement that shareowners provide advance notice of any
shareowner nominations of directors or any proposal of new business to
be considered at any meeting of shareowners;    
|
| |  |  | a requirement that a supermajority vote be obtained to remove a
director for cause or to amend or repeal certain provisions of our
restated certificate of incorporation or by-laws;
|
| |  |  | elimination of the right of shareowners to call a special meeting of shareowners; and                                                                                               
|
| |  |  | a fair price provision.                                                                                                                                                             

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

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

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Executive Officers

Our executive officers are:

|                     |  |     |    |          |  |                                                                                                   
|-------------------- |  | --- | -- | -------- |  | --------------------------------------------------------------------------------------------------
|Name                 |  | Age |    | Position
|                     |  |     |    |         
|Dwight W. Decker     |  |     | 51 |          |  | Chairman of the Board of Directors and Chief Executive Officer                                    
|Kevin D. Barber      |  |     | 41 |          |  | Senior Vice President, Operations                                                                 
|Mark S. Becker       |  |     | 44 |          |  | Vice President and Controller                                                                     
|Moiz M. Beguwala     |  |     | 55 |          |  | Senior Vice President and General Manager, Wireless Communications                                
|J. Scott Blouin      |  |     | 51 |          |  | Senior Vice President and Chief Accounting Officer                                                
|Lewis C. Brewster    |  |     | 37 |          |  | Senior Vice President, Worldwide Sales                                                            
|Raouf Y. Halim       |  |     | 41 |          |  | Senior Vice President and Chief Executive Officer, Mindspeed
Technologies                         
|Balakrishnan S. Iyer |  |     | 45 |          |  | Senior Vice President and Chief Financial Officer                                                 
|Shu Li               |  |     | 42 |          |  | Senior Vice President and Chief Quality Officer, Supply Chain
Management and Platform Technologies
|Daniel A. Marotta    |  |     | 41 |          |  | Senior Vice President and General Manager, Digital Infotainment                                   
|Dennis E. OReilly   |  |     | 57 |          |  | Senior Vice President, General Counsel, Secretary and Chief
Compliance Officer                    
|Kerry K. Petry       |  |     | 52 |          |  | Vice President and Treasurer                                                                      
|Ashwin Rangan        |  |     | 42 |          |  | Senior Vice President and Chief Information Officer                                               
|F. Matthew Rhodes    |  |     | 44 |          |  | Senior Vice President and General Manager, Personal Computing                                     
|Thomas A. Stites     |  |     | 46 |          |  | Senior Vice President, Communications                                                             
|Kevin V. Strong      |  |     | 41 |          |  | Senior Vice President and General Manager, Personal Imaging                                       
|Bradley W. Yates     |  |     | 43 |          |  | Senior Vice President, Human Resources                                                            

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

Dwight W. Decker  Chairman of the Board of Directors 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; and President, Rockwell Semiconductor Systems
prior thereto. Mr. Decker received a Ph.D. in applied mathematics from the
California Institute of Technology and a B.Sc. in mathematics and physics from
McGill University.

Kevin D. Barber  Senior Vice President, Operations. Mr. Barber has served as
Senior Vice President, Operations of Conexant since February 2001; Vice
President, Internal Manufacturing from August 2000 to February 2001; Vice
President, Device Manufacturing from March 1999 to August 2000; Vice President,
Strategic Sourcing from November 1998 to March 1999; and Director, Material
Sourcing of Rockwell Semiconductor Systems prior thereto. Mr. Barber received
an M.B.A. from Pepperdine University and a BSEE degree from San Diego State
University.

Mark S. Becker  Vice President and Controller. Mr. Becker has served as Vice
President and Controller of Conexant since May 2001; Controller of the
Burr-Brown division of Texas Instruments, Incorporated (semiconductors) from
October 2000 to April 2001; Corporate Controller of Burr-Brown Corporation
(semiconductors) from October 1997 to September 2000; Operations Controller of
Crystal Semiconductor Corporation (semiconductors) from March 1997 to September
1997; and Controller of Crystal Semiconductor Corporation prior thereto. Mr.
Becker received an M.B.A. from the University of Pittsburgh and a B.B.A. in
accounting and political science from American 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;
and Vice President, Worldwide Sales of Rockwell Semiconductor Systems 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.

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

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; and Director,
Americas Sales of Rockwell Semiconductor Systems prior thereto. Mr. Brewster
received an M.B.A. from Stanford University and a B.S. in electrical
engineering and biomedical engineering from Duke University.

Raouf Y. Halim  Senior Vice President and Chief Executive Officer, Mindspeed
Technologies. Mr. Halim served as Senior Vice President and General Manager,
Network Access from January 1999 to February 2001; Vice President and General
Manager, Network Access Division of Rockwell Semiconductor Systems from
February 1997 to December 1998; and Vice President  VLSI Engineering of
Rockwell Semiconductor Systems 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 and Chief Quality Officer, Supply Chain
Management and Platform Technologies. Mr. Li served as Divisional Vice
President and General Manager, Semiconductor Packaging of
AlliedSignal, Inc. (semiconductors)
from January 1999 to January 2000; and Divisional Vice President and General
Manager, Commercial Spares and Total Logistics Services of AlliedSignal, 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, Secretary and
Chief Compliance Officer. 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.

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; and Executive
Director, Business Process Re-engineering and Information Technology of
Rockwell Semiconductor

26



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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 Services Inc. (communications systems 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.

Thomas A. Stites  Senior Vice President, Communications. Mr. Stites served as
Vice President, Communications of Advanced Micro Devices 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 of 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; and Business Director,
Personal Computing Products, Multimedia Communications Division of Rockwell
Semiconductor Systems prior thereto. Mr. Strong received a B.S. in electronic
engineering from Southampton 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; and Vice President, Human Resources of AT&T
Wireless Services Los Angeles Cellular partnership with Bell South Corporation
prior thereto. Mr. Yates received an M.S. in strategic human resource
management from the University of Dayton and a B.S. in business administration
from San Diego State University.

27



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Item 2. Properties

At September 30, 2001, we operated three manufacturing facilities in the United
States and one facility in Mexicali, Mexico. We also had 26 design centers and
29 sales offices. These facilities had an aggregate floor space of
approximately 2.5 million square feet, approximately 48% of which were owned
and approximately 52% of which were leased. We believe our properties have been
well maintained, are in sound operating condition and contain all the equipment
and facilities necessary to operate at present levels. A summary of floor space
of our facilities at September 30, 2001 is as follows (in thousands of square
feet):

|                     |       |            |       |            |        |       |       |       |  |  |       |       | 
|-------------------- | ----- | ---------- | ----- | ---------- | ------ | ----- | ----- | ----- |  |  | ----- | ----- | 
|                     |       |            | Owned |            | Leased |       |       |       | 
|Type of Facility     |       | Facilities |       | Facilities |        | Total
|                     |       |            |       |            |        |      
|Manufacturing        |       |            | 736   |            |        |       | 161   |       |  |  | 897   |      
|General office space |       |            | 465   |            |        |       | 1,134 |       |  |  | 1,599 |      
|                     |       |            |       |            |        |       |       |       |  |  |       |      
|                     | Total |            |       | 1,201      |        |       |       | 1,295 |  |  |       | 2,496 | 
|                     |       |            |       |            |        |       |       |       |  |  |       |      

Our headquarters and primary wafer fabrication facility are located in Newport
Beach, California, consisting of approximately 633,000 square feet of owned and
approximately 542,000 square feet of leased floor space. This location includes
an approximately 123,000 square foot wafer fabrication facility. We manufacture
gallium arsenide products at an approximately 30,000 square foot wafer
fabrication facility located in Newbury Park, California.

Certain of our facilities, including our California and Mexicali facilities,
are located near major earthquake fault lines. We maintain no earthquake
insurance with respect to these facilities. The Newport Beach wafer fabrication
facility and a majority of the Mexicali facility are seismically isolated.

We are in negotiations to sell our board-level sub-assembly business and the
related module assembly plant in El Paso, Texas. We expect the sale to be
completed by December 31, 2001.

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Item 3. Legal Proceedings

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 our facsimile modem chipsets seeking 685 million yen
(approximately $5.5 million) plus court costs. In October 1998, the District
Court rendered its decision dismissing the suit against us, from which decision
Dr. Yamazaki appealed. On August 8, 2001, we and Dr. Yamazaki reached a
mutually agreeable settlement terminating the litigation.

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

Various other lawsuits, claims and proceedings have been or may be instituted
or asserted against us or our subsidiaries, including those pertaining to
product liability, intellectual property, environmental, safety and health, and
employment matters. In connection with our spin-off from Rockwell, we assumed
responsibility for all current and future litigation (including environmental
and intellectual property proceedings) against Rockwell or its subsidiaries in
respect of Semiconductor Systems.

The outcome of litigation cannot be predicted with certainty and some lawsuits,
claims or proceedings may be disposed of unfavorably to us. Many intellectual
property disputes have a risk of injunctive relief and there can be no
assurance that a license will be granted. Injunctive relief could have a
material adverse effect on our financial condition or results of operations.
Based on our evaluation of matters which are pending or asserted and taking
into account our reserves for such matters, we believe the disposition of such
matters will not have a material adverse effect on our financial condition or
results of operations.




Item 4. Submission of Matters to Vote of Security Holders

No matters were submitted to a vote of our shareholders during the quarter
ended September 30, 2001.

29



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PART II




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

Our 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 our common stock as reported by the Nasdaq National Market for
the periods indicated. These per share sales prices reflect our 2-for-1 stock
split effected in the form of a stock dividend on October 29, 1999.

|                                      |                |  |      |        |     |  |   |       | 
|------------------------------------- | -------------- |  | ---- | ------ | --- |  | - | ----- | 
|                                      |                |  | High |        | Low
|                                      |                |  |      |        |    
|Fiscal year ended September 30, 2000: |                |  |      |        |     |  |   |      
|                                      | First quarter  |  | $    | 76.19  |     |  | $ | 30.88 | 
|                                      | Second quarter |  |      | 132.50 |     |  |   | 53.00 | 
|                                      | Third quarter  |  |      | 79.00  |     |  |   | 31.25 | 
|                                      | Fourth quarter |  |      | 57.06  |     |  |   | 26.50 | 
|Fiscal year ended September 30, 2001: |                |  |      |        |     |  |   |      
|                                      | First quarter  |  | $    | 43.25  |     |  | $ | 13.75 | 
|                                      | Second quarter |  |      | 21.50  |     |  |   | 8.19  | 
|                                      | Third quarter  |  |      | 12.75  |     |  |   | 6.90  | 
|                                      | Fourth quarter |  |      | 12.85  |     |  |   | 7.25  | 

At November 23, 2001, there were approximately 48,375 holders of record of our
common stock.

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

30



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Item 6. Selected Financial Data

The following selected financial data for the five years ended September 30,
2001 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 (Rockwell) and subsidiaries. The financial data as of and for the
years ended September 30, 2001, 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 and 1997 are derived from the audited
combined 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 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 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.

|                                                                |                                               |                          |            |                                          |           |         |           |         |           |      |           |          |         |   |           |         |         |   |           |         |         | 
|--------------------------------------------------------------- | --------------------------------------------- | ------------------------ | ---------- | ---------------------------------------- | --------- | ------- | --------- | ------- | --------- | ---- | --------- | -------- | ------- | - | --------- | ------- | ------- | - | --------- | ------- | ------- | 
|                                                                |                                               |                          |            | 2001(1)                                  |           | 2000(1) |           | 1999    |           | 1998 |           | 1997 (1)
|                                                                |                                               |                          |            |                                          |           |         |           |         |           |      |           |         
|                                                                |                                               |                          |            | (in thousands, except per share amounts) |           |         |           |         |           |      |           |         
|Statement of Operations Data                                    |                                               |                          |            |                                          |           |         |           |         |           |      |           |          |         |   |           |         |         |   |           |        
|Net revenues                                                    |                                               | $                        | 1,062,558  |                                          |           | $       | 2,103,599 |         |           | $    | 1,444,114 |          |         | $ | 1,200,231 |         |         | $ | 1,412,325 |        
|Cost of goods sold                                              |                                               |                          | 1,020,303  |                                          |           |         | 1,133,647 |         |           |      | 863,252   |          |         |   | 844,851   |         |         |   | 733,848   |        
|                                                                |                                               |                          |            |                                          |           |         |           |         |           |      |           |          |         |   |           |         |         |   |           |        
|Gross margin                                                    |                                               |                          | 42,255     |                                          |           |         | 969,952   |         |           |      | 580,862   |          |         |   | 355,380   |         |         |   | 678,477   |        
|Operating expenses:                                             |                                               |                          |            |                                          |           |         |           |         |           |      |           |          |         |   |           |         |         |   |           |        
|                                                                | Research and development                      |                          |            | 482,995                                  |           |         |           | 414,471 |           |      |           | 310,042  |         |   |           | 342,349 |         |   |           | 279,752 |        
|                                                                | Selling, general and administrative           |                          |            | 302,075                                  |           |         |           | 289,411 |           |      |           | 227,729  |         |   |           | 251,863 |         |   |           | 190,858 |        
|                                                                | Amortization of intangible assets             |                          |            | 340,664                                  |           |         |           | 160,154 |           |      |           | 8,364    |         |   |           | 11,020  |         |   |           | 9,178   |        
|                                                                | Special charges(2)                            |                          |            | 478,492                                  |           |         |           |        |           |      |           | 37,906   |         |   |           | 147,306 |         |   |           |        |        
|                                                                | Purchased in-process research
and development |                          |            |                                         |           |         |           | 215,710 |           |      |           |         |         |   |           |        |         |   |           | 29,900  |        
|                                                                |                                               |                          |            |                                          |           |         |           |         |           |      |           |          |         |   |           |         |         |   |           |        
|                                                                |                                               | Total operating expenses |            |                                          | 1,604,226 |         |           |         | 1,079,746 |      |           |          | 584,041 |   |           |         | 752,538 |   |           |         | 509,688 | 
|                                                                |                                               |                          |            |                                          |           |         |           |         |           |      |           |          |         |   |           |         |         |   |           |        
|Operating income (loss)                                         |                                               |                          | (1,561,971 | )                                        |           |         | (109,794  | )       |           |      | (3,179    | )        |         |   | (397,158  | )       |         |   | 168,789   |        
|Debt conversion costs                                           |                                               |                          | (42,584    | )                                        |           |         |          |         |           |      |          |          |         |   |          |         |         |   |          |        
|Special chargeslitigation                                      |                                               |                          |           |                                          |           |         | (35,000   | )       |           |      |          |          |         |   | (43,000   | )       |         |   |          |        
|Other income, net                                               |                                               |                          | 599        |                                          |           |         | 6,471     |         |           |      | 5,935     |          |         |   | 9,830     |         |         |   | 10,973    |        
|                                                                |                                               |                          |            |                                          |           |         |           |         |           |      |           |          |         |   |           |         |         |   |           |        
|Income (loss) before income taxes                               |                                               |                          | (1,603,956 | )                                        |           |         | (138,323  | )       |           |      | 2,756     |          |         |   | (430,328  | )       |         |   | 179,762   |        
|Provision (benefit) for income taxes                            |                                               |                          | (151,338   | )                                        |           |         | 52,604    |         |           |      | (10,173   | )        |         |   | (168,112  | )       |         |   | 53,938    |        
|                                                                |                                               |                          |            |                                          |           |         |           |         |           |      |           |          |         |   |           |         |         |   |           |        
|Income (loss) before extraordinary item                         |                                               |                          | (1,452,618 | )                                        |           |         | (190,927  | )       |           |      | 12,929    |          |         |   | (262,216  | )       |         |   | 125,824   |        
|Extraordinary gain(3)                                           |                                               |                          | 7,284      |                                          |           |         |          |         |           |      |          |          |         |   |          |         |         |   |          |        
|                                                                |                                               |                          |            |                                          |           |         |           |         |           |      |           |          |         |   |           |         |         |   |           |        
|Net income (loss)                                               |                                               | $                        | (1,445,334 | )                                        |           | $       | (190,927  | )       |           | $    | 12,929    |          |         | $ | (262,216  | )       |         | $ | 125,824   |        
|                                                                |                                               |                          |            |                                          |           |         |           |         |           |      |           |          |         |   |           |         |         |   |           |        
|Income (loss) per share before
extraordinary item(4):           |                                               |                          |            |                                          |           |         |           |         |           |      |           |          |         |   |           |         |         |   |           |        
|                                                                | Basic                                         |                          | $          | (5.94                                    | )         |         | $         | (0.90   | )         |      | $         | 0.07     |         |   | $         | (1.32   | )       |   | $         | 0.59    |        
|                                                                | Diluted                                       |                          |            | (5.94                                    | )         |         |           | (0.90   | )         |      |           | 0.06     |         |   |           | (1.32   | )       |   |           | 0.59    |        
|Balance Sheet Data                                              |                                               |                          |            |                                          |           |         |           |         |           |      |           |          |         |   |           |         |         |   |           |        
|Working capital                                                 |                                               | $                        | 442,354    |                                          |           | $       | 1,319,134 |         |           | $    | 604,453   |          |         | $ | 256,689   |         |         | $ | 221,747   |        
|Total assets                                                    |                                               |                          | 2,815,480  |                                          |           |         | 4,416,197 |         |           |      | 1,841,950 |          |         |   | 1,418,530 |         |         |   | 1,485,759 |        
|Long-term obligations                                           |                                               |                          | 709,849    |                                          |           |         | 999,997   |         |           |      | 350,000   |          |         |   |          |         |         |   |          |        
|Shareholders equity                                            |                                               |                          | 1,773,176  |                                          |           |         | 2,906,759 |         |           |      | 1,035,153 |          |         |   | 1,009,375 |         |         |   | 1,106,558 |        
|Other Financial Data(5)                                         |                                               |                          |            |                                          |           |         |           |         |           |      |           |          |         |   |           |         |         |   |           |        
|Pro forma operating income (loss)                               |                                               | $                        | (733,422   | )                                        |           | $       | 272,829   |         |           | $    | 43,091    |          |         | $ | (238,832  | )       |         | $ | 207,867   |        
|Pro forma income (loss) before
extraordinary item               |                                               |                          | (601,948   | )                                        |           |         | 195,517   |         |           |      | 41,414    |          |         |   | (138,159  | )       |         |   | 149,896   |        
|Pro forma income (loss) per share
before extraordinary item(4): |                                               |                          |            |                                          |           |         |           |         |           |      |           |          |         |   |           |         |         |   |           |        
|                                                                | Basic                                         |                          | $          | (2.46                                    | )         |         | $         | 0.92    |           |      | $         | 0.22     |         |   | $         | (0.70   | )       |   | $         | 0.70    |        
|                                                                | Diluted                                       |                          |            | (2.46                                    | )         |         |           | 0.84    |           |      |           | 0.20     |         |   |           | (0.70   | )       |   |           | 0.69    |        



---

|(1) |  | In fiscal 2001, we acquired HyperXS Communications, Inc. In fiscal 2000,
we completed ten acquisitions, including Microcosm Communications Limited
in January; Maker Communications, Inc. in March; Philsar Semiconductor
Inc. in May; HotRail, Inc. in June; and Novanet Semiconductor Ltd. and
NetPlane Systems, Inc. in September. In fiscal 1997, we acquired the
Hi-Media broadband communication chipset business of ComStream
Corporation. As a result of these acquisitions, during fiscal 2001 and
2000 we recorded $340.7
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|    |  | million and $160.2 million, respectively, in amortization of goodwill and
other acquisition-related intangible assets and in fiscal 2000 and 1997 we
recorded charges of $215.7 million and $29.9 million, respectively, related
to purchased in-process research and development.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | In fiscal 2001, we recorded special charges of $478.5 million,
principally related to the impairment of certain manufacturing assets and
restructuring activities. In fiscal 1998, we recorded special charges of
$147.3 million related to our decision to close and dispose of our wafer
fabrication facilities in Colorado Springs, Colorado, a worldwide
workforce reduction and certain other actions. In fiscal 1999, we recorded
additional special charges of $37.9 million related to the restructuring
actions we initiated in fiscal 1998.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(3) |  | In fiscal 2001, we recorded an extraordinary gain on the extinguishment
of debt, net of income taxes of $4.4 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(4) |  | Income (loss) per share amounts for all periods reflect our October 1999
2-for-1 stock split. Because we were not an independent company during all
of fiscal years 1997-1999, income (loss) per share amounts for those years
are calculated as if our spin-off from Rockwell had occurred on October 1,
1996.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(5) |  | Pro forma operating income (loss), pro forma income (loss) before
extraordinary item, and pro forma income (loss) per share before
extraordinary item exclude the amortization of intangible assets, special
charges, purchased in-process research and development, stock compensation
and certain non-operating gains and losses. The pro forma results reflect
a provision or benefit for income taxes based upon our estimated effective
tax rate for the periods presented. We believe these measures of earnings
provide a better understanding of our underlying operating results and we
use these measures internally to evaluate our underlying operating
performance. These measures of earnings are not in accordance with, or an
alternative for, generally accepted accounting principles and may be
different from pro forma measures used by other companies. See
Managements Discussion and Analysis of Financial Condition and Results
of Operations  Results of Operations  Pro Forma Earnings.

32



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

Overview

We are a worldwide leader in semiconductor system solutions for communications
applications. Our expertise in mixed-signal processing allows us to deliver
integrated systems and semiconductor products which facilitate communications
worldwide through wireline voice and data communications networks, cellular
telephony systems and emerging cable, satellite and fixed wireless broadband
communications networks. We operate in two business segments: the Personal
Networking business and Mindspeed Technologies, our Internet infrastructure
business.

Our Personal Networking business designs, develops and sells semiconductor
system solutions for mobile communications and broadband access applications.
Our mobile 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 as well as
advanced mobile terminals that support next-generation multimedia and
high-speed web browsing. Our broadband access products include semiconductor
solutions that perform communications and media processing functions within a
variety of information and entertainment platforms, such as personal computers
(PCs), asymmetric digital subscriber line (ADSL) modems, cable modems, set-top
boxes, gaming consoles, facsimile machines and personal digital assistants
(PDAs).

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

We market and sell our semiconductor products and system solutions directly to
leading OEMs of communication electronics products and third-party electronic
manufacturing service providers, and indirectly through electronic components
distributors. Sales to distributors accounted for approximately 22% of our
fiscal 2001 net revenues. Although no customer accounted for more than 10% of
our net revenues for fiscal 2001, our top 20 customers accounted for 58% of net
revenues for the period. Revenues derived from customers located in the
Americas, Europe, Japan and the Asia-Pacific region were 31%, 13%, 7% and 49%,
respectively, of our net revenues for fiscal 2001.

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. Our operating results have been, and may continue to 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 our products and our customers products, our ability to develop, introduce
and market new products and technologies on a timely basis, availability and
cost of products from our suppliers, new product and technology introductions
by our competitors, changes in the mix of products we produce and sell,
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 we expect this trend
to continue in the future.

On an ongoing basis, we review investment, alliance and acquisition prospects
that would complement our existing product offerings, augment our market
coverage or enhance our technological capabilities. During fiscal 2001 and

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2000, we completed eleven acquisitions, for aggregate consideration of $1.9
billion, to accelerate development efforts and fill technology gaps in our
product portfolio. We treated each of these acquisitions as a purchase for
financial accounting purposes and our results of operations reflect the
operations of these businesses after the dates of acquisition.

Results of Operations

Recent Developments

During fiscal 2001, welike many of our customers and competitorswere
adversely impacted by a broad slowdown affecting the technology sector,
including most of the communications electronics end-markets which our products
address. Personal Networking net revenues for fiscal 2001 reflect continued
deterioration in the digital cellular handset market resulting from excess
channel inventories due to a slowdown in demand for cellular phones and a
slower transition to next-generation phones. Sales of our broadband solutions
were affected by slower than anticipated deployment of broadband services by
system providers. Moreover, weak consumer demand for PCs and related peripheral
devices and satellite set-top boxes led to lower sales of our products for
these applications. Net revenues in our Mindspeed Technologies business were
affected by slowing investment in communications network capacity expansion by
Internet service providers (ISPs), competitive local exchange carriers (CLECs)
and incumbent local exchange and inter-exchange carriers. In most cases, the
effect of weakened end-customer demand was compounded by higher than normal
levels of equipment and component inventories among our OEM, subcontractor and
distributor customers.

The overall slowdown in the communications electronics markets has also
impacted our gross margins and operating income. Cost of goods sold for fiscal
2001 was adversely affected by the significant underutilization of our
manufacturing capacity. Our cost of goods sold for fiscal 2001 reflects $245.1
million of inventory write-downs across our product portfolio resulting from
the sharply reduced end-customer demand for digital cellular handsets, set-top
boxes, PC peripherals and Internet infrastructure equipment. During fiscal
2001, we also recorded $22.6 million of additional provisions for uncollectible
accounts receivable from slow-paying customers.

Strategic Initiatives

During fiscal 2001, we implemented a number of strategic initiatives to focus
investment and resources in the areas that best support our strategic growth
driversthe mobile communications, broadband access and Internet
infrastructure markets.

In the third quarter of fiscal 2001, we decided to realign our manufacturing
and procurement strategies to accelerate our transition from volume digital
complementary metal-oxide semiconductor (CMOS) manufacturing to a fabless CMOS
business model. We have discontinued advanced CMOS process technology
development efforts beyond 0.13 micron capability, as well as further
investments in CMOS manufacturing capacity. We have entered into long-term
supply agreements with major foundry partners to obtain additional external
CMOS wafer fabrication capacity. We also sold our photomask operations to a
major manufacturer of photomasks and entered into a long-term supply agreement
with the buyer for access to advanced photomask process technologies and
services.

As a result of our decision to realign our manufacturing and procurement
strategies, combined with the then-current and projected business conditions,
we recorded impairment charges during the third quarter of fiscal 2001 totaling
$429 million to write down the carrying value of certain manufacturing assets
in our Personal Networking segment. We expect that this write-down will reduce
our annual depreciation expense by approximately $90 million.

During fiscal 2001, we sold our global positioning system (GPS) business to
SiRF Technology, Inc. (SiRF), a privately-held company focused on GPS
applications, in exchange for shares of SiRF stock. As part of the agreement,
we received certain license rights to SiRFs GPS technology, and retained
rights to certain GPS technology developed by us, for use in mobile
communications applications. In addition, we are in negotiations to sell our
board-level sub-assembly business and the related module assembly plant in El
Paso, Texas. We expect the sale to be completed by December 31, 2001.

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Expense Reduction and Restructuring Initiatives

In fiscal 2001, we implemented a number of expense reduction and restructuring
initiatives to more closely align our cost structure with the current business
environment. The cost reduction initiatives include workforce reductions,
temporary shutdowns of our manufacturing facilities, significant reductions in
capital spending, the consolidation of certain facilities and salary reductions
for our senior management team until we return to profitability.

During fiscal 2001, we reduced our workforce by approximately 2,000 employees
(through involuntary severance programs and attrition), a 22% reduction from
January 2001 levels. In addition to the workforce reductions, we periodically
idled our wafer fabrication facilities in Newport Beach and Newbury Park,
California and for a portion of fiscal 2001, we implemented a reduced work week
at our Mexicali facility.

During fiscal 2001, we recorded restructuring charges of $22.8 million related
to the workforce reductions completed through September 30, 2001 and the
consolidation of certain facilities. Our continuing business reassessment and
expense reduction initiatives may require additional charges for future actions
and for exit costs associated with our El Paso, Texas board-level sub-assembly
business.

The fiscal 2001 restructuring initiatives and other expense reduction actions
taken, when combined with the reduction in depreciation expense as a result of
the write-down of the impaired manufacturing assets, resulted in a quarterly
reduction of manufacturing and operating expenses of approximately $90 million
for the fourth quarter of fiscal 2001 (or an estimated $360 million annualized)
as compared with the second quarter of fiscal 2001.

Separation of Personal Networking and Mindspeed Technologies Businesses

In March 2001, our Board of Directors approved in principle a revised plan for
the separation of our Personal Networking and Mindspeed Technologies
businesses. The separation would now be accomplished by the spin-off of the
Personal Networking business to our shareholders as a new company which will
have the Conexant name. Although current business conditions have delayed the
separation, we remain committed to completing the separation as soon as
business and market conditions permit. The separation is also subject to the
approval of our shareholders and receipt of a ruling from the Internal Revenue
Service (IRS) that the spin-off will qualify as a tax-free distribution. The
IRS ruling has been received. While the ruling is generally binding on the IRS,
the continuing validity of the ruling is subject to certain factual
representations and assumptions. As of the date of this Annual Report, we are
not aware of any facts or circumstances that would cause these representations
and assumptions to be untrue. We cannot assure you that shareholder approval of
the separation will be obtained, or that we will successfully complete the
separation.

Net Revenues

We generally recognize revenues from product sales directly to our customers
and to certain distributors upon shipment and transfer of title. We provide for
warranty costs, sales returns and other allowances at the time of shipment
based on our experience. We make a portion of our product sales to electronic
component distributors under agreements allowing for price protection and/or a
right of return on unsold products. We defer the recognition of revenue on
sales to these distributors until the products are sold by the distributors.
The following table summarizes our net revenues by business segment:

|                                 |                    |      |       |         |  |      |     |        |    |      |         |         |  |  |     |    |   |   |         |         | 
|-------------------------------- | ------------------ | ---- | ----- | ------- |  | ---- | --- | ------ | -- | ---- | ------- | ------- |  |  | --- | -- | - | - | ------- | ------- | 
|(in millions)                    |                    | 2001 |       | Change  |  | 2000 |     | Change |    | 1999
|                                 |                    |      |       |         |  |      |     |        |    |     
|Net revenues:                    |                    |      |       |         |  |      |     |        |    |      |         |         |  |  |     |    |   |   |         |        
|Personal Networking              |                    | $    | 757.2 |         |  |      | (50 | )%     |    | $    | 1,524.4 |         |  |  | 31  | %  |   | $ | 1,166.5 |        
|Mindspeed Technologies           |                    |      | 305.4 |         |  |      | (47 | )%     |    |      | 579.2   |         |  |  | 109 | %  |   |   | 277.6   |        
|                                 |                    |      |       |         |  |      |     |        |    |      |         |         |  |  |     |    |   |   |         |        
|                                 | Total net revenues |      | $     | 1,062.6 |  |      |     | (49    | )% |      | $       | 2,103.6 |  |  |     | 46 | % |   | $       | 1,444.1 | 
|                                 |                    |      |       |         |  |      |     |        |    |      |         |         |  |  |     |    |   |   |         |        
|As a percentage of net revenues: |                    |      |       |         |  |      |     |        |    |      |         |         |  |  |     |    |   |   |         |        
|Personal Networking              |                    |      | 71    | %       |  |      |     |        |    |      | 72      | %       |  |  |     |    |   |   | 81      | %      
|Mindspeed Technologies           |                    |      | 29    | %       |  |      |     |        |    |      | 28      | %       |  |  |     |    |   |   | 19      | %      
|                                 |                    |      |       |         |  |      |     |        |    |      |         |         |  |  |     |    |   |   |         |        
|                                 |                    |      | 100   | %       |  |      |     |        |    |      | 100     | %       |  |  |     |    |   |   | 100     | %      
|                                 |                    |      |       |         |  |      |     |        |    |      |         |         |  |  |     |    |   |   |         |        

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Personal Networking

The following table summarizes the net revenues of our Personal Networking
business by product group:

|                                              |                       |                    |    |        |       |      |  |        |     |      |    |         |         |  |  |    |    |   |    |       |         | 
|--------------------------------------------- | --------------------- | ------------------ | -- | ------ | ----- | ---- |  | ------ | --- | ---- | -- | ------- | ------- |  |  | -- | -- | - | -- | ----- | ------- | 
|(in millions)                                 |                       | 2001               |    | Change |       | 2000 |  | Change |     | 1999
|                                              |                       |                    |    |        |       |      |  |        |     |     
|Net revenues:                                 |                       |                    |    |        |       |      |  |        |     |      |    |         |         |  |  |    |    |   |    |      
|                                              | Mobile communications |                    | $  | 258.0  |       |      |  | (34    | )%  |      | $  | 390.8   |         |  |  | 47 | %  |   | $  | 266.6 |        
|                                              | Broadband access      |                    |    | 499.2  |       |      |  | (56    | )%  |      |    | 1,133.6 |         |  |  | 26 | %  |   |    | 899.9 |        
|                                              |                       |                    |    |        |       |      |  |        |     |      |    |         |         |  |  |    |    |   |    |      
|                                              |                       | Total net revenues |    | $      | 757.2 |      |  |        | (50 | )%   |    | $       | 1,524.4 |  |  |    | 31 | % |    | $     | 1,166.5 | 
|                                              |                       |                    |    |        |       |      |  |        |     |      |    |         |         |  |  |    |    |   |    |      
|As a percentage of
Conexants total revenues: |                       |                    |    |        |       |      |  |        |     |      |    |         |         |  |  |    |    |   |    |      
|                                              | Mobile communications |                    |    | 24     | %     |      |  |        |     |      |    | 18      | %       |  |  |    |    |   |    | 19    | %      
|                                              | Broadband access      |                    |    | 47     | %     |      |  |        |     |      |    | 54      | %       |  |  |    |    |   |    | 62    | %      
|                                              |                       |                    |    |        |       |      |  |        |     |      |    |         |         |  |  |    |    |   |    |      
|                                              |                       |                    | 71 | %      |       |      |  |        |     |      | 72 | %       |         |  |  |    |    |   | 81 | %    
|                                              |                       |                    |    |        |       |      |  |        |     |      |    |         |         |  |  |    |    |   |    |      

Mobile communications net revenues for fiscal 2001 declined 34%, reflecting
softer global demand for digital cellular handsets. Net revenues from digital
cellular components, subsystems and system-level products, primarily for code
division multiple access (CDMA) applications, declined as a result of lower
subsidies of new digital cellular handsets by service providers and a slower
transition to next-generation wireless phones. We also experienced lower sales
volume from 900MHz digital cordless telephone chipsets. While overall demand
remains lower than fiscal 2000 levels, we completed fiscal 2001 with strong
sequential quarterly growth in revenues from our mobile communications
products, driven by market share gains within our power amplifier portfolio,
the volume increases of new general packet radio services (GPRS) and
CDMA2000-based products, and increasing unit shipments of our cellular system
chipsets for global system for mobile communications (GSM) applications.

Mobile communications net revenues for fiscal 2000 grew 47% over fiscal 1999,
driven by strong overall demand for digital cellular handsets. In particular,
we derived significant revenue growth from accelerating unit shipments of our
GSM power amplifiers, radio frequency subsystems and full system solutions.
However, revenues derived from our CDMA product portfolio declined during the
second half of fiscal 2000 as a result of the Korean governments decision to
impose a ban on Korean service providers subsidizing new digital cellular
handsets. The subsidy ban curtailed demand in the Korean market for CDMA
digital cellular handset production and attendant semiconductor component
supply.

Broadband access net revenues for fiscal 2001 declined 56%, reflecting lower
unit shipments of our dial-up modem solutions resulting from weak consumer
demand for PCs and related peripheral devices, and the excess channel inventory
throughout the PC OEM product pipeline. Revenues from our embedded modem
solutions, which enable communications in a variety of personal communications
devices such as gaming consoles, web browsers and handheld devices, also
decreased due to weak consumer demand during fiscal 2001 and the decision of a
major OEM customer to exit the gaming console market. Revenues for our media
processing products, including video encoders and decoders, declined as a
result of the overall weakness in demand for consumer PCs and reduced demand
for legacy low-speed modems used in satellite set-top box applications. Net
revenues from our strategic broadband communications portfolio, including cable
modems and satellite set-top box tuners and demodulators, were similarly
affected by lower consumer demand and high levels of component inventories at
OEMs.

Broadband access net revenues for fiscal 2000 grew 26% over fiscal 1999,
reflecting strong growth in sales of our embedded modems. We also achieved
strong demand through fiscal 2000 for our 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 our cable modem products for European digital video
broadcast and North American Data Over Cable Service Interface Specification
(DOCSIS) applications, as well as the initial production shipments of our ADSL
chipset solutions supporting delivery of broadband communication services for
residential applications.

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Mindspeed Technologies

Net revenues for Mindspeed Technologies for fiscal 2001 reflect the sharply
lower demand for network equipment which has affected us, our customers and our
competitors. ISPs and CLECs have dramatically reduced their investment in
network capacity expansion as their business models fail to generate sufficient
cash flow. Incumbent local exchange carriers and inter-exchange carriers have
also reduced their capital spending. Demand has been further affected by
higher-than-normal levels of equipment and component inventories among many
OEM, subcontractor and distributor customers. As a result, in fiscal 2001 we
experienced a steep decline in revenues from our AnyPort family of
multi-service access processors and, to a lesser extent, our multi-megabit DSL,
optical networking and network processor products.

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

Gross Margin

|                        |  |      |      |        |  |      |     |        |  |      |       |   |  |  |    |   |  |   |       |  
|----------------------- |  | ---- | ---- | ------ |  | ---- | --- | ------ |  | ---- | ----- | - |  |  | -- | - |  | - | ----- | -
|(in millions)           |  | 2001 |      | Change |  | 2000 |     | Change |  | 1999
|                        |  |      |      |        |  |      |     |        |  |     
|Gross margin            |  | $    | 42.3 |        |  |      | (96 | )%     |  | $    | 970.0 |   |  |  | 67 | % |  | $ | 580.9 |  
|Percent of net revenues |  |      | 4    | %      |  |      |     |        |  |      | 46    | % |  |  |    |   |  |   | 40    | %

Our 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. Our gross margin for fiscal
2001 reflects the impact of lower sales volume on a base of relatively fixed
manufacturing support costs. Gross margin for fiscal 2001 also reflects
inventory write-downs of $245.1 million.

The inventory write-downs resulted from the sharply reduced end-customer demand
we experienced for digital cellular handsets, set-top boxes, PC peripherals and
Internet infrastructure equipment. We assess the recoverability of inventories
through an on-going review of inventory levels in relation to sales backlog and
forecasts, product marketing plans and product life cycles. We record inventory
write-downs when the inventory on hand exceeds the demand forecast. Once
established, these write-downs are considered permanent adjustments to the cost
basis of the excess inventory. We do not currently anticipate that the excess
inventory written down will be used at a later date based on our current demand
forecast. During fiscal 2001, we sold an insignificant amount of the inventory
that we had previously written down.

The gross margin improvement in fiscal 2000 compared with fiscal 1999
principally reflects the continued shift in our product mix toward
higher-margin products. The gross margin improvement also reflects higher
factory utilization at our wafer fabrication facilities that resulted from
increased unit sales volume. Gross margins for fiscal 1999 were adversely
affected by unusually high inventory costs which resulted from low
manufacturing capacity utilization during the last four months of fiscal 1998.

Research and Development

|                         |  |      |       |        |  |      |    |        |  |      |       |   |  |  |    |   |  |   |       |  
|------------------------ |  | ---- | ----- | ------ |  | ---- | -- | ------ |  | ---- | ----- | - |  |  | -- | - |  | - | ----- | -
|(in millions)            |  | 2001 |       | Change |  | 2000 |    | Change |  | 1999
|                         |  |      |       |        |  |      |    |        |  |     
|Research and development |  | $    | 483.0 |        |  |      | 17 | %      |  | $    | 414.5 |   |  |  | 34 | % |  | $ | 310.0 |  
|Percent of net revenues  |  |      | 45    | %      |  |      |    |        |  |      | 20    | % |  |  |    |   |  |   | 21    | %

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

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We continue to focus our R&D investment principally in the areas of mobile
communications, broadband access and Internet infrastructure. The increase in
our R&D expenses for fiscal 2001 primarily reflects higher headcount and
personnel-related costs of our expanded development efforts and the accelerated
launch of new products. The higher fiscal 2001 R&D expenses also reflect the
increase in our engineering team resulting from the acquisitions of ten
businesses during fiscal 2000.

The increase in R&D expenses for fiscal 2000 compared to fiscal 1999 primarily
reflects higher headcount and personnel-related costs as we expanded our R&D
efforts in the areas of Internet infrastructure, mobile communications and
broadband access. Subsequent to September 1999, our recruiting programs
increased our engineering team by over 450 engineers, including approximately
350 engineers joining us through the acquisition of ten businesses. Our key
product development efforts were targeted at client and multiport ADSL and
G.shdsl products, home networking solutions, cable modems, CMOS imager
solutions, GSM radio frequency subsystems and system solutions, and
broadband optical networking products.

Selling, General and Administrative

|                                    |  |      |       |        |  |      |   |        |  |      |       |   |  |  |    |   |  |   |       |  
|----------------------------------- |  | ---- | ----- | ------ |  | ---- | - | ------ |  | ---- | ----- | - |  |  | -- | - |  | - | ----- | -
|(in millions)                       |  | 2001 |       | Change |  | 2000 |   | Change |  | 1999
|                                    |  |      |       |        |  |      |   |        |  |     
|Selling, general and administrative |  | $    | 302.1 |        |  |      | 4 | %      |  | $    | 289.4 |   |  |  | 27 | % |  | $ | 227.7 |  
|Percent of net revenues             |  |      | 28    | %      |  |      |   |        |  |      | 14    | % |  |  |    |   |  |   | 16    | %

Our selling, general and administrative (SG&A) expenses include personnel
costs, sales representative commissions, advertising and other marketing costs.
Our SG&A expenses also include costs of corporate functions including legal,
accounting, treasury, human resources, real estate, information systems,
customer service, sales, marketing, field application engineering and other
services.

The increase in SG&A expenses for fiscal 2001 compared to fiscal 2000 primarily
reflects the addition of the selling, marketing and administrative teams of the
businesses we acquired during fiscal 2000 and the development of corporate
infrastructure early in fiscal 2001 in anticipation of the planned separation
of our Personal Networking and Mindspeed Technologies businesses. SG&A expenses
for fiscal 2001 also reflect provisions of $22.6 million for uncollectible
accounts receivable from slow-paying customers. Excluding the effect of the
provisions for uncollectible accounts, our SG&A expenses for fiscal 2001
compared to fiscal 2000 decreased by $7.9 million as a result of the
cost-reduction initiatives we implemented during fiscal 2001.

The increase in SG&A expenses for fiscal 2000 as compared to fiscal 1999
resulted from our continued development of our sales, marketing and business
support functions since our spin-off from Rockwell at the end of the fiscal
1999 first quarter. In particular, we invested in the expansion of our sales
and marketing organizations to support the rapid sales growth experienced in
fiscal 1999 and 2000. The increase also reflects higher sales representative
commissions driven by revenue growth, the SG&A costs associated with the
businesses we acquired in fiscal 2000, and the continued development of
corporate infrastructure, including our information systems, human resources
and finance teams.

Amortization of Intangible Assets

|                                  |  |      |       |        |  |      |  |        |       |      |  |    |  |   |     |  |  |  |  | 
|--------------------------------- |  | ---- | ----- | ------ |  | ---- |  | ------ | ----- | ---- |  | -- |  | - | --- |  |  |  |  | 
|(in millions)                     |  | 2001 |       | Change |  | 2000 |  | Change |       | 1999
|                                  |  |      |       |        |  |      |  |        |       |     
|Amortization of intangible assets |  | $    | 340.7 |        |  | nm   |  | $      | 160.2 |      |  | nm |  | $ | 8.4 | 



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

The higher amortization expense in the fiscal 2001 and 2000 periods resulted
from the ten business acquisitions we completed during fiscal 2000. In
connection with these acquisitions, we recorded an aggregate of $1.7 billion of
identified intangible assets and goodwill. These assets are being amortized
over their estimated lives (principally five years). Consequently, we expect to
record amortization expense related to goodwill and intangible assets of
approximately $355 million in fiscal 2002.

Under the recently-issued Statement of Financial Accounting Standards No. 142,
which we will adopt in the first quarter of fiscal 2003, we will cease
amortizing goodwill against our results of operations, reducing annual
amortization expense by approximately $285 million. However, we will be
required to evaluate goodwill at least

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annually for impairment, and to write down the value of goodwillwith a charge
against our results of operationswhen the recorded value of goodwill exceeds
its estimated fair value.

Special Charges

Special charges consist of the following:

|                      |  |      |       |        |  |      |  |        |   |      |   |    |  |   |      |  |  |   |      | 
|--------------------- |  | ---- | ----- | ------ |  | ---- |  | ------ | - | ---- | - | -- |  | - | ---- |  |  | - | ---- | 
|(in millions)         |  | 2001 |       | Change |  | 2000 |  | Change |   | 1999
|                      |  |      |       |        |  |      |  |        |   |     
|Asset impairments     |  | $    | 429.0 |        |  | nm   |  | $      |  |      |   | nm |  | $ | 20.0 | 
|Restructuring charges |  |      | 22.8  |        |  | nm   |  |        |  |      |   | nm |  |   | 17.9 | 
|Separation costs      |  |      | 15.7  |        |  | nm   |  |        |  |      |   | nm |  |   |     | 
|Other special costs   |  |      | 11.0  |        |  | nm   |  |        |  |      |   | nm |  |   |     | 
|                      |  |      |       |        |  |      |  |        |   |      |   |    |  |   |      |  |  |   |      | 
|                      |  | $    | 478.5 |        |  |      |  |        |   | $    |  |    |  |   |      |  |  | $ | 37.9 | 
|                      |  |      |       |        |  |      |  |        |   |      |   |    |  |   |      |  |  |   |      | 

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

Asset Impairments

During fiscal 2001, we recorded impairment charges totaling $429.0 million
associated with manufacturing assets in our Personal Networking segment. During
the third quarter, we decided to realign our manufacturing and procurement
strategies, accelerating our transition from volume digital CMOS manufacturing
to a fabless CMOS business model. We will continue to use the wafer fabrication
assets for specialty-process wafer manufacturing, as well as to meet a portion
of our CMOS wafer requirements during our transition to a fabless CMOS business
model. Over time, we expect that the majority of our requirements for CMOS
wafers, previously manufactured internally, will be sourced from third-party
foundries. Specialty-process wafer manufacturing (such as gallium arsenide and
silicon germanium processes) will remain an important component of our
strategy.

As a result of our decision to realign our manufacturing and procurement
strategies, combined with then-current and projected business conditions, we
recorded an impairment charge of $412.0 million to write down the carrying
value (approximately $516 million based on historical cost) of both of our
wafer fabrication facilities and related machinery and equipment (the wafer
fabrication assets) to their estimated fair value. We determined the fair
value of the wafer fabrication assets by discounting the cash flows we expect
to be generated from future manufacturing activities, using a discount rate we
believe is commensurate with the risks involved. We believe this discounted
cash flow model represents a reasonable estimate of the fair value of the wafer
fabrication assets. The write-down established a new cost basis for the wafer
fabrication assets, which we will depreciate based upon new estimated useful
lives ranging from one to six years. We expect the write-down of the wafer
fabrication assets, net of the impact of using shorter estimated useful lives,
will reduce our annual depreciation expense by approximately $90 million.

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

In fiscal 1999, we recorded a $20.0 million impairment charge to further write
down our Colorado Springs, Colorado wafer fabrication facilities, which we
decided to close and dispose of during fiscal 1998. We distributed the Colorado
Springs wafer fabrication facilities to Rockwell prior to our spin-off from
Rockwell.

Restructuring Charges

In fiscal 2001, we implemented a number of expense reduction and restructuring
initiatives to more closely align our cost structure with the current business
environment. The cost reduction initiatives include workforce reductions,
temporary shutdowns of our manufacturing facilities, significant reductions in
capital spending, the consolidation of certain facilities and salary reductions
for our senior management team until we return to profitability.

During fiscal 2001, we reduced our workforce by approximately 2,000 employees
(through involuntary severance programs and attrition), a 22% reduction from
January 2001 levels. We recorded restructuring charges of $22.8 million for
costs of the workforce reduction and the consolidation of certain facilities.
The charges were based upon

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estimates of the cost of severance benefits for approximately 1,300 affected
employees and lease cancellation and related costs. The actions reduced our
workforce in both our Personal Networking and Mindspeed Technologies segments,
including approximately 1,000 employees in our manufacturing operations.

Activity and liability balances related to our fiscal 2001 restructuring
actions through September 30, 2001 are as follows:

|                                          |  |            |         |           |  |       |       |   |  |   |         |  
|----------------------------------------- |  | ---------- | ------- | --------- |  | ----- | ----- | - |  | - | ------- | -
|                                          |  | Workforce  |         | Facility  |  |       |       |  
|(in thousands)                            |  | reductions |         | and other |  | Total
|                                          |  |            |         |           |  |      
|Charged to costs and expenses             |  | $          | 17,199  |           |  | $     | 5,584 |   |  | $ | 22,783  |  
|Cash payments                             |  |            | (11,104 | )         |  |       | (223  | ) |  |   | (11,327 | )
|                                          |  |            |         |           |  |       |       |   |  |   |         |  
|Restructuring balance, September 30, 2001 |  | $          | 6,095   |           |  | $     | 5,361 |   |  | $ | 11,456  |  
|                                          |  |            |         |           |  |       |       |   |  |   |         |  

We expect to pay a majority of the amounts accrued for these actions within one
year. Cash payments to complete the restructuring actions will be funded from
available cash reserves and funds from operations, and are not expected to
significantly impact our liquidity.

The fiscal 2001 restructuring initiatives and other expense reduction actions
taken, when combined with the reduction in depreciation expense as a result of
the write-down of the impaired manufacturing assets, resulted in an approximate
$90 million quarterly (or an estimated $360 million annualized) reduction of
manufacturing and operating expenses for the fourth quarter of fiscal 2001 as
compared with the second quarter of fiscal 2001.

Our continuing business reassessment and expense reduction initiatives may
require additional charges for future actions and for exit costs associated
with our El Paso, Texas board-level sub-assembly business.

In fiscal 1999, we recorded additional restructuring charges of $17.9 million
to complete an approximate 10% worldwide workforce reduction and other
restructuring actions which we commenced in 1998. The 1999 charges include
$17.0 million of additional costs relating to our voluntary early retirement
program and $0.9 million to decommission equipment, activities at foreign
subsidiaries and contract cancellations at our Colorado Springs wafer
fabrication facilities. We completed these restructuring actions in fiscal
2000.

Separation Costs

In fiscal 2001, we incurred costs of $15.7 million related to the
previously-announced separation of our Personal Networking and Mindspeed
Technologies businesses into two independent companies. We anticipate that we
will incur additional costs in fiscal 2002 in connection with our revised plan
for the separation of our Personal Networking and Mindspeed Technologies
businesses.

Other Special Charges

In connection with our fiscal 2001 restructuring actions and realigned
manufacturing and procurement strategies, we recorded other special charges
aggregating $11.0 million related to the disposal or write-off of certain
assets.

Purchased In-Process Research and Development

In connection with our fiscal 2000 business acquisitions, we recorded charges
totaling $215.7 million for the fair value of purchased in-process research and
development (IPRD). The following table summarizes the significant assumptions
underlying the valuations related to IPRD at the time of the acquisitions.

|              |  |                |  |      |       |           |               |          |           |            |  |              |            |  |  |  |    |  
|------------- |  | -------------- |  | ---- | ----- | --------- | ------------- | -------- | --------- | ---------- |  | ------------ | ---------- |  |  |  | -- | -
|              |  |                |  |      |       | Estimated |               |          |           |            |  |              |            | 
|              |  |                |  |      |       | costs to  | Discount rate |          | Weighted-
|              |  | Date           |  |      |       |           |               | complete |           | applied to |  | average cost
|(in millions) |  | Acquired       |  | IPRD |       | projects  |               | IPRD     |           | of capital
|              |  |                |  |      |       |           |               |          |           |           
|Microcosm     |  | January 2000   |  | $    | 27.4  |           |               | $        | 0.8       |            |  |              | 35%        |  |  |  | 20 | %
|Maker         |  | March 2000     |  |      | 118.5 |           |               |          | 5.7       |            |  |              | 30%        |  |  |  | 18 | %
|Philsar       |  | May 2000       |  |      | 24.4  |           |               |          | 5.4       |            |  |              | 30%        |  |  |  | 20 | %
|HotRail       |  | June 2000      |  |      | 26.1  |           |               |          | 11.7      |            |  |              | 34%        |  |  |  | 24 | %
|Novanet       |  | September 2000 |  |      | 17.3  |           |               |          | 10.8      |            |  |              | 22% to 27% |  |  |  | 20 | %
|NetPlane      |  | September 2000 |  |      | 2.0   |           |               |          | 0.5       |            |  |              | 20% to 22% |  |  |  | 17 | %

We believe the discount rates applied to the IPRD projects reflect the specific
risks associated therewith. We are

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responsible for the amounts determined for IPRD and we believe the amounts are
representative of fair values and do not exceed the amounts an independent
party would pay for these projects at the dates of acquisition.

MicrocosmWe identified and valued IPRD projects relating to four product
families, directed toward the development of high-performance programmable
communications processors. Microcosms IPRD projects ranged from 77% to 90%
complete and averaged approximately 84% complete. Microcosm completed IPRD
projects in two product families as expected in fiscal 2001; IPRD projects in
two other product families were abandoned in fiscal 2001 in favor of efforts
focused on higher data-rate solutions.

MakerWe identified and valued IPRD projects relating to seven product
families, directed toward the development of high-performance programmable
communications processors and applications software. Makers IPRD projects
ranged from 55% to 92% complete and averaged approximately 75% complete. Maker
completed IPRD projects in three product families during fiscal 2001. The
remaining IPRD projects are expected to be completed during fiscal 2002.

PhilsarWe identified and valued IPRD projects relating to five product
families, directed toward the development of Bluetooth products
including radio frequency
transceivers, a baseband controller and an integrated single-chip Bluetooth
solution. Philsars IPRD projects ranged from 41% to 78% complete and averaged
approximately 60% complete. Philsar completed two IPRD projects in fiscal 2001,
and one other project was cancelled in favor of an alternate solution. The
remaining projects are expected to be completed during fiscal 2002.

HotRailWe identified and valued IPRD projects relating to two product
families, directed toward the development of scaleable, high-speed switch
fabric systems and the HotRail Channel parallel CMOS transceiver. HotRails
IPRD projects ranged from 34% to 95% complete and averaged approximately 74%
complete. The HotRail Channel transceiver was completed during fiscal 2001.
HotRails other IPRD projects were completed during fiscal 2001, with the
exception of one project which is expected to be completed during fiscal 2002.

NovanetWe identified and valued three IPRD projects, directed toward the
development of high-speed semiconductor solutions for ATM and packet-over-SONET
applications. Novanets IPRD projects ranged from 45% to 90% complete and
averaged approximately 70% complete. One of Novanets IPRD projects,
representing 79% of the total value of IPRD acquired, was cancelled during
fiscal 2001 to permit development resources to be refocused on next-generation
semiconductor products which the we believe are better aligned with expected
future demand. One IPRD project was completed during fiscal 2001, and the other
project is now expected to be completed during fiscal 2002.

NetPlaneWe identified and valued 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 routing protocol product suite. NetPlanes IPRD
projects ranged from 5% to 60% complete and averaged approximately 30%
complete. NetPlanes IPRD projects were completed during fiscal 2001.

In the event we are unable 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, the financial results and
operations of the acquired businesses could be adversely affected.

Debt Conversion Costs

During fiscal 2001, approximately $255.2 million principal amount of our
4-1/4% Convertible Subordinated Notes due 2006 were converted into
approximately 11.0 million shares of our common stock at a cost to us of $42.6
million.

Special Charges  Litigation

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

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Other Income, Net

|                  |  |      |     |        |  |      |     |        |  |      |     |  |  |  |   |   |  |   |     | 
|----------------- |  | ---- | --- | ------ |  | ---- | --- | ------ |  | ---- | --- |  |  |  | - | - |  | - | --- | 
|(in millions)     |  | 2001 |     | Change |  | 2000 |     | Change |  | 1999
|                  |  |      |     |        |  |      |     |        |  |     
|Other income, net |  | $    | 0.6 |        |  |      | (91 | )%     |  | $    | 6.5 |  |  |  | 9 | % |  | $ | 5.9 | 

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

In fiscal 2000, 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 our
4% Convertible Subordinated Notes due 2007 issued in February 2000. The fiscal
1999 period reflects gains on the sale of certain investments, which were
partially offset by net interest expense resulting from lower invested cash
balances.

Provision for Income Taxes

In fiscal 2001, we recorded an income tax benefit of $151.3 million, which
reflects the value of our net loss to reduce our income taxes, net of the
impact of the valuation allowance established against the deferred tax assets
and the non-deductible costs for amortization of intangible assets. As a result
of our large fiscal 2001 operating losses and our expectation of future
operating results, we determined that it is more likely than not that a portion
of the additional income tax benefits which arose during fiscal 2001 will not
be realized. Consequently, we established a valuation allowance of $363.4
million for the portion of our deferred tax assets which we do not expect to
realize through the reduction of future income tax payments. We believe the
remaining portion of our deferred tax assets will be realized based on our
current expectations of future earnings and tax planning strategies available
to us. We do not expect to recognize any income tax benefits relating to future
operating losses until we believe that such benefits are more likely than not
to be realized. We expect foreign income taxes to be insignificant.
Consequently, we expect our effective income tax rate will be approximately 0%
for fiscal 2002.

For fiscal 2000, our provision for income taxes was $52.6 million. Exclusive of
the non-deductible charges for IPRD and amortization of intangible assets
resulting from the our fiscal 2000 acquisitions, our the effective tax rate for
fiscal 2000 was approximately 30% of pre-tax income. This rate reflects the
positive impact of state and federal research and experimentation tax credits
available to us. In fiscal 1999, we recorded an income tax benefit of $10.2
million, primarily due to significant research and development credits
generated in comparison to pre-tax income.

Extraordinary Gain on Extinguishment of Debt

During fiscal 2001, we purchased $35.0 million principal amount of our 4%
Convertible Subordinated Notes due 2007 at prevailing market prices, resulting
in a gain of $11.7 million. We have presented such gain in the consolidated
statement of operations as an extraordinary item, net of income taxes of $4.4
million.

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Pro Forma Earnings

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

|                                                             |         |      |            |         |   |      |          |         |  |   |         |         | 
|------------------------------------------------------------ | ------- | ---- | ---------- | ------- | - | ---- | -------- | ------- |  | - | ------- | ------- | 
|(in thousands, except per share amounts)                     |         | 2001 |            | 2000    |   | 1999
|                                                             |         |      |            |         |   |     
|Income (loss) before extraordinary item                      |         | $    | (1,452,618 | )       |   | $    | (190,927 | )       |  | $ | 12,929  |        
|Amortization of intangible assets                            |         |      | 340,664    |         |   |      | 160,154  |         |  |   | 8,364   |        
|Special charges                                              |         |      | 478,492    |         |   |      |         |         |  |   | 37,906  |        
|Purchased in-process research
and development                |         |      |           |         |   |      | 215,710  |         |  |   |        |        
|Stock compensation                                           |         |      | 9,393      |         |   |      | 6,759    |         |  |   |        |        
|Debt conversion costs                                        |         |      | 42,584     |         |   |      |         |         |  |   |        |        
|Gain on sale of certain investments                          |         |      | (23,251    | )       |   |      |          |         |  |   |         |        
|Write-down of investments                                    |         |      | 13,051     |         |   |      |         |         |  |   |        |        
|Write-off of terminated credit facility costs                |         |      | 4,146      |         |   |      |         |         |  |   |        |        
|Special chargeslitigation                                   |         |      |           |         |   |      | 35,000   |         |  |   |        |        
|Tax benefit                                                  |         |      | (14,409    | )       |   |      | (31,179  | )       |  |   | (17,785 | )      
|                                                             |         |      |            |         |   |      |          |         |  |   |         |        
|Pro forma income (loss) before extraordinary item            |         | $    | (601,948   | )       |   | $    | 195,517  |         |  | $ | 41,414  |        
|                                                             |         |      |            |         |   |      |          |         |  |   |         |        
|Pro forma income (loss) per share
before extraordinary item: |         |      |            |         |   |      |          |         |  |   |         |        
|                                                             | Basic   |      | $          | (2.46   | ) |      | $        | 0.92    |  |   | $       | 0.22    | 
|                                                             | Diluted |      | $          | (2.46   | ) |      | $        | 0.84    |  |   | $       | 0.20    | 
|Shares used per share computation:                           |         |      |            |         |   |      |          |         |  |   |         |        
|                                                             | Basic   |      |            | 244,711 |   |      |          | 211,840 |  |   |         | 192,551 | 
|                                                             | Diluted |      |            | 244,711 |   |      |          | 244,970 |  |   |         | 203,484 | 

Special charges excluded from our pro forma results consist of asset
impairments, restructuring charges, separation costs incurred in connection
with the proposed separation of our Personal Networking and Mindspeed
Technologies businesses and losses on the disposal of certain assets. Pro forma
results also exclude stock compensation costs (representing the amortization of
the value of unvested in-the-money stock options we assumed in connection with
certain business acquisitions) and, in fiscal 2000, a $6.8 million charge for
the value of compensatory stock options granted to employees. Non-operating
gains and losses excluded from pro forma results consist of realized gains on
the sale of marketable securities, debt conversion costs, the write-off of
terminated credit facility costs and the write-down of certain non-marketable
investments. The pro forma results reflect a provision or benefit for income
taxes based upon our estimated effective tax rate for the periods presented.
For fiscal 2001, the pro forma results reflect a 36% income tax benefit on
losses we incurred through the first half of fiscal 2001.

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Quarterly Results of Operations

The following table presents our operating results for each of the eight fiscal
quarters in the period ended September 30, 2001. 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. In our
opinion, 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 our
unaudited quarterly results. This data should be read together with our
consolidated financial statements and the notes thereto included in
this Annual Report.

|                                                                                      |         |                          |         |                    |         |          |          |          |         |           |         |                                          |         |          |         |          |         |           |          |         |         |   |          |         |         |   |          |         |         |   |          |         |         | 
|------------------------------------------------------------------------------------- | ------- | ------------------------ | ------- | ------------------ | ------- | -------- | -------- | -------- | ------- | --------- | ------- | ---------------------------------------- | ------- | -------- | ------- | -------- | ------- | --------- | -------- | ------- | ------- | - | -------- | ------- | ------- | - | -------- | ------- | ------- | - | -------- | ------- | ------- | 
|                                                                                      |         |                          |         | Three months ended
|                                                                                      |         |                          |         |                   
|                                                                                      |         |                          |         | Dec. 31,           |         | Mar. 31, |          | June 30, |         | Sept. 30, |         | Dec. 31,                                 |         | Mar. 31, |         | June 30, |         | Sept. 30,
|                                                                                      |         |                          |         | 1999               |         | 2000     |          | 2000     |         | 2000      |         | 2000                                     |         | 2001     |         | 2001     |         | 2001     
|                                                                                      |         |                          |         |                    |         |          |          |          |         |           |         |                                          |         |          |         |          |         |          
|                                                                                      |         |                          |         |                    |         |          |          |          |         |           |         | (in thousands, except per share amounts) |         |          |         |          |         |           |          |        
|Statement of Operations Data                                                          |         |                          |         |                    |         |          |          |          |         |           |         |                                          |         |          |         |          |         |           |          |         |         |   |          |         |         |   |          |         |         |   |          |        
|Net revenues                                                                          |         | $                        | 509,963 |                    |         | $        | 501,728  |          |         | $         | 530,474 |                                          |         | $        | 561,434 |          |         | $         | 410,361  |         |         | $ | 251,003  |         |         | $ | 200,146  |         |         | $ | 201,048  |        
|Cost of goods sold                                                                    |         |                          | 277,446 |                    |         |          | 269,459  |          |         |           | 282,185 |                                          |         |          | 304,557 |          |         |           | 296,603  |         |         |   | 334,168  |         |         |   | 228,998  |         |         |   | 160,534  |        
|                                                                                      |         |                          |         |                    |         |          |          |          |         |           |         |                                          |         |          |         |          |         |           |          |         |         |   |          |         |         |   |          |         |         |   |          |        
|Gross margin                                                                          |         |                          | 232,517 |                    |         |          | 232,269  |          |         |           | 248,289 |                                          |         |          | 256,877 |          |         |           | 113,758  |         |         |   | (83,165  | )       |         |   | (28,852  | )       |         |   | 40,514   |        
|Research and development                                                              |         |                          | 88,477  |                    |         |          | 100,095  |          |         |           | 106,017 |                                          |         |          | 119,882 |          |         |           | 118,538  |         |         |   | 128,879  |         |         |   | 117,128  |         |         |   | 118,450  |        
|Selling, general and
administrative                                                   |         |                          | 68,168  |                    |         |          | 66,024   |          |         |           | 71,017  |                                          |         |          | 84,202  |          |         |           | 80,376   |         |         |   | 89,741   |         |         |   | 76,058   |         |         |   | 55,900   |        
|Amortization of intangible
assets                                                     |         |                          | 2,405   |                    |         |          | 25,337   |          |         |           | 55,861  |                                          |         |          | 76,551  |          |         |           | 82,304   |         |         |   | 84,040   |         |         |   | 85,307   |         |         |   | 89,013   |        
|Special charges                                                                       |         |                          |        |                    |         |          |         |          |         |           |        |                                          |         |          |        |          |         |           | 7,927    |         |         |   | 11,848   |         |         |   | 432,462  |         |         |   | 26,255   |        
|Purchased in-process R&D                                                              |         |                          |        |                    |         |          | 145,900  |          |         |           | 50,462  |                                          |         |          | 19,348  |          |         |           |         |         |         |   |         |         |         |   |         |         |         |   |         |        
|                                                                                      |         |                          |         |                    |         |          |          |          |         |           |         |                                          |         |          |         |          |         |           |          |         |         |   |          |         |         |   |          |         |         |   |          |        
|                                                                                      |         | Total operating expenses |         |                    | 159,050 |          |          |          | 337,356 |           |         |                                          | 283,357 |          |         |          | 299,983 |           |          |         | 289,145 |   |          |         | 314,508 |   |          |         | 710,955 |   |          |         | 289,618 | 
|                                                                                      |         |                          |         |                    |         |          |          |          |         |           |         |                                          |         |          |         |          |         |           |          |         |         |   |          |         |         |   |          |         |         |   |          |        
|Operating income (loss)                                                               |         |                          | 73,467  |                    |         |          | (105,087 | )        |         |           | (35,068 | )                                        |         |          | (43,106 | )        |         |           | (175,387 | )       |         |   | (397,673 | )       |         |   | (739,807 | )       |         |   | (249,104 | )      
|Debt conversion costs                                                                 |         |                          |        |                    |         |          |         |          |         |           |        |                                          |         |          |        |          |         |           | (42,584  | )       |         |   |         |         |         |   |         |         |         |   |         |        
|Special chargeslitigation                                                            |         |                          |        |                    |         |          |         |          |         |           |        |                                          |         |          | (35,000 | )        |         |           |         |         |         |   |         |         |         |   |         |         |         |   |         |        
|Other income (expense), net                                                           |         |                          | 578     |                    |         |          | 932      |          |         |           | 2,082   |                                          |         |          | 2,879   |          |         |           | (4,356   | )       |         |   | (1,021   | )       |         |   | (4,766   | )       |         |   | 10,742   |        
|                                                                                      |         |                          |         |                    |         |          |          |          |         |           |         |                                          |         |          |         |          |         |           |          |         |         |   |          |         |         |   |          |         |         |   |          |        
|Income (loss) before income
taxes                                                     |         |                          | 74,045  |                    |         |          | (104,155 | )        |         |           | (32,986 | )                                        |         |          | (75,227 | )        |         |           | (222,327 | )       |         |   | (398,694 | )       |         |   | (744,573 | )       |         |   | (238,362 | )      
|Provision (benefit)
for income taxes                                                  |         |                          | 22,214  |                    |         |          | 28,187   |          |         |           | 20,335  |                                          |         |          | (18,132 | )        |         |           | (15,467  | )       |         |   | (136,683 | )       |         |   | 367      |         |         |   | 445      |        
|                                                                                      |         |                          |         |                    |         |          |          |          |         |           |         |                                          |         |          |         |          |         |           |          |         |         |   |          |         |         |   |          |         |         |   |          |        
|Income (loss) before
extraordinary item                                               |         |                          | 51,831  |                    |         |          | (132,342 | )        |         |           | (53,321 | )                                        |         |          | (57,095 | )        |         |           | (206,860 | )       |         |   | (262,011 | )       |         |   | (744,940 | )       |         |   | (238,807 | )      
|Extraordinary gain on
extinguishment of debt                                          |         |                          |        |                    |         |          |         |          |         |           |        |                                          |         |          |        |          |         |           | 7,284    |         |         |   |         |         |         |   |         |         |         |   |         |        
|                                                                                      |         |                          |         |                    |         |          |          |          |         |           |         |                                          |         |          |         |          |         |           |          |         |         |   |          |         |         |   |          |         |         |   |          |        
|Net income (loss)                                                                     |         | $                        | 51,831  |                    |         | $        | (132,342 | )        |         | $         | (53,321 | )                                        |         | $        | (57,095 | )        |         | $         | (199,576 | )       |         | $ | (262,011 | )       |         | $ | (744,940 | )       |         | $ | (238,807 | )      
|                                                                                      |         |                          |         |                    |         |          |          |          |         |           |         |                                          |         |          |         |          |         |           |          |         |         |   |          |         |         |   |          |         |         |   |          |        
|Income (loss) per share
before extraordinary item:                                    |         |                          |         |                    |         |          |          |          |         |           |         |                                          |         |          |         |          |         |           |          |         |         |   |          |         |         |   |          |         |         |   |          |        
|                                                                                      | Basic   |                          | $       | 0.26               |         |          | $        | (0.64    | )       |           | $       | (0.24                                    | )       |          | $       | (0.25    | )       |           | $        | (0.88   | )       |   | $        | (1.08   | )       |   | $        | (3.02   | )       |   | $        | (0.95   | )      
|                                                                                      | Diluted |                          |         | 0.24               |         |          |          | (0.64    | )       |           |         | (0.24                                    | )       |          |         | (0.25    | )       |           |          | (0.88   | )       |   |          | (1.08   | )       |   |          | (3.02   | )       |   |          | (0.95   | )      
|Shares used in computing
income (loss) per share
before extraordinary item:           |         |                          |         |                    |         |          |          |          |         |           |         |                                          |         |          |         |          |         |           |          |         |         |   |          |         |         |   |          |         |         |   |          |        
|                                                                                      | Basic   |                          |         | 196,715            |         |          |          | 205,207  |         |           |         | 218,249                                  |         |          |         | 227,124  |         |           |          | 236,119 |         |   |          | 243,515 |         |   |          | 246,777 |         |   |          | 252,427 |        
|                                                                                      | Diluted |                          |         | 228,974            |         |          |          | 205,207  |         |           |         | 218,249                                  |         |          |         | 227,124  |         |           |          | 236,119 |         |   |          | 243,515 |         |   |          | 246,777 |         |   |          | 252,427 |        
|Other Financial Data(1)                                                               |         |                          |         |                    |         |          |          |          |         |           |         |                                          |         |          |         |          |         |           |          |         |         |   |          |         |         |   |          |         |         |   |          |        
|Pro forma operating
income (loss)                                                     |         | $                        | 75,872  |                    |         | $        | 66,150   |          |         | $         | 71,255  |                                          |         | $        | 59,552  |          |         | $         | (82,669  | )       |         | $ | (299,566 | )       |         | $ | (219,453 | )       |         | $ | (131,734 | )      
|Pro forma income (loss) before
extraordinary item                                     |         |                          | 53,318  |                    |         |          | 47,143   |          |         |           | 51,545  |                                          |         |          | 43,511  |          |         |           | (57,417  | )       |         |   | (187,454 | )       |         |   | (220,440 | )       |         |   | (136,637 | )      
|Pro forma income (loss) per
share before extraordinary
item:                          |         |                          |         |                    |         |          |          |          |         |           |         |                                          |         |          |         |          |         |           |          |         |         |   |          |         |         |   |          |         |         |   |          |        
|                                                                                      | Basic   |                          | $       | 0.27               |         |          | $        | 0.23     |         |           | $       | 0.24                                     |         |          | $       | 0.19     |         |           | $        | (0.24   | )       |   | $        | (0.77   | )       |   | $        | (0.89   | )       |   | $        | (0.54   | )      
|                                                                                      | Diluted |                          |         | 0.24               |         |          |          | 0.21     |         |           |         | 0.22                                     |         |          |         | 0.18     |         |           |          | (0.24   | )       |   |          | (0.77   | )       |   |          | (0.89   | )       |   |          | (0.54   | )      
|Shares used in computing
pro forma income (loss) per
share before extraordinary
item: |         |                          |         |                    |         |          |          |          |         |           |         |                                          |         |          |         |          |         |           |          |         |         |   |          |         |         |   |          |         |         |   |          |        
|                                                                                      | Basic   |                          |         | 196,715            |         |          |          | 205,207  |         |           |         | 218,249                                  |         |          |         | 227,124  |         |           |          | 236,119 |         |   |          | 243,515 |         |   |          | 246,777 |         |   |          | 252,427 |        
|                                                                                      | Diluted |                          |         | 228,974            |         |          |          | 239,644  |         |           |         | 248,491                                  |         |          |         | 257,972  |         |           |          | 236,119 |         |   |          | 243,515 |         |   |          | 246,777 |         |   |          | 252,427 |        



|(1) |  | Pro forma operating income (loss), pro forma income (loss) before
extraordinary item, and pro forma income (loss) per share before
extraordinary item exclude the amortization of intangible assets, special
charges, purchased in-process research and development, stock compensation
and certain non-operating gains and losses.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | The pro forma results reflect a provision or benefit for income taxes based
upon our estimated effective tax rate for the periods presented. We believe
these measures of earnings provide a better understanding of our underlying
operating results and we use these measures internally to evaluate our
underlying operating performance. These measures of earnings are not in
accordance with, or an alternative for, generally accepted accounting
principles and may be different from pro forma measures used by other
companies.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Liquidity and Capital Resources

Cash used in operating activities was $247.0 million for fiscal 2001, compared
to cash provided by operating activities of $162.1 million for fiscal 2000 and
$307.7 million for fiscal 1999. Fiscal 2001 operating cash flows reflect our
net loss of $1.4 billion, offset by noncash charges (depreciation and
amortization, special charges and other) of $1.1 billion, and a net decrease in
the non-cash components of our working capital of approximately $70.9 million.
Before the effect of working capital changes, operating cash flow was $(317.9)
million for fiscal 2001, compared to $404.4 million for fiscal 2000.

The fiscal 2001 working capital decreases include a $266.4 million decrease in
net receivables, principally due to lower quarterly sales. Our allowance for
doubtful accounts increased by $11.3 million during fiscal 2001, resulting from
additional reserves taken for slow-paying accounts. The working capital changes
 include a $29.7 million increase in net inventories (before the effect of
inventory provisions of $248.3 million). The working capital changes also
include a reduction of accounts payable of $130.2 million and a decrease in
accrued expenses and other current liabilities of $17.5 million resulting from
lower materials purchases and decreased capital spending.

Cash used in investing activities of $357.0 million during fiscal 2001 included
net purchases of marketable securities totaling $93.0 million. Capital
expenditures totaled $158.4 million during fiscal 2001, primarily for
investment in production and test facilities and corporate information systems.
As a part of our expense reduction initiatives, we reduced capital expenditures
to $9.1 million in the fourth quarter of fiscal 2001. In addition, we made
payments for investments, advances and acquisitions totaling $108.2 million,
including a vendor advance of $75.0 million, payments of $15.1 million in
connection with business acquisitions, and $18.1 million of equity investments,
principally in early-stage communications technology companies. Cash used in investing activities during fiscal 2000 consisted of
routine capital expenditures of $315.1 million, payments for investments,
advances and acquisitions totaling $175.3 million, and net sales of marketable
securities of $13.2 million.

Cash used in financing activities of $44.8 million during fiscal 2001
principally consisted of $65.0 million paid in connection with the conversion
and repurchase of a portion of our convertible subordinated notes. During
fiscal 2001, approximately $255.2 million principal amount of
our 4-1/4%
Convertible Subordinated Notes were converted into approximately 11.0 million
shares of common stock, at a cost to us of $42.6 million. Also during fiscal
2001, we purchased $35.0 million principal amount of our 4% Convertible
Subordinated Notes at prevailing market prices, resulting in an extraordinary
gain of $11.7 million. These costs were partially offset by proceeds of $20.2
million from the exercise of stock options. Cash provided by financing
activities during fiscal 2000 of $747.7 million consisted of net proceeds from
the issuance of $650 million principal amount of our 4% Convertible
Subordinated Notes due 2007 and proceeds from the exercise of stock options of
$116.7 million.

Our principal sources of liquidity are our existing cash reserves and
available-for-sale marketable securities and cash generated from operations.
Combined cash and cash equivalents and marketable securities at September 30,
2001 totaled $338.9 million compared to $944.4 million at September 30, 2000.
Our working capital at September 30, 2001 was $442.4 million compared to $1.3
billion at September 30, 2000. The overall working capital decrease
principally reflects cash used in operations and cash payments for capital
expenditures, investments and advances and the inventory write-downs recorded
during the year.

While the recent dramatic changes in end-user demand and the continued high
levels of channel inventories have reduced visibility into future demand, we
expect that these and other factors will continue to affect our revenues in
fiscal 2002. We also believe that ongoing underutilization of our manufacturing
capacity will adversely affect our gross margin and operating profit.
Consequently, we anticipate that we will continue to experience negative cash

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flows from operations in the near term. During fiscal 2001, we implemented a
number of expense reduction initiatives, including workforce reductions,
temporary shutdowns of our manufacturing facilities, the consolidation of
certain facilities and salary reductions of 10% for senior management. We have
also reduced our planned capital expenditures based upon our current revenue
outlook.

We believe that our existing sources of liquidity, along with cash expected to
be generated from operations, will be sufficient to fund our operations,
research and development efforts, and anticipated capital expenditures for at
least the next twelve months. Although reduced capital expenditures are a key
component of our realigned manufacturing and procurement strategy, we will need
to continue a focused program of capital expenditures to sustain our current
manufacturing capabilities during the transition to a fabless CMOS business
model and to support our continuing specialty-process wafer manufacturing. We
may also consider acquisition opportunities to extend our technology portfolio
and design expertise and to expand our product offerings. In order to fund
renewed capital expenditures, increase our working capital or complete any
acquisitions, we may seek to obtain additional debt financing or issue
additional shares of our common stock. However, we can not assure you that
such financing will be available to us on favorable terms, or at all.




Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Our financial instruments include cash and cash equivalents, marketable
securities and long-term debt. Our main investment objectives are the
preservation of investment capital and the maximization of after-tax returns on
our investment portfolio. Consequently, we invest with only high-credit-quality
issuers and we limit the amount of our credit exposure to any one issuer. We do
not use derivative instruments for speculative or investment purposes.

Our cash and cash equivalents are not subject to significant interest rate risk
due to the short maturities of these instruments. As of September 30, 2001, the
carrying value of our cash and cash equivalents approximates fair value.

Our marketable debt securities (consisting of commercial paper, corporate bonds
and government securities) principally have remaining terms of two years or
less. Consequently, such securities are not subject to significant interest
rate risk. All of our marketable securities are classified as available for
sale and, as of September 30, 2001, unrealized gains of $1.6 million (net of
related income taxes of $1.2 million) on these securities are included in
accumulated other comprehensive income.

Our long-term debt consists of convertible subordinated notes with interest at
fixed rates. Consequently, we do not have significant cash flow exposure on our
long-term debt. However, the fair value of our convertible subordinated notes
is subject to significant fluctuation due to their convertibility into shares
of our common stock.

The following table shows the fair values of our investments and long-term debt
as of September 30, 2001:

|                           |  |                |         |            |  |   |         | 
|-------------------------- |  | -------------- | ------- | ---------- |  | - | ------- | 
|(in thousands)             |  | Carrying Value |         | Fair Value
|                           |  |                |         |           
|Cash and cash equivalents  |  | $              | 182,260 |            |  | $ | 182,260 | 
|Marketable debt securities |  |                | 156,660 |            |  |   | 156,660 | 
|Long-term debt             |  |                | 709,849 |            |  |   | 398,311 | 

We transact business in various foreign currencies, and we have established a
foreign currency hedging program utilizing foreign currency forward exchange
contracts to hedge certain foreign currency transaction exposures (principally
the Japanese yen). Under this program, we seek to offset foreign currency
transaction gains and losses with gains and losses on the forward contracts, so
as to mitigate our overall risk of foreign transaction gains and losses. We do
not enter into forward contracts for speculative or trading purposes.

At September 30, 2001, we held foreign currency forward exchange contracts (to
sell Japanese yen at specified rates) having an aggregate notional amount of
approximately 574 million yen, at a notional weighted average exchange rate of
approximately 116.2 yen to one dollar. The net unrealized gain/loss on the
forward contracts outstanding at September 30, 2001 was not material to our
consolidated financial statements. Based on our overall currency rate exposure
at September 30, 2001, a 10 percent change in currency rates would not have a
material effect on our consolidated financial position, results of operations
or cash flows.

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The table below provides information as of September 30, 2001 about our 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.

|                                             |  |          |       |               |  |            |        |  |  |   |     | 
|-------------------------------------------- |  | -------- | ----- | ------------- |  | ---------- | ------ |  |  | - | --- | 
|                                             |  | Notional |       | Contract Rate |  | Estimated 
|(dollars in thousands)                       |  | Amount   |       | Per US $1.00  |  | Fair Value
|                                             |  |          |       |               |  |           
|Foreign currency forward exchange contracts: |  |          |       |               |  |            |        |  |  |   |     | 
|Japanese yen                                 |  | $        | 4,938 |               |  |            | 116.19 |  |  | $ | 124 | 

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Item 8. Financial Statements and Supplementary Data




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

|                                     |                                                                                                                |                                            |           |            |           |               |           |           |           |  |  | 
|------------------------------------ | -------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | ---------- | --------- | ------------- | --------- | --------- | --------- |  |  | 
|                                     |                                                                                                                |                                            |           |            |           | September 30,
|                                     |                                                                                                                |                                            |           |            |           |              
|                                     |                                                                                                                |                                            |           |            |           | 2001          |           | 2000     
|                                     |                                                                                                                |                                            |           |            |           |               |           |          
|ASSETS                              
|Current Assets                       |                                                                                                                |                                            |           |            |           |               |           |          
|                                     | Cash and cash equivalents                                                                                      |                                            | $         | 182,260    |           |               | $         | 831,100   |          
|                                     | Short-term investments                                                                                         |                                            |           | 156,660    |           |               |           | 17,397    |          
|                                     | Receivables, net of allowance of $18,206 (2001) and $6,949 (2000)                                              |                                            |           | 133,685    |           |               |           | 422,650   |          
|                                     | Inventories                                                                                                    |                                            |           | 122,397    |           |               |           | 341,002   |          
|                                     | Deferred income taxes                                                                                          |                                            |           | 75,710     |           |               |           | 95,260    |          
|                                     | Other current assets                                                                                           |                                            |           | 54,639     |           |               |           | 66,733    |          
|                                     |                                                                                                                |                                            |           |            |           |               |           |          
|                                     |                                                                                                                | Total current assets                       |           |            | 725,351   |               |           |           | 1,774,142 | 
|Marketable securities                |                                                                                                                |                                            |          |            |           |               | 95,876    |          
|Property, plant and equipment, net   |                                                                                                                |                                            | 387,433   |            |           |               | 828,511   |          
|Goodwill and intangible assets, net  |                                                                                                                |                                            | 1,251,253 |            |           |               | 1,507,326 |          
|Other assets                         |                                                                                                                |                                            | 267,999   |            |           |               | 209,056   |          
|Deferred income taxes                |                                                                                                                |                                            | 183,444   |            |           |               | 1,286     |          
|                                     |                                                                                                                |                                            |           |            |           |               |           |          
|                                     |                                                                                                                | Total assets                               |           | $          | 2,815,480 |               |           | $         | 4,416,197 | 
|                                     |                                                                                                                |                                            |           |            |           |               |           |          
|LIABILITIES AND SHAREHOLDERS EQUITY
|Current Liabilities                  |                                                                                                                |                                            |           |            |           |               |           |          
|                                     | Accounts payable                                                                                               |                                            | $         | 98,141     |           |               | $         | 233,865   |          
|                                     | Deferred revenue                                                                                               |                                            |           | 27,149     |           |               |           | 37,586    |          
|                                     | Accrued compensation and benefits                                                                              |                                            |           | 50,407     |           |               |           | 88,399    |          
|                                     | Other current liabilities                                                                                      |                                            |           | 107,300    |           |               |           | 95,158    |          
|                                     |                                                                                                                |                                            |           |            |           |               |           |          
|                                     |                                                                                                                | Total current liabilities                  |           |            | 282,997   |               |           |           | 455,008   | 
|Convertible subordinated notes       |                                                                                                                |                                            | 709,849   |            |           |               | 999,997   |          
|Other long-term liabilities          |                                                                                                                |                                            | 49,458    |            |           |               | 54,433    |          
|                                     |                                                                                                                |                                            |           |            |           |               |           |          
|                                     |                                                                                                                | Total liabilities                          |           |            | 1,042,304 |               |           |           | 1,509,438 | 
|                                     |                                                                                                                |                                            |           |            |           |               |           |          
|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;
253,900 (2001) and 231,164 (2000) issued shares    |                                            |           | 253,900    |           |               |           | 231,164   |          
|                                     | Additional paid-in capital                                                                                     |                                            |           | 3,113,205  |           |               |           | 2,775,115 |          
|                                     | Accumulated deficit                                                                                            |                                            |           | (1,566,209 | )         |               |           | (120,875  | )        
|                                     | Accumulated other comprehensive income (loss)                                                                  |                                            |           | (17,204    | )         |               |           | 47,295    |          
|                                     | Treasury stock, at cost: 41 (2001) and 30 (2000) shares                                                        |                                            |           | (1,807     | )         |               |           | (1,619    | )        
|                                     | Unearned compensation                                                                                          |                                            |           | (8,709     | )         |               |           | (24,321   | )        
|                                     |                                                                                                                |                                            |           |            |           |               |           |          
|                                     |                                                                                                                | Total shareholders equity                 |           |            | 1,773,176 |               |           |           | 2,906,759 | 
|                                     |                                                                                                                |                                            |           |            |           |               |           |          
|                                     |                                                                                                                | Total liabilities and shareholders equity |           | $          | 2,815,480 |               |           | $         | 4,416,197 | 
|                                     |                                                                                                                |                                            |           |            |           |               |           |          

See accompanying notes to consolidated financial statements.

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

|                                                                            |                                               |                          |            |                           |           |      |           |         |           |   |           |         |         | 
|--------------------------------------------------------------------------- | --------------------------------------------- | ------------------------ | ---------- | ------------------------- | --------- | ---- | --------- | ------- | --------- | - | --------- | ------- | ------- | 
|                                                                            |                                               |                          |            | Years Ended September 30,
|                                                                            |                                               |                          |            |                          
|                                                                            |                                               |                          |            | 2001                      |           | 2000 |           | 1999   
|                                                                            |                                               |                          |            |                           |           |      |           |        
|Net revenues                                                                |                                               | $                        | 1,062,558  |                           |           | $    | 2,103,599 |         |           | $ | 1,444,114 |        
|Cost of goods sold                                                          |                                               |                          | 1,020,303  |                           |           |      | 1,133,647 |         |           |   | 863,252   |        
|                                                                            |                                               |                          |            |                           |           |      |           |         |           |   |           |        
|Gross margin                                                                |                                               |                          | 42,255     |                           |           |      | 969,952   |         |           |   | 580,862   |        
|Operating expenses:                                                         |                                               |                          |            |                           |           |      |           |         |           |   |           |        
|                                                                            | Research and development                      |                          |            | 482,995                   |           |      |           | 414,471 |           |   |           | 310,042 |        
|                                                                            | Selling, general and administrative           |                          |            | 302,075                   |           |      |           | 289,411 |           |   |           | 227,729 |        
|                                                                            | Amortization of intangible assets             |                          |            | 340,664                   |           |      |           | 160,154 |           |   |           | 8,364   |        
|                                                                            | Special charges                               |                          |            | 478,492                   |           |      |           |        |           |   |           | 37,906  |        
|                                                                            | Purchased in-process research and development |                          |            |                          |           |      |           | 215,710 |           |   |           |        |        
|                                                                            |                                               |                          |            |                           |           |      |           |         |           |   |           |        
|                                                                            |                                               | Total operating expenses |            |                           | 1,604,226 |      |           |         | 1,079,746 |   |           |         | 584,041 | 
|                                                                            |                                               |                          |            |                           |           |      |           |         |           |   |           |        
|Operating loss                                                              |                                               |                          | (1,561,971 | )                         |           |      | (109,794  | )       |           |   | (3,179    | )      
|Debt conversion costs                                                       |                                               |                          | (42,584    | )                         |           |      |          |         |           |   |          |        
|Special charges  litigation                                                |                                               |                          |           |                           |           |      | (35,000   | )       |           |   |          |        
|Other income, net                                                           |                                               |                          | 599        |                           |           |      | 6,471     |         |           |   | 5,935     |        
|                                                                            |                                               |                          |            |                           |           |      |           |         |           |   |           |        
|Income (loss) before income taxes                                           |                                               |                          | (1,603,956 | )                         |           |      | (138,323  | )       |           |   | 2,756     |        
|Provision (benefit) for income taxes                                        |                                               |                          | (151,338   | )                         |           |      | 52,604    |         |           |   | (10,173   | )      
|                                                                            |                                               |                          |            |                           |           |      |           |         |           |   |           |        
|Income (loss) before extraordinary item                                     |                                               |                          | (1,452,618 | )                         |           | $    | (190,927  | )       |           |   | 12,929    |        
|Extraordinary gain on extinguishment of debt,
net of income taxes of $4,426 |                                               |                          | 7,284      |                           |           |      |          |         |           |   |          |        
|                                                                            |                                               |                          |            |                           |           |      |           |         |           |   |           |        
|Net income (loss)                                                           |                                               | $                        | (1,445,334 | )                         |           | $    | (190,927  | )       |           | $ | 12,929    |        
|                                                                            |                                               |                          |            |                           |           |      |           |         |           |   |           |        
|Basic income (loss) per share:                                              |                                               |                          |            |                           |           |      |           |         |           |   |           |        
|                                                                            | Income (loss) before extraordinary item       |                          | $          | (5.94                     | )         |      | $         | (0.90   | )         |   | $         | 0.07    |        
|                                                                            | Extraordinary item                            |                          |            | 0.03                      |           |      |           |        |           |   |           |        |        
|                                                                            |                                               |                          |            |                           |           |      |           |         |           |   |           |        
|                                                                            | Net income (loss)                             |                          | $          | (5.91                     | )         |      | $         | (0.90   | )         |   | $         | 0.07    |        
|                                                                            |                                               |                          |            |                           |           |      |           |         |           |   |           |        
|Diluted income (loss) per share:                                            |                                               |                          |            |                           |           |      |           |         |           |   |           |        
|                                                                            | Income (loss) before extraordinary item       |                          | $          | (5.94                     | )         |      | $         | (0.90   | )         |   | $         | 0.06    |        
|                                                                            | Extraordinary item                            |                          |            | 0.03                      |           |      |           |        |           |   |           |        |        
|                                                                            |                                               |                          |            |                           |           |      |           |         |           |   |           |        
|                                                                            | Net income (loss)                             |                          | $          | (5.91                     | )         |      | $         | (0.90   | )         |   | $         | 0.06    |        
|                                                                            |                                               |                          |            |                           |           |      |           |         |           |   |           |        
|Number of shares used in per share computation:                             |                                               |                          |            |                           |           |      |           |         |           |   |           |        
|                                                                            | Basic                                         |                          |            | 244,711                   |           |      |           | 211,840 |           |   |           | 192,551 |        
|                                                                            |                                               |                          |            |                           |           |      |           |         |           |   |           |        
|                                                                            | Diluted                                       |                          |            | 244,711                   |           |      |           | 211,840 |           |   |           | 203,484 |        
|                                                                            |                                               |                          |            |                           |           |      |           |         |           |   |           |        

See accompanying notes to consolidated financial statements.

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

|                                                                                                            |                                                         |                                                |            |                           |          |      |          |          |          |   |          |          |         |  
|----------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ---------------------------------------------- | ---------- | ------------------------- | -------- | ---- | -------- | -------- | -------- | - | -------- | -------- | ------- | -
|                                                                                                            |                                                         |                                                |            | Years Ended September 30,
|                                                                                                            |                                                         |                                                |            |                          
|                                                                                                            |                                                         |                                                |            | 2001                      |          | 2000 |          | 1999    
|                                                                                                            |                                                         |                                                |            |                           |          |      |          |         
|Cash Flows From Operating Activities                                                                        |                                                         |                                                |            |                           |          |      |          |          |          |   |          |         
|Net income (loss)                                                                                           |                                                         | $                                              | (1,445,334 | )                         |          | $    | (190,927 | )        |          | $ | 12,929   |         
|Adjustments required to reconcile net income (loss)
to net cash provided by (used in) operating activities: |                                                         |                                                |            |                           |          |      |          |          |          |   |          |         
|                                                                                                            | Depreciation                                            |                                                |            | 175,402                   |          |      |          | 192,734  |          |   |          | 204,512  |        
|                                                                                                            | Amortization of intangible assets                       |                                                |            | 340,664                   |          |      |          | 160,154  |          |   |          | 8,364    |        
|                                                                                                            | Asset impairments                                       |                                                |            | 429,000                   |          |      |          |         |          |   |          | 20,000   |        
|                                                                                                            | Provision for losses on accounts receivable             |                                                |            | 22,613                    |          |      |          | 2,066    |          |   |          | 3,745    |        
|                                                                                                            | Inventory provisions                                    |                                                |            | 248,333                   |          |      |          | 7,771    |          |   |          | 10,067   |        
|                                                                                                            | Deferred income taxes                                   |                                                |            | (142,056                  | )        |      |          | (32,126  | )        |   |          | 9,940    |        
|                                                                                                            | Stock compensation                                      |                                                |            | 15,168                    |          |      |          | 9,491    |          |   |          | 19,570   |        
|                                                                                                            | Purchased in-process research and development           |                                                |            |                          |          |      |          | 215,710  |          |   |          |         |        
|                                                                                                            | Special charges  litigation                            |                                                |            |                          |          |      |          | 35,000   |          |   |          |         |        
|                                                                                                            | Debt conversion costs                                   |                                                |            | 42,584                    |          |      |          |         |          |   |          |         |        
|                                                                                                            | Extraordinary gainextinguishment of debt               |                                                |            | (11,710                   | )        |      |          |         |          |   |          |         |        
|                                                                                                            | Other noncash charges, net                              |                                                |            | 7,399                     |          |      |          | 4,533    |          |   |          | 6,583    |        
|                                                                                                            | Changes in assets and liabilities, net of acquisitions: |                                                |            |                           |          |      |          |          |          |   |          |          |        
|                                                                                                            |                                                         | Receivables                                    |            |                           | 266,364  |      |          |          | (178,968 | ) |          |          | (76,299 | )
|                                                                                                            |                                                         | Inventories                                    |            |                           | (29,728  | )    |          |          | (122,038 | ) |          |          | (33,618 | )
|                                                                                                            |                                                         | Accounts payable                               |            |                           | (130,214 | )    |          |          | (48,840  | ) |          |          | 114,107 |  
|                                                                                                            |                                                         | Accrued expenses and other current liabilities |            |                           | (17,538  | )    |          |          | 112,300  |   |          |          | 50,338  |  
|                                                                                                            |                                                         | Other                                          |            |                           | (17,973  | )    |          |          | (4,757   | ) |          |          | (42,564 | )
|                                                                                                            |                                                         |                                                |            |                           |          |      |          |          |          |   |          |         
|                                                                                                            | Net cash provided by (used in) operating activities     |                                                |            | (247,026                  | )        |      |          | 162,103  |          |   |          | 307,674  |        
|                                                                                                            |                                                         |                                                |            |                           |          |      |          |          |          |   |          |         
|Cash Flows From Investing Activities                                                                        |                                                         |                                                |            |                           |          |      |          |          |          |   |          |         
|Purchase of marketable securities                                                                           |                                                         |                                                | (531,201   | )                         |          |      | (6,011   | )        |          |   |         |         
|Sale of marketable securities                                                                               |                                                         |                                                | 438,211    |                           |          |      | 19,206   |          |          |   |         |         
|Capital expenditures                                                                                        |                                                         |                                                | (158,414   | )                         |          |      | (315,118 | )        |          |   | (213,756 | )       
|Proceeds from sale of assets                                                                                |                                                         |                                                | 2,522      |                           |          |      |         |          |          |   |         |         
|Acquisitions of businesses, net of cash acquired                                                            |                                                         |                                                | (15,052    | )                         |          |      | (1,027   | )        |          |   |         |         
|Investments in and advances to businesses                                                                   |                                                         |                                                | (93,112    | )                         |          |      | (174,258 | )        |          |   | (18,400  | )       
|                                                                                                            |                                                         |                                                |            |                           |          |      |          |          |          |   |          |         
|                                                                                                            | Net cash used in investing activities                   |                                                |            | (357,046                  | )        |      |          | (477,208 | )        |   |          | (232,156 | )      
|                                                                                                            |                                                         |                                                |            |                           |          |      |          |          |          |   |          |         
|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                                                                     |                                                         |                                                | 20,216     |                           |          |      | 116,697  |          |          |   | 23,408   |         
|Payment of debt conversion costs                                                                            |                                                         |                                                | (42,584    | )                         |          |      |         |          |          |   |         |         
|Repurchase of convertible subordinated notes                                                                |                                                         |                                                | (22,400    | )                         |          |      |         |          |          |   |         |         
|Payment of short-term debt                                                                                  |                                                         |                                                |           |                           |          |      |         |          |          |   | (14,075  | )       
|Net transfers to Rockwell                                                                                   |                                                         |                                                |           |                           |          |      |         |          |          |   | (39,909  | )       
|                                                                                                            |                                                         |                                                |            |                           |          |      |          |          |          |   |          |         
|                                                                                                            | Net cash provided by (used in) financing activities     |                                                |            | (44,768                   | )        |      |          | 747,689  |          |   |          | 308,998  |        
|                                                                                                            |                                                         |                                                |            |                           |          |      |          |          |          |   |          |         
|Net increase (decrease) in cash and cash equivalents                                                        |                                                         |                                                | (648,840   | )                         |          |      | 432,584  |          |          |   | 384,516  |         
|Cash and cash equivalents at beginning of period                                                            |                                                         |                                                | 831,100    |                           |          |      | 398,516  |          |          |   | 14,000   |         
|                                                                                                            |                                                         |                                                |            |                           |          |      |          |          |          |   |          |         
|Cash and cash equivalents at end of period                                                                  |                                                         | $                                              | 182,260    |                           |          | $    | 831,100  |          |          | $ | 398,516  |         
|                                                                                                            |                                                         |                                                |            |                           |          |      |          |          |          |   |          |         

See accompanying notes to consolidated financial statements.

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

|                                                                          |                      |  |              |   |            |   |          |  |          |   |               |   |               |   |              |   |            |   |            |   |               |   |        |   |  |   |         |   |  |   |           |   |  |   |            |            |  
|------------------------------------------------------------------------- | -------------------- |  | ------------ | - | ---------- | - | -------- |  | -------- | - | ------------- | - | ------------- | - | ------------ | - | ---------- | - | ---------- | - | ------------- | - | ------ | - |  | - | ------- | - |  | - | --------- | - |  | - | ---------- | ---------- | -
|                                                                          |                      |  | Common Stock |   |            |   |          |  | Retained |   | Accumulated   |   |               |   |              |   |            |   |            |   |               |   |        |   |  |   |        
|                                                                          |                      |  |              |   | Additional |   | Earnings |  | Other    |   |               |   |               |   |              |   |            |   | Rockwell's |   | Total        
|                                                                          |                      |  | Outstanding  |   |            |   |          |  | Paid-In  |   | (Accumulated  |   | Comprehensive |   | Treasury     |   | Unearned   |   | Net        |   | Shareholders'
|                                                                          |                      |  | Shares       |   | Amount     |   | Capital  |  | Deficit) |   | Income (Loss) |   | Stock         |   | Compensation |   | Investment |   | Equity    
|                                                                          |                      |  |              |   |            |   |          |  |          |   |               |   |               |   |              |   |            |   |           
|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       |   |            |   |           |   |               |   |       |   |  |   |        |   |  |   |          |   |  |   | 70,052     |           
|Currency translation adjustment                                           |                      |  |             |   |            |   |         |  |          |   |              |   |               |   |             |   |            |   | 149        |   |               |   |       |   |  |   |        |   |  |   | (3,845    | ) |  |   | (3,696     | )         
|Realized gains on available-for-sale
investments                          |                      |  |             |   |            |   |         |  |          |   |              |   |               |   |             |   |            |   | (3,589     | ) |               |   |       |   |  |   |        |   |  |   |          |   |  |   | (3,589     | )         
|                                                                          |                      |  |              |   |            |   |          |  |          |   |               |   |               |   |              |   |            |   |            |   |               |   |        |   |  |   |         |   |  |   |           |   |  |   |            |           
|                                                                          | Comprehensive income |  |              |   |            |   |          |  |          |   |               |   |               |   |              |   |            |   |            |   |               |   |        |   |  |   |         |   |  |   |           |   |  |   |            | 5,644      |  
|Net transfers to Rockwell                                                 |                      |  |             |   |            |   |         |  |          |   | (796          | ) |               |   |             |   |            |   | 3,589      |   |               |   |       |   |  |   |        |   |  |   | (51,335   | ) |  |   | (48,542    | )         
|The Distribution                                                          |                      |  | 189,763      |   |            |   | 189,763  |  |          |   | 707,309       |   |               |   |             |   |            |   |           |   |               |   |       |   |  |   |        |   |  |   | (897,072  | ) |  |   |           |           
|Issuance of common stock                                                  |                      |  | 6,624        |   |            |   | 6,624    |  |          |   | 42,467        |   |               |   |             |   |            |   |           |   |               |   |       |   |  |   | (20,568 | ) |  |   |          |   |  |   | 28,523     |           
|Tax benefits from stock plans                                             |                      |  |             |   |            |   |         |  |          |   | 20,583        |   |               |   |             |   |            |   |           |   |               |   |       |   |  |   |        |   |  |   |          |   |  |   | 20,583     |           
|Compensation expense under
restricted stock plan                          |                      |  |             |   |            |   |         |  |          |   |              |   |               |   |             |   |            |   |           |   |               |   |       |   |  |   | 19,570  |   |  |   |          |   |  |   | 19,570     |           
|                                                                          |                      |  |              |   |            |   |          |  |          |   |               |   |               |   |              |   |            |   |            |   |               |   |        |   |  |   |         |   |  |   |           |   |  |   |            |           
|Balance at September 30, 1999                                             |                      |  | 196,387      |   |            |   | 196,387  |  |          |   | 769,563       |   |               |   | 70,052       |   |            |   | 149        |   |               |   |       |   |  |   | (998    | ) |  |   |          |   |  |   | 1,035,153  |           
|Net loss                                                                  |                      |  |             |   |            |   |         |  |          |   |              |   |               |   | (190,927     | ) |            |   |           |   |               |   |       |   |  |   |        |   |  |   |          |   |  |   | (190,927   | )         
|Currency translation adjustment                                           |                      |  |             |   |            |   |         |  |          |   |              |   |               |   |             |   |            |   | (539       | ) |               |   |       |   |  |   |        |   |  |   |          |   |  |   | (539       | )         
|Change in unrealized gains on available-for-
sale investments, net of tax |                      |  |             |   |            |   |         |  |          |   |              |   |               |   |             |   |            |   | 47,685     |   |               |   |       |   |  |   |        |   |  |   |          |   |  |   | 47,685     |           
|                                                                          |                      |  |              |   |            |   |          |  |          |   |               |   |               |   |              |   |            |   |            |   |               |   |        |   |  |   |         |   |  |   |           |   |  |   |            |           
|                                                                          | Comprehensive loss   |  |              |   |            |   |          |  |          |   |               |   |               |   |              |   |            |   |            |   |               |   |        |   |  |   |         |   |  |   |           |   |  |   |            | (143,781   | )
|Purchase acquisitions                                                     |                      |  | 26,988       |   |            |   | 26,988   |  |          |   | 1,761,138     |   |               |   |             |   |            |   |           |   |               |   |       |   |  |   | (19,453 | ) |  |   |          |   |  |   | 1,768,673  |           
|Issuance of common stock                                                  |                      |  | 7,788        |   |            |   | 7,788    |  |          |   | 71,463        |   |               |   |             |   |            |   |           |   |               |   |       |   |  |   | (6,511  | ) |  |   |          |   |  |   | 72,740     |           
|Tax benefits from stock plans                                             |                      |  |             |   |            |   |         |  |          |   | 166,102       |   |               |   |             |   |            |   |           |   |               |   |       |   |  |   |        |   |  |   |          |   |  |   | 166,102    |           
|Purchase of treasury stock                                                |                      |  | (30          | ) |            |   |         |  |          |   |              |   |               |   |             |   |            |   |           |   |               |   | (1,619 | ) |  |   |        |   |  |   |          |   |  |   | (1,619     | )         
|Compensation expense related to
employee stock plans                      |                      |  | 1            |   |            |   | 1        |  |          |   | 6,849         |   |               |   |             |   |            |   |           |   |               |   |       |   |  |   | 2,641   |   |  |   |          |   |  |   | 9,491      |           
|                                                                          |                      |  |              |   |            |   |          |  |          |   |               |   |               |   |              |   |            |   |            |   |               |   |        |   |  |   |         |   |  |   |           |   |  |   |            |           
|Balance at September 30, 2000                                             |                      |  | 231,134      |   |            |   | 231,164  |  |          |   | 2,775,115     |   |               |   | (120,875     | ) |            |   | 47,295     |   |               |   | (1,619 | ) |  |   | (24,321 | ) |  |   |          |   |  |   | 2,906,759  |           
|Net loss                                                                  |                      |  |             |   |            |   |         |  |          |   |              |   |               |   | (1,445,334   | ) |            |   |           |   |               |   |       |   |  |   |        |   |  |   |          |   |  |   | (1,445,334 | )         
|Currency translation adjustment                                           |                      |  |             |   |            |   |         |  |          |   |              |   |               |   |             |   |            |   | (18,362    | ) |               |   |       |   |  |   |        |   |  |   |          |   |  |   | (18,362    | )         
|Change in unrealized gains on investments,
net of tax                     |                      |  |             |   |            |   |         |  |          |   |              |   |               |   |             |   |            |   | (46,094    | ) |               |   |       |   |  |   |        |   |  |   |          |   |  |   | (46,094    | )         
|Unrealized loss on forward exchange contracts                             |                      |  |             |   |            |   |         |  |          |   |              |   |               |   |             |   |            |   | (43        | ) |               |   |       |   |  |   |        |   |  |   |          |   |  |   | (43        | )         
|                                                                          |                      |  |              |   |            |   |          |  |          |   |               |   |               |   |              |   |            |   |            |   |               |   |        |   |  |   |         |   |  |   |           |   |  |   |            |           
|                                                                          | Comprehensive loss   |  |              |   |            |   |          |  |          |   |               |   |               |   |              |   |            |   |            |   |               |   |        |   |  |   |         |   |  |   |           |   |  |   |            | (1,509,833 | )
|Purchase acquisitions                                                     |                      |  | 7,494        |   |            |   | 7,494    |  |          |   | 66,653        |   |               |   |             |   |            |   |           |   |               |   |       |   |  |   | 3,819   |   |  |   |          |   |  |   | 77,966     |           
|Conversion of debt                                                        |                      |  | 11,046       |   |            |   | 11,046   |  |          |   | 237,896       |   |               |   |             |   |            |   |           |   |               |   |       |   |  |   |        |   |  |   |          |   |  |   | 248,942    |           
|Issuance of common stock                                                  |                      |  | 4,196        |   |            |   | 4,196    |  |          |   | 29,788        |   |               |   |             |   |            |   |           |   |               |   |       |   |  |   | (1,106  | ) |  |   |          |   |  |   | 32,878     |           
|Tax benefits from stock plans                                             |                      |  |             |   |            |   |         |  |          |   | 1,484         |   |               |   |             |   |            |   |           |   |               |   |       |   |  |   |        |   |  |   |          |   |  |   | 1,484      |           
|Purchase of treasury stock                                                |                      |  | (11          | ) |            |   |         |  |          |   |              |   |               |   |             |   |            |   |           |   |               |   | (188   | ) |  |   |        |   |  |   |          |   |  |   | (188       | )         
|Compensation expense related to
employee stock plans                      |                      |  |             |   |            |   |         |  |          |   | 2,269         |   |               |   |             |   |            |   |           |   |               |   |       |   |  |   | 12,899  |   |  |   |          |   |  |   | 15,168     |           
|                                                                          |                      |  |              |   |            |   |          |  |          |   |               |   |               |   |              |   |            |   |            |   |               |   |        |   |  |   |         |   |  |   |           |   |  |   |            |           
|Balance at September 30, 2001                                             |                      |  | 253,859      |   |            | $ | 253,900  |  |          | $ | 3,113,205     |   |               | $ | (1,566,209   | ) |            | $ | (17,204    | ) |               | $ | (1,807 | ) |  | $ | (8,709  | ) |  | $ |          |   |  | $ | 1,773,176  |           
|                                                                          |                      |  |              |   |            |   |          |  |          |   |               |   |               |   |              |   |            |   |            |   |               |   |        |   |  |   |         |   |  |   |           |   |  |   |            |           

See accompanying notes to consolidated financial statements.

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CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business

Conexant Systems, Inc. (Conexant or the Company) is a worldwide leader in
semiconductor system solutions for communications applications. The Companys
expertise in mixed-signal processing allows it to deliver integrated systems
and semiconductor products which facilitate communications worldwide through
wireline voice and data communications networks, cellular telephony systems and
emerging cable, satellite and fixed wireless broadband communications networks.
The Company operates in two business segments: the Personal Networking business
and Mindspeed Technologies, the Companys Internet infrastructure business.

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

In March 2001, the Companys Board of Directors approved in principle a revised
plan for the separation of the Personal Networking and Mindspeed Technologies
businesses. The separation would now be accomplished by the spin-off of the
Personal Networking business to Conexant shareholders as a new company which
will have the Conexant name. Although current business conditions have delayed
the separation, the Company remains committed to completing the separation as
soon as business and market conditions permit. The separation is also subject
to the approval of the Companys shareholders and receipt of a ruling from the
Internal Revenue Service (IRS) that the spin-off will qualify as a tax-free
distribution. The IRS ruling has been received. While the ruling is generally
binding on the IRS, the continuing validity of the ruling is subject to certain
factual representations and assumptions. The Company is not aware of any facts
or circumstances that would cause these representations and assumptions to be
untrue. There can be no assurance that shareholder approval of the separation
will be obtained, or that the separation will be successfully completed.

2. Summary of Significant Accounting Policies

Basis of PresentationThe 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 SplitCommon 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 YearThe Company maintains a fifty-two/fifty-three week fiscal year
ending on the Friday closest to September 30. Fiscal years 2001, 2000 and 1999
each comprised 52 weeks and ended on September 28, September 29 and October 1,
respectively. For convenience, the accompanying financial statements have been
shown as ending on the last day of the calendar month.

Use of EstimatesThe preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Among the significant estimates affecting
the financial statements are those related to inventories, long-lived assets,
income taxes and litigation. On an ongoing basis,

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

management reviews its estimates based upon currently available information.
Actual results could differ materially from those estimates.

Revenue RecognitionRevenues 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 and other allowances at the
time of shipment based on its experience. Certain of the Companys product
sales are made to electronic component distributors under agreements allowing
for price protection and/or a right of return on unsold products. 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.

The Company adopted Securities and Exchange Commission Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101) in
the fourth quarter of fiscal 2001. The adoption of SAB 101 did not have a
significant impact on the Companys financial position or results of
operations.

Cash and Cash EquivalentsThe 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.

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

Property, Plant and EquipmentProperty, plant and equipment is stated at cost.
Depreciation is based on estimated useful lives (principally 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.

In connection with the write-down of certain wafer fabrication facilities and
related machinery and equipment in fiscal 2001 (see Note 13), the Company
reduced the estimated economic useful lives of certain assets such that the new
cost basis will be depreciated over periods that range from one to six years.

Goodwill and Intangible AssetsGoodwill and intangible assets principally
result from business acquisitions. Conexant 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 AssetsThe Company continually monitors events or
changes in circumstances that could indicate that the carrying amount of
long-lived assets to be held and used, including goodwill and intangible
assets, may not be recoverable. The determination of recoverability is based on
an estimate of undiscounted future cash flows resulting from the use of the
asset and its eventual disposition. When impairment is indicated for a
long-lived asset, the amount of impairment loss is the excess of net book value
over fair value. Long-lived assets to be disposed of are reported at the lower
of carrying amount or fair value less costs to sell. During fiscal 2001 and
1999, the Company recorded impairment charges as discussed in Notes 5 and 13.

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

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

Derivative Financial InstrumentsIn the first quarter of fiscal 2001, the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS 133
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative, and its designation as a hedge. Derivatives
that are not hedges must be adjusted to fair value through earnings. If a
derivative is a hedge, depending on the nature of the hedge, changes in fair
value of derivatives either offset the change in fair value of the hedged
assets, liabilities or firm commitments through earnings, or are recognized in
other comprehensive income until the hedged item is recognized in earnings. The
change in a derivatives fair value related to the ineffective portion of a
hedge, if any, is immediately recognized in earnings. The adoption of SFAS 133
did not have a significant effect on the Companys financial position or
results of operations.

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

At September 30, 2001, the Company had approximately $4.9 million of foreign
currency forward contracts outstanding, principally to sell Japanese yen. These
contracts mature at various dates through February 2002 and are with major
financial institutions. The Company has designated certain forward contracts as
hedges of forecasted intercompany transactions. Unrealized gains and losses on
these contracts are recorded as a component of accumulated other comprehensive
income. Other forward contracts are designated as hedges of intercompany
accounts of the Companys foreign subsidiaries. Unrealized gains and losses on
these forward contracts are recorded currently through earnings, and offset the
corresponding losses and gains on the assets and liabilities being hedged. The
fair value of the foreign currency forward contracts at September 30, 2001 and
changes in fair values during fiscal 2001 was not significant. During fiscal
2001, there were no significant gains or losses recognized in earnings for
hedge ineffectiveness.

Stock-Based CompensationThe 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 SFAS No. 123,
Accounting for Stock-Based Compensation.

Income TaxesThe 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.

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

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

At September 30, 2001, one customer accounted for 23% of the Companys accounts
receivable; at September 30, 2000, one customer accounted for 10% of the
Companys accounts receivable. No individual customer accounted for 10% or more
of net revenues for fiscal 2001, 2000 or 1999.

Supplemental Cash Flow InformationInterest paid, net of amounts capitalized,
was $35.1 million, $26.0 million and $0.6 million during fiscal 2001, 2000 and
1999, respectively. Income taxes paid were $6.5 million, $20.6 million and $-0-
during fiscal 2001, 2000 and 1999, respectively.

Comprehensive IncomeOther comprehensive income includes foreign currency
translation adjustments, unrealized losses on forward exchange contracts 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 (loss) at fiscal year-ends are as
follows (in thousands):

|                                                  |                                               |   |         |         |      |   |        |        | 
|------------------------------------------------- | --------------------------------------------- | - | ------- | ------- | ---- | - | ------ | ------ | 
|                                                  |                                               |   | 2001    |         | 2000
|                                                  |                                               |   |         |         |     
|Unrealized
gains on available-for-sale securities |                                               | $ | 1,591   |         |      | $ | 47,685 |       
|Unrealized loss on forward exchange contracts     |                                               |   | (43     | )       |      |   |       |       
|Foreign currency translation adjustments          |                                               |   | (18,752 | )       |      |   | (390   | )     
|                                                  |                                               |   |         |         |      |   |        |       
|                                                  | Accumulated other comprehensive income (loss) |   | $       | (17,204 | )    |   | $      | 47,295 | 
|                                                  |                                               |   |         |         |      |   |        |       

Recent Accounting StandardsIn June 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 141, Business Combinations and SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS 141 requires that all business
combinations be accounted for using the purchase method and provides new
criteria for recording intangible assets separately from goodwill. Existing
goodwill and intangible assets will be evaluated against this new criteria,
which may result in certain intangible assets being subsumed into goodwill.
SFAS 142 addresses financial accounting and reporting for acquired goodwill and
other intangible assets. Goodwill and intangible assets that have indefinite
useful lives will not be amortized into results of operations, but instead will
be tested at least annually for impairment and written down when impaired. The
Company will be required to adopt the provisions of each statement which apply
to goodwill and intangible assets acquired prior to June 30, 2001 as of the
beginning of fiscal 2003. However, SFAS 142 is immediately applicable to any
goodwill and intangible assets the Company may acquire after June 30, 2001.
Upon adoption, the Company will cease amortizing goodwill against its results
of operations, reducing annual amortization expense by approximately $285
million. The Company is evaluating the full impact of adopting the new
standards. In addition, impairment reviews may result in charges against
earnings to write down the value of goodwill.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which supersedes previous guidance on financial
accounting and reporting for the impairment or disposal of long-lived assets
and for segments of a business to be disposed of. Adoption of SFAS 144 is
required no later than the beginning of fiscal 2003. Management does not expect
the adoption of SFAS 144 to have a significant impact on the Companys
financial position or results of operations. However, future impairment reviews
may result in charges against earnings to write down the value of long-lived
assets.

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

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

3. Acquisitions

During fiscal 2001 and 2000, the Company completed eleven acquisitions that
were accounted for using the purchase method of accounting.

Fiscal 2001

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

Fiscal 2000

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.

In March 2000, the Company acquired Maker Communications, Inc. (Maker), a
fabless semiconductor company that develops and markets high-performance
programmable network processors, software solutions and development tools.

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, and RF components
for third-generation (3G) digital cellular handsets. To effect the acquisition
of Philsar, all of the then-outstanding capital stock of Philsar was exchanged
for Philsar securities which are exchangeable at the option of the holders into
an aggregate of approximately 2.2 million shares of Conexant common stock.

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.

During fiscal 2000, the Company also completed the acquisitions of Applied
Telecom, Inc. (Applied Telecom), Istari Design, Inc. (Istari), Novanet
Semiconductor Limited (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.

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

|            |  |              |        |         |  |           |       |               |  |                |        |        |  |   |           |            |  |   |         |              |  |   |           | 
|----------- |  | ------------ | ------ | ------- |  | --------- | ----- | ------------- |  | -------------- | ------ | ------ |  | - | --------- | ---------- |  | - | ------- | ------------ |  | - | --------- | 
|            |  | Shares of    |        |         |  |           |       |               |  |                |        |        |  |   |           |            |  |   |         | Goodwill and
|            |  | Conexant     |        |         |  |           |       |               |  |                |        |        |  |   |           |            |  |   |         | identified  
|            |  | common stock |        | Options |  |           |       |               |  | Total value of |        |        |  |   |           | intangible
|            |  | issued       |        | assumed |  | Cash paid |       | consideration |  | IPRD           |        | assets
|            |  |              |        |         |  |           |       |               |  |                |        |       
|Fiscal 2001 |  |              |        |         |  |           |       |               |  |                |        |        |  |   |           |            |  |   |         |              |  |   |           | 
|HyperXS     |  |              | 75     |         |  |           | 210   |               |  | $              | 7,500  |        |  | $ | 11,036    |            |  | $ |        |              |  | $ | 9,139     | 
|            |  |              |        |         |  |           |       |               |  |                |        |        |  |   |           |            |  |   |         |              |  |   |           | 
|Fiscal 2000 |  |              |        |         |  |           |       |               |  |                |        |        |  |   |           |            |  |   |         |              |  |   |           | 
|Microcosm   |  |              | 7,012  |         |  |           | 1,022 |               |  | $              | 3,265  |        |  | $ | 153,227   |            |  | $ | 27,400  |              |  | $ | 136,198   | 
|Maker       |  |              | 12,651 |         |  |           | 1,637 |               |  |                |       |        |  |   | 979,591   |            |  |   | 118,500 |              |  |   | 888,923   | 
|Philsar     |  |              | 2,475  |         |  |           | 525   |               |  |                |       |        |  |   | 109,952   |            |  |   | 24,362  |              |  |   | 81,161    | 
|HotRail     |  |              | 6,518  |         |  |           | 1,337 |               |  |                |       |        |  |   | 355,677   |            |  |   | 26,100  |              |  |   | 340,214   | 
|Novanet     |  |              | 2,019  |         |  |           | 294   |               |  |                |       |        |  |   | 105,423   |            |  |   | 17,317  |              |  |   | 88,188    | 
|NetPlane    |  |              | 1,927  |         |  |           | 305   |               |  |                |       |        |  |   | 86,981    |            |  |   | 2,031   |              |  |   | 77,402    | 
|Other       |  |              | 1,805  |         |  |           | 277   |               |  |                | 17,120 |        |  |   | 99,956    |            |  |   |        |              |  |   | 95,903    | 
|            |  |              |        |         |  |           |       |               |  |                |        |        |  |   |           |            |  |   |         |              |  |   |           | 
|            |  |              | 34,407 |         |  |           | 5,397 |               |  | $              | 20,385 |        |  | $ | 1,890,807 |            |  | $ | 215,710 |              |  | $ | 1,707,989 | 
|            |  |              |        |         |  |           |       |               |  |                |        |        |  |   |           |            |  |   |         |              |  |   |           | 

The total value of the fiscal 2001 and 2000 acquisitions includes additional
consideration of $88.7 million paid in fiscal 2001 upon the achievement of
certain performance and technology goals and the expiration of indemnity,
escrow or holdback provisions of the related acquisition agreements. The
additional consideration consisted of $7.5 million in cash, approximately 7.5
million shares of common stock and options to purchase 928,000 shares of common
stock. An additional $10.0 million, payable in fiscal 2002, has been accrued as
of September 30, 2001. The terms of the acquisition agreements include
provisions under which the former shareholders could receive additional
consideration of up to $25.0 million in cash and 225,000 shares of the
Companys common stock if certain performance and technology goals are
achieved.

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

The value of the common stock issued was based on market prices at the time of
the acquisition or, in the case of the additional consideration, at the time of
resolution of the contingency. The value of the 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. The tangible assets of the businesses
acquired in fiscal 2001 totaled $0.1 million. The tangible assets of the
businesses acquired in fiscal 2000 totaled $59.4 million, net of liabilities of
$20.7 million.

During fiscal 2001 and 2000, the Company allocated $2.0 million and $19.5
million, respectively, of the purchase consideration to deferred compensation.
These amounts represent the fair value of Conexant common stock subject to
repurchase agreements and, for acquisitions completed after the effective date
of FASB Interpretation No. 44, Accounting for Certain Transactions Involving
Stock Compensation, the intrinsic value of unvested options assumed by
Conexant. The deferred compensation is being recognized over the remaining
vesting period of the common stock or options. A total of $9.4 million of
compensation expense was recognized during fiscal 2001.

In connection with six of the fiscal 2000 acquisitions, 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 were discounted to
approximate fair value. Discount rates, ranging from 20% to 35% for IPRD and
from 17% to 28% for developed technology, 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 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 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 results of operations of the acquired companies are included in the
consolidated financial statements from the dates of acquisition. The pro forma
statement of operations data for fiscal 2000 and 1999 below assumes that each
of the fiscal 2000 acquisitions had been completed as of the beginning of each
period presented. The pro forma effect of the HyperXS acquisition was not
material to the Companys results of operations for fiscal 2001 or 2000. 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 is presented for informational purposes only, and is not
necessarily indicative of the results of future operations nor of the results
that would have been achieved had the acquisitions taken place at the beginning
of fiscal 1999.

|                                      |  |                       |           |      |  |   |           |  
|------------------------------------- |  | --------------------- | --------- | ---- |  | - | --------- | -
|                                      |  | 2000                  |           | 1999
|                                      |  |                       |           |     
|                                      |  | (in thousands, except
|                                      |  | per share amounts)   
|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     | )

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

4. Marketable Securities

Marketable securities include commercial paper, corporate bonds, government
securities and marketable equity securities. All of the Companys marketable
securities are classified as available for sale and are recorded at fair value,
based upon quoted market prices. As of September 30, 2001, unrealized gains of
$1.6 million (net of related income taxes of $1.2 million) on these securities
are included in accumulated other comprehensive income. The Companys
available-for-sale marketable securities are classified as short-term
investments in the consolidated balance sheet at September 30, 2001 as the
Company intends to sell these securities as necessary to meet its liquidity
requirements.

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

|                              |  |           |         |         |  |            |        |            |  |   |     |   |  |   |         | 
|----------------------------- |  | --------- | ------- | ------- |  | ---------- | ------ | ---------- |  | - | --- | - |  | - | ------- | 
|                              |  |           |         |         |  | Gross      |        | Gross      |  |   |     |  
|                              |  |           |         |         |  | Unrealized |        | Unrealized |  |   |     |  
|                              |  | Amortized |         | Holding |  | Holding    |        | Fair      
|                              |  | Cost      |         | Gains   |  | Losses     |        | Value     
|                              |  |           |         |         |  |            |        |           
|September 30, 2001:           |  |           |         |         |  |            |        |            |  |   |     |   |  |   |         | 
|U.S. government agencies      |  | $         | 38,393  |         |  | $          | 380    |            |  | $ | (4  | ) |  | $ | 38,769  | 
|Foreign government securities |  |           | 11,370  |         |  |            | 197    |            |  |   |    |   |  |   | 11,567  | 
|Corporate debt securities     |  |           | 104,069 |         |  |            | 2,256  |            |  |   | (1  | ) |  |   | 106,324 | 
|                              |  |           |         |         |  |            |        |            |  |   |     |   |  |   |         | 
|                              |  | $         | 153,832 |         |  | $          | 2,833  |            |  | $ | (5  | ) |  | $ | 156,660 | 
|                              |  |           |         |         |  |            |        |            |  |   |     |   |  |   |         | 
|September 30, 2000:           |  |           |         |         |  |            |        |            |  |   |     |   |  |   |         | 
|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 | 
|                              |  |           |         |         |  |            |        |            |  |   |     |   |  |   |         | 

The amortized cost and estimated fair value of debt securities at September 30,
2001, by contractual maturity, are shown below (in thousands). Expected
maturities will differ from contractual maturities because the issuers of the
securities may have the right to prepay obligations without prepayment
penalties.

|                      |  |           |         |       |  |   |         | 
|--------------------- |  | --------- | ------- | ----- |  | - | ------- | 
|                      |  | Amortized |         | Fair 
|                      |  | Cost      |         | Value
|                      |  |           |         |      
|Due in 1 year or less |  | $         | 58,345  |       |  | $ | 59,494  | 
|Due in 1  2 years    |  |           | 66,533  |       |  |   | 67,516  | 
|Due in 2  5 years    |  |           | 20,451  |       |  |   | 20,966  | 
|Due after 5 years     |  |           | 8,503   |       |  |   | 8,684   | 
|                      |  |           |         |       |  |   |         | 
|                      |  | $         | 153,832 |       |  | $ | 156,660 | 
|                      |  |           |         |       |  |   |         | 

5. Supplemental Financial Statement Data

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

|                |  |      |         |      |  |   |         | 
|--------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                |  | 2001 |         | 2000
|                |  |      |         |     
|Raw material    |  | $    | 10,727  |      |  | $ | 38,866  | 
|Work-in-process |  |      | 100,012 |      |  |   | 209,871 | 
|Finished goods  |  |      | 11,658  |      |  |   | 92,265  | 
|                |  |      |         |      |  |   |         | 
|                |  | $    | 122,397 |      |  | $ | 341,002 | 
|                |  |      |         |      |  |   |         | 

Cost of goods sold for fiscal 2001 includes inventory write-downs of $245.1
million. The Company assesses the recoverability of inventories through an
on-going review of inventory levels in relation to sales backlog and forecasts,
product marketing plans and product life cycles. Inventory write-downs are
recorded when the inventory on hand exceeds the demand forecast. Once
established, these write-downs are considered permanent adjustments to the cost
basis of the excess inventory.

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

|                                          |  |      |           |      |  |   |            |  
|----------------------------------------- |  | ---- | --------- | ---- |  | - | ---------- | -
|                                          |  | 2001 |           | 2000
|                                          |  |      |           |     
|Land                                      |  | $    | 15,596    |      |  | $ | 12,087     |  
|Land and leasehold improvements           |  |      | 28,797    |      |  |   | 21,068     |  
|Buildings                                 |  |      | 125,527   |      |  |   | 391,567    |  
|Machinery and equipment                   |  |      | 1,001,126 |      |  |   | 1,351,005  |  
|Construction in progress                  |  |      | 51,227    |      |  |   | 99,334     |  
|                                          |  |      |           |      |  |   |            |  
|                                          |  |      | 1,222,273 |      |  |   | 1,875,061  |  
|Accumulated depreciation and amortization |  |      | (834,840  | )    |  |   | (1,046,550 | )
|                                          |  |      |           |      |  |   |            |  
|                                          |  | $    | 387,433   |      |  | $ | 828,511    |  
|                                          |  |      |           |      |  |   |            |  

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

Interest capitalized into construction in progress was $0, $1.3 million and
$1.5 million during fiscal 2001, 2000 and 1999, respectively.

Goodwill and intangible assets at fiscal year-ends consist of the following (in
thousands):

|                         |  |               |       |      |  |      |           |   |  |   |           |  
|------------------------ |  | ------------- | ----- | ---- |  | ---- | --------- | - |  | - | --------- | -
|                         |  | Life in years |       | 2001 |  | 2000
|                         |  |               |       |      |  |     
|Goodwill                 |  |               | 310  |      |  | $    | 1,411,895 |   |  | $ | 1,323,477 |  
|Developed technology     |  |               | 58.5 |      |  |      | 302,620   |   |  |   | 306,661   |  
|Other intangible assets  |  |               | 210  |      |  |      | 61,183    |   |  |   | 62,783    |  
|                         |  |               |       |      |  |      |           |   |  |   |           |  
|                         |  |               |       |      |  |      | 1,775,698 |   |  |   | 1,692,921 |  
|Accumulated amortization |  |               |       |      |  |      | (524,445  | ) |  |   | (185,595  | )
|                         |  |               |       |      |  |      |           |   |  |   |           |  
|                         |  |               |       |      |  | $    | 1,251,253 |   |  | $ | 1,507,326 |  
|                         |  |               |       |      |  |      |           |   |  |   |           |  

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

|                            |  |      |         |      |  |   |         | 
|--------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                            |  | 2001 |         | 2000
|                            |  |      |         |     
|Advance payments to vendors |  | $    | 156,496 |      |  | $ | 96,030  | 
|Investments, at cost        |  |      | 83,095  |      |  |   | 75,942  | 
|Other                       |  |      | 28,408  |      |  |   | 37,084  | 
|                            |  |      |         |      |  |   |         | 
|                            |  | $    | 267,999 |      |  | $ | 209,056 | 
|                            |  |      |         |      |  |   |         | 

The advance payments to vendors were paid to wafer suppliers under agreements
for foundry capacity. These advance payments will be repaid upon the
termination of the agreements, or earlier if certain conditions are met.
Investments consist of non-marketable 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 and does not exercise
significant influence. In connection with certain of these investments, the
Company may be required to invest up to an additional $19.3 million.

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

|                                         |  |      |         |      |  |   |        | 
|---------------------------------------- |  | ---- | ------- | ---- |  | - | ------ | 
|                                         |  | 2001 |         | 2000
|                                         |  |      |         |     
|Litigation and environmental liabilities |  | $    | 21,427  |      |  | $ | 56,463 | 
|Other                                    |  |      | 85,873  |      |  |   | 38,695 | 
|                                         |  |      |         |      |  |   |        | 
|                                         |  | $    | 107,300 |      |  | $ | 95,158 | 
|                                         |  |      |         |      |  |   |        | 

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

|                                         |  |      |         |      |  |      |         |   |  |   |         |  
|---------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                         |  | 2001 |         | 2000 |  | 1999
|                                         |  |      |         |      |  |     
|Investment and interest income           |  | $    | 29,703  |      |  | $    | 42,011  |   |  | $ | 10,239  |  
|Gain on sale of investments              |  |      | 23,251  |      |  |      |        |   |  |   | 4,614   |  
|Interest expense                         |  |      | (33,608 | )    |  |      | (35,943 | ) |  |   | (10,800 | )
|Write-down of non-marketable investments |  |      | (13,051 | )    |  |      |        |   |  |   |        |  
|Other                                    |  |      | (5,696  | )    |  |      | 403     |   |  |   | 1,882   |  
|                                         |  |      |         |      |  |      |         |   |  |   |         |  
|                                         |  | $    | 599     |      |  | $    | 6,471   |   |  | $ | 5,935   |  
|                                         |  |      |         |      |  |      |         |   |  |   |         |  

6. Income Taxes

The components of the provision (benefit) for income taxes, excluding
extraordinary item, are as follows (in thousands):

|          |                 |                |          |          |          |      |        |         |         |   |         |         |         |  
|--------- | --------------- | -------------- | -------- | -------- | -------- | ---- | ------ | ------- | ------- | - | ------- | ------- | ------- | -
|          |                 |                |          | 2001     |          | 2000 |        | 1999   
|          |                 |                |          |          |          |      |        |        
|Current:  |                 |                |          |          |          |      |        |         |         |   |         |        
|          | United States   |                | $        | (8,000   | )        |      | $      | 70,304  |         |   | $       | (22,604 | )      
|          | Foreign         |                |          | 3,144    |          |      |        | 7,189   |         |   |         | 6,047   |        
|          | State and local |                |          |         |          |      |        | 7,237   |         |   |         | (3,556  | )      
|          |                 |                |          |          |          |      |        |         |         |   |         |        
|          |                 | Total current  |          |          | (4,856   | )    |        |         | 84,730  |   |         |         | (20,113 | )
|          |                 |                |          |          |          |      |        |         |         |   |         |        
|Deferred: |                 |                |          |          |          |      |        |         |         |   |         |        
|          | United States   |                |          | (138,586 | )        |      |        | (17,124 | )       |   |         | 14,254  |        
|          | Foreign         |                |          | 479      |          |      |        | (4,527  | )       |   |         | 478     |        
|          | State and local |                |          | (8,375   | )        |      |        | (10,475 | )       |   |         | (4,792  | )      
|          |                 |                |          |          |          |      |        |         |         |   |         |        
|          |                 | Total deferred |          |          | (146,482 | )    |        |         | (32,126 | ) |         |         | 9,940   |  
|          |                 |                |          |          |          |      |        |         |         |   |         |        
|          |                 | $              | (151,338 | )        |          | $    | 52,604 |         |         | $ | (10,173 | )      
|          |                 |                |          |          |          |      |        |         |         |   |         |        

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

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

|                                      |  |      |          |      |  |      |        |  |  |   |         |  
|------------------------------------- |  | ---- | -------- | ---- |  | ---- | ------ |  |  | - | ------- | -
|                                      |  | 2001 |          | 2000 |  | 1999
|                                      |  |      |          |      |  |     
|Income taxes on continuing operations |  | $    | (151,338 | )    |  | $    | 52,604 |  |  | $ | (10,173 | )
|Extraordinary gain                    |  |      | 4,426    |      |  |      |       |  |  |   |        |  
|                                      |  |      |          |      |  |      |        |  |  |   |         |  
|                                      |  | $    | (146,912 | )    |  | $    | 52,604 |  |  | $ | (10,173 | )
|                                      |  |      |          |      |  |      |        |  |  |   |         |  

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

|                          |                                               |                                |   |          |         |  |      |        |         |  | 
|------------------------- | --------------------------------------------- | ------------------------------ | - | -------- | ------- |  | ---- | ------ | ------- |  | 
|                          |                                               |                                |   |          | 2001    |  | 2000
|                          |                                               |                                |   |          |         |  |     
|Deferred tax assets:      |                                               |                                |   |          |         |  |      |       
|                          | Accounts receivable                           |                                | $ | 6,654    |         |  | $    | 2,251  |        
|                          | Inventories                                   |                                |   | 141,908  |         |  |      | 36,448 |        
|                          | Property, plant and equipment                 |                                |   | 128,487  |         |  |      |       |        
|                          | Deferred revenue                              |                                |   | 11,256   |         |  |      | 12,999 |        
|                          | Accrued compensation and benefits             |                                |   | 9,715    |         |  |      | 8,701  |        
|                          | Product returns and allowances                |                                |   | 8,407    |         |  |      | 12,070 |        
|                          | Retirement benefits and deferred compensation |                                |   | 25,797   |         |  |      | 23,749 |        
|                          | Litigation settlement                         |                                |   | 7,591    |         |  |      | 21,615 |        
|                          | Net operating losses                          |                                |   | 283,624  |         |  |      | 48,809 |        
|                          | Research and development credits              |                                |   | 93,396   |         |  |      | 52,963 |        
|                          | State investment credits                      |                                |   | 15,657   |         |  |      | 17,199 |        
|                          | Other  net                                   |                                |   | 13,392   |         |  |      | 7,227  |        
|                          | Valuation allowance                           |                                |   | (363,394 | )       |  |      |       |        
|                          |                                               |                                |   |          |         |  |      |       
|                          |                                               | Total deferred tax assets      |   |          | 382,490 |  |      |        | 244,031 | 
|                          |                                               |                                |   |          |         |  |      |       
|Deferred tax liabilities: |                                               |                                |   |          |         |  |      |       
|                          | Property, plant and equipment                 |                                |   |         |         |  |      | 2,477  |        
|                          | Intangible assets                             |                                |   | 76,775   |         |  |      | 85,909 |        
|                          | Unrealized gains on investments               |                                |   | 1,237    |         |  |      | 29,458 |        
|                          | Deferred state taxes                          |                                |   | 45,324   |         |  |      | 16,980 |        
|                          | Other  net                                   |                                |   |         |         |  |      | 12,661 |        
|                          |                                               |                                |   |          |         |  |      |       
|                          |                                               | Total deferred tax liabilities |   |          | 123,336 |  |      |        | 147,485 | 
|                          |                                               |                                |   |          |         |  |      |       
|                          |                                               | Net deferred tax assets        |   | $        | 259,154 |  |      | $      | 96,546  | 
|                          |                                               |                                |   |          |         |  |      |       

Based upon the large operating losses and expected future operating results,
management determined that it is more likely than not that a portion of the
additional income tax benefits which arose during fiscal 2001 will not be
realized. Consequently, the Company established a valuation allowance of $363.4
million for the portion of its deferred tax assets that are not expected to be
realized through the reduction of future income tax payments. Management
believes the remaining portion of the deferred tax assets are more likely than
not to be realized based on current expectations of future earnings and
available tax planning strategies.

As of September 30, 2001, the Company has U.S. Federal net operating loss
carryforwards of approximately $704 million which expire at various dates
through 2021 and aggregate state net operating loss carryforwards of
approximately $746 million which expire at various dates through 2006. The
Company also has U.S. Federal and state income tax credit carryforwards of
approximately $48 million and $76 million, respectively. The U.S. Federal
credits expire at various dates through 2021. California Manufacturers
Investment Credits of approximately $31 million expire at various dates through
2009, while the remaining state credits of approximately $45 million have no
expiration date. Approximately $15 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 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 $1.5 million, $166.1
million and $20.6 million for fiscal 2001, 2000 and 1999, respectively, were
credited directly to shareholders equity.

The results of Conexants operations for the quarter ended December 31, 1998
were included in the U.S. Federal, state, local and foreign income tax returns
of Rockwell. The remaining results of operations for Conexant are

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

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 any operations included in Rockwells income tax returns.
Income taxes included in the consolidated statement of operation for the period
prior to the spin-off from Rockwell were determined based on the separate
return method.

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

|                                                |  |      |          |      |  |      |         |   |  |   |         |  
|----------------------------------------------- |  | ---- | -------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                |  | 2001 |          | 2000 |  | 1999
|                                                |  |      |          |      |  |     
|U.S. Federal statutory tax at 35%               |  | $    | (561,385 | )    |  | $    | (48,414 | ) |  | $ | 965     |  
|State taxes, net of federal effects             |  |      | (54,604  | )    |  |      | (2,105  | ) |  |   | (5,426  | )
|Foreign income taxes in excess of U.S.          |  |      | 3,623    |      |  |      | 29,384  |   |  |   | 1,145   |  
|Research and development credits                |  |      | (20,591  | )    |  |      | (18,936 | ) |  |   | (6,941  | )
|Nondeductible amortization of intangible assets |  |      | 94,691   |      |  |      | 36,706  |   |  |   |        |  
|Nondeductible reorganization costs              |  |      | 20,481   |      |  |      |        |   |  |   |        |  
|Nondeductible IPRD                              |  |      |         |      |  |      | 51,321  |   |  |   |        |  
|Valuation allowance                             |  |      | 363,394  |      |  |      |        |   |  |   |        |  
|Other                                           |  |      | 3,053    |      |  |      | 4,648   |   |  |   | 84      |  
|                                                |  |      |          |      |  |      |         |   |  |   |         |  
|Provision (benefit) for income taxes            |  | $    | (151,338 | )    |  | $    | 52,604  |   |  | $ | (10,173 | )
|                                                |  |      |          |      |  |      |         |   |  |   |         |  

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

|              |  |      |            |      |  |      |          |   |  |   |         |  
|------------- |  | ---- | ---------- | ---- |  | ---- | -------- | - |  | - | ------- | -
|              |  | 2001 |            | 2000 |  | 1999
|              |  |      |            |      |  |     
|United States |  | $    | (1,607,411 | )    |  | $    | (61,974  | ) |  | $ | (12,617 | )
|Foreign       |  |      | 3,455      |      |  |      | (76,349  | ) |  |   | 15,373  |  
|              |  |      |            |      |  |      |          |   |  |   |         |  
|              |  | $    | (1,603,956 | )    |  | $    | (138,323 | ) |  | $ | 2,756   |  
|              |  |      |            |      |  |      |          |   |  |   |         |  

No provision has been made for U.S. Federal, state or additional foreign income
taxes which would be due upon the actual or deemed distribution of
approximately $45.7 million and $36.2 million of undistributed earnings of
foreign subsidiaries as of September 30, 2001 and 2000, 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. During
fiscal 2001, the Company purchased $35.0 million principal amount of its 4%
Convertible Subordinated Notes at prevailing market prices, resulting in an
extraordinary gain of $7.3 million (net of income taxes of $4.4 million). At
September 30, 2001, $615.0 million principal amount of the 4% Convertible
Subordinated Notes were outstanding.

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
2001, approximately $255.2 million principal amount of the
Companys 4-1/4%
Convertible Subordinated Notes were converted into approximately 11.0 million
shares of common stock at a cost to the Company of $42.6 million. At September
30, 2001, $94.8 million principal amount of the 4-1/4% Convertible
Subordinated Notes were outstanding.

At September 30, 2001, the fair value of the convertible subordinated notes
(based on quoted market prices) was approximately $398.3 million compared to
their carrying value of $709.8 million.

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

8. Commitments

The Company leases certain facilities and equipment under non-cancelable
operating leases. Land and facility leases expire at various dates through 2010
and contain various provisions for rental adjustments including, in certain
cases, adjustments based on increases in the Consumer Price Index. The leases
generally contain renewal provisions for varying periods of time. Rental
expense under operating leases was approximately $28.1 million, $17.6 million
and $13.5 million during fiscal 2001, 2000 and 1999, respectively.

At September 30, 2001, future minimum payments under operating leases are as
follows (in thousands):

|            |                               |   |        |        | 
|----------- | ----------------------------- | - | ------ | ------ | 
|Fiscal Year |                               |   |        |        | 
|            |                               |   |        |        | 
|2002        |                               | $ | 21,361 |       
|2003        |                               |   | 18,541 |       
|2004        |                               |   | 15,270 |       
|2005        |                               |   | 11,410 |       
|2006        |                               |   | 5,269  |       
|Thereafter  |                               |   | 2,321  |       
|            |                               |   |        |       
|            | Total future minimum payments |   | $      | 74,172 | 
|            |                               |   |        |       

9. Contingencies

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

The outcome of litigation cannot be predicted with certainty and some lawsuits,
claims or proceedings may be disposed of unfavorably to the Company. Many
intellectual property disputes have a risk of injunctive relief and there can
be no assurance that a license will be granted. Injunctive relief could have a
material adverse effect on the financial condition or results of operations of
the Company. Based on its evaluation of matters which are pending or asserted
and taking into account the Companys reserves for such matters, management of
the Company believes the disposition of such matters will not have a material
adverse effect on the financial condition or results of operations of the
Company.

Conexant has been designated as a potentially responsible party and is engaged
in groundwater remediation at one Superfund site located at a former silicon
wafer manufacturing facility and steel fabrication plant in Parker Ford,
Pennsylvania formerly occupied by the Company. In addition, the Company is
engaged in two other remediations of groundwater contamination at its Newport
Beach and Newbury Park, California facilities. Management currently estimates
the aggregate remaining costs for these remediations to be approximately $3.7
million and has accrued for these costs as of September 30, 2001.

10. Stock Plans

The Companys authorized capital consists of 1,000,000,000 shares of common
stock, par value $1 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. The preferred share
purchase right (a Right) is attached to each share of common stock pursuant to
which the holder may, in certain takeover-related circumstances, become
entitled to purchase from the Company 1/200th of a share of Junior Preferred
Stock at a price of $300, subject to adjustment. Also, in certain
takeover-related circumstances, each Right (other than those held by an
acquiring person) will generally be exercisable for shares of the Companys
common stock or stock of the acquiring person having a market value of twice
the exercise price. In certain events, each Right may be exchanged by the
Company for one share of common stock or 1/200th of a share of Junior Preferred
Stock. The Rights expire on December 31, 2008, unless earlier exchanged or
redeemed at a redemption price of $0.01 per Right, subject to adjustment.

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

Stock Options

The Company has stock option plans and long-term incentive plans under which
employees and directors may be granted options to purchase shares of the
Companys common stock. As of September 30, 2001, approximately 4.0 million
shares are available for grant under the stock option and long-term incentive
plans. Stock options are generally granted at not less than the fair market
value at grant date, generally vest over four years and expire eight or ten
years after the grant date. The Company has also assumed stock option plans in
connection with the business acquisitions completed during fiscal 2001 and
2000. A summary of stock option activity follows (shares in thousands):

|                                                  |  |           |        |          |  |           |       |          |  |           |        |          |  |   |       |  |  |          |        |   |  |   |       | 
|------------------------------------------------- |  | --------- | ------ | -------- |  | --------- | ----- | -------- |  | --------- | ------ | -------- |  | - | ----- |  |  | -------- | ------ | - |  | - | ----- | 
|                                                  |  | 2001      |        | 2000     |  | 1999     
|                                                  |  |           |        |          |  |          
|                                                  |  |           |        |          |  | Weighted  |       |          |  |           |        | Weighted |  |   |       |  |  | Weighted
|                                                  |  |           |        |          |  | Average   |       |          |  |           |        | Average  |  |   |       |  |  | Average 
|                                                  |  | Number of |        | Exercise |  | Number of |       | Exercise |  | Number of |        | Exercise
|                                                  |  | shares    |        | Price    |  | shares    |       | Price    |  | shares    |        | Price   
|                                                  |  |           |        |          |  |           |       |          |  |           |        |         
|Outstanding at beginning of year                  |  |           | 60,679 |          |  | $         | 32.51 |          |  |           | 33,350 |          |  | $ | 9.80  |  |  |          |       |   |  | $ |      | 
|Issued with spin-off from Rockwell                |  |           |       |          |  |           |      |          |  |           |       |          |  |   |      |  |  |          | 20,113 |   |  |   | 6.99  | 
|Granted during period                             |  |           | 28,880 |          |  |           | 12.48 |          |  |           | 32,404 |          |  |   | 53.37 |  |  |          | 18,727 |   |  |   | 11.91 | 
|Issued or assumed in connection
with acquisitions |  |           | 1,138  |          |  |           | 1.00  |          |  |           | 4,469  |          |  |   | 11.15 |  |  |          |       |   |  |   |      | 
|Exercised                                         |  |           | (1,998 | )        |  |           | 6.08  |          |  |           | (7,082 | )        |  |   | 7.41  |  |  |          | (4,026 | ) |  |   | 5.81  | 
|Cancelled                                         |  |           | (8,670 | )        |  |           | 34.44 |          |  |           | (2,462 | )        |  |   | 35.49 |  |  |          | (1,464 | ) |  |   | 9.21  | 
|                                                  |  |           |        |          |  |           |       |          |  |           |        |          |  |   |       |  |  |          |        |   |  |   |       | 
|Outstanding at end of year                        |  |           | 80,029 |          |  |           | 25.36 |          |  |           | 60,679 |          |  |   | 32.51 |  |  |          | 33,350 |   |  |   | 9.80  | 
|                                                  |  |           |        |          |  |           |       |          |  |           |        |          |  |   |       |  |  |          |        |   |  |   |       | 
|Exercisable at end of year                        |  |           | 23,889 |          |  |           | 22.05 |          |  |           | 12,211 |          |  |   | 8.32  |  |  |          | 9,910  |   |  |   | 6.54  | 
|                                                  |  |           |        |          |  |           |       |          |  |           |        |          |  |   |       |  |  |          |        |   |  |   |       | 

The following table summarizes stock options outstanding at September 30, 2001
(shares in thousands):

|                 |                 |           |             |              |             |          |           |           |          |          |       |       |  |  |          |        |  |  |       |       | 
|---------------- | --------------- | --------- | ----------- | ------------ | ----------- | -------- | --------- | --------- | -------- | -------- | ----- | ----- |  |  | -------- | ------ |  |  | ----- | ----- | 
|                 |                 |           | 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   
|                 |                 |           |             |              |             |          |           |           |          |         
|                 | $0.24  $8.45   |           |             | 10,331       |             |          |           | 5.5       |          |          | $     | 6.19  |  |  |          | 8,596  |  |  | $     | 6.68  | 
|                 | $8.47  $8.94   |           |             | 18,787       |             |          |           | 9.4       |          |          |       | 8.92  |  |  |          | 564    |  |  |       | 8.50  | 
|                 | $8.95  $9.41   |           |             | 12,586       |             |          |           | 7.1       |          |          |       | 9.36  |  |  |          | 6,142  |  |  |       | 9.33  | 
|                 | $9.45  $24.88  |           |             | 8,841        |             |          |           | 8.9       |          |          |       | 18.01 |  |  |          | 934    |  |  |       | 14.52 | 
|$25.00  $117.00 |                 |           | 29,484      |              |             |          | 8.6       |           |          |          | 51.51 |       |  |  | 7,653    |        |  |  | 51.27 |      
|                 |                 |           |             |              |             |          |           |           |          |          |       |       |  |  |          |        |  |  |       |      
|                 | $0.24  $117.00 |           |             | 80,029       |             |          |           | 8.2       |          |          |       | 25.36 |  |  |          | 23,889 |  |  |       | 22.05 | 
|                 |                 |           |             |              |             |          |           |           |          |          |       |       |  |  |          |        |  |  |       |      

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

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
2001, 2000 and 1999, the Company issued 106,000, 65,000 and 2.2 million
restricted shares of common stock at weighted-average fair values of $9.29,
$71.84 and $11.84, respectively. The fair value of restricted

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

stock awards is charged to expense over the vesting period. In fiscal 2001,
2000 and 1999, the Company recorded compensation expense of $3.5 million, $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, 2001, 24,000 shares of Company common stock have
been issued under the Directors Stock Plan and an aggregate of 125,000 shares
of the Companys common stock are available for grant under the Directors Stock
Plan.

Employee Stock Purchase Plans

The Company has an employee stock purchase plan which allows eligible employees
to purchase shares of the Companys common stock at six-month intervals during
a 24-month offering period at 85% of the lower of the fair market value on the
first day of the 24-month offering period or on the purchase date. Under the
employee stock purchase plan, employees may authorize the Company to withhold
up to 10% of their compensation for each pay period to purchase shares under
the plan, subject to certain limitations. Offering periods generally commence
on the first trading day of February and August of each year and are generally
24 months in duration, but may be terminated earlier under certain
circumstances. At September 30, 2001, an aggregate of 5.0 million shares of the
Companys common stock are available for future purchases under the plan.

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 stock 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 amounts):

|                                                |  |      |            |      |  |      |          |   |  |   |         |  
|----------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | -------- | - |  | - | ------- | -
|                                                |  | 2001 |            | 2000 |  | 1999
|                                                |  |      |            |      |  |     
|Pro forma net loss                              |  | $    | (1,809,833 | )    |  | $    | (348,878 | ) |  | $ | (19,971 | )
|Pro forma net loss per share,
basic and diluted |  | $    | (7.40      | )    |  | $    | (1.65    | ) |  | $ | (0.10   | )

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. The fair value of the options granted has been estimated at the date of
grant using the Black-Scholes option pricing model with the following
assumptions:

|                                               |  |      |      |      |  |      |       |   |  |   |      |  
|---------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ----- | - |  | - | ---- | -
|                                               |  | 2001 |      | 2000 |  | 1999
|                                               |  |      |      |      |  |     
|Risk-free interest rate                        |  |      | 3.8  | %    |  |      | 5.9   | % |  |   | 5.9  | %
|Expected volatility                            |  |      | 85   | %    |  |      | 60    | % |  |   | 60   | %
|Dividend yield                                 |  |      |     |      |  |      |      |   |  |   |     |  
|Expected life (years)                          |  |      | 4.5  |      |  |      | 4.5   |   |  |   | 5.0  |  
|Weighted-average fair value
of options granted |  | $    | 8.14 |      |  | $    | 28.70 |   |  | $ | 5.65 |  

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

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

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 Plans

The Company sponsors 401(k) retirement savings plans that allow eligible U.S.
employees to contribute a portion of their compensation, on a pre-tax or
after-tax basis, subject to annual limits. The Company may match employee
contributions in whole or part up to specified levels, and the Company may make
an additional discretionary contribution at fiscal year-end, based on the
Companys performance. All Company contributions to the retirement
savings plans are invested in shares of the Companys common stock and are
vested immediately. Expense under the retirement savings plans was $11.7
million, $13.5 million and $6.7 million for fiscal 2001, 2000 and 1999,
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 $3.0 million, $3.9 million and
$1.6 million in fiscal 2001, 2000 and 1999, respectively.

The change in the retirement medical obligation is as follows (in millions):

|                                               |  |      |       |      |  |   |       |  
|---------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|                                               |  | 2001 |       | 2000
|                                               |  |      |       |     
|Change in benefit obligation:                  |  |      |       |      |  |   |       |  
|Benefit obligation at beginning of year        |  | $    | 36.6  |      |  | $ | 27.3  |  
|Service cost                                   |  |      | 0.3   |      |  |   | 0.4   |  
|Interest cost                                  |  |      | 2.7   |      |  |   | 2.8   |  
|Plan participants contributions               |  |      | 0.5   |      |  |   | 0.1   |  
|Curtailments                                   |  |      | (0.5  | )    |  |   |      |  
|Actuarial loss (gain)                          |  |      | (1.2  | )    |  |   | 9.4   |  
|Benefits paid                                  |  |      | (2.8  | )    |  |   | (3.4  | )
|                                               |  |      |       |      |  |   |       |  
|Benefit obligation at end of year              |  |      | 35.6  |      |  |   | 36.6  |  
|                                               |  |      |       |      |  |   |       |  
|Change in plan assets:                         |  |      |       |      |  |   |       |  
|Fair value of plan assets at beginning of year |  |      |      |      |  |   |      |  
|Actual return on plan assets                   |  |      |      |      |  |   |      |  
|Employer contribution                          |  |      | 2.3   |      |  |   | 3.3   |  
|Plan participants contributions               |  |      | 0.5   |      |  |   | 0.1   |  
|Benefits paid                                  |  |      | (2.8  | )    |  |   | (3.4  | )
|                                               |  |      |       |      |  |   |       |  
|Fair value of plan assets at end of year       |  |      |      |      |  |   |      |  
|                                               |  |      |       |      |  |   |       |  
|Funded status                                  |  |      | (35.6 | )    |  |   | (36.6 | )
|Unrecognized net actuarial loss                |  |      | 11.2  |      |  |   | 13.7  |  
|Unrecognized prior service cost                |  |      | (5.4  | )    |  |   | (8.2  | )
|                                               |  |      |       |      |  |   |       |  
|Accrued benefit cost                           |  | $    | (29.8 | )    |  | $ | (31.1 | )
|                                               |  |      |       |      |  |   |       |  

For measurement purposes, a 9.3% annual rate of increase in the per capita cost
of health care benefits was assumed for fiscal 2001, decreasing to 5.5% in 2012
and remaining at that level thereafter. The accrued benefit obligation is based
on discount rates of 7.5% (2001) and 7.75% (2000). Increasing the health care
cost trend rate by 1% would increase the accumulated retirement medical
obligation at September 30, 2001 by approximately $3.5 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

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

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 a restructuring plan initiated in September 1998, the
Company offered a voluntary early retirement program (VERP) to certain salaried
employees. Pension benefits under the VERP are paid from a newly established
pension plan (the VERP Plan) of Conexant. Benefits payable under the VERP Plan
are equal to the excess of the total early retirement pension benefit over the
vested benefit obligation retained by Rockwell under the Rockwell pension plan.
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 $1.8 million, $1.9 million and $17.9
million for fiscal 2001, 2000 and 1999, respectively. Net pension expense
consists of service costs for benefits earned during the year and, in fiscal
1999, the cost of benefits under the VERP. As of September 30, 2001 and 2000,
the aggregate projected benefit obligation included in the consolidated balance
sheet for the VERP and hourly pension plans was approximately $10.3 million and
$11.6 million, respectively. The pension obligations are based on a discount
rate of 7.5% (2001) and 7.75% (2000).

12. Income (Loss) Per Share

Basic income (loss) per share is based on the weighted average number of shares
of common stock outstanding during the period. Diluted income (loss) per share
also includes the effect of stock options and other common stock equivalents
outstanding during the period, and assumes the conversion of the Companys
convertible subordinated notes for the period of time such notes were
outstanding, if such stock options and convertible notes are dilutive.

For periods prior to the December 31, 1998 spin-off from Rockwell, income
(loss) per share represents a pro forma income (loss) per share, calculated as
if the spin-off had occurred on October 1, 1998. The number of pro forma
weighted average outstanding shares and common share equivalents used in the
pro forma 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.

The following table sets forth the computation of basic and diluted income
(loss) per share before extraordinary item (in thousands, except per share
amounts):

|                                                  |                                                                                            |                  |   |            |   |      |   |          |   |  |   |         |        | 
|------------------------------------------------- | ------------------------------------------------------------------------------------------ | ---------------- | - | ---------- | - | ---- | - | -------- | - |  | - | ------- | ------ | 
|                                                  |                                                                                            |                  |   | 2001       |   | 2000 |   | 1999    
|                                                  |                                                                                            |                  |   |            |   |      |   |         
|Income:                                           |                                                                                            |                  |   |            |   |      |   |          |   |  |   |        
|                                                  | Income (loss) before extraordinary item available
to common shareholdersbasic and diluted |                  | $ | (1,452,618 | ) |      | $ | (190,927 | ) |  | $ | 12,929  |       
|                                                  |                                                                                            |                  |   |            |   |      |   |          |   |  |   |        
|Shares:                                           |                                                                                            |                  |   |            |   |      |   |          |   |  |   |        
|                                                  | Weighted average shares outstandingbasic                                                  |                  |   | 244,711    |   |      |   | 211,840  |   |  |   | 192,551 |       
|                                                  | Effect of dilutive securities:                                                             |                  |   |            |   |      |   |          |   |  |   |         |       
|                                                  |                                                                                            | Stock options    |   |            |  |      |   |          |  |  |   |         | 10,830 | 
|                                                  |                                                                                            | Restricted stock |   |            |  |      |   |          |  |  |   |         | 103    | 
|                                                  |                                                                                            |                  |   |            |   |      |   |          |   |  |   |        
|                                                  | Weighted average shares outstandingdiluted                                                |                  |   | 244,711    |   |      |   | 211,840  |   |  |   | 203,484 |       
|                                                  |                                                                                            |                  |   |            |   |      |   |          |   |  |   |        
|Income (loss) per share before extraordinary item |                                                                                            |                  |   |            |   |      |   |          |   |  |   |        
|                                                  | Basic                                                                                      |                  | $ | (5.94      | ) |      | $ | (0.90    | ) |  | $ | 0.07    |       
|                                                  |                                                                                            |                  |   |            |   |      |   |          |   |  |   |        
|                                                  | Diluted                                                                                    |                  | $ | (5.94      | ) |      | $ | (0.90    | ) |  | $ | 0.06    |       
|                                                  |                                                                                            |                  |   |            |   |      |   |          |   |  |   |        

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):

|                                                |  |      |       |      |  |      |        |  |  |  |       | 
|----------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ------ |  |  |  | ----- | 
|                                                |  | 2001 |       | 2000 |  | 1999
|                                                |  |      |       |      |  |     
|Stock options (under the treasury stock method) |  |      | 9,340 |      |  |      | 17,164 |  |  |  |      | 
|4-1/4% Convertible Subordinated Notes due 2006  |  |      | 5,636 |      |  |      | 15,153 |  |  |  | 5,953 | 
|4% Convertible Subordinated Notes due 2007      |  |      | 5,747 |      |  |      | 3,929  |  |  |  |      | 
|Restricted stock and other                      |  |      | 1,955 |      |  |      | 813    |  |  |  |      | 

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

13. Special Charges

Special charges consist of the following (in thousands):

|                  |  |      |         |      |  |      |   |  |  |   |        | 
|----------------- |  | ---- | ------- | ---- |  | ---- | - |  |  | - | ------ | 
|                  |  | 2001 |         | 2000 |  | 1999
|                  |  |      |         |      |  |     
|Asset impairments |  | $    | 429,000 |      |  | $    |  |  |  | $ | 20,000 | 
|Restructuring     |  |      | 22,783  |      |  |      |  |  |  |   | 17,906 | 
|Separation costs  |  |      | 15,693  |      |  |      |  |  |  |   |       | 
|Other             |  |      | 11,016  |      |  |      |  |  |  |   |       | 
|                  |  |      |         |      |  |      |   |  |  |   |        | 
|                  |  | $    | 478,492 |      |  | $    |  |  |  | $ | 37,906 | 
|                  |  |      |         |      |  |      |   |  |  |   |        | 

Asset Impairments

During fiscal 2001, the Company recorded impairment charges totaling $429.0
million associated with manufacturing assets in its Personal Networking
segment. During the third quarter of fiscal 2001, the Company determined it
would realign its manufacturing and procurement strategies, accelerating its
transition from volume digital CMOS manufacturing to a fabless CMOS business
model.

The decision to realign the manufacturing and procurement strategies, combined
with the then-current and projected business conditions, resulted in the
Company recording an impairment charge of $412.0 million to write down the
carrying value (approximately $516 million based on historical cost) of both of
its wafer fabrication facilities and related machinery and equipment (the
wafer fabrication assets) to their estimated fair value. The Company
determined the fair value of the wafer fabrication assets by discounting the
cash flows expected to be generated from future manufacturing activities, using
a discount rate management believes is commensurate with the risks involved.
Management believes this discounted cash flow model represents a reasonable
estimate of the fair value of the wafer fabrication assets. The write-down
established a new cost basis for the wafer fabrication assets, which will be
depreciated based upon new estimated useful lives ranging from one to six
years.

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

In fiscal 1999, the Company recorded a $20.0 million impairment charge to
further write down its Colorado Springs, Colorado wafer fabrication facilities,
which management decided to close and dispose of during fiscal 1998. The
Colorado Springs wafer fabrication facilities were distributed to Rockwell
prior to the Distribution.

Restructuring Charges

In fiscal 2001, the Company implemented a number of cost reduction initiatives
to more closely align its cost structure with the current business environment.
The cost reduction initiatives include workforce reductions, temporary
shutdowns of the Companys manufacturing facilities, significant reductions in
capital spending, the consolidation of certain facilities and salary reductions
for the senior management team until the Company returns to profitability.

During fiscal 2001, the Company reduced its workforce by approximately 2,000
employees (through involuntary severance programs and attrition) and recorded
restructuring charges of $22.8 million for costs of the workforce reduction and
the consolidation of certain facilities. The charges were based upon estimates
of the cost of severance benefits for approximately 1,300 affected employees
and lease cancellation and related costs. The actions reduced the Companys
workforce in both the Personal Networking and Mindspeed Technologies segments,
including approximately 1,000 employees in the Companys manufacturing
operations.

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

Activity and liability balances related to the fiscal 2001 restructuring
actions through September 30, 2001 are as follows (in thousands):

|                                          |  |            |         |           |  |       |       |   |  |   |         |  
|----------------------------------------- |  | ---------- | ------- | --------- |  | ----- | ----- | - |  | - | ------- | -
|                                          |  | Workforce  |         | Facility  |  |       |       |  
|                                          |  | reductions |         | and other |  | Total
|                                          |  |            |         |           |  |      
|Charged to costs and expenses             |  | $          | 17,199  |           |  | $     | 5,584 |   |  | $ | 22,783  |  
|Cash payments                             |  |            | (11,104 | )         |  |       | (223  | ) |  |   | (11,327 | )
|                                          |  |            |         |           |  |       |       |   |  |   |         |  
|Restructuring balance, September 30, 2001 |  | $          | 6,095   |           |  | $     | 5,361 |   |  | $ | 11,456  |  
|                                          |  |            |         |           |  |       |       |   |  |   |         |  

A majority of the amounts accrued for these actions are expected to be paid within
one year. Cash payments to complete the restructuring actions will be funded
from available cash reserves and funds from operations, and are not expected to
significantly impact the Companys liquidity.

In fiscal 1999, the Company recorded restructuring charges of $17.9 million to
complete an approximate 10% worldwide workforce reduction and other
restructuring actions commenced in 1998. The 1999 charges include $17.0 million
of additional costs 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. These restructuring actions
were completed in fiscal 2000.

Separation Costs

In fiscal 2001, the Company incurred costs of approximately $15.7 million
related to the previously-announced separation of the Company into two
independent companies to operate its Personal Networking and Mindspeed
Technologies business segments.

Other Special Charges

In connection with the Companys fiscal 2001 restructuring actions and
realigned manufacturing and procurement strategies, the Company recorded other
special charges aggregating $11.0 million related to the loss on disposal and
write-off of certain assets.

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 reasonable. These costs totaled approximately $1.5
million, $4.5 million and $10 million in fiscal 2001, 2000 and 1999,
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 in fiscal 1999.

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 reportable segmentsPersonal
Networking and Mindspeed Technologies. The Personal Networking segment designs,
develops and sells semiconductor system solutions for two general personal
communications applications marketsmobile communications and broadband access.
For segment reporting purposes, these product groups have been aggregated
because of their common characteristics and

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

their reliance on shared operating functions. Mindspeed Technologies designs,
develops and sells semiconductor networking solutions that facilitate the
aggregation, transmission and switching of data, video and voice from the edge
of the Internet to linked metropolitan area networks and long-haul networks.

The accounting policies of the segments are the same as those described in the
Note 2. The Company evaluates segment performance based on segment operating
income (loss) excluding amortization of intangible assets, special charges,
IPRD and stock compensation costs. Special charges excluded from segment
operating income (loss) consist of asset impairments, restructuring charges,
separation costs incurred in connection with the proposed separation of the
Personal Networking and Mindspeed Technologies businesses and losses on the
disposal of certain assets. The tables below present information about
reportable segments (in thousands):

|                                  |                |   |          |           |                         |   |           |           |      |   |           |           |      |   |          |            |   |   |         |          |   |   |        |        |  
|--------------------------------- | -------------- | - | -------- | --------- | ----------------------- | - | --------- | --------- | ---- | - | --------- | --------- | ---- | - | -------- | ---------- | - | - | ------- | -------- | - | - | ------ | ------ | -
|                                  |                |   | Revenues |           | Operating Income (Loss)
|                                  |                |   |          |           |                        
|                                  |                |   | 2001     |           | 2000                    |   | 1999      |           | 2001 |   | 2000      |           | 1999
|                                  |                |   |          |           |                         |   |           |           |      |   |           |           |     
|Personal Networking               |                | $ | 757,190  |           |                         | $ | 1,524,393 |           |      | $ | 1,166,501 |           |      | $ | (511,895 | )          |   | $ | 145,503 |          |   | $ | 23,240 |       
|Mindspeed Technologies            |                |   | 305,368  |           |                         |   | 579,206   |           |      |   | 277,613   |           |      |   | (221,527 | )          |   |   | 127,326 |          |   |   | 19,851 |       
|                                  |                |   |          |           |                         |   |           |           |      |   |           |           |      |   |          |            |   |   |         |          |   |   |        |       
|                                  | Segment totals |   | $        | 1,062,558 |                         |   | $         | 2,103,599 |      |   | $         | 1,444,114 |      |   |          | (733,422   | ) |   |         | 272,829  |   |   |        | 43,091 |  
|                                  |                |   |          |           |                         |   |           |           |      |   |           |           |      |   |          |            |   |   |         |          |   |   |        |       
|Amortization of intangible assets |                |   |          |           |                         |   |           |           |      |   |           |           |      |   | 340,664  |            |   |   | 160,154 |          |   |   | 8,364  |       
|Special charges                   |                |   |          |           |                         |   |           |           |      |   |           |           |      |   | 478,492  |            |   |   |        |          |   |   | 37,906 |       
|IPRD                              |                |   |          |           |                         |   |           |           |      |   |           |           |      |   |         |            |   |   | 215,710 |          |   |   |       |       
|Stock compensation                |                |   |          |           |                         |   |           |           |      |   |           |           |      |   | 9,393    |            |   |   | 6,759   |          |   |   |       |       
|                                  |                |   |          |           |                         |   |           |           |      |   |           |           |      |   |          |            |   |   |         |          |   |   |        |       
|                                  | Operating loss |   |          |           |                         |   |           |           |      |   |           |           |      |   | $        | (1,561,971 | ) |   | $       | (109,794 | ) |   | $      | (3,179 | )
|                                  |                |   |          |           |                         |   |           |           |      |   |           |           |      |   |          |            |   |   |         |          |   |   |        |       

|                       |  |              |         |                      |  |      |         |      |  |      |         |      |  |   |         |  |  |   |         |  |  |   |         | 
|---------------------- |  | ------------ | ------- | -------------------- |  | ---- | ------- | ---- |  | ---- | ------- | ---- |  | - | ------- |  |  | - | ------- |  |  | - | ------- | 
|                       |  | Depreciation |         | Capital Expenditures
|                       |  |              |         |                     
|                       |  | 2001         |         | 2000                 |  | 1999 |         | 2001 |  | 2000 |         | 1999
|                       |  |              |         |                      |  |      |         |      |  |      |         |     
|Personal Networking    |  | $            | 155,868 |                      |  | $    | 185,914 |      |  | $    | 198,187 |      |  | $ | 120,680 |  |  | $ | 299,019 |  |  | $ | 203,997 | 
|Mindspeed Technologies |  |              | 19,534  |                      |  |      | 6,820   |      |  |      | 6,325   |      |  |   | 37,734  |  |  |   | 16,099  |  |  |   | 9,759   | 
|                       |  |              |         |                      |  |      |         |      |  |      |         |      |  |   |         |  |  |   |         |  |  |   |         | 
|                       |  | $            | 175,402 |                      |  | $    | 192,734 |      |  | $    | 204,512 |      |  | $ | 158,414 |  |  | $ | 315,118 |  |  | $ | 213,756 | 
|                       |  |              |         |                      |  |      |         |      |  |      |         |      |  |   |         |  |  |   |         |  |  |   |         | 

Segment operating loss for fiscal 2001 includes inventory write-downs of $162.9
million and $82.2 million for the Personal Networking and Mindspeed
Technologies segments, respectively.

Segment total assets at fiscal year-ends are as follows (in thousands):

|                       |              |   |           |           |      |   |           |           | 
|---------------------- | ------------ | - | --------- | --------- | ---- | - | --------- | --------- | 
|                       |              |   | 2001      |           | 2000
|                       |              |   |           |           |     
|Personal Networking    |              | $ | 1,411,325 |           |      | $ | 2,676,836 |          
|Mindspeed Technologies |              |   | 1,404,155 |           |      |   | 1,739,361 |          
|                       |              |   |           |           |      |   |           |          
|                       | Total assets |   | $         | 2,815,480 |      |   | $         | 4,416,197 | 
|                       |              |   |           |           |      |   |           |          

Revenues by product group are as follows (in thousands):

|                        |  |      |           |      |  |      |           |  |  |   |           | 
|----------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                        |  | 2001 |           | 2000 |  | 1999
|                        |  |      |           |      |  |     
|Mobile communications   |  | $    | 257,949   |      |  | $    | 390,838   |  |  | $ | 266,553   | 
|Broadband access        |  |      | 499,241   |      |  |      | 1,133,555 |  |  |   | 899,948   | 
|Internet infrastructure |  |      | 305,368   |      |  |      | 579,206   |  |  |   | 277,613   | 
|                        |  |      |           |      |  |      |           |  |  |   |           | 
|                        |  | $    | 1,062,558 |      |  | $    | 2,103,599 |  |  | $ | 1,444,114 | 
|                        |  |      |           |      |  |      |           |  |  |   |           | 

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

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 fiscal years presented. Revenues by geographic area are as
follows (in thousands):

|                               |                    |   |           |         |      |   |           |         |  |   |           |         | 
|------------------------------ | ------------------ | - | --------- | ------- | ---- | - | --------- | ------- |  | - | --------- | ------- | 
|                               |                    |   | 2001      |         | 2000 |   | 1999     
|                               |                    |   |           |         |      |   |          
|United States                  |                    | $ | 307,211   |         |      | $ | 634,440   |         |  | $ | 461,254   |        
|Other Americas                 |                    |   | 27,166    |         |      |   | 49,610    |         |  |   | 58,769    |        
|                               |                    |   |           |         |      |   |           |         |  |   |           |        
|                               | Total Americas     |   |           | 334,377 |      |   |           | 684,050 |  |   |           | 520,023 | 
|Taiwan                         |                    |   | 158,767   |         |      |   | 426,264   |         |  |   | 309,112   |        
|South Korea                    |                    |   | 174,965   |         |      |   | 247,040   |         |  |   | 144,898   |        
|Other Asia-Pacific             |                    |   | 189,249   |         |      |   | 312,326   |         |  |   | 173,705   |        
|                               |                    |   |           |         |      |   |           |         |  |   |           |        
|                               | Total Asia-Pacific |   |           | 522,981 |      |   |           | 985,630 |  |   |           | 627,715 | 
|Japan                          |                    |   | 71,597    |         |      |   | 200,486   |         |  |   | 168,919   |        
|Europe, Middle East and Africa |                    |   | 133,603   |         |      |   | 233,433   |         |  |   | 127,457   |        
|                               |                    |   |           |         |      |   |           |         |  |   |           |        
|                               |                    | $ | 1,062,558 |         |      | $ | 2,103,599 |         |  | $ | 1,444,114 |        
|                               |                    |   |           |         |      |   |           |         |  |   |           |        

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

|                               |  |      |           |      |  |   |           | 
|------------------------------ |  | ---- | --------- | ---- |  | - | --------- | 
|                               |  | 2001 |           | 2000
|                               |  |      |           |     
|United States                  |  | $    | 1,626,746 |      |  | $ | 2,265,318 | 
|Europe, Middle East and Africa |  |      | 188,670   |      |  |   | 178,160   | 
|Other                          |  |      | 91,269    |      |  |   | 101,415   | 
|                               |  |      |           |      |  |   |           | 
|                               |  | $    | 1,906,685 |      |  | $ | 2,544,893 | 
|                               |  |      |           |      |  |   |           | 

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INDEPENDENT AUDITORS REPORT

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

We have audited the accompanying consolidated balance sheets of Conexant
Systems, Inc. and subsidiaries (the Company) as of September 30, 2001 and
2000, and the related consolidated statements of operations, cash flows and
shareholders equity for each of the three years in the period ended September
30, 2001. 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 financial position of the Company and its
subsidiaries at September 30, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2001, 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 18, 2001

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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 Report in that
the Registrant will file its definitive Proxy Statement for the Annual Meeting
of Shareowners to be held on February 27, 2002 pursuant to Regulation 14A of
the Securities Exchange Act of 1934 (the Proxy Statement) not later than 120
days after the end of the fiscal year covered by this Annual Report, and
certain information included in the Proxy Statement is incorporated herein by
reference.




Item 10. Directors and Executive Officers of the Registrant



|(a) |  | Executive Officers  See Executive Officers in Part I, Item 1 hereof.                                                                               
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Directors  The information required by this Item is incorporated 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.

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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, 2001 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 Deloitte & Touche LLP, Independent Auditors
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(2)  Supplemental Schedules

Schedule II Valuation and Qualifying Accounts

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

(3)  Exhibits

|         |  |                                                                                                                                                                                                                                                                                                                                                                                                  
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits |  | Description                                                                                                                                                                                                                                                                                                                                                                                      
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                  
|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    |  | Copy of resolutions of the Board of Directors of the Company,
adopted November 1, 2001, amending Article II, Section 5 of the
By-Laws of the Company.                                                                                                                                                                                                                                            
|3-a-3    |  | Amended By-Laws of the Company.                                                                                                                                                                                                                                                                                                                                                                  
|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.
|4-c-1    |  | Registration Rights Agreement, dated as of February 1, 2000, by
and between the Company and Morgan Stanley & Co. Incorporated,
filed as Exhibit 4.2 to the Companys Registration Statement on
Form S-3 (Registration No. 333-32468), is incorporated herein by
reference.                                                                                                                       
|*10-a-1  |  | Conexant Systems, Inc. 1998 Stock Option Plan, filed as Exhibit
10.6 to the Companys Registration Statement on Form 10 (File No.
000-24923), is incorporated herein by reference.                                                                                                                                                                                                               
|*10-a-2  |  | Copy of resolution of the Board of Directors of the Company,
adopted March 1, 1999, amending the Companys 1998 Stock Option
Plan, filed as Exhibit 10-b-2 to the Companys Annual Report on
Form 10-K for the year ended September 30, 1999, is incorporated
herein by reference.                                                                                                               

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|         |  |                                                                                                                                                                                                                                                                                                                                                                                                           
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits |  | Description                                                                                                                                                                                                                                                                                                                                                                                               
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                           
|*10-a-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-a-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.                                                    
|*10-a-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-a-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-a-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-a-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-a-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-a-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-a-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-a-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-a-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-a-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-a-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-a-16 |  | Copy of resolution of the Board of Directors of Rockwell, adopted
December 2, 1998, assigning                                                                                                                                                                                                                                                                                                             

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|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |  | to the Company outstanding options to
purchase shares of Company Common Stock, filed as Exhibit 4.f.4
to the Companys Registration Statement on Form S-3 (Registration
No. 333-70085), is incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                             
|*10-a-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-b-1  |  | Conexant Systems, Inc. 1999 Long-Term Incentives Plan, as
amended, filed as Exhibit 4.7 to the Companys Registration
Statement on Form S-8 (Registration No. 333-37918), is
incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                           
|*10-b-2  |  | Copy of resolution of the Board of Directors of the Company,
adopted April 20, 1999, amending the Companys 1999 Long-Term
Incentives Plan, filed as Exhibit 10-c-2 to the Companys Annual
Report on Form 10-K for the year ended September 30, 1999, is
incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                              
|*10-b-3  |  | Form of Stock Option Agreement under the Companys 1999 Long-Term
Incentives Plan, filed as Exhibit 10.1 to the Companys Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999, is
incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                       
|*10-b-4  |  | Form of Restricted Stock Agreement (Performance Vesting) under
the Companys 1999 Long-Term Incentives Plan, filed as Exhibit
10.2 to the Companys Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999, is incorporated herein by
reference.                                                                                                                                                                                                                                                                                                                                                                             
|*10-b-5  |  | Form of Restricted Stock Agreement (Time Vesting) under the
Companys 1999 Long-Term Incentives Plan, filed as Exhibit 10.3
to the Companys Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999, is incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                    
|*10-b-6  |  | Copy of resolutions of the Board of Directors of the Company,
adopted July 2, 1999, accelerating the vesting of certain
outstanding restricted stock awards under the Companys 1999
Long-Term Incentives Plan to October 1, 1999, subject to the
satisfaction of certain conditions precedent, filed as Exhibit
10-c-6 to the Companys Annual Report on Form 10-K for the year
ended September 30, 1999, is incorporated herein by reference.                                                                                                                                                                                          
|*10-b-7  |  | Copy of resolutions of the Board of Directors of the Company,
adopted September 8, 1999, approving the repurchase by the
Company of shares of Common Stock from certain executives and
employees of the Company or loans to such executives or
employees, in each case, in an amount sufficient to pay the
required withholding tax in connection with the acceleration of
the vesting of certain outstanding restricted stock awards under
the Companys 1999 Long-Term Incentives Plan, filed as Exhibit
10-c-7 to the Companys Annual Report on Form 10-K for the year
ended September 30, 1999, is incorporated herein by reference.
|*10-b-8  |  | Copy of resolution of the Special Committee of the Board of
Directors of the Company, adopted September 22, 1999, determining
that the conditions precedent to the acceleration of the vesting
of certain outstanding restricted stock awards under the
Companys 1999 Long-Term Incentives Plan have been satisfied,
filed as Exhibit 10-c-8 to the Companys Annual Report on Form
10-K for the year ended September 30, 1999, is incorporated
herein by reference.                                                                                                                                                                    
|*10-b-9  |  | 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-c-1  |  | Conexant Systems, Inc. Retirement Savings Plan, as amended, filed
as Exhibit 4.5 to the Companys Registration Statement on Form
S-8 (Registration No. 333-73142), is incorporated herein by
reference.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|*10-d-1  |  | Copy of resolutions of the Board of Directors of the Company,
adopted August 13, 1999 amending, among other things, the
Companys 1999 Long-Term Incentives Plan, filed as Exhibit 10-e-1
to the Companys Annual Report on Form 10-K for the year ended
September 30, 1999,                                                                                                                                                                                                                                                                                                                                                             

75



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|         |  |                                                                                                                                                                                                                                                                                                 
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits |  | Description                                                                                                                                                                                                                                                                                     
|         |  |                                                                                                                                                                                                                                                                                                 
|         |  | 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.                                                              
|*10-f-2  |  | Schedule identifying agreements substantially identical to the
Employment Agreement constituting Exhibit 10-g-1 hereto entered
into by the Company with M.M. Beguwala, J.S. Blouin, L.C.
Brewster, R.Y. Halim, D.A. Marotta, D.E. OReilly, A. Rangan,
F.M. Rhodes, 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       |  | Computation of Ratios.                                                                                                                                                                                                                                                                          
|21       |  | List of Subsidiaries of the Company.                                                                                                                                                                                                                                                            
|23       |  | Independent Auditors Consent.                                                                                                                                                                                                                                                                  
|24       |  | Power of Attorney authorizing certain persons to sign this Annual
Report on Form 10-K on behalf of certain directors and officers
of the Company.                                                                                                                                               
|99       |  | NetPlane Systems, Inc. Stock Option Plan, as amended.                                                                                                                                                                                                                                           



---

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



| | (b) |  | Reports on Form 8-K.The Company filed no reports on Form 8-K during
the quarter ended September 30, 2001.
| | --- |  | ---------------------------------------------------------------------------------------------------------



| | (c) |  | Exhibits
| | --- |  | --------

See subsection (a) (3) above.



| | (d) |  | Financial Statement Schedules
| | --- |  | -----------------------------



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

76



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Newport Beach, State of California, on this 4th day of
December, 2001.

| |                                                                                 |                     
| | ------------------------------------------------------------------------------- | --------------------
| | CONEXANT SYSTEMS, INC.                                                         
|
| | By:                                                                             | /s/ DWIGHT W. DECKER
| |                                                                                
| | Dwight W. Decker,Chief Executive Officer and Chairman
of the Board of Directors

Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed on the 4th day of December, 2001 by the
following persons on behalf of the Registrant and in the capacities indicated:

|                                           |  |                                                                                             
|------------------------------------------ |  | --------------------------------------------------------------------------------------------
|Signature                                  |  | Title                                                                                       
|                                           |  |                                                                                             
|                                          
|/s/ DWIGHT W. DECKER
Dwight W. Decker      |  | Chief Executive Officer and Chairman
of the Board of Directors
(Principal Executive Officer)
|                                          
|BALAKRISHNAN S. IYER*
Balakrishnan S. Iyer |  | Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)             
|                                          
|J. SCOTT BLOUIN*
J. Scott Blouin           |  | Senior Vice President and Chief
Accounting Officer
(Principal Accounting Officer)           
|                                          
|DONALD R. BEALL*
Donald R. Beall           |  | Director                                                                                    
|                                          
|RICHARD
M. BRESSLER*
Richard M. Bressler   |  | Director                                                                                    
|                                          
|RALPH J. CICERONE*
Ralph J. Cicerone       |  | Director                                                                                    
|                                          
|HOSSEIN
ESLAMBOLCHI*
Hossein Eslambolchi   |  | Director                                                                                    
|                                          
|F.
CRAIG FARRILL*
F. Craig Farrill         |  | Director                                                                                    
|                                          
|JERRE L. STEAD*
Jerre L. Stead             |  | Director                                                                                    



|*By: |  | /s/ DWIGHT W. DECKER                                             
|---- |  | -----------------------------------------------------------------
|     |  | Dwight W. Decker, Attorney-in-Fact**                             
|    
|**   |  | By authority of the power of attorney
filed as
Exhibit 24 hereto.

77



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##### Table of Contents



SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS
(In thousands)

|                               |                                               |         |            |          |              |       |           |            |  |      |   |   |  |  |            |         |   |  |   |        | 
|------------------------------ | --------------------------------------------- | ------- | ---------- | -------- | ------------ | ----- | --------- | ---------- |  | ---- | - | - |  |  | ---------- | ------- | - |  | - | ------ | 
|                               |                                               |         |            |          |              |       | Additions |            |  |      |   |   |  |  |           
|                               |                                               |         |            |          |              |       |           |            |  |      |   |   |  |  |           
|                               |                                               |         | Balance at |          | Charged      |       |           |            |  |      |   |   |  |  | Balance at
|                               |                                               |         | Beginning  |          | to Costs and |       |           |            |  |      |   |   |  |  | End of    
|Description                    |                                               | of Year |            | Expenses |              | Other |           | Deductions |  | Year
|                               |                                               |         |            |          |              |       |           |            |  |     
|Year ended September 30, 2001: |                                               |         |            |          |              |       |           |            |  |      |   |   |  |  |            |         |   |  |   |       
|                               | Allowance for doubtful accounts               |         | $          | 6,949    |              |       | $         | 22,613     |  |      | $ |  |  |  | $          | (11,356 | ) |  | $ | 18,206 | 
|                               | Allowance for excess and
obsolete inventories |         |            | 50,205   |              |       |           | 19,356     |  |      |   |  |  |  |            | (13,826 | ) |  |   | 55,735 | 
|Year ended September 30, 2000: |                                               |         |            |          |              |       |           |            |  |      |   |   |  |  |            |         |   |  |   |       
|                               | Allowance for doubtful accounts               |         | $          | 9,658    |              |       | $         | 2,066      |  |      | $ |  |  |  | $          | (4,775  | ) |  | $ | 6,949  | 
|                               | Allowance for excess and
obsolete inventories |         |            | 64,582   |              |       |           | 7,771      |  |      |   |  |  |  |            | (22,148 | ) |  |   | 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 | 

78



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##### Table of Contents






EXHIBIT INDEX

|  |        |  |                                                                                                                                                                                                                                                                                                 
|- | ------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  | 3-a-2  |  | Copy of resolutions of the Board of Directors of the Company,
adopted November 1, 2001, amending Article II, Section 5 of the
By-Laws of the Company.                                                                                                                                           
|  | 3-a-3  |  | Amended By-Laws of the Company.                                                                                                                                                                                                                                                                 
|* | 10-f-2 |  | Schedule identifying agreements substantially identical to the
Employment Agreement constituting Exhibit 10-g-1 hereto entered
into by the Company with M.M. Beguwala, J.S. Blouin, L.C.
Brewster, R.Y. Halim, D.A. Marotta, D.E. OReilly, A. Rangan, F.M.
Rhodes, T.A. Stites and K.V. Strong.
|  | 12     |  | Computation of Ratios.                                                                                                                                                                                                                                                                          
|  | 21     |  | List of Subsidiaries of the Company.                                                                                                                                                                                                                                                            
|  | 23     |  | Independent Auditors Consent.                                                                                                                                                                                                                                                                  
|  | 24     |  | Power of Attorney authorizing certain persons to sign this Annual
Report on Form 10-K on behalf of certain directors and officers of
the Company.                                                                                                                                               
|  | 99     |  | NetPlane Systems, Inc. Stock Option Plan, as amended.                                                                                                                                                                                                                                           



---

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

79