##### Table of Contents



---

---

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




---



FORM 10-K

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

For the fiscal year ended September 30, 2002*

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. [    ]

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 December 6, 2002) was approximately $505.9 million.
Shares of voting stock held by each officer and director and by each shareowner
affiliated with a director have been excluded from this calculation because
such persons may be deemed to be affiliates. This determination of officer or
affiliate status is not necessarily a conclusive determination for other
purposes. The number of outstanding shares of the Registrants Common Stock as
of December 6, 2002 was 266,089,745.

Documents Incorporated by Reference

Portions of the Registrants Proxy Statement for the 2003 Annual Meeting
of Shareowners to be held on February 26, 2003, are incorporated by reference
into Part III of this Form 10-K.



---





|* |  | For presentation purposes of this Form 10-K, references made to the
September 30, 2002 period relate to the actual fiscal year ended September
27, 2002.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------





---

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 AND COMPREHENSIVE LOSS
|                |                                                                                                         | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                            
|                |                                                                                                         | INDEPENDENT AUDITORS REPORT                                          
|                | 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 and Related Stockholder Matters
|                | Item 13. Certain Relationships and Related Transactions                                                
|                | Item 14. Controls and Procedures                                                                       
|PART IV        
|                | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                               
|SIGNATURES     
|CERTIFICATIONS 
|                | SCHEDULE II                                                                                            
|EXHIBIT INDEX  
|EXHIBIT 10-B-9 
|EXHIBIT 10-B-10
|EXHIBIT 10-F-2 
|EXHIBIT 10-F-4 
|EXHIBIT 10-F-5 
|EXHIBIT 10-J-8 
|EXHIBIT 10-J-9 
|EXHIBIT 10-K-1 
|EXHIBIT 10-K-2 
|EXHIBIT 10-K-3 
|EXHIBIT 10-K-4 
|EXHIBIT 10-K-5 
|EXHIBIT 10-K-6 
|EXHIBIT 21     
|EXHIBIT 23     
|EXHIBIT 24     
|EXHIBIT 99     



---



##### Table of Contents



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 of manufacturing
capacity and raw materials; pricing pressures and other competitive factors;
changes in our product mix; fluctuations in manufacturing yields; product
obsolescence; our ability to develop and implement new technologies and to
obtain protection of the related intellectual property; the successful
implementation of our expense reduction and restructuring initiatives; the
successful separation of our Broadband Communications and Mindspeed
Technologies businesses; our ability to attract and retain qualified
personnel; 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 and AccessRunner are trademarks of Conexant Systems,
Inc. Other brands, names and trademarks contained in this Annual Report are the
property of their respective owners.

2



---



##### Table of Contents






PART I




Item 1. Business

General

Conexant Systems, Inc. (we, Conexant or the Company) designs, develops
and sells semiconductor system solutions for communications applications. Our
expertise in mixed-signal processing allows us to deliver integrated systems
and semiconductor products which facilitate communications worldwide through
wireline voice and data communications networks and emerging cable, satellite
and fixed wireless broadband communications networks. We operate in two
business segments: our Broadband Communications 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.

On June 25, 2002, we completed the distribution to Conexant shareholders of
outstanding shares of our wholly owned subsidiary Washington Sub, Inc.
(Washington), to which we contributed our wireless communications business,
other than certain assets and liabilities which we retained, pursuant to the
Contribution and Distribution Agreement dated as of December 16, 2001, as
amended, by and between us and Washington (the Spin-off Transaction).
Immediately thereafter, pursuant to the Agreement and Plan of Reorganization
dated as of December 16, 2001, as amended as of April 12, 2002, by and among
us, Washington and Alpha Industries, Inc. (Alpha), Washington merged with and
into Alpha, with Alpha the surviving corporation (the Merger). As a result of
the Spin-off Transaction and the Merger, Conexant shareholders received 0.351
of a share of Alpha common stock for each Conexant share held and continued to
hold their Conexant shares. Upon completion of the Merger, Alpha and its
subsidiaries purchased our semiconductor assembly, module manufacturing and
test facility located in Mexicali, Mexico and our package design team that
supports the Mexicali facility for $150 million. Effective June 26, 2002, Alpha
changed its name to Skyworks Solutions, Inc. (Skyworks).

In March 2002, we and The Carlyle Group formed a new specialty foundry company
named Jazz Semiconductor, Inc. (Jazz). We contributed our Newport Beach,
California wafer fabrication operations and related assets and liabilities and
certain intellectual property to Jazz in exchange for $19.3 million in cash and
a 45% equity interest in Jazz, having an estimated fair value of $42.5 million.
We also entered into a long-term supply arrangement with Jazz under which it
provides capacity to meet a portion of our requirements for complementary
metal-oxide semiconductor (CMOS) and specialty-process wafer fabrication
services and we agreed to purchase certain minimum annual volumes of wafers
during the first three years of the supply agreement. We purchase a substantial
portion of our requirements for silicon-based semiconductor products from Jazz.

Throughout fiscal 2001 and continuing into fiscal 2002, 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. Our net revenues for fiscal 2002 and
2001 were $602 million and $847 million, respectively, compared to $1.8 billion
for fiscal 2000. Although our revenues continue to reflect a substantial
decline from previous levels, during fiscal 2002 we began to experience renewed
demand in a number of the end markets addressed by our products and through the
end of fiscal 2002 we achieved three consecutive quarters of sequential revenue
growth.

3



---



##### Table of Contents



We incurred net losses of $881 million for fiscal 2002 and $1.4 billion for
fiscal 2001. As a result of our cost reduction initiatives, our strategic
manufacturing realignment and the closure of certain facilities, in fiscal 2002
and 2001 we recorded special charges of $199.4 million and $389.6 million,
respectively, for asset impairments and restructuring and other costs.

In September 2000, our Board of Directors approved in principle the separation
of our Broadband Communications and Mindspeed Technologies businesses. Although
business conditions have delayed the separation, we remain committed to
completing the separation as soon as business and market conditions permit. The
separation may be subject to the approval of our shareholders, the receipt of a
ruling from the Internal Revenue Service that any related spin-off will qualify
as a tax-free distribution and other conditions. We cannot assure you that we
will successfully complete the separation.

Our Strategy

Our strategy is to build focused businesses providing semiconductor system
solutions for broadband communications and Internet infrastructure
applications. Key elements of our strategy include the following:

Target High-Growth Communications Markets

Our strategy is to identify segments of the broadband communications and
Internet infrastructure markets offering the potential for high growth and to
develop semiconductor system solutions for applications in these markets. 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 original equipment manufacturer
(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, mixed-signal processing cores and software across multiple product
platforms. 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.

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 relationships with leading
customers in each of our markets is a competitive advantage that enables us to
more effectively target our research and development investments. We seek to
establish customer relationships with leading system OEMs in each of our
addressed markets and we seek to gain market share 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.

4



---



##### Table of Contents



Operate as a Fabless Semiconductor Company

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

Broadband Communications Business

Our Broadband Communications business designs, develops and sells semiconductor
system solutions that connect personal communications access products, such as
set-top boxes, residential gateways, personal computers (PCs) and game
consoles, to voice, video and data services over broadband connections,
including asynchronous DSL (ADSL), cable and direct broadcast satellite
systems. The Broadband Communications business also includes our foundation
analog dial-up access portfolio, including PC data and fax modems, and our
broadcast video encoder and decoder product family.

Our Broadband Communications 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. This trend has been propelled by
the 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 more 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. Additionally, home
networking can also provide the flexibility and convenience of full-featured
on-line computing from anywhere within the home.

Dial-Up Access Solutions

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

Broadband Access Solutions

Our broadband access business is categorized into three focused product areas:
broadband data access, broadband media access and video processing solutions.

Our broadband data access business is comprised of semiconductor solutions that
connect personal communications access devices to broadband connections. During
fiscal 2002, we increased unit shipments of our AccessRunnerTM ADSL modem
solution and secured 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. During
fiscal 2002, we unveiled a complete universal serial bus (USB) 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.

Also during fiscal 2002, despite a lower than expected growth rate in the cable
modem market, we increased shipments of our single-chip cable modem from the
prior year. Our single-chip cable modem contains an embedded

5



---



##### Table of Contents



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

To support the distribution of broadband content throughout the 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 portfolio of home network processors
which can be used at the core of a variety of devices, such as residential
gateways, that consumers may use to access the Internet and share content using
a wide range of existing and emerging connectivity technologies to link a
network of home PCs and peripheral devices. In addition to connecting broadband
services to networks inside the home, these processors offer processing power
sufficient to implement a full-featured Statefull Packet Inspection (SPI)-based
firewall. The importance of a secure firewall is greater than ever with the
increasing use of always on Internet access in both the home and small office
environments.

Through our broadband media access business, we offer an extensive portfolio
enabling digital cable, satellite and terrestrial set-top boxes. Our complete
set-top box system solution incorporates a silicon tuner, a demodulator, a
highly integrated media processor, a digital video encoder and a back-channel
telephony modem. In fiscal 2002, we introduced new highly integrated front-end
satellite set-top box silicon tuner and demodulator products. These products
improve our set-top box system solution by offering a tightly integrated path
for our customers to follow in the design of their next generation solutions.
We have also unveiled a single-chip dual-stream 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 users to record one channel while simultaneously watching a second
channel.

During fiscal 2002, we acquired GlobespanVirata, Inc.s video compression
business to accelerate the development of our future Motion Picture Experts
Group (MPEG) video products. This strategic acquisition enhances our portfolio
by adding MPEG-2 and advanced MPEG-4 digital media compression technologies,
which we believe are important to our long-term product strategy in the PC and
set-top box markets.

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

Our overall research and development efforts in the Broadband Communication
business include building a comprehensive portfolio of products for a variety
of access, delivery and display technologies converging on the television and
associated set-top box, PC, residential gateway and other consumer electronics
platforms. Key products in various stages of design and development include
next-generation ADSL routers, cable modems, home network processors and set-top
box systems.

6



---



##### Table of Contents



Mindspeed Technologies Business

Our Mindspeed Technologies business designs, develops and sells semiconductor
networking solutions for communications applications that extend from the edge
of the Internet and throughout linked metropolitan area 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 decreased over the past two years,
communications 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 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 accessand transport
applications in communications networks have specific semiconductor
requirements.

Accessapplications encompass 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. Transportapplications include 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 three focused product families: multiservice
access products, T/E carrier products and asynchronous transfer mode (ATM)
network processing solutions. Multiservice access products include voiceband
processor solutions designed to support multiple voice and data services across
wireline and wireless networks and are found in a variety of network access
equipment, such as remote access concentrators, voice and media gateways,
integrated access devices, private branch exchanges, digital loop carriers and
wireless base stations. Our T/E carrier and ATM network processor products
support both wide area network (WAN) access and transport applications. Our T/E
carrier and ATM product portfolios are complemented by DSL and
serializer/deserializer (SerDes) transceivers, crosspoint switches, clock and
data recovery devices (CDRs), switch fabrics and physical media dependent
devices supporting synchronous optical networking/synchronous digital hierarchy
(SONET/SDH) and gigabit Ethernet/Fibre Channel digital transmission standards.
These access and transport solutions are used in a variety of network
equipment, including high-speed routers, ATM switches, optical switches,
add-drop multiplexers, digital cross-connect systems, DSL access multiplexers,
storage area servers and routers and dense wave division multiplexer equipment.

Multiservice Access Products

Our multiservice access processor products, designed to support voice and data
services, are software configurable and implement a variety of services
including dial-up and dedicated Internet access and wholesale Internet access
for Internet service providers (ISPs). Our multiservice access device
architecture combines the performance of a digital signal processor core with
the flexibility of a microcontroller core to support our extensive suite of
field-proven modulation techniques, echo cancellers, speech coders and
communications protocols. Our multiservice access processors also implement
voice-over-packet, voice-over-ATM, voice-over-DSL, Internet fax, wireless and
multicast-based services. Recently, we introduced two products in a family of
next-generation voice-over-packet communications convergence processors. These
software-intensive solutions are capable of handling voice-over-

7



---



##### Table of Contents



Internet protocol (VoIP) and voice-over-ATM traffic and are ideally suited for
voice and media gateways designed to bridge wireline, wireless and enterprise
networks.

T/E Carrier Products

Our T/E carrier products include physical-layer and link-layer communications
device solutions for access, aggregation and transport of data, video and voice
from the edge of the network to metropolitan and long haul telecommunications
networks. Our T1/E1 and DS3/E3 carrier transceiver devices enable digital
communications over twisted copper wire and include multi-port 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. Recent
product introductions include our multi-port DS3/E3 LIUs with integrated
digital jitter attenuation functionality. These highly integrated, low-power
solutions are designed for transmission applications including add-drop
multiplexers, routers, ATM switches and digital cross-connect systems.

Our T/E carrier products are complemented by a family of multi-megabit
symmetric DSL (SDSL) transceivers which provide incumbent and competitive local
exchange carriers the ability to deliver Internet access at data rates of 1.5
Mbps to 8 Mbps in both directions, supporting telecommuting and branch office
functions. Recent additions to our DSL transceiver family include low power,
single-port and multi-port 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.

ATM Network Processor Products

Our high-performance ATM/multi-protocol label switching (MPLS) network
processors 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 to 2.4 gigabits per second (Gbps) 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.

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, multiservice access
processors and DSL transceivers to create complete semiconductor networking
solutions.

Our three focused product families are complemented by a portfolio of
networking transmission and switching solutions which support lower-speed
SONET/SDH and packet-over-SONET applications. Our optical transceiver products
for transmission applications include laser drivers, transimpedance amplifiers
and post amplifiers supporting up to 3 Gbps applications. Our optical
transceiver products also include CDRs and SerDes transceivers operating at 3.2
Gbps. Our switching portfolio includes high-density crosspoint switches and
switch fabric devices. Our switch fabric chipset, configurable for up to 128
ports operating at 2.4 Gbps per port, enables data to be transferred between
line cards in high capacity, high-speed network equipment. Target equipment
applications for these switching products include high-density Internet
protocol switches, storage area routers and digital cross-connect systems.

Our current research and development initiatives in Mindspeed Technologies
focus on expansion of our next-generation voice-over-packet communications
convergence processors, higher integration levels for our T/E carrier and ATM
physical and link-layer communication devices and the development of our
next-generation ATM/MPLS network processor family.

Research and Development

We have significant research, development, engineering and product design
capabilities. At September 30, 2002, we had approximately 1,460 employees
engaged in research and development activities at 19 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.

8



---



##### Table of Contents



We incurred research and development expenses of $323.8 million, $371.9 million
and $322.9 million in fiscal 2002, 2001 and 2000, respectively.

Manufacturing

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

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

To obtain external wafer manufacturing capacity, we entered into a five-year
supply arrangement with Jazz in March 2002 under which we purchase a
substantial portion of our requirements for silicon-based semiconductor
products. During the first two years of our supply arrangement with Jazz, our
cost of wafers is an amount which approximates our historical cost. Thereafter,
the cost of wafers will be based on market prices. Additionally, we are
obligated to purchase (and Jazz is obligated to supply) certain minimum annual
volumes of wafers during the first three years of the arrangement. In the event
our actual wafer purchases are less than the required minimum volumes, we will
be required to make additional payments to Jazz. Our expected minimum purchase
obligations under the supply agreement with Jazz, net of a portion of the wafer
purchase obligations assumed by a third party, will be approximately $71
million, $43 million and $14 million in fiscal 2003, 2004 and 2005,
respectively. Our arrangements with other foundries generally do not provide us
with any guaranteed levels of supply.

Upon completion of the Spin-off Transaction and the Merger, Skyworks purchased
our Mexicali, Mexico assembly and test facility. We use third parties,
including Skyworks, for the assembly and test of all of our products. We
entered into a three-year supply agreement with Skyworks in June 2002, under
which Skyworks provides us semiconductor assembly and test services at our
former Mexicali, Mexico facility. Under this supply agreement, we are obligated
to purchase (and Skyworks is obligated to supply) assembly and test services
aggregating approximately $35 million during fiscal 2003. Thereafter and
subject to certain conditions, we are obligated to offer Skyworks the
opportunity to provide additional assembly and test services that we may need
and Skyworks is obligated to make commercially reasonable efforts to provide
such requested services during the three-year agreement.

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

Customers, Marketing and Sales

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

In our Broadband Communications business, our top five direct OEM customers are
Canon Inc., Matsushita Electric Industrial Co. Ltd., Microsoft Corporation,
Samsung Electronics Co., Ltd. and Thomson Corporation. We believe that
significant indirect OEM customers of our broadband communications business
include Apple Computer, Inc., Dell Computer Corporation, Hewlett-Packard
Company, Motorola, Inc. and Sony Corporation.

In our Mindspeed Technologies business, our top five direct OEM customers are
ADC Telecommunications, Inc., Alcatel Data Networks, S.A., Cisco Systems, Inc.,
Nokia Corporation and Tyco International Ltd. We believe that significant
indirect OEM customers of our Mindspeed Technologies business include Huawei
Technologies Co.,
Ltd., McData Corporation, NEC Corporation, Nortel Networks, Inc. and Siemens
A.G.

9



---



##### Table of Contents



Revenues derived from customers located in the Americas, Europe, Japan and the
Asia-Pacific region were 21%, 12%, 8% and 59%, respectively, of our net
revenues for fiscal 2002. We believe a substantial portion of the products we
sell to OEMs and third-party manufacturing service providers in the
Asia-Pacific region are ultimately shipped to end markets in the Americas and
Europe.

We have a worldwide sales organization
comprised of approximately 230 employees
as of September 30, 2002, with 11 domestic and 14 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 45 distributors and dealers. In addition, our design and
applications engineering staff is actively involved with customers during all
phases of design and production and provides customer support through our
worldwide sales offices, which are generally in close proximity to customers
facilities.

Backlog

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

In the Broadband Communications business, we compete primarily with Agere
Systems, Inc., Analog Devices, Inc., Broadcom, Inc., Centillium Communications,
Inc., GlobespanVirata, Inc., Infineon Technologies A.G., LSI Logic Corporation,
Microtune, Inc., PC-Tel, Inc., Philips Electronics N.V., Samsung Electronics
Co. Ltd., 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, GlobespanVirata, Inc., Infineon Technologies A.G., Intel
Corporation, Maxim Integrated Products, Inc., 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 a number of United States and foreign patents and patent
applications related to our products, processes and technologies. We are also
cross-licensed under a number of intellectual property portfolios in the
industry that are relevant to our technologies and products. We have filed and
received federal and international trademark registrations of our Conexant and
Mindspeed trademarks. In addition, we have registered or applied to register a
number of additional trademarks applicable to our products. We believe that
intellectual property, including patents, patent applications, licenses, and
trademarks are of material importance to our business. In addition to
protecting our proprietary technologies and processes, we constantly strive to
strengthen and enhance our intellectual property portfolio. We use the
portfolio to seek licensing opportunities, to negotiate cross-licenses with
other intellectual property portfolios, to gain access to intellectual property
of others and to avoid, defend against or settle litigation. While in the
aggregate our patents, patent applications, licenses and trademarks are
considered important to our operations, they are not considered of such
importance that the loss or termination of any one of them would materially
affect our business or financial condition.

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

10



---



##### Table of Contents



Environmental Regulation

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

In connection with our spin-off from Rockwell, we assumed all liabilities in
respect of environmental matters related to the former manufacturing 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 a remediation of groundwater contamination at our former Newport Beach,
California facility. We currently estimate the remaining costs for these
remediations to be approximately $2.5 million and have accrued for these costs
as of September 30, 2002.

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

Cyclicality; Seasonality

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

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

Employees

As of September 30, 2002, we had approximately 2,460 full-time employees,
including approximately 1,520 in our Broadband Communications business and
approximately 940 in our Mindspeed Technologies business.
Approximately 1,470 of our employees are engineers. None of our employees are covered by collective
bargaining agreements.

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

Certain Business Risks

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

You should carefully consider and evaluate all of the information in this
Annual Report, including the risk factors listed below. Any of these risks
could materially and adversely affect our business, financial condition and
results of operations, which in turn could materially and adversely affect the
price of our common stock or other securities. Except where otherwise noted,
the financial information contained herein represents our continuing
operations, excluding the discontinued wireless communications business and
Mexicali operations.

11



---



##### Table of Contents



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

Our net revenues for fiscal 2002 were $602 million compared to $847 million for
fiscal 2001 and $1.8 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 losses from continuing operations of $812
million in fiscal 2002 and $1.2 billion in fiscal 2001. Including our
discontinued operations, we incurred a net loss of $881 million in fiscal 2002
and a net loss of $1.4 billion for fiscal 2001.

During fiscal 2001 and fiscal 2002, we implemented a number of expense
reduction and restructuring initiatives to more closely align our cost
structure with the current business environment. The cost reduction initiatives
include a worldwide workforce reduction, temporary shutdowns of our
manufacturing facilities, significant reductions in capital spending, the
consolidation of certain facilities and salary reductions for our senior
management team until we return to profitability. However, these expense
reduction initiatives alone will not return us to profitability. We expect that
reduced end-customer demand, changes in our revenue mix and other factors will
continue to adversely affect our operating results in the near term. In order
to return to profitability, we must achieve substantial revenue growth and
currently we continue to face an environment of uncertain demand in many of the
markets our products address. While we expect our Broadband Communications
segment will return to operating profitability in fiscal 2003, on a
consolidated basis we anticipate incurring additional losses from our
continuing operations. 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 have been characterized by diminished product demand,
production overcapacity, high inventory levels and accelerated erosion of
average selling prices. These factors cause substantial fluctuations in our
revenues and our results of operations. We have experienced these cyclical
fluctuations in our business in the past and may experience cyclical
fluctuations in the future.

During the late 1990s and extending into 2000, the semiconductor industry in
general, and communications applications in particular, enjoyed unprecedented
growth, benefiting from the rapid expansion of the Internet and other
communication services worldwide. During fiscal 2001 and 2002, we--like many of
our customers and competitors--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 was compounded by higher-than-normal
levels of equipment and component inventories held by many of our OEM,
subcontractor and distributor customers in fiscal 2001. As a result of this
sharply reduced demand across our product portfolio, we recorded $188.8 million
of inventory write-downs in fiscal 2001. We expect that reduced levels of
end-customer demand, changes in our revenue mix and other factors will continue
to adversely affect our operating results in the near term.

In addition, this environment of weak end-customer demand has, in some cases,
led to delays in payments for our products. During fiscal 2001, we recorded
$23.1 million of provisions for uncollectible accounts receivable from
slow-paying customers. In the event that our customers delay payments to us, or
are unable to pay amounts owed to us, we may incur additional losses on our
accounts receivable.

Demand for our products in each of the communications electronics end-markets
which we address is subject to a unique set of factors, and a downturn in
demand affecting one market may be more pronounced, or last longer, than a
downturn affecting another of our markets. In particular, demand for the
products sold by our Mindspeed Technologies business, which are incorporated
into telecommunications and data communications infrastructure equipment, is
recovering more slowly than demand for products offered by our Broadband
Communications business, which are ultimately sold to individual consumers in
products such as PCs, cable and satellite set-top boxes and other small office
and home networking products.

12



---



##### Table of Contents



We are subject to intense competition.

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

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



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

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

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



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

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

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

A number of our competitors have combined with each other and consolidated
their businesses, including the consolidation of competitors with our
customers. This is attributable to a number of factors, including the
historically high-growth nature of the communications electronics industry and
the time-to-market pressures on suppliers to decrease the time required for
product conception, research and development, sampling and production launch
before a product reaches the market. This consolidation trend is expected to
continue, since investments,

13



---



##### Table of Contents



alliances and acquisitions may enable semiconductor suppliers, including us and
our competitors, to augment technical capabilities or to achieve faster
time-to-market for their products than would be possible solely through
internal development.

Consolidation by industry participants has created entities with increased
market share, customer base, technology and marketing expertise in markets in
which we compete. These developments may significantly and adversely affect our
current markets, the markets we are seeking to serve and our ability to compete
successfully in those markets.

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

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



| |  |  | our ability to anticipate customer and market requirements and
changes in technology and industry standards;  
| | - |  | --------------------------------------------------------------------------------------------------------------
|
| |  |  | our ability to accurately define new products;                                                                
|
| |  |  | our ability to timely complete development of new products and bring
our products to market on a timely basis;
|
| |  |  | our ability to differentiate our products from offerings of our competitors; and                              
|
| |  |  | overall market acceptance of our products.                                                                    

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

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

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

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



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

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

14



---



##### Table of Contents



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

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

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

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

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

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

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

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

Our sales are typically made pursuant to individual purchase orders and we
generally do not have long-term supply arrangements with our customers.
Generally, our customers may cancel orders until 30 days prior to shipment. In
addition, we sell a portion of our products through distributors, some of whom
have rights to return unsold products to us. Sales to distributors accounted
for approximately 41% of our net revenues for fiscal 2002. We routinely purchase inventory based on estimates of end-market
demand for our customers products, which is difficult to predict. This
difficulty may be compounded when we sell to OEMs indirectly through
distributors or contract manufacturers, or both, as our forecasts of demand are
then based on estimates provided by multiple parties. In addition, our
customers may change their inventory practices on short notice for any reason.
The cancellation or deferral of product orders, the return of previously sold
products or overproduction due to the failure of anticipated orders to
materialize could result in our holding excess or obsolete inventory, which
could result in write-downs of inventory.

During fiscal 2001, the communications electronics markets which we address
were characterized by dramatic decreases in end-user demand and high levels of
channel inventories that reduced visibility into future demand for our
products. As a result of this sharply reduced demand across our product
portfolio, we recorded $188.8 million of inventory write-downs in fiscal 2001.

15



---



##### Table of Contents



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

In March 2002 we contributed our Newport Beach wafer fabrication operations to
Jazz, a joint venture in which we hold a minority ownership. In June 2002 we
contributed our Newbury Park gallium arsenide wafer fabrication facility to
Washington as part of the Spin-off Transaction and the Merger. As a result, we
are entirely dependent upon outside wafer fabrication facilities (known as
foundries), including Jazz and Skyworks, for wafer fabrication services. Under
our fabless business model, our long-term revenue growth is dependent on our
ability to obtain sufficient external manufacturing capacity, including wafer
production capacity. During times when the semiconductor industry is
experiencing a shortage of wafer fabrication capacity, we may experience delays
in shipments or increased manufacturing costs.

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



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

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

Upon completion of the Spin-off Transaction and the Merger, Skyworks purchased
our Mexicali, Mexico assembly and test facility. As a result, we are dependent
upon third parties, including Skyworks, for the assembly and test of all of our
products. Our reliance on others to assemble and test our products subjects us
to many of the same risks as are described above with respect to our reliance
on outside wafer fabrication facilities.

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

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

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

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

16



---



##### Table of Contents



assure you that we will be able to identify and consummate suitable investment,
alliance or acquisition transactions in the future.

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



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

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

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

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

We believe that our existing sources of liquidity together with cash expected
to be generated from product sales will be sufficient to fund our operations,
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 2002, approximately 83% of our net revenues were from customers
located outside the United States, primarily in the Asia-Pacific and European
countries. In addition, we have suppliers located outside the United States,
including the Skyworks assembly and test facility in Mexicali, Mexico and
third-party foundries located in the Asia-Pacific region. Our international
sales and operations are subject to a number of risks inherent in selling and
operating abroad. These include, but are not limited to, risks regarding:



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

17



---



##### Table of Contents





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

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

Our past operating performance has been impacted by adverse economic conditions
in the Asia-Pacific region, which have increased the uncertainty with respect
to the long-term viability of certain of our customers and suppliers in the
region. Sales to customers in Japan and other countries in the Asia-Pacific
region, principally Taiwan and Hong Kong, represented approximately 67% of our
net revenues in fiscal 2002.

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

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

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



| |  |  | changes in end-user demand for the products manufactured and sold by our customers;                         
| | - |  | ------------------------------------------------------------------------------------------------------------
|
| |  |  | the effects of competitive pricing pressures, including decreases in average selling prices of our products;
|
| |  |  | fluctuations in manufacturing yields;                                                                       
|
| |  |  | availability and cost of products from our suppliers;                                                       
|
| |  |  | the gain or loss of significant customers;                                                                  
|
| |  |  | our ability to develop, introduce and market new products and technologies on a timely basis;               
|
| |  |  | new product and technology introductions by competitors;                                                    
|
| |  |  | changes in the mix of products we develop and sell;                                                         
|
| |  |  | 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 and through the date of the Spin-off
Transaction and the Merger (June 25, 2002), the reported closing price of our
common stock on the Nasdaq National Market was as high as $124.42 and as low as
$3.16 per share. Subsequent to the Spin-off Transaction and the Merger, the
reported closing price of our common stock has been as high as $2.59 and as low
as $0.53 per share. This price may be influenced by many factors, including:
18Table of Contents



| |  |  | our operating and financial performance and prospects;                
| | - |  | ----------------------------------------------------------------------
|
| |  |  | the depth and liquidity of the market for our common stock;           
|
| |  |  | investor perception of us and the industry in which we operate;       
|
| |  |  | our inclusion in, or removal from, any equity market indices;         
|
| |  |  | the level of research coverage of our common stock;                   
|
| |  |  | changes in earnings estimates or buy/sell recommendations by analysts;
|
| |  |  | general financial and other market conditions; and                    
|
| |  |  | domestic and international economic conditions.                       

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

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

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

19



---



##### Table of Contents



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

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

Our former manufacturing operations used a variety of chemicals and were
subject to a wide range of environmental protection regulations in the United
States and Mexico. In connection with our spin-off from Rockwell, we assumed
all liabilities in respect of environmental matters related to the former
operations of our business. We have been designated as a potentially
responsible party and are engaged in groundwater remediation at one Superfund
site located at a former silicon wafer manufacturing facility and steel
fabrication plant in Parker Ford, Pennsylvania formerly occupied by us. In
addition, we are engaged in remediations of groundwater contamination at our
former Newport Beach, California wafer fabrication facility. We currently
estimate the remaining costs for these remediations to be approximately $2.5
million and have accrued for these costs as of September 30, 2002.

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

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

Our management currently faces a variety of challenges, including the
implementation of our expense reduction and restructuring initiatives. 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

20



---



##### Table of Contents



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.

Executive Officers

Our executive officers are:

|                     |  |     |    |          |  |                                                                               
|-------------------- |  | --- | -- | -------- |  | ------------------------------------------------------------------------------
|Name                 |  | Age |    | Position
|                     |  |     |    |         
|Dwight W. Decker     |  |     | 52 |          |  | Chairman of the Board and Chief Executive Officer                             
|Scott L. Allen       |  |     | 46 |          |  | Vice President, Communications, Broadband Communications                      
|J. Scott Blouin      |  |     | 52 |          |  | Senior Vice President, Chief Accounting Officer and Controller                
|Lewis C. Brewster    |  |     | 38 |          |  | Senior Vice President, Worldwide Sales                                        
|Raouf Y. Halim       |  |     | 42 |          |  | Senior Vice President and Chief Executive Officer, Mindspeed
Technologies     
|Balakrishnan S. Iyer |  |     | 46 |          |  | Senior Vice President and Chief Financial Officer and Director                
|Dennis E. OReilly   |  |     | 58 |          |  | Senior Vice President, General Counsel, Secretary and Chief
Compliance Officer
|Kerry K. Petry       |  |     | 53 |          |  | Vice President and Treasurer                                                  
|Ashwin Rangan        |  |     | 43 |          |  | Senior Vice President and Chief Information Officer                           
|F. Matthew Rhodes    |  |     | 45 |          |  | Senior Vice President and President, Broadband Communications                 
|Thomas A. Stites     |  |     | 47 |          |  | Senior Vice President, Communications                                         
|Michael H. Vishny    |  |     | 39 |          |  | Senior Vice President, Human Resources, Broadband Communications              
|Bradley W. Yates     |  |     | 44 |          |  | 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 and Chief Executive Officer since
December 1998; Senior Vice President of Rockwell International Corporation
(electronic controls and communications) and President, Rockwell Semiconductor
Systems from July 1998 to December 1998; and Senior Vice President of Rockwell
and President, Rockwell Semiconductor Systems and Electronic Commerce 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.

Scott L. Allen  Vice President, Communications, Broadband Communications since
February 2001; Executive Director of Public Relations from February 2000 to
February 2001; Director of Worldwide Public Relations of Advanced Micro Devices
(semiconductors) from November 1997 to February 2001 and Senior Manager of
Multimedia and Publications of Advanced Micro Devices prior thereto. Mr. Allen
holds a B.A. in journalism from San Jose State University.

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

Lewis C. Brewster  Senior Vice President, Worldwide Sales since December 1998;
Vice President, Worldwide Sales of Rockwell Semiconductor Systems from January
1998 to December 1998; and Executive 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 since February 2001; Senior Vice President and General Manager,
Network Access from January 1999 to February 2001; and Vice President and
General Manager, Network Access Division 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.

21



---



##### Table of Contents



Balakrishnan S. Iyer  Senior Vice President and Chief Financial Officer since
December 1998 and Director since February 2002; Senior Vice President and Chief
Financial Officer of Rockwell Semiconductor Systems from
October 1998 to December 1998; and Senior Vice President and Chief Financial
Officer of VLSI Technology, Inc. (semiconductors) 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.

Dennis E. OReilly  Senior Vice President, General Counsel, Secretary and
Chief Compliance Officer since December 1998; 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 since December 1998; Vice
President and Treasurer of Rockwell Semiconductor Systems from October 1998 to
December 1998; and 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 since
December 1998; 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 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 President, Broadband
Communications since May 2002; Senior Vice President and General Manager,
Personal Computing from January 2000 to May 2002; 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; and 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 since December 1998;
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.

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

Bradley W. Yates  Senior Vice President, Human Resources since January 2000;
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.

Available Information

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

22



---



##### Table of Contents






Item 2. Properties

Our headquarters and principal design center in Newport Beach,
California consist of approximately 108,000 square feet of owned and
approximately 578,000 square feet of leased floor space. An
additional 343,000 square feet of owned floor space at our Newport
Beach facility is leased to Jazz. At September 30, 2002,
we also operated 19 design centers and 25 sales offices at locations in North
America, Europe and the Asia-Pacific region. These facilities had an aggregate
of approximately 443,000 square feet of leased floor space. We believe our
properties have been well maintained, are in sound operating condition and
contain all the equipment and facilities necessary to operate at present
levels.

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

23



---



##### Table of Contents






Item 3. Legal Proceedings

Plasma Physics Corporation (Plasma) has sued the Company for alleged patent
infringement in a case currently pending in the United States District Court
for the Eastern District of New York, Civil Action No. CV 02 3473. This action
was filed on June 14, 2002 and alleges that the Company is now, and in the past
has been, infringing two patents. The complaint alleges that the Company has
infringed the patents by making and/or importing into the United States or
offering to sell, selling, and/or using within the United States semiconductor
wafer products made by processes claimed in one or more claims of the patents.
In its complaint, Plasma is seeking treble damages, injunctive relief and an
exceptional case determination under 35 U.S.C. §285 that would award Plasma its
costs, expenses and reasonable attorneys fees. The Company is pursuing a
number of meritorious defenses to Plasmas claims and is demanding
indemnification from Novellus Corporation, the manufacturer of the equipment
that allegedly employs the methods claimed to infringe the patents. This matter
is presently in its preliminary stages and the Court has not yet entered a
scheduling order.

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.

24



---



##### Table of Contents






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, 2002.

25



---



##### Table of Contents






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.

|                                      |                   |  |      |       |     |  |   |       | 
|------------------------------------- | ----------------- |  | ---- | ----- | --- |  | - | ----- | 
|                                      |                   |  | High |       | Low
|                                      |                   |  |      |       |    
|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  | 
|Fiscal year ended September 30, 2002: |                   |  |      |       |     |  |   |      
|                                      | First quarter     |  | $    | 18.11 |     |  | $ | 6.57  | 
|                                      | Second quarter    |  |      | 16.51 |     |  |   | 9.21  | 
|                                      | Third quarter (1) |  |      | 13.63 |     |  |   | 1.03  | 
|                                      | Fourth quarter    |  |      | 2.74  |     |  |   | 1.03  | 



---

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

At December 6, 2002, there were approximately 47,440 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.

26



---



##### Table of Contents






Item 6. Selected Financial Data

The following selected financial data for the five years ended September 30,
2002 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. In June 2002, Conexant completed the
spin-off of its wireless communications business and the sale of its Mexicali
operations. The selected financial data for all periods have been restated to
reflect the wireless communications business and Mexicali operations as
discontinued operations.

The financial data as of and for the years ended September 30, 2002, 2001, 2000
and 1999 are derived from the audited consolidated financial statements of
Conexant. The financial data as of and for the year ended September 30, 1998
are derived from the audited combined financial statements of Semiconductor
Systems as part of Rockwell. The fiscal 1999 selected financial data include
the operating results of Conexant while it was part of Rockwell prior to
January 1, 1999. The financial data for 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 report.

|                                                        |                                               |                          |                          |         |          |                                          |            |          |          |           |           |         |           |         |           |         |         |         |           |         |          |         |           |  
|------------------------------------------------------- | --------------------------------------------- | ------------------------ | ------------------------ | ------- | -------- | ---------------------------------------- | ---------- | -------- | -------- | --------- | --------- | ------- | --------- | ------- | --------- | ------- | ------- | ------- | --------- | ------- | -------- | ------- | --------- | -
|                                                        |                                               |                          |                          |         |          | 2002 (1)                                 |            | 2001 (1) |          | 2000 (1)  |           | 1999    |           | 1998   
|                                                        |                                               |                          |                          |         |          |                                          |            |          |          |           |           |         |           |        
|                                                        |                                               |                          |                          |         |          | (in thousands, except per share amounts)
|Statement of Operations Data                            |                                               |                          |                          |         |          |                                          |            |          |          |           |           |         |           |         |           |         |         |         |           |        
|Net revenues:                                           |                                               |                          |                          |         |          |                                          |            |          |          |           |           |         |           |         |           |         |         |         |           |        
|                                                        |                                               | Broadband Communications |                          | $       | 521,726  |                                          |            | $        | 541,688  |           |           | $       | 1,211,410 |         |           | $       | 990,486 |         |           | $       | 977,895  |        
|                                                        |                                               | Mindspeed Technologies   |                          |         | 80,036   |                                          |            |          | 305,368  |           |           |         | 579,206   |         |           |         | 277,613 |         |           |         | 143,270  |        
|                                                        |                                               |                          |                          |         |          |                                          |            |          |          |           |           |         |           |         |           |         |         |         |           |        
|                                                        |                                               |                          |                          | Total   |          |                                          | 601,762    |          |          |           | 847,056   |         |           |         | 1,790,616 |         |         |         | 1,268,099 |         |          |         | 1,121,165 |  
|Cost of goods sold                                      |                                               |                          | 347,331                  |         |          |                                          | 751,554    |          |          |           | 926,197   |         |           |         | 766,553   |         |         |         | 800,348   |        
|                                                        |                                               |                          |                          |         |          |                                          |            |          |          |           |           |         |           |         |           |         |         |         |           |        
|Gross margin                                            |                                               |                          | 254,431                  |         |          |                                          | 95,502     |          |          |           | 864,419   |         |           |         | 501,546   |         |         |         | 320,817   |        
|Operating expenses:                                     |                                               |                          |                          |         |          |                                          |            |          |          |           |           |         |           |         |           |         |         |         |           |        
|                                                        | Research and development                      |                          |                          | 323,811 |          |                                          |            | 371,942  |          |           |           | 322,855 |           |         |           | 243,585 |         |         |           | 285,601 |         
|                                                        | Selling, general and administrative           |                          |                          | 165,250 |          |                                          |            | 250,808  |          |           |           | 236,989 |           |         |           | 200,527 |         |         |           | 230,652 |         
|                                                        | Amortization of intangible assets             |                          |                          | 331,877 |          |                                          |            | 324,805  |          |           |           | 154,679 |           |         |           | 8,364   |         |         |           | 11,020  |         
|                                                        | Special charges (2)                           |                          |                          | 199,365 |          |                                          |            | 389,616  |          |           |           | 35,000  |           |         |           | 36,474  |         |         |           | 190,086 |         
|                                                        | Purchased in-process research
and development |                          |                          |        |          |                                          |            |         |          |           |           | 191,348 |           |         |           |        |         |         |           |        |         
|                                                        |                                               |                          |                          |         |          |                                          |            |          |          |           |           |         |           |         |           |         |         |         |           |        
|                                                        |                                               |                          | Total operating expenses |         |          | 1,020,303                                |            |          |          | 1,337,171 |           |         |           | 940,871 |           |         |         | 488,950 |           |         |          | 717,359 |          
|                                                        |                                               |                          |                          |         |          |                                          |            |          |          |           |           |         |           |         |           |         |         |         |           |        
|Operating income (loss)                                 |                                               |                          | (765,872                 | )       |          |                                          | (1,241,669 | )        |          |           | (76,452   | )       |           |         | 12,596    |         |         |         | (396,542  | )      
|Debt conversion costs                                   |                                               |                          | (10,435                  | )       |          |                                          | (42,584    | )        |          |           |          |         |           |         |          |         |         |         |          |        
|Other income (expense), net                             |                                               |                          | (37,168                  | )       |          |                                          | 389        |          |          |           | 6,329     |         |           |         | 5,989     |         |         |         | 8,271     |        
|                                                        |                                               |                          |                          |         |          |                                          |            |          |          |           |           |         |           |         |           |         |         |         |           |        
|Income (loss) before income taxes                       |                                               |                          | (813,475                 | )       |          |                                          | (1,283,864 | )        |          |           | (70,123   | )       |           |         | 18,585    |         |         |         | (388,271  | )      
|Provision (benefit) for income taxes                    |                                               |                          | (1,139                   | )       |          |                                          | (106,310   | )        |          |           | 63,036    |         |           |         | 5,575     |         |         |         | (151,682  | )      
|                                                        |                                               |                          |                          |         |          |                                          |            |          |          |           |           |         |           |         |           |         |         |         |           |        
|Income (loss) from continuing
operations                |                                               |                          | (812,336                 | )       |          |                                          | (1,177,554 | )        |          |           | (133,159  | )       |           |         | 13,010    |         |         |         | (236,589  | )      
|Loss from discontinued operations (3)                   |                                               |                          | (68,431                  | )       |          |                                          | (275,064   | )        |          |           | (57,768   | )       |           |         | (81       | )       |         |         | (25,627   | )      
|                                                        |                                               |                          |                          |         |          |                                          |            |          |          |           |           |         |           |         |           |         |         |         |           |        
|Income (loss) before extraordinary item                 |                                               |                          | (880,767                 | )       |          |                                          | (1,452,618 | )        |          |           | (190,927  | )       |           |         | 12,929    |         |         |         | (262,216  | )      
|Extraordinary gain (4)                                  |                                               |                          |                         |         |          |                                          | 7,284      |          |          |           |          |         |           |         |          |         |         |         |          |        
|                                                        |                                               |                          |                          |         |          |                                          |            |          |          |           |           |         |           |         |           |         |         |         |           |        
|Net income (loss)                                       |                                               | $                        | (880,767                 | )       |          | $                                        | (1,445,334 | )        |          | $         | (190,927  | )       |           | $       | 12,929    |         |         | $       | (262,216  | )      
|                                                        |                                               |                          |                          |         |          |                                          |            |          |          |           |           |         |           |         |           |         |         |         |           |        
|Income (loss) from continuing
operations per share (5): |                                               |                          |                          |         |          |                                          |            |          |          |           |           |         |           |         |           |         |         |         |           |        
|                                                        | Basic                                         |                          | $                        | (3.14   | )        |                                          | $          | (4.81    | )        |           | $         | (0.63   | )         |         | $         | 0.07    |         |         | $         | (1.20   | )       
|                                                        | Diluted                                       |                          |                          | (3.14   | )        |                                          |            | (4.81    | )        |           |           | (0.63   | )         |         |           | 0.06    |         |         |           | (1.20   | )       
|Segment Operating Performance                           |                                               |                          |                          |         |          |                                          |            |          |          |           |           |         |           |         |           |         |         |         |           |        
|Segment operating income (loss) (6):                    |                                               |                          |                          |         |          |                                          |            |          |          |           |           |         |           |         |           |         |         |         |           |        
|                                                        |                                               | Broadband Communications |                          | $       | (50,389  | )                                        |            | $        | (296,328 | )         |           | $       | 184,008   |         |           | $       | 37,583  |         |           | $       | (145,482 | )      
|                                                        |                                               | Mindspeed Technologies   |                          |         | (184,435 | )                                        |            |          | (221,527 | )         |           |         | 127,326   |         |           |         | 19,851  |         |           |         | (49,954  | )      
|                                                        |                                               |                          |                          |         |          |                                          |            |          |          |           |           |         |           |         |           |         |         |         |           |        
|                                                        |                                               |                          |                          | Total   |          | $                                        | (234,824   | )        |          | $         | (517,855  | )       |           | $       | 311,334   |         |         | $       | 57,434    |         |          | $       | (195,436  | )
|                                                        |                                               |                          |                          |         |          |                                          |            |          |          |           |           |         |           |         |           |         |         |         |           |        
|Balance Sheet Data                                      |                                               |                          |                          |         |          |                                          |            |          |          |           |           |         |           |         |           |         |         |         |           |        
|Working capital                                         |                                               | $                        | 441,204                  |         |          | $                                        | 442,354    |          |          | $         | 1,319,134 |         |           | $       | 604,453   |         |         | $       | 256,689   |        
|Total assets                                            |                                               |                          | 1,911,035                |         |          |                                          | 2,815,480  |          |          |           | 4,416,197 |         |           |         | 1,841,950 |         |         |         | 1,418,530 |        
|Long-term obligations                                   |                                               |                          | 681,825                  |         |          |                                          | 709,849    |          |          |           | 999,997   |         |           |         | 350,000   |         |         |         |          |        
|Shareholders equity                                    |                                               |                          | 947,827                  |         |          |                                          | 1,773,176  |          |          |           | 2,906,759 |         |           |         | 1,035,153 |         |         |         | 1,009,375 |        

27



---



##### Table of Contents





---

|(1) |  | In fiscal 2002, we acquired the video compression business of
iCompression, Inc., a wholly owned subsidiary of GlobespanVirata, Inc. In
fiscal 2001, we acquired HyperXS Communications, Inc. In fiscal 2000, we
completed nine acquisitions in our continuing operations, including
Microcosm Communications Limited in January; Maker Communications, Inc. in
March; HotRail, Inc. in June; and Novanet Semiconductor Ltd. and NetPlane
Systems, Inc. in September. As a result of these acquisitions, during
fiscal 2002, 2001 and 2000 we recorded $331.9 million, $324.8 million and
$154.7 million, respectively, in amortization of goodwill and other
acquisition-related intangible assets and in fiscal 2000 we recorded
charges of $191.3 million related to purchased in-process research and
development.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | In fiscal 2002, we recorded special charges of $199.4 million,
principally related to the impairment of goodwill and intangible assets
and restructuring activities. In fiscal 2001, we recorded special charges
of $389.6 million, principally related to the impairment of certain
manufacturing assets and restructuring activities. In fiscal 2000, we
recorded special charges of $35.0 million related to the settlement of
certain litigation. In fiscal 1998, we recorded special charges of $147.1
million related to restructuring actions and $43.0 million related to
litigation. In fiscal 1999, we recorded additional special charges of
$36.5 million related to the restructuring actions we initiated in fiscal
1998.                                                                               
|   
|(3) |  | Loss from discontinued operations (net of income taxes) for all periods
represents the operating results of our former wireless communications
business and our Mexicali operations which we disposed of in June 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(4) |  | In fiscal 2001, we recorded an extraordinary gain on the extinguishment
of debt, net of income taxes of $4.4 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(5) |  | Income (loss) from continuing operations per share for all periods
reflects our October 1999 2-for-1 stock split. Because we were not an
independent company during all of fiscal years 1998 and 1999, income
(loss) per share amounts for those years are calculated as if our spin-off
from Rockwell had occurred on October 1, 1997.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(6) |  | Segment operating income (loss) excludes 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, the settlement of certain litigation,
separation costs and losses on the disposal of certain assets. See Note 15
of Notes to Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                    

28



---



##### Table of Contents






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

Overview

We design, develop and sell semiconductor system solutions for communications
applications. Our expertise in mixed-signal processing allows us to deliver
integrated systems and semiconductor products which facilitate communications
worldwide through wireline voice and data communications networks and emerging
cable, satellite and fixed wireless broadband communications networks. We
operate in two business segments: our Broadband Communications business and
Mindspeed Technologies, our Internet infrastructure business.

Except where otherwise noted, this discussion of our financial condition and
results of operations represents our continuing operations, excluding our
discontinued wireless communications business and Mexicali operations.

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

Mindspeed Technologies designs, develops and sells semiconductor networking
solutions for communications applications that extend from the edge of the
Internet and throughout linked metropolitan area networks. Mindspeed
Technologies products, ranging from physical-layer devices to higher-layer
network processors, are sold to infrastructure original equipment manufacturers
(OEMs) and can be classified into three focused product families: multiservice
access products, T/E carrier products and asynchronous transfer mode (ATM)
network processing solutions. Our multiservice access products include
voiceband processor solutions designed to support multiple voice and data
services across wireline and wireless networks and are found in a variety of
network access equipment, such as remote access concentrators, voice and media
gateways and wireless base stations. Our T/E carrier and ATM network processor
products support both wide area network (WAN) access and transport
applications. Our T/E carrier and ATM product portfolios are complemented by
digital subscriber line (DSL) and serializer/deserializer (SerDes)
transceivers, crosspoint switches, clock and data recovery devices (CDRs),
switch fabrics and physical media dependent devices supporting synchronous
optical networking/synchronous digital hierarchy (SONET/SDH) and gigabit
Ethernet/Fibre Channel digital transmission standards. These access and
transport solutions are used in a variety of network equipment, including
high-speed routers, ATM switches, optical switches, add-drop multiplexers,
digital cross-connect systems, DSL access multiplexers, storage area servers
and routers 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 41% of our
fiscal 2002 net revenues. For fiscal 2002, one distributor accounted for 10% of
our net revenues and no other customer accounted for 10% or more of our net
revenues. Our top 20 customers accounted for 65% of our fiscal 2002 net
revenues. Revenues derived from customers located in the Americas, Europe,
Japan and the Asia-Pacific region were 21%, 12%, 8% and 59%, respectively, of
our net revenues for fiscal 2002. We believe a substantial portion of the
products we sell to OEMs and third-party manufacturing service providers in the
Asia-Pacific region are ultimately shipped to end markets in the Americas and
Europe.

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 customers 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

29



---



##### Table of Contents



develop 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 years 2000
through 2002, we completed eleven acquisitions in our continuing operations,
for aggregate consideration of $1.8 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.

Spin-off and Merger of Wireless Communications Business

On June 25, 2002, we completed the distribution to Conexant shareholders (the
Spin-off Transaction) of outstanding shares of our wholly owned subsidiary
Washington Sub, Inc. (Washington), to which we contributed our wireless
communications business, other than certain assets and liabilities which we
retained, pursuant to the Contribution and Distribution Agreement dated as of
December 16, 2001, as amended, by and between us and Washington. Immediately
thereafter, pursuant to the Agreement and Plan of Reorganization dated as of
December 16, 2001, as amended as of April 12, 2002, by and among us, Washington
and Alpha Industries, Inc. (Alpha), Washington merged with and into Alpha, with
Alpha the surviving corporation (the Merger). As a result of the Spin-off
Transaction and the Merger, Conexant shareholders received 0.351 of a share of
Alpha common stock for each Conexant share held and continued to hold their
Conexant shares.

Upon completion of the Merger, Alpha and its subsidiaries purchased our
semiconductor assembly, module manufacturing and test facility located in
Mexicali, Mexico and our package design team that supports the Mexicali
facility. In connection with the purchase, we, Alpha and certain subsidiaries
of Alpha entered into a financing agreement pursuant to which Alpha and a
subsidiary of Alpha delivered to us promissory notes for $150 million (the Term
Notes) guaranteed by Alpha and certain Alpha subsidiaries and secured by
substantially all assets of Alpha in payment of the purchase price for the
Mexicali facility and the package design team. The Term Notes, dated June 25,
2002, were to mature 50 percent in March 2003 and 50 percent in June 2003 and
were to bear interest initially at 10 percent, increasing to 12 percent in
three months and 15 percent in six months. The financing agreement also
provided for a revolving credit facility under which Alpha could borrow up to
$100 million, less specified reserves, for one year at the same interest rate
and with the same security applicable to the Term Notes.

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

Newport Foundry Joint Venture

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

We purchase a substantial portion of our requirements for silicon-based
semiconductor products from Jazz. We entered into a long-term supply
arrangement with Jazz under which it provides capacity to meet a portion of our
requirements for complementary metal-oxide semiconductor (CMOS) and
specialty-process wafer fabrication services and we agreed to purchase certain
minimum annual volumes of wafers during the first three years of the supply
agreement. We expect our minimum purchase obligations under the long-term
supply agreement with Jazz,

30



---



##### Table of Contents



net of a portion of the wafer purchase obligations assumed by a third party,
will be approximately $71 million, $43 million and $14 million in fiscal 2003,
2004 and 2005, respectively.

Digital Imaging Divestiture

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

Acquisition of Video Compression Business

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

Separation of Broadband Communications and Mindspeed Technologies Businesses

In September 2000, our Board of Directors approved in principle the separation
of our Broadband Communications and Mindspeed Technologies businesses. Although
business conditions have delayed the separation, we remain committed to
completing the separation as soon as business and market conditions permit. The
separation may be subject to the approval of our shareholders, the receipt of a
ruling from the Internal Revenue Service that any related spin-off will qualify
as a tax-free distribution and other conditions. We cannot assure you that we
will successfully complete the separation.

Results of Operations

Throughout fiscal 2001 and continuing into fiscal 2002, 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. Sales of our Broadband Communications
products were affected by slower than anticipated deployment of broadband
services by system providers. Moreover, weak consumer demand for PCs and
related peripheral devices and satellite set-top boxes led to lower sales of
our products for these applications as compared to fiscal 2000 levels. The
impact of the slowdown was even more pronounced on our Mindspeed Technologies
segment, where revenues were significantly affected by slowing investment in
communications network capacity expansion by Internet service providers (ISPs),
competitive local exchange carriers (CLECs) and incumbent local exchange and
inter-exchange carriers. In most cases, the effect of weakened end-customer
demand was compounded by higher than normal levels of equipment and component
inventories among our OEM, subcontractor and distributor customers.

Although our fiscal 2002 revenuesparticularly in our Mindspeed Technologies
segmentreflect a substantial decline from the prior years level, during
fiscal 2002 we began to experience renewed demand in a number of the end
markets addressed by our products. In addition, we believe that in some of the
markets we address, the levels of inventories among our OEM, subcontractor and
distributor customers have decreased. Consequently, through the end of fiscal
2002, our Broadband Communications business achieved four consecutive quarters
of sequential revenue growth. Our Mindspeed Technologies segment is
experiencing renewed demand in certain of its addressed markets, but at a
relatively slower pace, due to continued slow capital spending by
telecommunications carriers.

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 former
manufacturing facilities. Our cost of goods sold for fiscal 2001 also reflects
$188.8 million of inventory write-downs

31



---



##### Table of Contents



across our product portfolio resulting from the sharply reduced end-customer
demand for set-top boxes, PC peripherals and Internet infrastructure equipment.
During fiscal 2001, we also recorded $23.1 million of additional provisions for
accounts receivable from slow-paying customers which we believed we would not
be able to collect. Moreover, as a result of our cost reduction initiatives,
our strategic manufacturing realignment and the closure of certain facilities,
in fiscal 2002 and 2001 we recorded special charges of $199.4 million and
$389.6 million, respectively, for asset impairments and restructuring and other
costs.

Net Revenues

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

The following table summarizes our net revenues by business segment:

|                                 |                    |      |       |        |  |      |     |        |    |      |       |       |  |  |     |     |    |   |         |         | 
|-------------------------------- | ------------------ | ---- | ----- | ------ |  | ---- | --- | ------ | -- | ---- | ----- | ----- |  |  | --- | --- | -- | - | ------- | ------- | 
|(in millions)                    |                    | 2002 |       | Change |  | 2001 |     | Change |    | 2000
|                                 |                    |      |       |        |  |      |     |        |    |     
|Net revenues:                    |                    |      |       |        |  |      |     |        |    |      |       |       |  |  |     |     |    |   |         |        
|Broadband Communications         |                    | $    | 521.7 |        |  |      | (4  | )%     |    | $    | 541.7 |       |  |  | (55 | )%  |    | $ | 1,211.4 |        
|Mindspeed Technologies           |                    |      | 80.1  |        |  |      | (74 | )%     |    |      | 305.4 |       |  |  | (47 | )%  |    |   | 579.2   |        
|                                 |                    |      |       |        |  |      |     |        |    |      |       |       |  |  |     |     |    |   |         |        
|                                 | Total net revenues |      | $     | 601.8  |  |      |     | (29    | )% |      | $     | 847.1 |  |  |     | (53 | )% |   | $       | 1,790.6 | 
|                                 |                    |      |       |        |  |      |     |        |    |      |       |       |  |  |     |     |    |   |         |        
|As a percentage of net revenues: |                    |      |       |        |  |      |     |        |    |      |       |       |  |  |     |     |    |   |         |        
|Broadband Communications         |                    |      | 87    | %      |  |      |     |        |    |      | 64    | %     |  |  |     |     |    |   | 68      | %      
|Mindspeed Technologies           |                    |      | 13    | %      |  |      |     |        |    |      | 36    | %     |  |  |     |     |    |   | 32      | %      
|                                 |                    |      |       |        |  |      |     |        |    |      |       |       |  |  |     |     |    |   |         |        
|                                 |                    |      | 100   | %      |  |      |     |        |    |      | 100   | %     |  |  |     |     |    |   | 100     | %      
|                                 |                    |      |       |        |  |      |     |        |    |      |       |       |  |  |     |     |    |   |         |        

Broadband Communications

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

Broadband Communications net revenues for fiscal 2001 declined 55%, 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 game 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 game 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. The three acquisitions we completed in our Broadband Communications
business in fiscal 2000 contributed $6.0 million of revenue for fiscal 2001
compared with $4.8 million for fiscal 2000.

32



---



##### Table of Contents



Mindspeed Technologies

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

We believe that demand for the products sold by our Mindspeed Technologies
business, which are incorporated into telecommunications and data
communications infrastructure equipment, is recovering more slowly than demand
for products offered by our Broadband Communications business, which are
ultimately sold to individual consumers in products such as PCs, cable and
satellite set-top boxes and other home networking products. During fiscal 2002,
we began to experience some renewed demand in the end markets for certain of
our Mindspeed Technologies products, including our T/E physical layer products,
crosspoint switches and ATM/multi-protocol label switching (MPLS) network
processors.

Net revenues for Mindspeed Technologies for fiscal 2001 were affected by the
sharply lower end-market demand for network equipment we began to experience in
the second quarter of fiscal 2001. As a result, we experienced a steep decline
in revenues from our multiservice access processors and, to a lesser extent,
our multi-megabit DSL, optical networking and network processor products. The
six acquisitions we completed in our Mindspeed Technologies business in fiscal
2000 contributed $53.4 million of revenue for fiscal 2001 compared with $27.7
million for fiscal 2000.

Gross Margin

|                        |  |      |       |        |  |      |     |        |  |      |      |   |  |  |     |    |  |   |       |  
|----------------------- |  | ---- | ----- | ------ |  | ---- | --- | ------ |  | ---- | ---- | - |  |  | --- | -- |  | - | ----- | -
|(in millions)           |  | 2002 |       | Change |  | 2001 |     | Change |  | 2000
|                        |  |      |       |        |  |      |     |        |  |     
|Gross margin            |  | $    | 254.4 |        |  |      | 166 | %      |  | $    | 95.5 |   |  |  | (89 | )% |  | $ | 864.4 |  
|Percent of net revenues |  |      | 42    | %      |  |      |     |        |  |      | 11   | % |  |  |     |    |  |   | 48    | %

Gross margin represents revenues less cost of goods sold. Our cost of goods
sold consists predominantly of purchased materials, labor and overhead
(including depreciation) associated with product manufacturing and procurement,
royalty and other intellectual property costs and sustaining engineering
expenses pertaining to products sold. Gross margin for fiscal 2001 includes
inventory write-downs of $188.8 million. For fiscal 2002, our gross margins
reflect the favorable impact of cost reductions we initiated in fiscal 2001 and
lower depreciation expense which resulted from the write-down of manufacturing
assets in fiscal 2001. Our gross margin for fiscal 2002 also benefited from the
elimination of the burden of our underutilized former manufacturing operations
(which we contributed to Jazz in the second quarter of fiscal 2002) and
improved utilization of our former Mexicali operations. Cost of goods sold
includes provisions for excess and obsolete inventories of $17.1 million and
$17.1 million for fiscal 2002 and fiscal 2001, respectively.

Our gross margin for fiscal 2002 also benefited from the sale of inventories
with an original cost of $50.7 million that we had written down to a zero cost
basis during fiscal year 2001. These sales resulted from renewed demand for
certain products that was not anticipated at the time of the write-downs. The
previously written-down inventories were generally sold at prices which
exceeded their original cost. Had we not previously written down the cost basis
of these goods, our cost of sales for fiscal 2002 would include the original
cost of such goods, and our gross margin for fiscal 2002 would have been $203.7
million, or 34% of our net revenues.

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 $188.8 million, partially offset by
the sale of $6.8 million of these written-down goods in the fiscal 2001 fourth
quarter. The fiscal 2001 inventory write-downs resulted from the sharply
reduced end-customer demand for PCs and Internet infrastructure equipment
during that period. As a result of these market conditions, we experienced a
significant number of order cancellations and a decline in the volume of new
orders beginning in the fiscal 2001 first quarter and our first quarter
revenues decreased 29% compared with the immediately preceding quarter. The
reduced global

33



---



##### Table of Contents



demand for our products and system solutions became more pronounced in the
second and third quarters of fiscal 2001, and we experienced further sequential
decreases in our quarterly revenues of 40% and 23%, respectively, in those
periods. As a result of our ongoing assessment of the recoverability of our
inventories, we recorded inventory write-downs of $47.1 million, $102.9 million
and $38.8 million in the first, second and third quarters, respectively, of
fiscal 2001. The inventories written down in fiscal 2001 principally consisted
of voiceband processors, multi-megabit DSL transceivers, satellite set-top box
tuners and demodulators, ADSL modems and analog modems for non-PC applications.

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

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

From the time of the $188.8 million inventory write-downs in fiscal 2001 and
through September 30, 2002, we scrapped inventories having an original cost of
$37.2 million and sold $57.5 million of inventories previously written down to
a zero cost basis. The sales resulted from increased demand beginning in the
fourth quarter of fiscal 2001 which was not anticipated at the time of the
write-downs. As of September 30, 2002, we continued to hold inventories with an
original cost of $94.1 million which were previously written down to a zero
cost basis. We currently intend to hold these remaining inventories and will
sell these inventories if we experience renewed demand for these products.
While there can be no assurance that we will be able to do so, if we are able
to sell a portion of the inventories which are carried at zero cost basis, our
gross margins will be favorably affected by an amount equal to the original
cost of the zero-cost basis inventory sold. To the extent that we do not
experience renewed demand for the remaining inventories, they will be scrapped
as they become obsolete.

We base our assessment of the recoverability of our inventories, and the
amounts of any write-downs, on currently available information and assumptions
about future demand and market conditions. Demand for our products may
fluctuate significantly over time, and actual demand and market conditions may
be more or less favorable than those projected by management. In the event that
actual demand is lower than originally projected, additional inventory
write-downs may be required.

Under our long-term supply arrangement with Jazz, we are obligated to purchase
certain minimum annual volumes of wafers during fiscal years 2003 through 2005.
Additionally, under a long-term supply agreement with Skyworks, we are
obligated to purchase certain minimum amounts of assembly and test services
during fiscal 2003. In the event our actual purchases under these arrangements
are less than the required minimum volumes, we will be required to make
additional payments, which would adversely affect our gross margin.

Research and Development

|                         |  |      |       |        |  |      |     |        |  |      |       |   |  |  |    |   |  |   |       |  
|------------------------ |  | ---- | ----- | ------ |  | ---- | --- | ------ |  | ---- | ----- | - |  |  | -- | - |  | - | ----- | -
|(in millions)            |  | 2002 |       | Change |  | 2001 |     | Change |  | 2000
|                         |  |      |       |        |  |      |     |        |  |     
|Research and development |  | $    | 323.8 |        |  |      | (13 | )%     |  | $    | 371.9 |   |  |  | 15 | % |  | $ | 322.9 |  
|Percent of net revenues  |  |      | 54    | %      |  |      |     |        |  |      | 44    | % |  |  |    |   |  |   | 18    | %

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

34



---



##### Table of Contents



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

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 nine businesses during fiscal 2000.

Selling, General and Administrative

|                                    |  |      |       |        |  |      |     |        |  |      |       |   |  |  |   |   |  |   |       |  
|----------------------------------- |  | ---- | ----- | ------ |  | ---- | --- | ------ |  | ---- | ----- | - |  |  | - | - |  | - | ----- | -
|(in millions)                       |  | 2002 |       | Change |  | 2001 |     | Change |  | 2000
|                                    |  |      |       |        |  |      |     |        |  |     
|Selling, general and administrative |  | $    | 165.3 |        |  |      | (34 | %)     |  | $    | 250.8 |   |  |  | 6 | % |  | $ | 237.0 |  
|Percent of net revenues             |  |      | 27    | %      |  |      |     |        |  |      | 30    | % |  |  |   |   |  |   | 13    | %

Our selling, general and administrative (SG&A) expenses include personnel
costs, sales representative commissions, advertising and other marketing costs.
Our SG&A expenses also include costs of corporate functions including legal,
accounting, treasury, human resources, real estate, information systems,
customer service, sales, marketing, field application engineering and other
services. The decrease in SG&A expenses for fiscal 2002 compared to fiscal 2001
primarily reflects lower headcount and personnel-related costs resulting from
the expense reduction and restructuring actions initiated during fiscal 2002
and 2001 and lower provisions for uncollectible accounts receivable. The
provision for uncollectible accounts receivable of $(3.9) million for fiscal
2002 resulted from accounts receivable collections more favorable than
previously estimated; in fiscal 2001 the provision for uncollectible accounts
receivable of $23.1 million reflected an increase in past-due accounts which
management estimated would ultimately be uncollectible. Excluding the effect of
the provisions for uncollectible accounts, our SG&A expenses for fiscal 2002
decreased by $58.5 million.

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 Broadband Communications and Mindspeed Technologies businesses. SG&A
expenses for fiscal 2001 also reflect provisions of $23.1 million for accounts
receivable from slow-paying customers. The provision reflected an increase in
past-due accounts which we estimated would ultimately be uncollectible.
Excluding the effect of the provisions for uncollectible accounts, our SG&A
expenses for fiscal 2001 compared to fiscal 2000 decreased by $10.7 million as
a result of the cost reduction initiatives we implemented during fiscal 2001.

Amortization of Intangible Assets

|                                  |  |      |       |        |  |      |  |        |       |      |  |    |  |   |       |  |  |  |  | 
|--------------------------------- |  | ---- | ----- | ------ |  | ---- |  | ------ | ----- | ---- |  | -- |  | - | ----- |  |  |  |  | 
|(in millions)                     |  | 2002 |       | Change |  | 2001 |  | Change |       | 2000
|                                  |  |      |       |        |  |      |  |        |       |     
|Amortization of intangible assets |  | $    | 331.9 |        |  | nm   |  | $      | 324.8 |      |  | nm |  | $ | 154.7 | 

nm = not meaningful

Intangible asset amortization expense increased in fiscal 2002 primarily due to
the additional consideration paid in connection with certain businesses
acquired prior to fiscal 2002 upon the achievement of performance and
technology goals specified in the related acquisition agreements. This increase
was partially offset by the reduction of amortization expense associated with
the fiscal 2002 impairment of certain intangible assets. The additional
consideration consisted of $25.0 million in cash and 319,572 shares of our
common stock valued at $4.9 million (based upon the market price of our common
stock at the time of the resolution of the contingency). The $29.9 million
aggregate value of the additional consideration increased the amounts of
goodwill related to the acquired companies. As of September 30, 2002, no
additional consideration is payable, or contingently payable, for acquisitions
we completed prior to fiscal 2002.

The increase in amortization expense in the fiscal 2001 period from fiscal 2000
resulted from a full year of amortization of the intangible assets for the nine
business acquisitions we completed during fiscal 2000. In

35



---



##### Table of Contents



connection with these acquisitions, we recorded an aggregate of $1.6 billion of
identified intangible assets and goodwill. These assets are being amortized
over their estimated lives (principally five years).

Under the recently issued Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets, 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
$240 million. However, we will be required to evaluate goodwill for impairment
upon adoption and at least annually thereafter, and to write down the value of
goodwill when its recorded value exceeds its estimated fair value.

Special Charges

Special charges consist of the following:

|                      |  |      |       |        |  |      |  |        |       |      |       |    |  |   |      |  |  |   |      | 
|--------------------- |  | ---- | ----- | ------ |  | ---- |  | ------ | ----- | ---- | ----- | -- |  | - | ---- |  |  | - | ---- | 
|(in millions)         |  | 2002 |       | Change |  | 2001 |  | Change |       | 2000
|                      |  |      |       |        |  |      |  |        |       |     
|Asset impairments     |  | $    | 157.0 |        |  | nm   |  | $      | 342.8 |      |       | nm |  | $ |     | 
|Restructuring charges |  |      | 41.5  |        |  | nm   |  |        | 20.1  |      |       | nm |  |   |     | 
|Litigation            |  |      |      |        |  | nm   |  |        |      |      |       | nm |  |   | 35.0 | 
|Separation costs      |  |      | 0.9   |        |  | nm   |  |        | 15.7  |      |       | nm |  |   |     | 
|Other special charges |  |      |      |        |  | nm   |  |        | 11.0  |      |       | nm |  |   |     | 
|                      |  |      |       |        |  |      |  |        |       |      |       |    |  |   |      |  |  |   |      | 
|                      |  | $    | 199.4 |        |  |      |  |        |       | $    | 389.6 |    |  |   |      |  |  | $ | 35.0 | 
|                      |  |      |       |        |  |      |  |        |       |      |       |    |  |   |      |  |  |   |      | 

nm = not meaningful

Asset Impairments

2002 Impairments During fiscal 2002, we performed a strategic review of our
Mindspeed Technologies segment and initiated certain restructuring actions.
These actions are intended to focus our research and development spending on
products for the Internet infrastructure market segments we believe offer the
most attractive near-term growth prospects, such as our products for
metro/access applications. We believe that end markets for optical long-haul
networks offer weaker recovery prospects, with slow adoption of new, higher
speed networks. We determined that this weak demand would adversely affect the
potential return on continued investment in our Novanet business, which was
engaged in the development of semiconductor products for high-speed SONET
applications. In June 2002, we closed the Novanet design center in Israel,
which represented substantially all of Novanets operations. We also expected
this weak demand would adversely affect the operating performance of our
NetPlane business and determined to divest the NetPlane business. NetPlane
develops and sells networking protocol software and systems for control plane
applications in networking equipment. We have held preliminary discussions with
potential buyers for NetPlane and we anticipate completing the divestiture of
NetPlane in the second quarter of fiscal 2003.

As a result of these decisions, in the third quarter of fiscal 2002 we recorded
impairment charges of $114.1 million to write down the carrying value of
certain long-lived assets associated with these operations. Substantially all
of the $61.0 million impairment charge for Novanet was recorded to write down
the carrying value of goodwill. The amount of the impairment charge was the
excess of the carrying value of the goodwill over its fair value, which we
estimated to be zero because we did not expect to realize any significant cash
flows from Novanet. The principal components of the $53.1 million impairment
charge for NetPlane included the balances of goodwill ($40.8 million) and
identified intangible assets ($12.3 million). The amount of the impairment
charge was the excess of the carrying value over fair value, which we estimated
to be zero because we did not expect to realize any significant cash flows from
the disposition of NetPlane.

During the second quarter of fiscal 2002, we recorded an impairment charge of
$13.0 million in the Broadband Communications segment to write down the
carrying value (approximately $22 million) of the goodwill related to our
digital imaging business. In July 2002, we completed the planned divestiture of
the digital imaging business.

During fiscal 2002, we also recorded impairment charges in the Mindspeed
Technologies segment and Broadband Communications segment totaling $29.4
million and $0.5 million, respectively. The impairment charges for the
Mindspeed Technologies segment included $15.7 million to write off acquired
technology that we determined, at the time of impairment, would not be used in
the future. The remaining impairment charges were associated with property and
equipment that we determined to abandon or scrap.

36



---



##### Table of Contents



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

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

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

Restructuring Charges

In fiscal 2001, we implemented a number of cost reduction initiatives to more
closely align our cost structure with the then-current business environment.
The cost reduction initiatives included workforce reductions, temporary
shutdowns of our former 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 fiscal
2002, we expanded the cost reduction initiatives to provide for further
workforce reductions and the consolidation of additional facilities. The costs
and expenses associated with the restructuring activities are included in
special charges in the accompanying consolidated statements of operations.

2001 Global Restructuring Plan During the second quarter of fiscal 2001, we
announced certain expense reduction initiatives and a broad reduction in
workforce affecting all areas of our operations and reducing our headcount by
approximately 900 employees. These actions were the result of a comprehensive
reassessment of our operations and business activities in order to focus
investment and resources in areas that best support our strategic growth
drivers. As part of the reassessment, we determined that we would explore
alternatives to dispose of our digital imaging business and would also exit our
board-level sub-assembly module business. We completed these restructuring
actions in fiscal 2002.

In connection with this broad reduction in workforce, we terminated
approximately 840 employees (including approximately 130 employees in fiscal
2002). The charges for the workforce reduction aggregated $9.4 million
(including $2.6 million in fiscal 2002) and were based upon estimates of the
cost of severance benefits for the affected employees. These actions reduced
our workforce in both the Broadband Communications and Mindspeed Technologies
segments, including approximately 530 employees in our manufacturing
operations. In addition, we recorded restructuring charges of $5.8 million
(including $0.2 million in fiscal 2002) for costs associated with the

37



---



##### Table of Contents



consolidation of certain facilities and lease cancellation and related costs.
In fiscal 2002, we reversed $1.6 million of excess lease costs accrued in
fiscal 2001 as a result of a favorable resolution upon the termination of the
related lease.

Activity and liability balances related to the 2001 global restructuring
actions through September 30, 2002 are as follows (in thousands):

|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|----------------------------------------- |  | ---------- | ------ | --------- |  | ----- | ------ | - |  | - | ------ | -
|                                          |  | Workforce  |        | Facility  |  |       |        |  
|                                          |  | reductions |        | and other |  | Total
|                                          |  |            |        |           |  |      
|Charged to costs and expenses             |  | $          | 6,776  |           |  | $     | 5,584  |   |  | $ | 12,360 |  
|Cash payments                             |  |            | (4,155 | )         |  |       | (223   | ) |  |   | (4,378 | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, September 30, 2001 |  |            | 2,621  |           |  |       | 5,361  |   |  |   | 7,982  |  
|Charged to costs and expenses             |  |            | 2,616  |           |  |       | 172    |   |  |   | 2,788  |  
|Expense reversal                          |  |            |       |           |  |       | (1,646 | ) |  |   | (1,646 | )
|Cash payments                             |  |            | (3,432 | )         |  |       | (2,307 | ) |  |   | (5,739 | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, September 30, 2002 |  | $          | 1,805  |           |  | $     | 1,580  |   |  | $ | 3,385  |  
|                                          |  |            |        |           |  |       |        |   |  |   |        |  

Strategic Manufacturing Restructuring Plan During the third quarter of fiscal
2001, we realigned our manufacturing and procurement strategy to accelerate our
transition to a fabless CMOS business model. As part of the manufacturing
realignment, we reduced our workforce by an additional 410 employees and
recorded charges aggregating $7.8 million. These charges were based upon
estimates of the cost of severance benefits for the affected employees. These
actions were completed in the fourth quarter of fiscal 2001 and reduced our
workforce in both the Broadband Communications and Mindspeed Technologies
segments, including approximately 220 employees in our manufacturing
operations.

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

|                                          |  |            |        |  
|----------------------------------------- |  | ---------- | ------ | -
|                                          |  | Workforce 
|                                          |  | reductions
|                                          |  |           
|Charged to costs and expenses             |  | $          | 7,756  |  
|Cash payments                             |  |            | (5,006 | )
|                                          |  |            |        |  
|Restructuring balance, September 30, 2001 |  |            | 2,750  |  
|Cash payments                             |  |            | (2,604 | )
|                                          |  |            |        |  
|Restructuring balance, September 30, 2002 |  | $          | 146    |  
|                                          |  |            |        |  

2002 Corporate and Manufacturing Restructuring Plan During fiscal 2002, we
initiated a further reduction of our workforce throughout our operations
primarily as a result of the divestiture of our Newport Beach wafer fabrication
operations and the Spin-off Transaction. In connection with the 2002 corporate
and manufacturing restructuring actions, we terminated approximately 230
employees and recorded charges aggregating $4.5 million. These charges were
based upon estimates of the cost of severance benefits for the affected
employees. We completed these actions in fiscal 2002, reducing our workforce by
approximately 120 employees in the Broadband Communications segment and
approximately 110 employees in the Mindspeed Technologies segment. In addition,
we recorded restructuring charges of $12.7 million for costs associated with
the consolidation of certain facilities and commitments under license
obligations that we determined would not be used in the future.

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

|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|----------------------------------------- |  | ---------- | ------ | --------- |  | ----- | ------ | - |  | - | ------ | -
|                                          |  | Workforce  |        | Facility  |  |       |        |  
|                                          |  | reductions |        | and other |  | Total
|                                          |  |            |        |           |  |      
|Charged to costs and expenses             |  | $          | 4,534  |           |  | $     | 12,690 |   |  | $ | 17,224 |  
|Cash payments                             |  |            | (3,179 | )         |  |       | (468   | ) |  |   | (3,647 | )
|Non-cash charges                          |  |            | (609   | )         |  |       |       |   |  |   | (609   | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, September 30, 2002 |  | $          | 746    |           |  | $     | 12,222 |   |  | $ | 12,968 |  
|                                          |  |            |        |           |  |       |        |   |  |   |        |  

38



---



##### Table of Contents



Mindspeed Strategic Restructuring Plan During fiscal 2002, we announced a
number of expense reduction and restructuring initiatives intended to reduce
our operating cost structure in the Mindspeed Technologies segment and focus
our research and development spending on products for the Internet
infrastructure market segments we believe offer the most attractive near-term
growth prospects. These actions include the elimination of research and
development spending in high-end optical networking applications, the closure
of our Novanet design center, the planned divestiture of NetPlane and a
reduction of support services spending and will reduce Mindspeeds workforce by
over 400 employees. We expect to complete the workforce reductions by the end
of the first quarter of fiscal 2003. During fiscal 2002, we terminated
approximately 280 employees and recorded charges aggregating $7.1 million.
These charges were based upon estimates of the cost of severance benefits for
the affected employees. These actions reduced our workforce throughout the
Mindspeed Technologies segment. In addition, we recorded restructuring charges
of $16.1 million for costs associated with the consolidation of certain
facilities and lease cancellation and related costs.

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

|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|----------------------------------------- |  | ---------- | ------ | --------- |  | ----- | ------ | - |  | - | ------ | -
|                                          |  | Workforce  |        | Facility  |  |       |        |  
|                                          |  | reductions |        | and other |  | Total
|                                          |  |            |        |           |  |      
|Charged to costs and expenses             |  | $          | 7,061  |           |  | $     | 16,109 |   |  | $ | 23,170 |  
|Cash payments                             |  |            | (2,419 | )         |  |       | (1,211 | ) |  |   | (3,630 | )
|Non-cash charges                          |  |            | (552   | )         |  |       | (354   | ) |  |   | (906   | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, September 30, 2002 |  | $          | 4,090  |           |  | $     | 14,544 |   |  | $ | 18,634 |  
|                                          |  |            |        |           |  |       |        |   |  |   |        |  

We expect to pay a majority of the amounts accrued for the workforce reductions
within one year and we expect to pay the obligations for the non-cancelable
lease and other commitments over their respective terms, which principally
expire through fiscal 2005. Cash payments to complete the restructuring actions
will be funded from available cash reserves and funds from operations, and are
not expected to significantly impact our liquidity.

Litigation

In fiscal 2000, we recorded a special charge of $35.0 million representing the
estimated amount of a settlement payment (in excess of amounts we previously
recorded in fiscal 1998) to be made in connection with certain litigation based
upon claims of patent infringement and other claims relating to our 56 Kbps
modem products. In October 2000, we agreed to a settlement of the litigation,
under which we subsequently paid $55.0 million in cash.

Separation Costs

In fiscal 2002, we incurred separation costs of approximately $0.9 million in
connection with the divestiture of our Newport Beach wafer fabrication
operations and our digital imaging business. In fiscal 2001, we incurred costs
of approximately $15.7 million related to our previously announced separation
into two independent companies to operate our Broadband Communications and
Mindspeed Technologies business segments.

Other Special Charges

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

39



---



##### Table of Contents



Purchased In-Process Research and Development

In connection with five of our fiscal 2000 business acquisitions, we recorded
charges totaling $191.3 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 | %
|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 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.

The IPRD projects are directed toward the development of integrated circuits
and related software for communications applications. The development of these
products is subject to significant risk due to the remaining effort required to
achieve technical viability, rapidly changing customer requirements, evolving
technical standards, and intense competition from semiconductor manufacturers
in the United States and abroad. The remaining effort to complete the IPRD
projects consists principally of design engineering and test activities to
produce commercially viable semiconductor products that meet market
requirements, including functionality and compliance with technical standards.
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 market acceptance for
the products we develop, we could lose market share or lose opportunities to
capitalize on emerging markets, which could have a material and adverse impact
on our business and operating results.

Microcosm We identified and valued four IPRD projects, 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. One IPRD project, directed toward the development
of an integrated transimpedance amplifier for applications such as SONET/SDH to
2.5 gigabits per second (Gbps), represented 86% of the total value of IPRD
acquired. This project was approximately 77% complete at the time of the
acquisition and the engineering and test efforts to complete this project were
initially expected to be completed during fiscal 2001. This project was
abandoned in fiscal 2001 in favor of efforts focused on higher data-rate
solutions.

Maker We identified and valued seven IPRD projects, principally directed
toward the development of high-performance programmable communications
processors for processing and switching data, voice and video in broadband
networks. Each project represented 10% to 26% of the total IPRD value. At the
time of the acquisition, Makers IPRD projects ranged from 55% to 92% complete
and averaged approximately 75% complete. The projects were initially expected
to be completed during fiscal 2001. Maker completed three IPRD projects during
fiscal 2001 and the remaining IPRD projects were completed during fiscal 2002,
with the exception of one project (which represented 18% of the IPRD value)
which was cancelled in fiscal 2002.

HotRail We identified and valued two IPRD projects, directed toward the
development of integrated circuits for high-speed switching, interconnect and
scaleable processing in Internet infrastructure systems. One IPRD project,
directed toward the development of scaleable, high-speed switch fabric systems,
represented 73% of the total value of IPRD acquired. This project was
approximately 34% complete at the time of the acquisition and the engineering
and test efforts to complete this project were initially expected to be
completed during fiscal 2001. The switch fabric project was completed in fiscal
2002. The second IPRD project, directed toward the development of the HotRail
Channel parallel CMOS transceiver, represented 27% of the total value of IPRD
acquired. This project was approximately 93% complete at the time of the
acquisition and the engineering and test efforts to complete this project were
completed during fiscal 2001, consistent with our original expectations.

Novanet We 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 IPRD project,
directed toward the development of

40



---



##### Table of Contents



a highly integrated telecommunications
device providing full duplex mapping functions at the 2.5 Gbps data rate,
represented 79% of the total value of IPRD acquired. This project was
approximately 45% complete at the time of the acquisition and the engineering
and test efforts to complete this project were expected to be completed in
fiscal 2001. This project was cancelled during fiscal 2001 to permit
development resources to be refocused on next-generation semiconductor products
which we believe are better aligned with expected future demand. In June 2002,
the Company decided to discontinue development of high-speed physical layer
optical networking devices and closed the Novanet design center. The Company
does not expect to generate significant future revenues from any of the
acquired projects.

NetPlane We 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. One project, directed toward the development of an IP routing
protocol product suite, represented 67% of the value of IPRD acquired. This
project was approximately 25% complete at the time of acquisition, and the
software development and testing efforts to complete this project were
completed during fiscal 2001, consistent with our original expectations.

Debt Conversion Costs

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

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.

Other Income (Expense), Net

|                            |  |      |       |        |  |      |  |        |     |      |  |  |     |    |  |   |     |  |  | 
|--------------------------- |  | ---- | ----- | ------ |  | ---- |  | ------ | --- | ---- |  |  | --- | -- |  | - | --- |  |  | 
|(in millions)               |  | 2002 |       | Change |  | 2001 |  | Change |     | 2000
|                            |  |      |       |        |  |      |  |        |     |     
|Other income (expense), net |  | $    | (37.2 | )      |  | nm   |  | $      | 0.4 |      |  |  | (94 | )% |  | $ | 6.3 | 

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

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.

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

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.

Provision (Benefit) for Income Taxes

In fiscal 2002, we recorded an income tax benefit of $1.1 million, which
consisted of foreign income taxes incurred by certain of our subsidiaries
offset by refunds received. As a result of our recent operating losses and our
expectation of future operating results, we determined that it is more likely
than not that the additional income tax
benefits (principally net operating losses we can carry forward to future
years) which arose during fiscal 2002 will

41



---



##### Table of Contents



not be realized. Accordingly, we
increased our valuation allowance by $220.9 million during fiscal 2002 for the
deferred tax assets which we do not expect to realize through the reduction of
future income tax payments. We believe the remaining portion of our deferred
tax assets will be realized based on our current expectations of future
earnings and tax planning strategies available to us. We do not expect to
recognize any income tax benefits relating to future operating losses until we
believe that such tax benefits are more likely than not to be realized. We
expect foreign income taxes to be insignificant. Consequently, we expect our
effective income tax rate will be approximately 0% for fiscal 2003. We evaluate
the realizability of our deferred tax assets quarterly and in the event that we
determine that we will not be able to realize all or part of our deferred tax
assets in the future, an adjustment to the deferred tax assets would be charged
against income in the period such determination is made.

In fiscal 2001, we recorded an income tax benefit of $106.3 million, which
reflects the value of our net loss to reduce our income taxes, net of the
impact of non-deductible costs for amortization of intangible assets and a
valuation allowance of $303.3 million for the portion of our deferred tax
assets which we do not expect to realize through the reduction of future income
tax payments.

For fiscal 2000, our provision for income taxes was $63.0 million. Exclusive of
the non-deductible charges for IPRD and amortization of intangible assets
resulting from our fiscal 2000 acquisitions, our effective tax rate for fiscal
2000 was approximately 28% of pre-tax income. This rate reflects the positive
impact of state and federal research and experimentation tax credits available
to us.

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.

Segment Operating Performance

Our segment operating income (loss) excludes 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, the settlement of certain litigation, separation costs
and losses on the disposal of certain assets. Our definition of segment
operating income (loss) may be different than definitions used by other
companies. For additional information on our business segments, see Note 15 of
Notes to Consolidated Financial Statements. The following table presents our
segment operating income (loss) and consolidated operating loss:

|                                  |                |      |        |        |   |      |        |          |   |   |       |       |  
|--------------------------------- | -------------- | ---- | ------ | ------ | - | ---- | ------ | -------- | - | - | ----- | ----- | -
|(in millions)                     |                | 2002 |        | 2001   |   | 2000
|                                  |                |      |        |        |   |     
|Segment Operating Income (Loss):  |                |      |        |        |   |      |        |          |   |   |       |      
|Broadband Communications          |                | $    | (50.4  | )      |   | $    | (296.4 | )        |   | $ | 184.0 |      
|Mindspeed Technologies            |                |      | (184.4 | )      |   |      | (221.5 | )        |   |   | 127.3 |      
|                                  |                |      |        |        |   |      |        |          |   |   |       |      
|                                  | Segment total  |      |        | (234.8 | ) |      |        | (517.9   | ) |   |       | 311.3 |  
|Amortization of intangible assets |                |      | 331.9  |        |   |      | 324.8  |          |   |   | 154.7 |      
|Special charges                   |                |      | 199.4  |        |   |      | 389.6  |          |   |   | 35.0  |      
|IPRD                              |                |      |       |        |   |      |       |          |   |   | 191.3 |      
|Stock compensation                |                |      | (0.2   | )      |   |      | 9.4    |          |   |   | 6.8   |      
|                                  |                |      |        |        |   |      |        |          |   |   |       |      
|                                  | Operating loss |      | $      | (765.9 | ) |      | $      | (1,241.7 | ) |   | $     | (76.5 | )
|                                  |                |      |        |        |   |      |        |          |   |   |       |      

Broadband Communications

The segment operating loss in our Broadband Communications business in fiscal
2002 reflects the favorable impact of lower headcount and personnel-related
costs resulting from the expense reduction and restructuring actions initiated
in fiscal 2001 and 2002 and lower depreciation expense which resulted from the
write-down of manufacturing assets in fiscal 2001. Our segment operating loss
for fiscal 2002 also benefited from the elimination of the negative
impact on our cost of goods sold of our
underutilized former manufacturing operations (which we contributed to Jazz in
the second quarter of fiscal 2002) and improved utilization of our former
Mexicali operations, partially offset by provision for excess and obsolete
inventories of $14.4 million in fiscal 2002. In addition, our segment operating
loss for fiscal 2002 benefited from the sale of inventories with an original
cost of $45.6 million that we had written down to a zero
cost basis during fiscal year 2001. These sales resulted from renewed demand
for certain products that was not anticipated at the time we recorded the
$105.4 million inventory write-down in fiscal 2001.

42



---



##### Table of Contents



Our Broadband Communications segment operating loss in fiscal 2001 reflects
the lower sales volume on a base of relatively fixed manufacturing support
costs. During fiscal 2001, segment revenues declined by $669.7 million (or 55%)
compared to fiscal 2000. Segment operating loss for fiscal 2001 also includes
the inventory write-down of $105.4 million, partially offset by the subsequent
sale of $6.8 million of these written-down goods in the fiscal 2001 fourth
quarter.

Although our fiscal 2002 revenues in the Broadband Communication segment
reflect a decline from the prior years level, we began to experience renewed
demand in a number of the end markets addressed by our Broadband Communications
products and through the end of fiscal 2002, we achieved four consecutive
quarters of sequential revenue growth. As a result of our expense reduction and
restructuring initiatives in fiscal 2001 and 2002, we reduced our quarterly
segment operating loss to $6.1 million in the fourth quarter of fiscal 2002,
its lowest quarterly level since fiscal 2000. We believe the reductions made to
our operating cost structure, when combined with a modest growth in quarterly
revenues to approximately $140 million, will result in the Broadband
Communications segment achieving quarterly segment operating income in the
first quarter of fiscal 2003.

Mindspeed Technologies

Mindspeed Technologies segment operating loss for fiscal 2002 reflects the
positive impact of the cost reduction initiatives we implemented during fiscal
2001 and 2002 and lower provisions for uncollectible accounts receivable. The
improvement in segment operating loss in comparison to fiscal 2001 also
reflects the $83.4 million of inventory write-downs we recorded in fiscal 2001.
Our segment operating loss for fiscal 2002 also benefited from the sale of
inventories with an original cost of $5.1 million that we had written down to a
zero cost basis during fiscal year 2001. These factors were partially offset by
the gross margin impact of a 74% decrease in net revenues we experienced for
fiscal 2002 compared with fiscal 2001.

Mindspeed Technologies segment operating loss for fiscal 2001 principally
reflects the gross margin impact of the 47% decrease in sales we experienced
compared with fiscal 2000. Segment operating loss for fiscal 2001 also reflects
the $83.4 million inventory write-downs we recorded as a result of sharply
reduced end-customer demand for Internet infrastructure equipment during that
period. In addition, Mindspeed Technologies segment operating expenses
increased by approximately $79.7 million over their fiscal 2000 levels due to
the addition of the selling, marketing and administrative teams of six
businesses acquired in the Mindspeed Technologies segment during fiscal 2000
and the development of Mindspeeds corporate infrastructure early in fiscal
2001 in anticipation of the separation of the Broadband Communications and
Mindspeed Technologies businesses. The increased segment operating expenses for
fiscal 2001 also reflect provisions of $13.0 million for accounts receivable
from slow-paying customers which resulted from an increase in past-due accounts
that we estimated would ultimately be uncollectible.

Mindspeed Technologies quarterly revenues remain substantially lower than
fiscal 2000 levels and we believe that demand for Mindspeed Technologies
products, which are incorporated into telecommunications and data
communications infrastructure equipment, is recovering more slowly than demand
for products offered by our Broadband Communications business. During fiscal
2002, we began to experience some renewed demand in the end markets for certain
of our Mindspeed Technologies products, including our T/E physical layer
products, crosspoint switches and ATM/MPLS network processors. Moreover, the
expense reduction and restructuring initiatives we undertook in fiscal 2001 and
2002, which we expect will be substantially complete by the end of the first
quarter of fiscal 2003, have significantly reduced Mindspeeds operating cost
structure. When fully implemented, we anticipate that these actions will reduce
Mindspeeds breakeven point to approximately $55 million in quarterly revenues.

43



---



##### Table of Contents



Quarterly Results of Operations

The following table presents our operating results for each of the eight fiscal
quarters in the period ended September 30, 2002. The information for each of
these quarters is derived from our unaudited interim financial statements which
have been prepared on the same basis as the audited consolidated financial
statements included in this report. In our opinion, all necessary adjustments,
which consist only of normal and recurring accruals as well as the inventory
write-downs, special charges, debt conversion costs and the extraordinary gain
on extinguishment of debt have been included to fairly present our unaudited
quarterly results. The quarterly financial data for all periods have been
restated to reflect the wireless communications business and Mexicali
operations as discontinued operations. This data should be read together with
our consolidated financial statements and the notes thereto included in this
report.

|                                                |                          |                         |                          |         |                                          |         |          |          |          |          |           |         |          |          |          |         |          |          |           |         |       |         |          |         |       |         |          |         |       |         |          |         |       |         |  
|----------------------------------------------- | ------------------------ | ----------------------- | ------------------------ | ------- | ---------------------------------------- | ------- | -------- | -------- | -------- | -------- | --------- | ------- | -------- | -------- | -------- | ------- | -------- | -------- | --------- | ------- | ----- | ------- | -------- | ------- | ----- | ------- | -------- | ------- | ----- | ------- | -------- | ------- | ----- | ------- | -
|                                                |                          |                         |                          |         | Three months ended                      
|                                                |                          |                         |                          |         |                                         
|                                                |                          |                         |                          |         | Dec. 31,                                 |         | Mar. 31, |          | June 30, |          | Sept. 30, |         | Dec. 31, |          | Mar. 31, |         | June 30, |          | Sept. 30,
|                                                |                          |                         |                          |         | 2000                                     |         | 2001     |          | 2001     |          | 2001      |         | 2001     |          | 2002     |         | 2002     |          | 2002     
|                                                |                          |                         |                          |         |                                          |         |          |          |          |          |           |         |          |          |          |         |          |          |          
|                                                |                          |                         |                          |         | (in thousands, except per share amounts)
|Statement of Operations Data                    |                          |                         |                          |         |                                          |         |          |          |          |          |           |         |          |          |          |         |          |          |           |         |       |         |          |         |       |         |          |         |       |         |          |        
|Net revenues:                                   |                          |                         |                          |         |                                          |         |          |          |          |          |           |         |          |          |          |         |          |          |           |         |       |         |          |         |       |         |          |         |       |         |          |        
|                                                | Broadband Communications |                         | $                        | 175,938 |                                          |         | $        | 123,135  |          |          | $         | 121,689 |          |          | $        | 120,926 |          |          | $         | 126,937 |       |         | $        | 129,728 |       |         | $        | 131,999 |       |         | $        | 133,062 |      
|                                                | Mindspeed Technologies   |                         |                          | 165,905 |                                          |         |          | 81,285   |          |          |           | 36,147  |          |          |          | 22,031  |          |          |           | 14,178  |       |         |          | 19,018  |       |         |          | 21,958  |       |         |          | 24,882  |      
|                                                |                          |                         |                          |         |                                          |         |          |          |          |          |           |         |          |          |          |         |          |          |           |         |       |         |          |         |       |         |          |         |       |         |          |        
|                                                |                          |                         | Total                    |         |                                          | 341,843 |          |          |          | 204,420  |           |         |          | 157,836  |          |         |          | 142,957  |           |         |       | 141,115 |          |         |       | 148,746 |          |         |       | 153,957 |          |         |       | 157,944 |  
|Cost of goods sold                              |                          |                         | 220,331                  |         |                                          |         | 240,591  |          |          |          | 173,861   |         |          |          | 116,771  |         |          |          | 93,274    |         |       |         | 90,219   |         |       |         | 81,266   |         |       |         | 82,572   |        
|                                                |                          |                         |                          |         |                                          |         |          |          |          |          |           |         |          |          |          |         |          |          |           |         |       |         |          |         |       |         |          |         |       |         |          |        
|Gross margin                                    |                          |                         | 121,512                  |         |                                          |         | (36,171  | )        |          |          | (16,025   | )       |          |          | 26,186   |         |          |          | 47,841    |         |       |         | 58,527   |         |       |         | 72,691   |         |       |         | 75,372   |        
|Research and development                        |                          |                         | 91,620                   |         |                                          |         | 99,414   |          |          |          | 90,557    |         |          |          | 90,351   |         |          |          | 79,413    |         |       |         | 83,269   |         |       |         | 82,669   |         |       |         | 78,460   |        
|Selling, general and
administrative             |                          |                         | 64,363                   |         |                                          |         | 71,666   |          |          |          | 63,377    |         |          |          | 51,402   |         |          |          | 45,052    |         |       |         | 42,608   |         |       |         | 40,963   |         |       |         | 36,627   |        
|Amortization of intangible
assets               |                          |                         | 78,419                   |         |                                          |         | 80,085   |          |          |          | 81,351    |         |          |          | 84,950   |         |          |          | 85,522    |         |       |         | 85,940   |         |       |         | 84,570   |         |       |         | 75,845   |        
|Special charges                                 |                          |                         | 7,927                    |         |                                          |         | 10,002   |          |          |          | 345,835   |         |          |          | 25,852   |         |          |          | 1,000     |         |       |         | 21,319   |         |       |         | 133,447  |         |       |         | 43,599   |        
|                                                |                          |                         |                          |         |                                          |         |          |          |          |          |           |         |          |          |          |         |          |          |           |         |       |         |          |         |       |         |          |         |       |         |          |        
|                                                |                          |                         | Total operating expenses |         |                                          | 242,329 |          |          |          | 261,167  |           |         |          | 581,120  |          |         |          | 252,555  |           |         |       | 210,987 |          |         |       | 233,136 |          |         |       | 341,649 |          |         |       | 234,531 |  
|                                                |                          |                         |                          |         |                                          |         |          |          |          |          |           |         |          |          |          |         |          |          |           |         |       |         |          |         |       |         |          |         |       |         |          |        
|Operating loss                                  |                          |                         | (120,817                 | )       |                                          |         | (297,338 | )        |          |          | (597,145  | )       |          |          | (226,369 | )       |          |          | (163,146  | )       |       |         | (174,609 | )       |       |         | (268,958 | )       |       |         | (159,159 | )      
|Debt conversion costs                           |                          |                         | (42,584                  | )       |                                          |         |         |          |          |          |          |         |          |          |         |         |          |          |          |         |       |         |         |         |       |         | (10,435  | )       |       |         |         |        
|Other income (expense), net                     |                          |                         | (4,345                   | )       |                                          |         | (1,084   | )        |          |          | (4,789    | )       |          |          | 10,607   |         |          |          | (9,169    | )       |       |         | (6,809   | )       |       |         | (5,043   | )       |       |         | (16,147  | )      
|                                                |                          |                         |                          |         |                                          |         |          |          |          |          |           |         |          |          |          |         |          |          |           |         |       |         |          |         |       |         |          |         |       |         |          |        
|Loss before income taxes                        |                          |                         | (167,746                 | )       |                                          |         | (298,422 | )        |          |          | (601,934  | )       |          |          | (215,762 | )       |          |          | (172,315  | )       |       |         | (181,418 | )       |       |         | (284,436 | )       |       |         | (175,306 | )      
|Provision (benefit)
for income taxes            |                          |                         | (10,476                  | )       |                                          |         | (95,896  | )        |          |          | 20        |         |          |          | 42       |         |          |          | (2,549    | )       |       |         | 403      |         |       |         | 137      |         |       |         | 870      |        
|                                                |                          |                         |                          |         |                                          |         |          |          |          |          |           |         |          |          |          |         |          |          |           |         |       |         |          |         |       |         |          |         |       |         |          |        
|Loss from continuing
operations                 |                          |                         | (157,270                 | )       |                                          |         | (202,526 | )        |          |          | (601,954  | )       |          |          | (215,804 | )       |          |          | (169,766  | )       |       |         | (181,821 | )       |       |         | (284,573 | )       |       |         | (176,176 | )      
|Discontinued operations                         |                          |                         | (49,590                  | )       |                                          |         | (59,485  | )        |          |          | (142,986  | )       |          |          | (23,003  | )       |          |          | (34,724   | )       |       |         | (18,881  | )       |       |         | (14,826  | )       |       |         |         |        
|                                                |                          |                         |                          |         |                                          |         |          |          |          |          |           |         |          |          |          |         |          |          |           |         |       |         |          |         |       |         |          |         |       |         |          |        
|Loss before extraordinary item                  |                          |                         | (206,860                 | )       |                                          |         | (262,011 | )        |          |          | (744,940  | )       |          |          | (238,807 | )       |          |          | (204,490  | )       |       |         | (200,702 | )       |       |         | (299,399 | )       |       |         | (176,176 | )      
|Extraordinary gain on
extinguishment of debt    |                          |                         | 7,284                    |         |                                          |         |         |          |          |          |          |         |          |          |         |         |          |          |          |         |       |         |         |         |       |         |         |         |       |         |         |        
|                                                |                          |                         |                          |         |                                          |         |          |          |          |          |           |         |          |          |          |         |          |          |           |         |       |         |          |         |       |         |          |         |       |         |          |        
|Net loss                                        |                          | $                       | (199,576                 | )       |                                          | $       | (262,011 | )        |          | $        | (744,940  | )       |          | $        | (238,807 | )       |          | $        | (204,490  | )       |       | $       | (200,702 | )       |       | $       | (299,399 | )       |       | $       | (176,176 | )      
|                                                |                          |                         |                          |         |                                          |         |          |          |          |          |           |         |          |          |          |         |          |          |           |         |       |         |          |         |       |         |          |         |       |         |          |         |      
|Diluted loss per share:                         |                          |                         |                          |         |                                          |         |          |          |          |          |           |         |          |          |          |         |          |          |           |         |       |         |          |         |       |         |          |         |       |         |          |        
|                                                |                          | Continuing operations   |                          | $       | (0.67                                    | )       |          | $        | (0.83    | )        |           | $       | (2.44    | )        |          | $       | (0.85    | )        |           | $       | (0.67 | )       |          | $       | (0.71 | )       |          | $       | (1.09 | )       |          | $       | (0.66 | )      
|                                                |                          | Discontinued operations |                          |         | (0.21                                    | )       |          |          | (0.25    | )        |           |         | (0.58    | )        |          |         | (0.10    | )        |           |         | (0.13 | )       |          |         | (0.07 | )       |          |         | (0.06 | )       |          |         |      |        
|                                                |                          | Extraordinary item      |                          |         | 0.03                                     |         |          |          |         |          |           |         |         |          |          |         |         |          |           |         |      |         |          |         |      |         |          |         |      |         |          |         |      |        
|                                                |                          |                         |                          |         |                                          |         |          |          |          |          |           |         |          |          |          |         |          |          |           |         |       |         |          |         |       |         |          |         |       |         |          |        
|                                                |                          | Net loss                |                          | $       | (0.85                                    | )       |          | $        | (1.08    | )        |           | $       | (3.02    | )        |          | $       | (0.95    | )        |           | $       | (0.80 | )       |          | $       | (0.78 | )       |          | $       | (1.15 | )       |          | $       | (0.66 | )      
|                                                |                          |                         |                          |         |                                          |         |          |          |          |          |           |         |          |          |          |         |          |          |           |         |       |         |          |         |       |         |          |         |       |         |          |         |      
|Shares used in computing
diluted loss per share |                          |                         | 236,119                  |         |                                          |         | 243,515  |          |          |          | 246,777   |         |          |          | 252,427  |         |          |          | 254,362   |         |       |         | 256,135  |         |       |         | 260,414  |         |       |         | 265,085  |        
|Segment Operating Performance                   |                          |                         |                          |         |                                          |         |          |          |          |          |           |         |          |          |          |         |          |          |           |         |       |         |          |         |       |         |          |         |       |         |          |        
|Segment operating
income (loss) (1):            |                          |                         |                          |         |                                          |         |          |          |          |          |           |         |          |          |          |         |          |          |           |         |       |         |          |         |       |         |          |         |       |         |          |        
|                                                | Broadband Communications |                         | $                        | (55,666 | )                                        |         | $        | (118,556 | )        |          | $         | (80,899 | )        |          | $        | (41,207 | )        |          | $         | (18,955 | )     |         | $        | (16,156 | )     |         | $        | (9,160  | )     |         | $        | (6,118  | )    
|                                                | Mindspeed Technologies   |                         |                          | 23,682  |                                          |         |          | (86,476  | )        |          |           | (86,475 | )        |          |          | (72,258 | )        |          |           | (55,628 | )     |         |          | (50,604 | )     |         |          | (44,066 | )     |         |          | (34,137 | )    
|                                                |                          |                         |                          |         |                                          |         |          |          |          |          |           |         |          |          |          |         |          |          |           |         |       |         |          |         |       |         |          |         |       |         |          |        
|                                                |                          |                         | Total                    |         | $                                        | (31,984 | )        |          | $        | (205,032 | )         |         | $        | (167,374 | )        |         | $        | (113,465 | )         |         | $     | (74,583 | )        |         | $     | (66,760 | )        |         | $     | (53,226 | )        |         | $     | (40,255 | )
|                                                |                          |                         |                          |         |                                          |         |          |          |          |          |           |         |          |          |          |         |          |          |           |         |       |         |          |         |       |         |          |         |       |         |          |         |      



---

|(1) |  | Segment operating income (loss) excludes 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, the settlement of certain litigation,
separation costs and losses on the disposal of certain assets. See Note 15
of Notes to Consolidated Financial Statements.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

44



---



##### Table of Contents



Commencing in the first quarter of fiscal 2001 our revenues declined as a
result of reduced global demand for PCs and related peripheral devices,
satellite set-top boxes and Internet infrastructure equipment. This decline
became more pronounced in the fourth quarter of fiscal 2001, particularly in
our Mindspeed Technologies segment. The decline in quarterly revenues, together
with lower utilization of our manufacturing facilities and the inventory
write-downs taken in the first three quarters of fiscal 2001, caused a
deterioration in gross margins as a percentage of net revenues during fiscal
2001. In fiscal 2002, our quarterly revenues reflect renewed demand in a number
of the end markets addressed by our products, particularly in our Broadband
Communications segment. Our quarterly gross margins for fiscal 2002 benefited
from the elimination of the burden of our underutilized former manufacturing
operations (which we contributed to Jazz in the second quarter of fiscal 2002)
and improved utilization of our former Mexicali operations.

Research and development expenses increased during the first half of 2001,
reflecting sustained investment in product development efforts, but generally
decreased beginning in the third quarter of fiscal 2001 as a result of the
workforce reductions and other cost reduction initiatives we implemented.
Similarly, quarterly selling, general and administrative expenses increased
during the first half of 2001 due to the development of infrastructure in
support of the planned separation of our Broadband Communications and Mindspeed
Technologies businesses and our fiscal 2000 acquisitions. Quarterly selling,
general and administrative expenses generally decreased beginning in the third
quarter of fiscal 2001 as a result of the workforce reductions and other cost
reduction initiatives we implemented. Operating expenses (both research and
development and selling, general and administrative) increased as a percentage
of net revenues through the fourth quarter of fiscal 2001 primarily as a result
of the decline in our net revenues.

Beginning in the second quarter of fiscal 2001 and continuing through fiscal
2002 we recorded special charges for our restructuring initiatives. We also
recorded special charges for asset impairments, most prominently in the fiscal
2001 third quarter (to write down the carrying value of manufacturing assets in
our Broadband Communications segment) and in the fiscal 2002 third quarter (to
write down the carrying value of certain goodwill and other assets in our
Mindspeed Technologies segment).

Through the second quarter of fiscal 2001, we recognized income tax benefits
for the value of our net losses to reduce our income taxes, net of the impact
of non-deductible costs such as amortization of intangible assets. Commencing
in the third quarter of fiscal 2001, we ceased recognizing any tax benefit
relating to our operating losses because we determined that it is more likely
than not that the additional income tax benefits would not be realized.

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

Liquidity and Capital Resources

Cash used in operating activities was $215.9 million for fiscal 2002 and $202.4
million for fiscal 2001, compared to cash provided by operating activities of
$211.3 million for fiscal 2000. Fiscal 2002 operating cash flows reflect our
loss from continuing operations of $812.3 million, offset by noncash charges
(depreciation and amortization, special charges and other) of $597.8 million
and a net increase in the non-cash components of our working capital of
approximately $1.3 million. Before the effect of working capital changes, cash
used in operations was $214.5 million for fiscal 2002, compared to $245.7
million for fiscal 2001.

The fiscal 2002 changes in the non-cash components of working capital include a
$24.5 million decrease in accounts receivable, principally due to our
aggressive accounts receivable collection efforts, a $12.6 million increase in
accrued expenses and other current liabilities, a $4.4 million increase in
accounts payable and a $2.9 million

45



---



##### Table of Contents



decrease in inventories. These working capital changes were partially offset by
a $16.2 million decrease in deferred revenue due to lower inventory levels at
our major distributors and changes in other assets and liabilities totaling
$29.6 million.

Cash provided by investing activities of $174.4 million for fiscal 2002
includes the return of a $150.0 million refundable deposit held by a vendor,
proceeds from the sale of assets of $72.9 million and net sales of marketable
securities of $58.4 million. These sources of cash were partially offset by
capital expenditures of $21.2 million and payments of $55.8 million for
acquisitions, including the initial purchase price for the video compression
business of GlobespanVirata, Inc. and contingent consideration for certain
businesses we acquired in fiscal 2000. We also advanced $30.0 million to
Skyworks under the credit facility. In fiscal 2001, cash used in investing
activities of $303.9 million principally consisted of capital expenditures of
$107.3 million, payments for investments, advances and acquisitions totaling
$106.1 million (including a $75.0 million refundable deposit paid to a vendor)
and net purchases of marketable securities totaling $93.0 million.

Cash provided by financing activities of $14.7 million for fiscal 2002
consisted of proceeds from the exercise of stock options. In fiscal 2001, cash
used in financing activities of $44.8 million principally consisted of $65.0
million paid in connection with the conversion and repurchase of a portion of
our convertible subordinated notes, partially offset by proceeds of $20.2
million from the exercise of stock options. During fiscal 2001, approximately
$255.2 million principal amount of our 41/4% 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.

As of September 30, 2002, we held notes receivable from Skyworks with an
aggregate principal amount of $180.0 million, including the $150.0 million Term
Notes and $30.0 million outstanding under the revolving credit facility. In
November 2002, we entered into a refinancing agreement with Skyworks pursuant
to which Skyworks repaid $105.0 million of the principal amount and all of the
accrued interest owed to us under the Term Notes and the remaining principal
balance of the Term Notes was exchanged for $45.0 million principal amount of a
new 15% convertible note with a maturity date of June 30, 2005. Skyworks also
paid us all amounts outstanding under the credit facility, the credit facility
was cancelled and we released all security interests in Skyworks assets and
properties. Skyworks may redeem the 15% convertible note at any time after May
12, 2004, subject to a redemption premium of 3% of the outstanding principal
amount. We may, at our option, convert the outstanding principal amount of the
15% convertible note into shares of Skyworks common stock based upon the
conversion price (initially $7.87 per share, subject to adjustment under
certain circumstances). At maturity, Skyworks must pay the outstanding
principal amount by delivering to us a number of shares of its common stock
based upon the conversion price. We subsequently exchanged the 15% convertible
note for an equal aggregate principal amount of substantially similar 15%
convertible senior subordinated notes issued under an indenture and Skyworks
has granted us certain registration rights relating to the 15% convertible
senior subordinated notes and the shares of Skyworks common stock underlying
the 15% convertible senior subordinated notes. We may sell all or part of the
$45.0 million 15% convertible senior subordinated notes or shares underlying
the notes as needed to meet our liquidity requirements.

As of September 30, 2002 our principal sources of liquidity are our existing
cash reserves, available-for-sale marketable securities, the notes receivable
from Skyworks and cash generated from product sales. Combined cash and cash
equivalents, marketable securities and notes receivable from Skyworks at
September 30, 2002 totaled $447.8 million compared to $338.9 million at
September 30, 2001. Our working capital at September 30, 2002 was $441.2
compared to $442.4 million at September 30, 2001.

During fiscal 2001 and 2002, we reduced our capital expenditures and
implemented a number of expense reduction initiatives (including workforce
reductions, the consolidation of certain facilities and salary reductions of
10% for senior management) to improve our operating cost structure. However, we
expect that reduced end-customer demand (as compared to fiscal 2000 levels),
changes in our revenue mix and other factors will continue to adversely affect
our operating results in fiscal 2003 and we anticipate that we will continue to
experience negative cash flows from operations in the near term.

We believe that our existing sources of liquidity, along with cash expected to
be generated from product sales, will be sufficient to fund our operations,
research and development efforts, anticipated capital expenditures and

46



---



##### Table of Contents



additional consideration that may be payable to iCompression for at least the
next twelve months. We will need to continue a focused program of capital
expenditures to meet our research and development and corporate requirements.
We may also consider acquisition opportunities to extend our technology
portfolio and design expertise and to expand our product offerings. In order to
fund capital expenditures, increase our working capital or complete any
acquisitions, we may seek to obtain additional debt financing or issue
additional shares of our common stock. However, we cannot assure you that such
financing will be available to us on favorable terms, or at all.

Commitments

Operating Leases

We lease certain facilities and equipment under non-cancelable operating
leases. The leases expire at various dates through 2017 and contain various
provisions for rental adjustments including, in certain cases, adjustments
based on increases in the Consumer Price Index. The leases generally contain
renewal provisions for varying periods of time. At September 30, 2002, minimum
future lease payments under these leases totaled $117.3 million, including
$22.8 million due within one year; $33.7 million due in one to three years;
$16.1 million due in three to five years; and $44.7 million due after five
years. Rental expense under operating leases was approximately $27.1 million
during fiscal 2002.

Convertible Debt

As of September 30, 2002, $615.0 million principal amount of our 4% Convertible
Subordinated Notes due 2007 and $66.8 million principal amount of our 41/4%
Convertible Subordinated Notes due 2006 were outstanding. The notes are general
unsecured obligations. We pay interest on the notes in arrears semiannually and
during fiscal 2002, we paid interest of $28.6 million. Both the 4% Convertible
Subordinated Notes and the 41/4% Convertible Subordinated Notes are
convertible, at the option of the holder, at any time prior to redemption or
maturity into shares of our common stock at conversion prices of $52.986 and
$11.332, respectively. At our option, we may redeem the 41/4% Convertible
Subordinated Notes and, on or after February 6, 2003, we may redeem the 4%
Convertible Subordinated Notes, in each case at a declining premium to par.

Capital Commitments

We have certain non-marketable equity investments in early stage technology
companies. In connection with two of these investments, we may be required to
invest up to an additional $14.8 million.

Purchase Commitments

We purchase a substantial portion of our requirements for silicon-based
semiconductor products from Jazz. During the first two years of the long-term
supply arrangement with Jazz, our cost of wafers is an amount which
approximates our historical cost. Thereafter, our cost of wafers will be based
on market prices. Additionally, we are obligated to purchase certain minimum
annual volumes of wafers during the first three years of the arrangement. In
the event our actual wafer purchases are less than the required minimum
volumes, we will be required to make additional payments to Jazz. Our expected
minimum purchase obligations under the long-term supply agreement with Jazz,
net of a portion of the wafer purchase obligations assumed by a third party,
will be approximately $71 million, $43 million and $14 million in fiscal 2003,
2004 and 2005, respectively.

Additionally, we entered into a long-term supply agreement with Skyworks in
June 2002, under which Skyworks provides semiconductor assembly and test
services at our former Mexicali, Mexico facility. Under this supply agreement,
we are obligated to purchase certain minimum amounts of assembly and test
services during fiscal 2003. In the event our purchases of assembly and test
services are less than the required minimum amounts, we will be required to
make additional payments to Skyworks. Thereafter and subject to certain
conditions, we are obligated to offer Skyworks the opportunity to provide
additional assembly and test services that we may need and Skyworks is
obligated to make commercially reasonable efforts to provide such requested
services during the three-year agreement. Our expected minimum obligation under
the supply agreement with Skyworks is approximately $35 million in fiscal 2003.

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

47



---



##### Table of Contents



Recent Accounting Standards

See Note 2 of Notes to Consolidated Financial Statements.

Critical Accounting Policies

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

Impairment of long-lived assets

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

In the first quarter of fiscal 2003, we will adopt the new rules in SFAS 142
for measuring the impairment of goodwill, which prescribe a fair value-based
approach. The estimates and assumptions described above (along with other
factors such as discount rates) will affect the amount of any impairment losses
we recognize under SFAS 142. Upon adoption of SFAS 142, we will be required to
make a transition test of our goodwill for impairment, which may result in a
significant transition impairment loss (recorded as a change in accounting
principle). At least annually thereafter, we will be required to test goodwill
for impairment, which may result in additional impairment losses (charged
against income).

Deferred income taxes

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

Inventories

We write down our inventory for estimated obsolescence or unmarketable
inventory in an amount equal to the difference between the cost of inventory
and the estimated market value based upon assumptions about future demand and
market conditions. If actual market conditions are less favorable than our
estimates, additional inventory write-downs may be required.

48



---



##### Table of Contents



Allowance for doubtful accounts

We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. If the financial
condition of our customers were to deteriorate, our actual losses may exceed
our estimates, and additional allowances would be required.




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, 2002, the
carrying value of our cash and cash equivalents approximates fair value.

Our marketable debt securities (consisting of asset-backed securities,
corporate bonds and government securities) principally have remaining terms of
two years or less. 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, 2002, unrealized gains of $0.5
million (net of related income taxes) 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, 2002:

|                               |  |                |         |            |  |   |         | 
|------------------------------ |  | -------------- | ------- | ---------- |  | - | ------- | 
|(in thousands)                 |  | Carrying Value |         | Fair Value
|                               |  |                |         |           
|Cash and cash equivalents      |  | $              | 168,357 |            |  | $ | 168,357 | 
|Marketable debt securities     |  |                | 99,466  |            |  |   | 99,466  | 
|Notes receivable from Skyworks |  |                | 180,000 |            |  |   | 180,000 | 
|Long-term debt                 |  |                | 681,825 |            |  |   | 198,848 | 

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

At September 30, 2002, we held foreign currency forward exchange contracts
(principally to sell Mexican pesos at specified rates) having an aggregate
notional amount of approximately 59.6 million pesos, at a notional weighted
average exchange rate of approximately 10.01 pesos to the dollar. The net
unrealized gain/loss on the forward contracts outstanding at September 30, 2002
was not material to our consolidated financial statements. Based on our
overall currency rate exposure at September 30, 2002, a 10 percent change in
currency rates would not have a material effect on our consolidated financial
position, results of operations or cash flows.

49



---



##### Table of Contents






Item 8. Financial Statements and Supplementary Data




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

|                                                   |                                                                                                               |                                            |                                      |            |           |               |           |            |           |  |  | 
|-------------------------------------------------- | ------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------ | ---------- | --------- | ------------- | --------- | ---------- | --------- |  |  | 
|                                                   |                                                                                                               |                                            |                                      |            |           | September 30,
|                                                   |                                                                                                               |                                            |                                      |            |           |              
|                                                   |                                                                                                               |                                            |                                      |            |           | 2002          |           | 2001      
|                                                   |                                                                                                               |                                            |                                      |            |           |               |           |           
|                                                   |                                                                                                               |                                            |                                      | ASSETS     |           |               |           |            |           |  |  | 
|Current Assets                                     |                                                                                                               |                                            |                                      |            |           |               |           |           
|                                                   | Cash and cash equivalents                                                                                     |                                            | $                                    | 168,357    |           |               | $         | 182,260    |          
|                                                   | Short-term investments                                                                                        |                                            |                                      | 99,466     |           |               |           | 156,660    |          
|                                                   | Notes receivable from Skyworks                                                                                |                                            |                                      | 180,000    |           |               |           |           |          
|                                                   | Receivables, net of allowance of $8,405 (2002) and $15,000 (2001)                                             |                                            |                                      | 73,552     |           |               |           | 92,931     |          
|                                                   | Inventories                                                                                                   |                                            |                                      | 57,330     |           |               |           | 85,014     |          
|                                                   | Deferred income taxes                                                                                         |                                            |                                      | 32,233     |           |               |           | 75,710     |          
|                                                   | Other current assets                                                                                          |                                            |                                      | 52,695     |           |               |           | 51,414     |          
|                                                   | Current assets of discontinued operations                                                                     |                                            |                                      |           |           |               |           | 81,362     |          
|                                                   |                                                                                                               |                                            |                                      |            |           |               |           |           
|                                                   |                                                                                                               | Total current assets                       |                                      |            | 663,633   |               |           |            | 725,351   | 
|Property, plant and equipment, net                 |                                                                                                               |                                            | 93,994                               |            |           |               | 217,886   |           
|Goodwill and intangible assets, net                |                                                                                                               |                                            | 773,202                              |            |           |               | 1,191,429 |           
|Deferred income taxes                              |                                                                                                               |                                            | 224,168                              |            |           |               | 183,444   |           
|Other assets                                       |                                                                                                               |                                            | 156,038                              |            |           |               | 264,529   |           
|Non-current assets of discontinued operations      |                                                                                                               |                                            |                                     |            |           |               | 232,841   |           
|                                                   |                                                                                                               |                                            |                                      |            |           |               |           |           
|                                                   |                                                                                                               | Total assets                               |                                      | $          | 1,911,035 |               |           | $          | 2,815,480 | 
|                                                   |                                                                                                               |                                            |                                      |            |           |               |           |            |          
|                                                   |                                                                                                               |                                            | LIABILITIES AND SHAREHOLDERS EQUITY |            |           |               |           |            |           |  | 
|Current Liabilities                                |                                                                                                               |                                            |                                      |            |           |               |           |           
|                                                   | Accounts payable                                                                                              |                                            | $                                    | 101,342    |           |               | $         | 95,488     |          
|                                                   | Deferred revenue                                                                                              |                                            |                                      | 10,420     |           |               |           | 26,583     |          
|                                                   | Accrued compensation and benefits                                                                             |                                            |                                      | 38,929     |           |               |           | 38,044     |          
|                                                   | Other current liabilities                                                                                     |                                            |                                      | 71,738     |           |               |           | 100,062    |          
|                                                   | Current liabilities of discontinued operations                                                                |                                            |                                      |           |           |               |           | 22,820     |          
|                                                   |                                                                                                               |                                            |                                      |            |           |               |           |           
|                                                   |                                                                                                               | Total current liabilities                  |                                      |            | 222,429   |               |           |            | 282,997   | 
|Convertible subordinated notes                     |                                                                                                               |                                            | 681,825                              |            |           |               | 709,849   |           
|Other liabilities                                  |                                                                                                               |                                            | 58,954                               |            |           |               | 45,652    |           
|Non-current liabilities of discontinued operations |                                                                                                               |                                            |                                     |            |           |               | 3,806     |           
|                                                   |                                                                                                               |                                            |                                      |            |           |               |           |           
|                                                   |                                                                                                               | Total liabilities                          |                                      |            | 963,208   |               |           |            | 1,042,304 | 
|                                                   |                                                                                                               |                                            |                                      |            |           |               |           |           
|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;
265,676 (2002) and 253,900 (2001) issued shares   |                                            |                                      | 265,676    |           |               |           | 253,900    |          
|                                                   | Additional paid-in capital                                                                                    |                                            |                                      | 3,219,044  |           |               |           | 3,113,205  |          
|                                                   | Accumulated deficit                                                                                           |                                            |                                      | (2,507,407 | )         |               |           | (1,566,209 | )        
|                                                   | Accumulated other comprehensive loss                                                                          |                                            |                                      | (28,077    | )         |               |           | (17,204    | )        
|                                                   | Treasury stock, at cost: 41 shares (2001)                                                                     |                                            |                                      |           |           |               |           | (1,807     | )        
|                                                   | Unearned compensation                                                                                         |                                            |                                      | (1,409     | )         |               |           | (8,709     | )        
|                                                   |                                                                                                               |                                            |                                      |            |           |               |           |           
|                                                   |                                                                                                               | Total shareholders equity                 |                                      |            | 947,827   |               |           |            | 1,773,176 | 
|                                                   |                                                                                                               |                                            |                                      |            |           |               |           |           
|                                                   |                                                                                                               | Total liabilities and shareholders equity |                                      | $          | 1,911,035 |               |           | $          | 2,815,480 | 
|                                                   |                                                                                                               |                                            |                                      |            |           |               |           |            |          

See accompanying notes to consolidated financial statements.

50



---



##### Table of Contents






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

|                                                                  |                                               |                         |                          |         |                           |           |            |         |       |           |           |         |       |         | 
|----------------------------------------------------------------- | --------------------------------------------- | ----------------------- | ------------------------ | ------- | ------------------------- | --------- | ---------- | ------- | ----- | --------- | --------- | ------- | ----- | ------- | 
|                                                                  |                                               |                         |                          |         | Years Ended September 30,
|                                                                  |                                               |                         |                          |         |                          
|                                                                  |                                               |                         |                          |         | 2002                      |           | 2001       |         | 2000 
|                                                                  |                                               |                         |                          |         |                           |           |            |         |      
|Net revenues                                                      |                                               | $                       | 601,762                  |         |                           | $         | 847,056    |         |       | $         | 1,790,616 |        
|Cost of goods sold                                                |                                               |                         | 347,331                  |         |                           |           | 751,554    |         |       |           | 926,197   |        
|                                                                  |                                               |                         |                          |         |                           |           |            |         |       |           |           |        
|Gross margin                                                      |                                               |                         | 254,431                  |         |                           |           | 95,502     |         |       |           | 864,419   |        
|Operating expenses:                                               |                                               |                         |                          |         |                           |           |            |         |       |           |           |        
|                                                                  | Research and development                      |                         |                          | 323,811 |                           |           |            | 371,942 |       |           |           | 322,855 |      
|                                                                  | Selling, general and administrative           |                         |                          | 165,250 |                           |           |            | 250,808 |       |           |           | 236,989 |      
|                                                                  | Amortization of intangible assets             |                         |                          | 331,877 |                           |           |            | 324,805 |       |           |           | 154,679 |      
|                                                                  | Special charges                               |                         |                          | 199,365 |                           |           |            | 389,616 |       |           |           | 35,000  |      
|                                                                  | Purchased in-process research and development |                         |                          |        |                           |           |            |        |       |           |           | 191,348 |      
|                                                                  |                                               |                         |                          |         |                           |           |            |         |       |           |           |        
|                                                                  |                                               |                         | Total operating expenses |         |                           | 1,020,303 |            |         |       | 1,337,171 |           |         |       | 940,871 | 
|                                                                  |                                               |                         |                          |         |                           |           |            |         |       |           |           |        
|Operating loss                                                    |                                               |                         | (765,872                 | )       |                           |           | (1,241,669 | )       |       |           | (76,452   | )      
|Debt conversion costs                                             |                                               |                         | (10,435                  | )       |                           |           | (42,584    | )       |       |           |          |        
|Other income (expense), net                                       |                                               |                         | (37,168                  | )       |                           |           | 389        |         |       |           | 6,329     |        
|                                                                  |                                               |                         |                          |         |                           |           |            |         |       |           |           |        
|Loss before income taxes                                          |                                               |                         | (813,475                 | )       |                           |           | (1,283,864 | )       |       |           | (70,123   | )      
|Provision (benefit) for income taxes                              |                                               |                         | (1,139                   | )       |                           |           | (106,310   | )       |       |           | 63,036    |        
|                                                                  |                                               |                         |                          |         |                           |           |            |         |       |           |           |        
|Loss from continuing operations                                   |                                               |                         | (812,336                 | )       |                           |           | (1,177,554 | )       |       |           | (133,159  | )      
|Loss from discontinued operations, net of income taxes            |                                               |                         | (68,431                  | )       |                           |           | (275,064   | )       |       |           | (57,768   | )      
|                                                                  |                                               |                         |                          |         |                           |           |            |         |       |           |           |        
|Loss before extraordinary item                                    |                                               |                         | (880,767                 | )       |                           |           | (1,452,618 | )       |       |           | (190,927  | )      
|Extraordinary gain on extinguishment of debt,
net of income taxes |                                               |                         |                         |         |                           |           | 7,284      |         |       |           |          |        
|                                                                  |                                               |                         |                          |         |                           |           |            |         |       |           |           |        
|Net loss                                                          |                                               | $                       | (880,767                 | )       |                           | $         | (1,445,334 | )       |       | $         | (190,927  | )      
|                                                                  |                                               |                         |                          |         |                           |           |            |         |       |           |           |        
|Loss per share, basic and diluted:                                |                                               |                         |                          |         |                           |           |            |         |       |           |           |        
|                                                                  |                                               | Continuing operations   |                          | $       | (3.14                     | )         |            | $       | (4.81 | )         |           | $       | (0.63 | )      
|                                                                  |                                               | Discontinued operations |                          |         | (0.26                     | )         |            |         | (1.13 | )         |           |         | (0.27 | )      
|                                                                  |                                               | Extraordinary item      |                          |         |                          |           |            |         | 0.03  |           |           |         |      |        
|                                                                  |                                               |                         |                          |         |                           |           |            |         |       |           |           |        
|                                                                  |                                               | Net loss                |                          | $       | (3.40                     | )         |            | $       | (5.91 | )         |           | $       | (0.90 | )      
|                                                                  |                                               |                         |                          |         |                           |           |            |         |       |           |           |        
|Number of shares used in per share computation                    |                                               |                         | 258,998                  |         |                           |           | 244,711    |         |       |           | 211,840   |        
|                                                                  |                                               |                         |                          |         |                           |           |            |         |       |           |           |        

See accompanying notes to consolidated financial statements.

51



---



##### Table of Contents






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

|                                                                                                                          |                                                         |                                                |          |                           |         |      |            |          |          |   |          |         |          |  
|------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ---------------------------------------------- | -------- | ------------------------- | ------- | ---- | ---------- | -------- | -------- | - | -------- | ------- | -------- | -
|                                                                                                                          |                                                         |                                                |          | Years Ended September 30,
|                                                                                                                          |                                                         |                                                |          |                          
|                                                                                                                          |                                                         |                                                |          | 2002                      |         | 2001 |            | 2000    
|                                                                                                                          |                                                         |                                                |          |                           |         |      |            |         
|Cash Flows From Operating Activities                                                                                      |                                                         |                                                |          |                           |         |      |            |          |          |   |          |        
|Loss from continuing operations                                                                                           |                                                         | $                                              | (812,336 | )                         |         | $    | (1,177,554 | )        |          | $ | (133,159 | )      
|Adjustments required to reconcile loss from continuing
operations to net cash provided by (used in) operating activities: |                                                         |                                                |          |                           |         |      |            |          |          |   |          |        
|                                                                                                                          | Depreciation                                            |                                                |          | 51,046                    |         |      |            | 116,694  |          |   |          | 131,024 |         
|                                                                                                                          | Amortization of intangible assets                       |                                                |          | 331,877                   |         |      |            | 324,805  |          |   |          | 154,679 |         
|                                                                                                                          | Asset impairments                                       |                                                |          | 156,951                   |         |      |            | 342,791  |          |   |          |        |         
|                                                                                                                          | Write-down of non-marketable investments                |                                                |          | 21,207                    |         |      |            | 13,051   |          |   |          |        |         
|                                                                                                                          | Provision for losses on accounts receivable             |                                                |          | (3,878                    | )       |      |            | 23,081   |          |   |          | (1,472  | )       
|                                                                                                                          | Inventory provisions                                    |                                                |          | 17,063                    |         |      |            | 205,884  |          |   |          | 4,639   |         
|                                                                                                                          | Deferred income taxes                                   |                                                |          | 3,667                     |         |      |            | (146,482 | )        |   |          | (29,167 | )       
|                                                                                                                          | Stock compensation                                      |                                                |          | 9,196                     |         |      |            | 15,168   |          |   |          | 9,491   |         
|                                                                                                                          | Debt conversion costs                                   |                                                |          | 10,435                    |         |      |            | 42,584   |          |   |          |        |         
|                                                                                                                          | Purchased in-process research and development           |                                                |          |                          |         |      |            |         |          |   |          | 191,348 |         
|                                                                                                                          | Special charges  litigation                            |                                                |          |                          |         |      |            |         |          |   |          | 35,000  |         
|                                                                                                                          | Other noncash charges, net                              |                                                |          | 256                       |         |      |            | (5,732   | )        |   |          | 4,533   |         
|                                                                                                                          | Changes in assets and liabilities, net of acquisitions: |                                                |          |                           |         |      |            |          |          |   |          |         |         
|                                                                                                                          |                                                         | Receivables                                    |          |                           | 24,477  |      |            |          | 239,088  |   |          |         | (139,122 | )
|                                                                                                                          |                                                         | Inventories                                    |          |                           | 2,896   |      |            |          | (39,879  | ) |          |         | (56,888  | )
|                                                                                                                          |                                                         | Accounts payable                               |          |                           | 4,381   |      |            |          | (127,668 | ) |          |         | (49,955  | )
|                                                                                                                          |                                                         | Deferred revenue                               |          |                           | (16,163 | )    |            |          | (10,952  | ) |          |         | 14,974   |  
|                                                                                                                          |                                                         | Accrued expenses and other current liabilities |          |                           | 12,615  |      |            |          | (10,731  | ) |          |         | 97,871   |  
|                                                                                                                          |                                                         | Other                                          |          |                           | (29,553 | )    |            |          | (6,527   | ) |          |         | (22,482  | )
|                                                                                                                          |                                                         |                                                |          |                           |         |      |            |          |          |   |          |        
|Net cash provided by (used in) operating activities                                                                       |                                                         |                                                | (215,863 | )                         |         |      | (202,379   | )        |          |   | 211,314  |        
|                                                                                                                          |                                                         |                                                |          |                           |         |      |            |          |          |   |          |        
|Cash Flows From Investing Activities                                                                                      |                                                         |                                                |          |                           |         |      |            |          |          |   |          |        
|Purchase of marketable securities                                                                                         |                                                         |                                                | (334,461 | )                         |         |      | (531,201   | )        |          |   | (6,011   | )      
|Sale of marketable securities                                                                                             |                                                         |                                                | 392,902  |                           |         |      | 438,211    |          |          |   | 19,206   |        
|Refundable deposit                                                                                                        |                                                         |                                                | 150,000  |                           |         |      | (75,000    | )        |          |   | (75,000  | )      
|Proceeds from sale of assets                                                                                              |                                                         |                                                | 72,927   |                           |         |      | 2,522      |          |          |   |         |        
|Capital expenditures                                                                                                      |                                                         |                                                | (21,229  | )                         |         |      | (107,296   | )        |          |   | (214,694 | )      
|Advances to Skyworks                                                                                                      |                                                         |                                                | (30,000  | )                         |         |      |           |          |          |   |         |        
|Acquisitions of businesses, net of cash acquired                                                                          |                                                         |                                                | (45,989  | )                         |         |      | (12,994    | )        |          |   | (8,682   | )      
|Investments in and advances to businesses                                                                                 |                                                         |                                                | (9,800   | )                         |         |      | (18,112    | )        |          |   | (99,258  | )      
|                                                                                                                          |                                                         |                                                |          |                           |         |      |            |          |          |   |          |        
|Net cash provided by (used in) investing activities                                                                       |                                                         |                                                | 174,350  |                           |         |      | (303,870   | )        |          |   | (384,439 | )      
|                                                                                                                          |                                                         |                                                |          |                           |         |      |            |          |          |   |          |        
|Cash Flows From Financing Activities                                                                                      |                                                         |                                                |          |                           |         |      |            |          |          |   |          |        
|Proceeds from issuance of convertible subordinated notes,
net of issuance costs                                           |                                                         |                                                |         |                           |         |      |           |          |          |   | 630,992  |        
|Proceeds from exercise of stock options                                                                                   |                                                         |                                                | 14,733   |                           |         |      | 20,216     |          |          |   | 116,697  |        
|Payment of debt conversion costs                                                                                          |                                                         |                                                |         |                           |         |      | (42,584    | )        |          |   |         |        
|Repurchase of convertible subordinated notes                                                                              |                                                         |                                                |         |                           |         |      | (22,400    | )        |          |   |         |        
|                                                                                                                          |                                                         |                                                |          |                           |         |      |            |          |          |   |          |        
|Net cash provided by (used in) financing activities                                                                       |                                                         |                                                | 14,733   |                           |         |      | (44,768    | )        |          |   | 747,689  |        
|                                                                                                                          |                                                         |                                                |          |                           |         |      |            |          |          |   |          |        
|Net cash provided by (used in) discontinued operations                                                                    |                                                         |                                                | 12,877   |                           |         |      | (97,823    | )        |          |   | (141,980 | )      
|                                                                                                                          |                                                         |                                                |          |                           |         |      |            |          |          |   |          |        
|Net increase (decrease) in cash and cash equivalents                                                                      |                                                         |                                                | (13,903  | )                         |         |      | (648,840   | )        |          |   | 432,584  |        
|Cash and cash equivalents at beginning of period                                                                          |                                                         |                                                | 182,260  |                           |         |      | 831,100    |          |          |   | 398,516  |        
|                                                                                                                          |                                                         |                                                |          |                           |         |      |            |          |          |   |          |        
|Cash and cash equivalents at end of period                                                                                |                                                         | $                                              | 168,357  |                           |         | $    | 182,260    |          |          | $ | 831,100  |        
|                                                                                                                          |                                                         |                                                |          |                           |         |      |            |          |          |   |          |        

See accompanying notes to consolidated financial statements.

52



---



##### Table of Contents






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



|                                                     |                    |  |              |   |            |   |          |   |          |   |              |   |  |   |            |   | 
|---------------------------------------------------- | ------------------ |  | ------------ | - | ---------- | - | -------- | - | -------- | - | ------------ | - |  | - | ---------- | - | 
|                                                     |                    |  | Common Stock |   |            |   | Retained
|                                                     |                    |  |              |   | Additional |   | Earnings
|                                                     |                    |  | Outstanding  |   |            |   |          |   | Paid-In  |   | (Accumulated
|                                                     |                    |  | Shares       |   | Amount     |   | Capital  |   | Deficit)
|                                                     |                    |  |              |   |            |   |          |   |         
|Balance at September 30, 1999                        |                    |  | 196,387      |   |            | $ | 196,387  |   |          | $ | 769,563      |   |  | $ | 70,052     |  
|Net loss                                             |                    |  |             |   |            |   |         |   |          |   |             |   |  |   | (190,927   | )
|Currency translation adjustment                      |                    |  |             |   |            |   |         |   |          |   |             |   |  |   |           |  
|Change in unrealized gains on investments            |                    |  |             |   |            |   |         |   |          |   |             |   |  |   |           |  
|                                                     | Comprehensive loss |  |              |   |            |   |          |   |          |   |              |   |  |   |            |   | 
|Purchase acquisitions                                |                    |  | 26,988       |   |            |   | 26,988   |   |          |   | 1,761,138    |   |  |   |           |  
|Issuance of common stock                             |                    |  | 7,788        |   |            |   | 7,788    |   |          |   | 71,463       |   |  |   |           |  
|Tax benefits from stock plans                        |                    |  |             |   |            |   |         |   |          |   | 166,102      |   |  |   |           |  
|Purchase of treasury stock                           |                    |  | (30          | ) |            |   |         |   |          |   |             |   |  |   |           |  
|Compensation expense related to
employee stock plans |                    |  | 1            |   |            |   | 1        |   |          |   | 6,849        |   |  |   |           |  
|                                                     |                    |  |              |   |            |   |          |   |          |   |              |   |  |   |            |  
|Balance at September 30, 2000                        |                    |  | 231,134      |   |            |   | 231,164  |   |          |   | 2,775,115    |   |  |   | (120,875   | )
|Net loss                                             |                    |  |             |   |            |   |         |   |          |   |             |   |  |   | (1,445,334 | )
|Currency translation adjustment                      |                    |  |             |   |            |   |         |   |          |   |             |   |  |   |           |  
|Change in unrealized gains on investments            |                    |  |             |   |            |   |         |   |          |   |             |   |  |   |           |  
|Unrealized loss on forward exchange contracts        |                    |  |             |   |            |   |         |   |          |   |             |   |  |   |           |  
|                                                     | Comprehensive loss |  |              |   |            |   |          |   |          |   |              |   |  |   |            |   | 
|Purchase acquisitions                                |                    |  | 7,494        |   |            |   | 7,494    |   |          |   | 66,653       |   |  |   |           |  
|Conversion of debt                                   |                    |  | 11,046       |   |            |   | 11,046   |   |          |   | 237,896      |   |  |   |           |  
|Issuance of common stock                             |                    |  | 4,196        |   |            |   | 4,196    |   |          |   | 29,788       |   |  |   |           |  
|Tax benefits from stock plans                        |                    |  |             |   |            |   |         |   |          |   | 1,484        |   |  |   |           |  
|Purchase of treasury stock                           |                    |  | (11          | ) |            |   |         |   |          |   |             |   |  |   |           |  
|Compensation expense related to
employee stock plans |                    |  |             |   |            |   |         |   |          |   | 2,269        |   |  |   |           |  
|                                                     |                    |  |              |   |            |   |          |   |          |   |              |   |  |   |            |  
|Balance at September 30, 2001                        |                    |  | 253,859      |   |            |   | 253,900  |   |          |   | 3,113,205    |   |  |   | (1,566,209 | )
|Net loss                                             |                    |  |             |   |            |   |         |   |          |   |             |   |  |   | (880,767   | )
|Currency translation adjustment                      |                    |  |             |   |            |   |         |   |          |   |             |   |  |   |           |  
|Change in unrealized gains on investments            |                    |  |             |   |            |   |         |   |          |   |             |   |  |   |           |  
|Minimum pension liability adjustment                 |                    |  |             |   |            |   |         |   |          |   |             |   |  |   |           |  
|Unrealized loss on forward exchange contracts        |                    |  |             |   |            |   |         |   |          |   |             |   |  |   |           |  
|                                                     | Comprehensive loss |  |              |   |            |   |          |   |          |   |              |   |  |   |            |   | 
|Purchase acquisitions                                |                    |  | 1,420        |   |            |   | 1,420    |   |          |   | 16,658       |   |  |   |           |  
|Conversion of debt                                   |                    |  | 2,233        |   |            |   | 2,233    |   |          |   | 35,720       |   |  |   |           |  
|Issuance of common stock and warrants                |                    |  | 7,939        |   |            |   | 7,939    |   |          |   | 52,303       |   |  |   |           |  
|Tax benefits from stock plans                        |                    |  |             |   |            |   |         |   |          |   | 1,175        |   |  |   |           |  
|Cancellation of treasury stock                       |                    |  |             |   |            |   | (41      | ) |          |   | (1,766       | ) |  |   |           |  
|Compensation expense related to
employee stock plans |                    |  | 225          |   |            |   | 225      |   |          |   | 1,749        |   |  |   |           |  
|Distribution of wireless business                    |                    |  |             |   |            |   |         |   |          |   |             |   |  |   | (60,431    | )
|                                                     |                    |  |              |   |            |   |          |   |          |   |              |   |  |   |            |  
|Balance at September 30, 2002                        |                    |  | 265,676      |   |            | $ | 265,676  |   |          | $ | 3,219,044    |   |  | $ | (2,507,407 | )
|                                                     |                    |  |              |   |            |   |          |   |          |   |              |   |  |   |            |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                     |                    |   |               |   |          |   |              |   |               |   |         |   |       |   |            |            |  
|---------------------------------------------------- | ------------------ | - | ------------- | - | -------- | - | ------------ | - | ------------- | - | ------- | - | ----- | - | ---------- | ---------- | -
|                                                     |                    |   | Accumulated   |   |          |   |              |   |               |   |         |   |       |   |           
|                                                     |                    |   | Other         |   |          |   |              |   |               |   |         |   | Total
|                                                     |                    |   | Comprehensive |   | Treasury |   | Unearned     |   | Shareholders'
|                                                     |                    |   | Income (Loss) |   | Stock    |   | Compensation |   | Equity       
|                                                     |                    |   |               |   |          |   |              |   |              
|Balance at September 30, 1999                        |                    | $ | 149           |   |          | $ |             |   |               | $ | (998    | ) |       | $ | 1,035,153  |           
|Net loss                                             |                    |   |              |   |          |   |             |   |               |   |        |   |       |   | (190,927   | )         
|Currency translation adjustment                      |                    |   | (539          | ) |          |   |             |   |               |   |        |   |       |   | (539       | )         
|Change in unrealized gains on investments            |                    |   | 47,685        |   |          |   |             |   |               |   |        |   |       |   | 47,685     |           
|                                                     |                    |   |               |   |          |   |              |   |               |   |         |   |       |   |            |           
|                                                     | Comprehensive loss |   |               |   |          |   |              |   |               |   |         |   |       |   |            | (143,781   | )
|Purchase acquisitions                                |                    |   |              |   |          |   |             |   |               |   | (19,453 | ) |       |   | 1,768,673  |           
|Issuance of common stock                             |                    |   |              |   |          |   |             |   |               |   | (6,511  | ) |       |   | 72,740     |           
|Tax benefits from stock plans                        |                    |   |              |   |          |   |             |   |               |   |        |   |       |   | 166,102    |           
|Purchase of treasury stock                           |                    |   |              |   |          |   | (1,619       | ) |               |   |        |   |       |   | (1,619     | )         
|Compensation expense related to
employee stock plans |                    |   |              |   |          |   |             |   |               |   | 2,641   |   |       |   | 9,491      |           
|                                                     |                    |   |               |   |          |   |              |   |               |   |         |   |       |   |            |           
|Balance at September 30, 2000                        |                    |   | 47,295        |   |          |   | (1,619       | ) |               |   | (24,321 | ) |       |   | 2,906,759  |           
|Net loss                                             |                    |   |              |   |          |   |             |   |               |   |        |   |       |   | (1,445,334 | )         
|Currency translation adjustment                      |                    |   | (18,362       | ) |          |   |             |   |               |   |        |   |       |   | (18,362    | )         
|Change in unrealized gains on investments            |                    |   | (46,094       | ) |          |   |             |   |               |   |        |   |       |   | (46,094    | )         
|Unrealized loss on forward exchange contracts        |                    |   | (43           | ) |          |   |             |   |               |   |        |   |       |   | (43        | )         
|                                                     |                    |   |               |   |          |   |              |   |               |   |         |   |       |   |            |           
|                                                     | Comprehensive loss |   |               |   |          |   |              |   |               |   |         |   |       |   |            | (1,509,833 | )
|Purchase acquisitions                                |                    |   |              |   |          |   |             |   |               |   | 3,819   |   |       |   | 77,966     |           
|Conversion of debt                                   |                    |   |              |   |          |   |             |   |               |   |        |   |       |   | 248,942    |           
|Issuance of common stock                             |                    |   |              |   |          |   |             |   |               |   | (1,106  | ) |       |   | 32,878     |           
|Tax benefits from stock plans                        |                    |   |              |   |          |   |             |   |               |   |        |   |       |   | 1,484      |           
|Purchase of treasury stock                           |                    |   |              |   |          |   | (188         | ) |               |   |        |   |       |   | (188       | )         
|Compensation expense related to
employee stock plans |                    |   |              |   |          |   |             |   |               |   | 12,899  |   |       |   | 15,168     |           
|                                                     |                    |   |               |   |          |   |              |   |               |   |         |   |       |   |            |           
|Balance at September 30, 2001                        |                    |   | (17,204       | ) |          |   | (1,807       | ) |               |   | (8,709  | ) |       |   | 1,773,176  |           
|Net loss                                             |                    |   |              |   |          |   |             |   |               |   |        |   |       |   | (880,767   | )         
|Currency translation adjustment                      |                    |   | (4,195        | ) |          |   |             |   |               |   |        |   |       |   | (4,195     | )         
|Change in unrealized gains on investments            |                    |   | (1,072        | ) |          |   |             |   |               |   |        |   |       |   | (1,072     | )         
|Minimum pension liability adjustment                 |                    |   | (5,649        | ) |          |   |             |   |               |   |        |   |       |   | (5,649     | )         
|Unrealized loss on forward exchange contracts        |                    |   | 43            |   |          |   |             |   |               |   |        |   |       |   | 43         |           
|                                                     |                    |   |               |   |          |   |              |   |               |   |         |   |       |   |            |           
|                                                     | Comprehensive loss |   |               |   |          |   |              |   |               |   |         |   |       |   |            | (891,640   | )
|Purchase acquisitions                                |                    |   |              |   |          |   |             |   |               |   |        |   |       |   | 18,078     |           
|Conversion of debt                                   |                    |   |              |   |          |   |             |   |               |   |        |   |       |   | 37,953     |           
|Issuance of common stock and warrants                |                    |   |              |   |          |   |             |   |               |   | (459    | ) |       |   | 59,783     |           
|Tax benefits from stock plans                        |                    |   |              |   |          |   |             |   |               |   |        |   |       |   | 1,175      |           
|Cancellation of treasury stock                       |                    |   |              |   |          |   | 1,807        |   |               |   |        |   |       |   |           |           
|Compensation expense related to
employee stock plans |                    |   |              |   |          |   |             |   |               |   | 7,609   |   |       |   | 9,583      |           
|Distribution of wireless business                    |                    |   |              |   |          |   |             |   |               |   | 150     |   |       |   | (60,281    | )         
|                                                     |                    |   |               |   |          |   |              |   |               |   |         |   |       |   |            |           
|Balance at September 30, 2002                        |                    | $ | (28,077       | ) |          | $ |             |   |               | $ | (1,409  | ) |       | $ | 947,827    |           
|                                                     |                    |   |               |   |          |   |              |   |               |   |         |   |       |   |            |           

See accompanying notes to consolidated financial statements.

53



---



##### Table of Contents






CONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business

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

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.

In September 2000, the Companys Board of Directors approved in principle the
separation of the Broadband Communications and Mindspeed Technologies
businesses. Although business conditions have delayed the separation, the
Company remains committed to completing the separation as soon as business and
market conditions permit. The separation may be subject to the approval of the
Companys shareholders, the receipt of a ruling from the Internal Revenue
Service that any related spin-off will qualify as a tax-free distribution and
other conditions. There can be no assurance that the separation will be
successfully completed.

2. Summary of Significant Accounting Policies

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

Fiscal Year The Company maintains a fifty-two/fifty-three week fiscal year
ending on the Friday closest to September 30. Fiscal years 2002, 2001 and 2000
each comprised 52 weeks and ended on September 27, September 28 and September
29, respectively. For convenience, the accompanying consolidated financial
statements have been shown as ending on the last day of the calendar month.

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

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

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

54



---



##### Table of Contents



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

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

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

Goodwill and Intangible AssetsGoodwill and intangible assets principally
result from business acquisitions. The Company accounts for business
acquisitions by assigning the purchase price to tangible and intangible assets
and liabilities, including purchased in-process research and development (IPRD)
projects which have not yet reached technological feasibility and have no
alternative future use. Assets acquired and liabilities assumed are recorded at
their fair values; the excess of the purchase price over the net assets
acquired is recorded as goodwill. The value of IPRD is immediately charged to
expense upon completion of the acquisition. Goodwill acquired prior to June 30,
2001 and patents, developed technology, and other intangible assets are
amortized on a straight-line basis over their estimated useful lives, ranging
from 2 to 10 years.

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

Impairment of Long-Lived Assets The 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 2002 and
2001, the Company recorded impairment charges as discussed in Notes 7 and 14.

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

55



---



##### Table of Contents



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

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

The Company designates certain forward contracts as hedges of forecasted
intercompany transactions. Unrealized gains and losses on these contracts are
recorded as a component of accumulated other comprehensive income. Other
forward contracts are designated as hedges of intercompany accounts of the
Companys foreign subsidiaries. Unrealized gains and losses on these forward
contracts are recorded currently through earnings and offset the corresponding
losses and gains on the assets and liabilities being hedged. At September 30,
2002, the Company had approximately $6.0 million of foreign currency forward
contracts outstanding, principally to sell Mexican pesos. These contracts
mature in October 2002 and are with major financial institutions. The fair
value of the foreign currency forward contracts at September 30, 2002 and
changes in fair values during fiscal 2002 and 2001 were not significant. During
fiscal 2002 and 2001, there were no significant gains or losses recognized in
earnings for hedge ineffectiveness.

Stock-Based Compensation The Company accounts for employee stock-based
compensation in accordance with the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations and has adopted the disclosure provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation.

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

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

|                                                |  |      |        |      |  |      |       |  |  |  |        | 
|----------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ----- |  |  |  | ------ | 
|                                                |  | 2002 |        | 2001 |  | 2000
|                                                |  |      |        |      |  |     
|Stock options (under the treasury stock method) |  |      | 4,616  |      |  |      | 9,340 |  |  |  | 17,164 | 
|4-1/4% Convertible Subordinated Notes due 2006  |  |      | 7,342  |      |  |      | 5,636 |  |  |  | 15,153 | 
|4% Convertible Subordinated Notes due 2007      |  |      | 11,607 |      |  |      | 5,747 |  |  |  | 3,929  | 
|Restricted stock and other                      |  |      | 230    |      |  |      | 1,955 |  |  |  | 813    | 

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

56



---



##### Table of Contents



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

At September 30, 2002, three customers accounted for 16%, 12% and 10% of the
Companys accounts receivable; at September 30, 2001, three customers accounted
for 12%, 11% and 11% of the Companys accounts receivable. In fiscal 2002, one
distributor accounted for 10% of net revenues and no other customer accounted
for 10% or more of net revenues. In fiscal 2001, one distributor accounted for
11% of net revenues and no other customer accounted for 10% or more of net
revenues. No individual customer accounted for 10% or more of net revenues for
fiscal 2000.

Supplemental Cash Flow Information Interest paid, net of amounts capitalized,
was $28.6 million, $35.1 million and $26.0 million during fiscal 2002, 2001 and
2000, respectively. Income taxes paid were $(8.2) million, $6.5 million and
$20.6 million during fiscal 2002, 2001 and 2000, respectively.

Comprehensive Income Other comprehensive income includes foreign currency
translation adjustments, unrealized holding gains on available-for-sale
marketable securities, minimum pension liability adjustments and unrealized
losses on forward exchange contracts, net of applicable income taxes. Foreign
currency translation adjustments are not presented net of any tax effect as the
Company does not expect to incur any tax liability or benefit related thereto.
The components of accumulated other comprehensive loss at fiscal year-ends are
as follows (in thousands):

|                                                  |                                      |   |         |         |      |   |         |         |  
|------------------------------------------------- | ------------------------------------ | - | ------- | ------- | ---- | - | ------- | ------- | -
|                                                  |                                      |   | 2002    |         | 2001
|                                                  |                                      |   |         |         |     
|Foreign currency translation adjustments          |                                      | $ | (22,947 | )       |      | $ | (18,752 | )      
|Unrealized gains on available-for-sale securities |                                      |   | 519     |         |      |   | 1,591   |        
|Minimum pension liability adjustments             |                                      |   | (5,649  | )       |      |   |        |        
|Unrealized losses on forward exchange contracts   |                                      |   |        |         |      |   | (43     | )      
|                                                  |                                      |   |         |         |      |   |         |        
|                                                  | Accumulated other comprehensive loss |   | $       | (28,077 | )    |   | $       | (17,204 | )
|                                                  |                                      |   |         |         |      |   |         |        

Recent Accounting Standards In 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 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. Upon adoption, the Company will cease amortizing goodwill against its
results of operations, reducing annual amortization expense by approximately
$240 million. The provisions of SFAS 142 are immediately applicable to goodwill
and intangible assets acquired after June 30, 2001.

SFAS 142 requires the Company to complete a transition impairment test of its
goodwill (as of the beginning of fiscal 2003) no later than the fourth quarter
of fiscal 2003. If the recorded value of goodwill exceeds its estimated fair
value, the Company will write down the value of goodwill to estimated fair
value. Any such transition impairment loss will be recognized as the effect of
a change in accounting principle. The Company is evaluating the impact of
adopting the new standards. The transition impairment test and periodic
impairment tests may result in significant write-downs of 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 significant charges against earnings to write down the value of
long-lived assets.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS 145 rescinds SFAS 4, which required gains and losses from extinguishment
of debt to be aggregated and, if material, classified as an extraordinary item,
net of the related income tax effect. The Company must adopt SFAS 145 as of the
beginning of fiscal 2003. Management expects that
57Table of Contents

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

the adoption of SFAS 145 will
result in the reclassification of fiscal 2001 gains of $11.7 million from
extraordinary gain on extinguishment of debt to income from continuing
operations in the consolidated statements of operations.

In August 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS 146 requires that costs associated with
exit or disposal activities be recognized when they are incurred rather than at
the date of a commitment to an exit or disposal plan. The Company must apply
SFAS 146 prospectively to exit or disposal activities initiated after December
31, 2002. If the Company initiates exit or disposal activities after that date,
SFAS 146 will affect the timing of the recognition of the related costs.
Management does not expect the adoption of SFAS 146 to have a significant
impact on the Companys financial position.

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

3. Spin-off and Merger of Wireless Communications Business

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

Upon completion of the Merger, Alpha and its subsidiaries purchased Conexants
semiconductor assembly, module manufacturing and test facility located in
Mexicali, Mexico and Conexants package design team that supports the Mexicali
facility (together, the Mexicali Operations) for $150 million. In connection
with the purchase, Conexant, Alpha and certain subsidiaries of Alpha entered
into a financing agreement pursuant to which Alpha and a subsidiary of Alpha
delivered to Conexant promissory notes for $150 million (the Term Notes)
guaranteed by Alpha and certain Alpha subsidiaries and secured by substantially
all the assets of Alpha in payment of the purchase price for the Mexicali
facility and the package design team. The Term Notes, dated June 25, 2002, were
to mature 50 percent in March 2003 and 50 percent in June 2003 and were to bear
interest initially at 10 percent, increasing to 12 percent in three months and
15 percent in six months. The financing agreement also provided for a revolving
credit facility under which Alpha could borrow up to $100 million, less
specified reserves, for one year at the same interest rate and with the same
security applicable to the Term Notes. As of September 30, 2002, borrowings of
$30.0 million were outstanding under the credit facility. See Note 16 for a
description of certain subsequent events.

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

The Spin-off Transaction and the Merger were completed pursuant to the
Contribution and Distribution Agreement and the Agreement and Plan of
Reorganization entered into as of December 16, 2001 (the measurement date for
financial accounting purposes), as amended. The accompanying consolidated
financial statements have been restated to reflect the wireless communications
business and Mexicali operations as discontinued operations. For financial
accounting purposes, the sale of the Mexicali operations by Conexant to
Skyworks was treated as if Conexant had
contributed the Mexicali operations to Washington as part of the Spin-off
Transaction, and the $150 million purchase price was treated as a return of
capital to Conexant. The carrying value of the assets and liabilities which the
Company contributed to Washington (including the Mexicali operations) was
$210.4 million.

The operating results of the discontinued wireless communications business and
Mexicali operations included in the accompanying consolidated statements of
operations were as follows (in thousands):

|                                     |  |      |         |      |  |      |          |   |  |   |         |  
|------------------------------------ |  | ---- | ------- | ---- |  | ---- | -------- | - |  | - | ------- | -
|                                     |  | 2002 |         | 2001 |  | 2000
|                                     |  |      |         |      |  |     
|Net revenues                         |  | $    | 272,931 |      |  | $    | 215,502  |   |  | $ | 312,983 |  
|                                     |  |      |         |      |  |      |          |   |  |   |         |  
|Loss before income taxes             |  | $    | (65,282 | )    |  | $    | (320,092 | ) |  | $ | (68,200 | )
|Provision (benefit) for income taxes |  |      | 3,149   |      |  |      | (45,028  | ) |  |   | (10,432 | )
|                                     |  |      |         |      |  |      |          |   |  |   |         |  
|Loss from discontinued operations    |  | $    | (68,431 | )    |  | $    | (275,064 | ) |  | $ | (57,768 | )
|                                     |  |      |         |      |  |      |          |   |  |   |         |  

58



---



##### Table of Contents



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

The loss from discontinued operations for fiscal 2001 includes asset
impairments of $86.2 million and inventory write-downs of $58.7 million.

The components of assets and liabilities of discontinued operations at
September 30, 2001 are as follows (in thousands):

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

4. Acquisitions

During fiscal 2002, 2001 and 2000, the Company completed twelve acquisitions
that were accounted for using the purchase method of accounting.

Fiscal 2002

Acquisition of Video Compression Business

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

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

The tangible assets of the acquired video compression business totaled $0.3
million, net of liabilities of $1.6 million. The results of operations of the
video compression business are included in the Broadband Communications
59Table of ContentsCONEXANT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)segment
in the consolidated financial statements from the date of acquisition. The pro
forma effect of this acquisition is not material to the Companys results of
operations for fiscal 2002 or 2001.Fiscal 2001In February 2001, the Company acquired HyperXS Communications, Inc. (HyperXS),
a developer of semiconductors and related software products for high-speed
Internet access devices.Fiscal 2000In January 2000, the Company acquired Microcosm Communications Limited
(Microcosm), a fabless semiconductor company that develops and markets
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 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.Consideration for the fiscal 2001 and 2000 acquisitions consisted of cash,
shares of the Companys common stock or a combination of cash and stock and the
fair value of outstanding stock options of the acquired companies converted
into options to purchase shares of the Companys common stock.The Companys acquisitions are summarized below (in thousands):

|                           |  |              |        |           |  |           |       |               |  |                |        |          |  |        |           |  |  |   |         |            |  |   |           |            |  |   |         | 
|-------------------------- |  | ------------ | ------ | --------- |  | --------- | ----- | ------------- |  | -------------- | ------ | -------- |  | ------ | --------- |  |  | - | ------- | ---------- |  | - | --------- | ---------- |  | - | ------- | 
|                           |  | Shares of    |        |           |  |           |       |               |  |                |        |          |  |        |           |  |  |   |         |            |  |   |           |            |  |  
|                           |  | Conexant     |        |           |  |           |       |               |  |                |        |          |  |        |           |  |  |   |         |            |  |   |           | Identified
|                           |  | common stock |        | Options   |  |           |       |               |  | Total value of |        |          |  |        |           |  |  |   |         | intangible
|                           |  | issued       |        | converted |  | Cash paid |       | consideration |  | IPRD           |        | Goodwill |  | assets
|                           |  |              |        |           |  |           |       |               |  |                |        |          |  |       
|Fiscal 2002                |  |              |        |           |  |           |       |               |  |                |        |          |  |        |           |  |  |   |         |            |  |   |           |            |  |   |         | 
|Video compression
business |  |              | 1,100  |           |  |           |      |               |  | $              | 19,200 |          |  | $      | 32,400    |  |  | $ |        |            |  | $ | 23,557    |            |  | $ | 8,851   | 
|                           |  |              |        |           |  |           |       |               |  |                |        |          |  |        |           |  |  |   |         |            |  |   |           |            |  |   |         | 
|Fiscal 2001                |  |              |        |           |  |           |       |               |  |                |        |          |  |        |           |  |  |   |         |            |  |   |           |            |  |   |         | 
|HyperXS                    |  |              | 300    |           |  |           | 210   |               |  | $              | 7,500  |          |  | $      | 14,627    |  |  | $ |        |            |  | $ | 12,730    |            |  | $ |        | 
|                           |  |              |        |           |  |           |       |               |  |                |        |          |  |        |           |  |  |   |         |            |  |   |           |            |  |   |         | 
|Fiscal 2000                |  |              |        |           |  |           |       |               |  |                |        |          |  |        |           |  |  |   |         |            |  |   |           |            |  |   |         | 
|Microcosm                  |  |              | 7,012  |           |  |           | 1,022 |               |  | $              | 3,265  |          |  | $      | 153,227   |  |  | $ | 27,400  |            |  | $ | 86,478    |            |  | $ | 49,720  | 
|Maker                      |  |              | 12,651 |           |  |           | 1,637 |               |  |                |       |          |  |        | 979,591   |  |  |   | 118,500 |            |  |   | 717,163   |            |  |   | 171,760 | 
|HotRail                    |  |              | 6,518  |           |  |           | 1,337 |               |  |                |       |          |  |        | 355,677   |  |  |   | 26,100  |            |  |   | 284,674   |            |  |   | 55,540  | 
|Novanet                    |  |              | 2,019  |           |  |           | 294   |               |  |                | 22,316 |          |  |        | 117,739   |  |  |   | 17,317  |            |  |   | 99,846    |            |  |   | 658     | 
|NetPlane                   |  |              | 1,927  |           |  |           | 305   |               |  |                |       |          |  |        | 86,981    |  |  |   | 2,031   |            |  |   | 58,507    |            |  |   | 18,895  | 
|Other acquisitions         |  |              | 1,900  |           |  |           | 277   |               |  |                | 19,793 |          |  |        | 103,956   |  |  |   |        |            |  |   | 86,719    |            |  |   | 13,184  | 
|                           |  |              |        |           |  |           |       |               |  |                |        |          |  |        |           |  |  |   |         |            |  |   |           |            |  |   |         | 
|                           |  |              | 32,027 |           |  |           | 4,872 |               |  | $              | 45,374 |          |  | $      | 1,797,171 |  |  | $ | 191,348 |            |  | $ | 1,333,387 |            |  | $ | 309,757 | 
|                           |  |              |        |           |  |           |       |               |  |                |        |          |  |        |           |  |  |   |         |            |  |   |           |            |  |   |         | 

Also in fiscal 2000, the Companys discontinued wireless communications
business completed the acquisition of Philsar Semiconductor, Inc. (Philsar) for
aggregate consideration of $110.0 million, consisting of 2.5 million shares of
the Companys common stock and the conversion of outstanding Philsar stock
options into options to purchase 525,000 shares of the Companys common stock.

The total value of the fiscal 2001 and 2000 acquisitions includes additional
consideration of $108.6 million paid in fiscal 2002 and 2001 to the former
owners of the acquired companies upon the achievement of certain performance
and technology goals and the expiration of indemnity, escrow or holdback
provisions of the related acquisition agreements. In fiscal 2002, the Company
paid additional consideration valued at $29.9 million, consisting of $25.0

60



---



##### Table of Contents



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

million in cash and 319,572 shares of common stock. In fiscal 2001, the Company
paid additional consideration valued at $78.7 million, consisting of $7.5
million in cash, approximately 7.5 million shares of common stock and options
to purchase 928,000 shares of common stock. The value of the additional
consideration increased the amounts of goodwill related to the acquired
companies. No additional consideration is payable, or contingently payable, for
acquisitions the Company completed prior to fiscal 2002.

The value of the common stock issued for the fiscal 2001 and 2000 acquisitions
was based on market prices at the time of announcement of the acquisition or,
in the case of the additional consideration, at the time of resolution of the
contingency. The value of the options converted was determined using the
Black-Scholes option pricing model, based upon their various exercise prices
(which ranged from $1.00 to $44.32 per share), and remaining contractual lives
(ranging from two to ten years) and the following additional assumptions:
estimated volatility of 60%, risk-free interest rate of 5.9% to 6.0% and no
dividend yield. 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 business acquired by the continuing
operations in fiscal 2001 totaled $0.1 million. The tangible assets of the
businesses acquired by the continuing operations in fiscal 2000 totaled $51.5
million, net of liabilities of $18.5 million.

Identified intangible assets, principally consisting of developed technology,
are being amortized over estimated lives of two to seven years (principally
five years). The goodwill balances related to each of the fiscal 2001 and 2000
acquisitions are being amortized over estimated lives of five years and are not
deductible for income tax purposes.

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 $4.6 million and $9.4 million of
compensation expense was recognized during fiscal 2002 and 2001, respectively.

In connection with five of the fiscal 2000 acquisitions, an aggregate of $191.3
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. While the acquired companies were development
stage companies, or had limited operating histories, the forecasted revenues
and costs were generally consistent with historical pricing, gross margins and
expense levels, where applicable. Future cash flows from the significant
acquired projects were expected to commence at various dates within six to
eighteen months of acquisition.

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
61Table of Contents

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

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.

5. Sales of Assets

In March 2002, the Company and The Carlyle Group formed a new specialty foundry
company named Jazz Semiconductor, Inc. (Jazz). In the transaction, Conexant
contributed its Newport Beach, California wafer fabrication operations and
certain intellectual property to Jazz and the Company received $19.3 million in
cash and a 45% equity interest in Jazz, having an estimated fair value of $42.5
million. In addition to contributing its Newport Beach wafer fabrication
operations (with a carrying value of approximately $43.2 million) and certain
related assets and liabilities (with carrying values of $7.4 million and $7.8
million, respectively), the Company also issued to Jazz a warrant to purchase
2.9 million shares of Conexant common stock at a price of $13.05 per share (the
fair market value on the date of grant of the warrant) through January 2005.
The warrant had a fair value of $14.2 million, determined by management using
the Black-Scholes option pricing model (assuming volatility of 68.5%, a
risk-free interest rate of 4.1%, and no dividend yield) and discounted 20% for
the lack of marketability. In connection with the Spin-off Transaction and the
Merger, the exercise price of the warrant was adjusted to $4.62 per share.

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

In July 2002, the Company completed the planned divestiture of its digital
imaging business and merged the business with Zing Network, Inc. to create a
new privately held company named Pictos Technologies, Inc. (Pictos). The
Company contributed assets with a carrying value of $17.3 million to Pictos in
exchange for shares of Pictos stock. The Company accounts for its investment in
Pictos under the cost method.

In fiscal 2001, the Company transferred the net assets of its global
positioning system (GPS) business to SiRF Technology, Inc. (SiRF), a privately
held company focused on GPS applications. The Company transferred assets with a
carrying value of $5.6 million to SiRF in exchange for shares of SiRF stock.
The Company accounts for its investment in SiRF under the cost method.

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

6. Marketable Securities

Marketable securities include asset-backed securities, corporate bonds,
government securities and marketable equity securities. All of the Companys
marketable securities are classified as available for sale and are recorded at
fair value, based upon quoted market prices. As of September 30, 2002,
unrealized gains of $0.5 million (net of related income taxes) on these
securities are included in accumulated other comprehensive income. The
Companys available-for-sale marketable securities are classified as short-term
investments in the consolidated balance sheets as the Company intends to sell
these securities as necessary to meet its liquidity requirements.

62



---



##### Table of Contents



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

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

|                              |  |           |         |         |  |                  |       |                  |  |   |     |   |  |   |         | 
|----------------------------- |  | --------- | ------- | ------- |  | ---------------- | ----- | ---------------- |  | - | --- | - |  | - | ------- | 
|                              |  |           |         |         |  | Gross Unrealized |       | Gross Unrealized |  |   |     |  
|                              |  | Amortized |         | Holding |  | Holding          |       | Fair            
|                              |  | Cost      |         | Gains   |  | Losses           |       | Value           
|                              |  |           |         |         |  |                  |       |                 
|September 30, 2002:           |  |           |         |         |  |                  |       |                  |  |   |     |   |  |   |         | 
|U.S. government agencies      |  | $         | 24,686  |         |  | $                | 257   |                  |  | $ |    |   |  | $ | 24,943  | 
|Foreign government securities |  |           | 8,446   |         |  |                  | 102   |                  |  |   |    |   |  |   | 8,548   | 
|Corporate debt securities     |  |           | 65,493  |         |  |                  | 517   |                  |  |   | (35 | ) |  |   | 65,975  | 
|                              |  |           |         |         |  |                  |       |                  |  |   |     |   |  |   |         | 
|                              |  | $         | 98,625  |         |  | $                | 876   |                  |  | $ | (35 | ) |  | $ | 99,466  | 
|                              |  |           |         |         |  |                  |       |                  |  |   |     |   |  |   |         | 
|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 | 
|                              |  |           |         |         |  |                  |       |                  |  |   |     |   |  |   |         | 

The amortized cost and estimated fair value of debt securities at September 30,
2002, 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 |  | $         | 20,445 |       |  | $ | 20,580 | 
|Due in 1  2 years    |  |           | 50,533 |       |  |   | 50,985 | 
|Due in 2  5 years    |  |           | 24,819 |       |  |   | 25,047 | 
|Due after 5 years     |  |           | 2,828  |       |  |   | 2,854  | 
|                      |  |           |        |       |  |   |        | 
|                      |  | $         | 98,625 |       |  | $ | 99,466 | 
|                      |  |           |        |       |  |   |        | 

7. Supplemental Financial Statement Data

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

|                |  |      |        |      |  |   |        | 
|--------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                |  | 2002 |        | 2001
|                |  |      |        |     
|Raw material    |  | $    | 363    |      |  | $ | 7,092  | 
|Work-in-process |  |      | 39,313 |      |  |   | 64,883 | 
|Finished goods  |  |      | 17,654 |      |  |   | 13,039 | 
|                |  |      |        |      |  |   |        | 
|                |  | $    | 57,330 |      |  | $ | 85,014 | 
|                |  |      |        |      |  |   |        | 

Cost of goods sold for fiscal 2001 includes inventory write-downs of $188.8
million. These write-downs resulted from the sharply reduced end-customer
demand for PCs and Internet infrastructure equipment experienced during fiscal
2001. As a result of these market conditions, the Company experienced a
significant number of order cancellations and a decline in the volume of new
orders beginning in the fiscal 2001 first quarter, and becoming more pronounced
in the second quarter. The inventories written down in fiscal 2001 principally
consisted of voiceband processors, multi-megabit DSL transceivers, satellite
set-top box tuners and demodulators, ADSL modems and analog modems for non-PC
applications.

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. When the inventory on hand exceeds the
foreseeable demand, the value of inventory that at the time of the review is
not expected to be sold is written down. The amount of the write-down is the
excess of historical cost over estimated realizable value (generally zero).
Once established, these write-downs are considered permanent adjustments to the
cost basis of the excess inventory.

The assessment of the recoverability of inventories, and the amounts of any
write-downs, is based on currently available information and assumptions about
future demand (generally over six months) and market conditions. Demand for the
Companys products may fluctuate significantly over time, and actual demand and
market conditions may be more or less favorable than those projected by
management. In the event that actual demand is lower than originally projected,
additional inventory write-downs may be required.

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

63



---



##### Table of Contents



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

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

|                                          |  |      |          |      |  |   |          |  
|----------------------------------------- |  | ---- | -------- | ---- |  | - | -------- | -
|                                          |  | 2002 |          | 2001
|                                          |  |      |          |     
|Land                                      |  | $    | 1,663    |      |  | $ | 7,260    |  
|Land and leasehold improvements           |  |      | 15,460   |      |  |   | 17,067   |  
|Buildings                                 |  |      | 35,601   |      |  |   | 107,242  |  
|Machinery and equipment                   |  |      | 233,363  |      |  |   | 604,858  |  
|Construction in progress                  |  |      | 4,652    |      |  |   | 31,420   |  
|                                          |  |      |          |      |  |   |          |  
|                                          |  |      | 290,739  |      |  |   | 767,847  |  
|Accumulated depreciation and amortization |  |      | (196,745 | )    |  |   | (549,961 | )
|                                          |  |      |          |      |  |   |          |  
|                                          |  | $    | 93,994   |      |  | $ | 217,886  |  
|                                          |  |      |          |      |  |   |          |  

Interest capitalized into construction in progress was $1.3 million during
fiscal 2000.

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

|                         |  |      |           |      |  |   |           |  
|------------------------ |  | ---- | --------- | ---- |  | - | --------- | -
|                         |  | 2002 |           | 2001
|                         |  |      |           |     
|Goodwill                 |  | $    | 1,198,471 |      |  | $ | 1,337,525 |  
|Developed technology     |  |      | 288,996   |      |  |   | 296,625   |  
|Other intangible assets  |  |      | 51,775    |      |  |   | 60,390    |  
|                         |  |      |           |      |  |   |           |  
|                         |  |      | 1,539,242 |      |  |   | 1,694,540 |  
|Accumulated amortization |  |      | (766,040  | )    |  |   | (503,111  | )
|                         |  |      |           |      |  |   |           |  
|                         |  | $    | 773,202   |      |  | $ | 1,191,429 |  
|                         |  |      |           |      |  |   |           |  

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

|                            |  |      |         |      |  |   |         | 
|--------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                            |  | 2002 |         | 2001
|                            |  |      |         |     
|Advance payments to vendors |  | $    | 6,592   |      |  | $ | 156,496 | 
|Investments                 |  |      | 122,173 |      |  |   | 83,095  | 
|Other                       |  |      | 27,273  |      |  |   | 24,938  | 
|                            |  |      |         |      |  |   |         | 
|                            |  | $    | 156,038 |      |  | $ | 264,529 | 
|                            |  |      |         |      |  |   |         | 

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 and the Companys investments in Jazz, Pictos and SiRF. In
connection with certain of these investments, the Company may be required to
invest up to an additional $14.8 million.

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

|                                         |  |      |        |      |  |   |         | 
|---------------------------------------- |  | ---- | ------ | ---- |  | - | ------- | 
|                                         |  | 2002 |        | 2001
|                                         |  |      |        |     
|Restructuring                            |  | $    | 35,133 |      |  | $ | 10,732  | 
|Litigation and environmental liabilities |  |      | 3,310  |      |  |   | 21,305  | 
|Other                                    |  |      | 33,295 |      |  |   | 68,025  | 
|                                         |  |      |        |      |  |   |         | 
|                                         |  | $    | 71,738 |      |  | $ | 100,062 | 
|                                         |  |      |        |      |  |   |         | 

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

|                                         |  |      |         |      |  |      |         |   |  |   |         |  
|---------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                         |  | 2002 |         | 2001 |  | 2000
|                                         |  |      |         |      |  |     
|Investment and interest income           |  | $    | 13,259  |      |  | $    | 29,622  |   |  | $ | 41,948  |  
|Gain on sale of investments              |  |      |        |      |  |      | 23,251  |   |  |   |        |  
|Interest expense                         |  |      | (31,138 | )    |  |      | (33,608 | ) |  |   | (35,943 | )
|Write-down of non-marketable investments |  |      | (21,207 | )    |  |      | (13,051 | ) |  |   |        |  
|Other                                    |  |      | 1,918   |      |  |      | (5,825  | ) |  |   | 324     |  
|                                         |  |      |         |      |  |      |         |   |  |   |         |  
|                                         |  | $    | (37,168 | )    |  | $    | 389     |   |  | $ | 6,329   |  
|                                         |  |      |         |      |  |      |         |   |  |   |         |  

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

64



---



##### Table of Contents



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

8. Income Taxes

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

|          |                 |                |        |        |      |      |          |         |         |   |        |        |         |  
|--------- | --------------- | -------------- | ------ | ------ | ---- | ---- | -------- | ------- | ------- | - | ------ | ------ | ------- | -
|          |                 |                |        | 2002   |      | 2001 |          | 2000   
|          |                 |                |        |        |      |      |          |        
|Current:  |                 |                |        |        |      |      |          |         |         |   |        |       
|          | United States   |                | $      | (2,767 | )    |      | $        | (8,000  | )       |   | $      | 70,304 |        
|          | Foreign         |                |        | 1,110  |      |      |          | 1,525   |         |   |        | 6,049  |        
|          | State and local |                |        | 670    |      |      |          |        |         |   |        | 7,237  |        
|          |                 |                |        |        |      |      |          |         |         |   |        |       
|          |                 | Total current  |        |        | (987 | )    |          |         | (6,475  | ) |        |        | 83,590  |  
|          |                 |                |        |        |      |      |          |         |         |   |        |       
|Deferred: |                 |                |        |        |      |      |          |         |         |   |        |       
|          | United States   |                |        |       |      |      |          | (94,597 | )       |   |        | (9,944 | )      
|          | Foreign         |                |        | (152   | )    |      |          | 479     |         |   |        | (4,527 | )      
|          | State and local |                |        |       |      |      |          | (5,717  | )       |   |        | (6,083 | )      
|          |                 |                |        |        |      |      |          |         |         |   |        |       
|          |                 | Total deferred |        |        | (152 | )    |          |         | (99,835 | ) |        |        | (20,554 | )
|          |                 |                |        |        |      |      |          |         |         |   |        |       
|          |                 | $              | (1,139 | )      |      | $    | (106,310 | )       |         | $ | 63,036 |       
|          |                 |                |        |        |      |      |          |         |         |   |        |        |        

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

|                        |  |      |        |      |  |      |          |   |  |   |         |  
|----------------------- |  | ---- | ------ | ---- |  | ---- | -------- | - |  | - | ------- | -
|                        |  | 2002 |        | 2001 |  | 2000
|                        |  |      |        |      |  |     
|Continuing operations   |  | $    | (1,139 | )    |  | $    | (106,310 | ) |  | $ | 63,036  |  
|Discontinued operations |  |      | 3,149  |      |  |      | (45,028  | ) |  |   | (10,432 | )
|Extraordinary gain      |  |      |       |      |  |      | 4,426    |   |  |   |        |  
|                        |  |      |        |      |  |      |          |   |  |   |         |  
|                        |  | $    | 2,010  |      |  | $    | (146,912 | ) |  | $ | 52,604  |  
|                        |  |      |        |      |  |      |          |   |  |   |         |  

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

|                          |                                                 |                                |   |          |         |      |   |          |         | 
|------------------------- | ----------------------------------------------- | ------------------------------ | - | -------- | ------- | ---- | - | -------- | ------- | 
|                          |                                                 |                                |   | 2002     |         | 2001
|                          |                                                 |                                |   |          |         |     
|Deferred tax assets:      |                                                 |                                |   |          |         |      |   |         
|                          | Accounts receivable                             |                                | $ | 3,210    |         |      | $ | 6,654    |        
|                          | Inventories                                     |                                |   | 84,405   |         |      |   | 110,072  |        
|                          | Property, plant and equipment                   |                                |   | 35,193   |         |      |   | 97,611   |        
|                          | Investments                                     |                                |   | 69,371   |         |      |   |         |        
|                          | Deferred revenue                                |                                |   | 11,084   |         |      |   | 8,477    |        
|                          | Accrued compensation and benefits               |                                |   | 6,204    |         |      |   | 7,843    |        
|                          | Product returns and allowances                  |                                |   | 13,135   |         |      |   | 4,721    |        
|                          | Retirement benefits and deferred compensation   |                                |   | 23,542   |         |      |   | 24,498   |        
|                          | Capitalized research and development            |                                |   | 151,773  |         |      |   | 34,582   |        
|                          | Net operating losses                            |                                |   | 332,180  |         |      |   | 249,042  |        
|                          | Research and development and investment
credits |                                |   | 152,542  |         |      |   | 109,053  |        
|                          | Other, net                                      |                                |   | 15,559   |         |      |   | 18,982   |        
|                          | Valuation allowance                             |                                |   | (524,174 | )       |      |   | (303,275 | )      
|                          |                                                 |                                |   |          |         |      |   |         
|                          |                                                 | Total deferred tax assets      |   |          | 374,024 |      |   |          | 368,260 | 
|                          |                                                 |                                |   |          |         |      |   |         
|Deferred tax liabilities: |                                                 |                                |   |          |         |      |   |         
|                          | Intangible assets                               |                                |   | 51,472   |         |      |   | 74,438   |        
|                          | Unrealized gains on investments                 |                                |   | 321      |         |      |   | 1,237    |        
|                          | Deferred state taxes                            |                                |   | 65,830   |         |      |   | 33,431   |        
|                          |                                                 |                                |   |          |         |      |   |         
|                          |                                                 | Total deferred tax liabilities |   |          | 117,623 |      |   |          | 109,106 | 
|                          |                                                 |                                |   |          |         |      |   |         
|                          |                                                 | Net deferred tax assets        |   | $        | 256,401 |      |   | $        | 259,154 | 
|                          |                                                 |                                |   |          |         |      |   |          |        

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
deferred tax assets as of September 30, 2002 and 2001 will not be realized.
Consequently, the Company established a valuation allowance for the portion of
its deferred tax assets that is not expected to be realized through the
reduction of future income tax payments. Management believes the remaining
portion of the deferred tax assets is more likely than not to be realized based
on current expectations of future earnings and available tax planning
strategies.

A valuation allowance of $303.3 million was recorded in fiscal 2001 and an
additional $220.9 million was recorded in fiscal 2002. The addition to the
valuation allowance in fiscal 2002 includes $22.8 million associated with net
operating loss carryforwards, attributable to the Companys discontinued
operations, that were retained by the Company and $2.0 million related to
deductions attributable to stock option exercises. To the extent the Company

65



---



##### Table of Contents



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

obtains a tax benefit for the net operating losses attributable to the stock
option exercises, such amount will be recorded as additional paid-in capital.

As of September 30, 2002, the Company has U.S. Federal net operating loss
carryforwards of approximately $936 million which expire at various dates
through 2022, aggregate state net operating loss carryforwards of approximately
$77 million which expire at various dates through 2012 and foreign net
operating loss carryforwards of approximately $2 million which have no
expiration. The Company also has U.S. Federal and state income tax credit
carryforwards of approximately $65 million and $88 million, respectively. The
U.S. Federal credits expire at various dates through 2022. California
Manufacturers Investment Credits of approximately $24 million expire at
various dates through 2009, while the remaining state credits have no
expiration date. Approximately $19 million of additional 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 $19 million when the
benefits from such portion of the credit carryforwards are realized.

Tax benefits from the exercise of stock options (including payments received
under the tax allocation agreement with Rockwell) totaling $1.2 million, $1.5
million and $166.1 million for fiscal 2002, 2001 and 2000, respectively, were
credited directly to shareholders equity.

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

|                                                |  |      |          |      |  |      |          |   |  |   |         |  
|----------------------------------------------- |  | ---- | -------- | ---- |  | ---- | -------- | - |  | - | ------- | -
|                                                |  | 2002 |          | 2001 |  | 2000
|                                                |  |      |          |      |  |     
|U.S. Federal statutory tax at 35%               |  | $    | (284,716 | )    |  | $    | (449,352 | ) |  | $ | (24,543 | )
|State taxes, net of federal effect              |  |      | (26,388  | )    |  |      | (42,932  | ) |  |   | 1,178   |  
|Foreign income taxes in excess of U.S           |  |      | 1,430    |      |  |      | 4,221    |   |  |   | 29,174  |  
|Research and development credits                |  |      | (10,303  | )    |  |      | (15,670  | ) |  |   | (15,000 | )
|Nondeductible amortization of intangible assets |  |      | 115,644  |      |  |      | 89,592   |   |  |   | 34,954  |  
|Nondeductible reorganization costs              |  |      |         |      |  |      | 20,481   |   |  |   |        |  
|Nondeductible IPRD                              |  |      |         |      |  |      |         |   |  |   | 42,794  |  
|Valuation allowance                             |  |      | 196,050  |      |  |      | 303,275  |   |  |   |        |  
|Other                                           |  |      | 7,144    |      |  |      | (15,925  | ) |  |   | (5,521  | )
|                                                |  |      |          |      |  |      |          |   |  |   |         |  
|Provision (benefit) for income taxes            |  | $    | (1,139   | )    |  | $    | (106,310 | ) |  | $ | 63,036  |  
|                                                |  |      |          |      |  |      |          |   |  |   |         |  

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

|              |  |      |          |      |  |      |            |   |  |   |         |  
|------------- |  | ---- | -------- | ---- |  | ---- | ---------- | - |  | - | ------- | -
|              |  | 2002 |          | 2001 |  | 2000
|              |  |      |          |      |  |     
|United States |  | $    | (690,528 | )    |  | $    | (1,280,982 | ) |  | $ | 8,882   |  
|Foreign       |  |      | (122,947 | )    |  |      | (2,882     | ) |  |   | (79,005 | )
|              |  |      |          |      |  |      |            |   |  |   |         |  
|              |  | $    | (813,475 | )    |  | $    | (1,283,864 | ) |  | $ | (70,123 | )
|              |  |      |          |      |  |      |            |   |  |   |         |  

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 $32.5 million and $27.1 million of undistributed earnings of
foreign subsidiaries as of September 30, 2002 and 2001, respectively, which
have been or are intended to be permanently reinvested.

9. 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 initially 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, 2002, $615.0 million principal amount of the 4% Convertible
Subordinated Notes were outstanding.

66



---



##### Table of Contents



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

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 initially 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.
During fiscal 2002, the Company exchanged 2.2 million shares of its common
stock for approximately $28.0 million principal amount of its 4 1/4%
Convertible Subordinated Notes. In connection with the exchanges, the Company
recognized debt conversion costs of $10.4 million for the fair value of the
shares issued in excess of the number of shares issuable in a conversion of the
notes pursuant to their original terms. At September 30, 2002, $66.8 million
principal amount of the 4 1/4% Convertible Subordinated Notes were
outstanding.

At September 30, 2002, the fair value of the convertible subordinated notes
(based on quoted market prices) was approximately $198.8 million compared to
their carrying value of $681.8 million.

In connection with the Spin-off Transaction and the Merger, the conversion
prices of the Companys 4% Convertible Subordinated Notes and 41/4%
Convertible Subordinated Notes were adjusted to $52.986 and $11.332,
respectively.

10. Commitments

The Company leases certain facilities and equipment under non-cancelable
operating leases. Land and facility leases expire at various dates through 2017
and contain various provisions for rental adjustments including, in certain
cases,
adjustments based on increases in the Consumer Price Index. The leases
generally contain renewal provisions for varying periods of time. Rental
expense under operating leases was approximately $27.1 million, $23.2 million
and $13.9 million during fiscal 2002, 2001 and 2000, respectively.

At September 30, 2002, future minimum lease payments under operating leases
were as follows (in thousands):

|            |                                     |   |        |         | 
|----------- | ----------------------------------- | - | ------ | ------- | 
|Fiscal Year |                                     |   |        |        
|            |                                     |   |        |        
|2003        |                                     | $ | 22,801 |        
|2004        |                                     |   | 18,305 |        
|2005        |                                     |   | 15,439 |        
|2006        |                                     |   | 9,317  |        
|2007        |                                     |   | 6,771  |        
|Thereafter  |                                     |   | 44,665 |        
|            |                                     |   |        |        
|            | Total future minimum lease payments |   | $      | 117,298 | 
|            |                                     |   |        |        

The summary of future minimum lease payments includes an aggregate of $7.8
million of lease obligations that principally expire through fiscal 2005, which
have been accrued for in connection with the Companys restructuring actions
(see Note 14).

The Company purchases a substantial portion of its requirements for
silicon-based semiconductor products from Jazz. During the first two years of
the long-term supply arrangement with Jazz, the Companys cost of wafers is an
amount which approximates its historical cost. Thereafter, the cost of wafers
will be based on market prices. Additionally, the Company is obligated to
purchase certain minimum annual volumes of wafers during the first three years
of the arrangement. In the event the Companys actual wafer purchases are less
than the required minimum volumes, it will be required to make additional
payments to Jazz. The Companys expected minimum purchase obligations under the
long-term supply agreement with Jazz, net of a portion of the wafer purchase
obligations assumed by a third party, will be approximately $71 million, $43
million and $14 million in fiscal 2003, 2004 and 2005, respectively.

Additionally, the Company entered into a long-term supply agreement with
Skyworks in June 2002, under which Skyworks provides semiconductor assembly and
test services at the Companys former Mexicali, Mexico facility. Under this
supply agreement, the Company is obligated to purchase certain minimum amounts
of assembly and test

67



---



##### Table of Contents



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

services during fiscal 2003. In the event the Companys
purchases of assembly and test services are less than the required minimum
amounts, it will be required to make additional payments to Skyworks.
Thereafter and subject to certain conditions, the Company is obligated to offer
Skyworks the opportunity to provide additional assembly and test services that
the Company may need and Skyworks is obligated to make commercially reasonable
efforts to provide such requested services during the three-year agreement. The
Companys expected minimum obligation under the supply agreement with Skyworks
is approximately $35 million in fiscal 2003.

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

11. Contingencies

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

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

Conexant has been designated as a potentially responsible party and is engaged
in groundwater remediation at one Superfund site located at a former silicon
wafer manufacturing facility and steel fabrication plant in Parker Ford,
Pennsylvania formerly occupied by the Company. In addition, the Company is
engaged in a remediation of groundwater contamination at its former Newport
Beach, California facility. Management currently estimates the aggregate
remaining costs for these remediations to be approximately $2.5 million and has
accrued for these costs as of September 30, 2002.

12. 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.

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, 2002, approximately 8.8 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
68Table of Contents

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

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.

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

In connection with the Spin-off Transaction, each option holder, other than
holders of options granted to employees of the Mindspeed Technologies segment
on March 30, 2001 and options held by persons in certain foreign locations
(Mindspeed March 30 options), received an option to purchase an equal number of
shares of Washington common stock. The exercise prices of the outstanding
Conexant options and the Washington options were adjusted so that the
aggregate intrinsic value of the options was equal to the intrinsic value of
the Conexant option immediately prior to the Spin-off Transaction and the ratio
of the exercise price per share to the market value per share of each option
was the same immediately before and after the Spin-off Transaction. In the
Merger, each outstanding Washington option was converted into an option to
purchase Skyworks common stock based upon the exchange ratio in the Merger.
Mindspeed March 30 options remained exercisable only for shares of Conexant
common stock, with appropriate adjustment to the number of shares and exercise
prices thereof such that the aggregate intrinsic value of the options was equal
to the intrinsic value of the option immediately prior to the Spin-off
Transaction and the ratio of the exercise price per share to the market value
per share of each option was the same immediately before and after the Spin-off
Transaction.

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

|                                                  |  |           |         |          |  |           |       |          |  |           |        |           |  |   |       |  |  |           |        |   |  |   |       | 
|------------------------------------------------- |  | --------- | ------- | -------- |  | --------- | ----- | -------- |  | --------- | ------ | --------- |  | - | ----- |  |  | --------- | ------ | - |  | - | ----- | 
|                                                  |  | 2002      |         | 2001     |  | 2000     
|                                                  |  |           |         |          |  |          
|                                                  |  |           |         |          |  | 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                  |  |           | 80,029  |          |  | $         | 25.36 |          |  |           | 60,679 |           |  | $ | 32.51 |  |  |           | 33,350 |   |  | $ | 9.80  | 
|Granted during period                             |  |           | 31,762  |          |  |           | 11.16 |          |  |           | 28,880 |           |  |   | 12.48 |  |  |           | 32,404 |   |  |   | 53.37 | 
|Issued or assumed in connection
with acquisitions |  |           |        |          |  |           |      |          |  |           | 1,138  |           |  |   | 1.00  |  |  |           | 4,469  |   |  |   | 11.15 | 
|Adjustments for the Spin-off Transaction          |  |           | 17,029  |          |  |           | 3.23  |          |  |           |       |           |  |   |      |  |  |           |       |   |  |   |      | 
|Exercised                                         |  |           | (2,775  | )        |  |           | 5.15  |          |  |           | (1,998 | )         |  |   | 6.08  |  |  |           | (7,082 | ) |  |   | 7.41  | 
|Cancelled                                         |  |           | (37,240 | )        |  |           | 41.33 |          |  |           | (8,670 | )         |  |   | 34.44 |  |  |           | (2,462 | ) |  |   | 35.49 | 
|                                                  |  |           |         |          |  |           |       |          |  |           |        |           |  |   |       |  |  |           |        |   |  |   |       | 
|Outstanding at end of year                        |  |           | 88,805  |          |  |           | 3.90  |          |  |           | 80,029 |           |  |   | 25.36 |  |  |           | 60,679 |   |  |   | 32.51 | 
|                                                  |  |           |         |          |  |           |       |          |  |           |        |           |  |   |       |  |  |           |        |   |  |   |       | 
|Exercisable at end of year                        |  |           | 50,683  |          |  |           | 3.75  |          |  |           | 23,889 |           |  |   | 22.05 |  |  |           | 12,211 |   |  |   | 8.32  | 
|                                                  |  |           |         |          |  |           |       |          |  |           |        |           |  |   |       |  |  |           |        |   |  |   |       | 

69



---



##### Table of Contents



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

The following table summarizes stock options outstanding at September 30, 2002
(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           |      |           |  |              |  | $        | 3.05 |           |  |          | 12,963      |        |             |  | 6.3       |     |           | $ | 2.15 |      |  |  | 9,469     |        |  | $ | 2.16 |     
|                | 3.06 |           |   |             |  |          |      | 3.23      |  |          |             | 29,932 |             |  |           | 8.4 |           |   |      | 3.23 |  |  |           | 15,542 |  |   |      | 3.22 | 
|                | 3.25 |           |   |             |  |          |      | 3.40      |  |          |             | 11,348 |             |  |           | 6.1 |           |   |      | 3.38 |  |  |           | 8,507  |  |   |      | 3.38 | 
|                | 3.41 |           |   |             |  |          |      | 4.23      |  |          |             | 25,783 |             |  |           | 9.4 |           |   |      | 4.20 |  |  |           | 13,342 |  |   |      | 4.21 | 
|                | 4.28 |           |   |             |  |          |      | 115.62    |  |          |             | 8,779  |             |  |           | 8.0 |           |   |      | 8.56 |  |  |           | 3,823  |  |   |      | 9.08 | 
|                |      |           |   |              |  |          |      |           |  |          |             |        |             |  |           |     |           |   |      |      |  |  |           |        |  |   |      |     
|                | 0.24 |           |   |             |  |          |      | 115.62    |  |          |             | 88,805 |             |  |           | 8.0 |           |   |      | 3.90 |  |  |           | 50,683 |  |   |      | 3.75 | 
|                |      |           |   |              |  |          |      |           |  |          |             |        |             |  |           |     |           |   |      |      |  |  |           |        |  |   |      |     

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
2002, 2001 and 2000, the Company issued 37,000, 106,000 and 65,000 restricted
shares of common stock at weighted-average fair values per share of $9.14,
$9.29 and $71.84, respectively. The fair value of restricted stock awards is
charged to expense over the vesting period. In fiscal 2002, 2001 and 2000, the
Company recorded compensation expense of $3.5 million, $3.1 million and $1.8
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, 2002, 53,000 shares of Company common stock have
been issued under the Directors Stock Plan and an aggregate of 367,000 shares
of the Companys common stock are available for grant under the Directors Stock
Plan.

Employee Stock Purchase Plan

The Company has an employee stock purchase plan 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, 2002, an aggregate of 4.1 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 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 pro
forma loss from continuing operations and pro forma
loss from continuing operations per share would have been the amounts indicated
below (in thousands, except per share amounts):

70



---



##### Table of Contents



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

|                                                                       |  |      |            |      |  |      |            |   |  |   |          |  
|---------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | -------- | -
|                                                                       |  | 2002 |            | 2001 |  | 2000
|                                                                       |  |      |            |      |  |     
|Pro forma loss from continuing operations                              |  | $    | (1,075,887 | )    |  | $    | (1,470,155 | ) |  | $ | (350,689 | )
|Pro forma loss from continuing
operations per share, basic and diluted |  | $    | (4.15      | )    |  | $    | (6.01      | ) |  | $ | (1.66    | )

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:

|                                               |  |      |      |      |  |      |      |   |  |   |       |  
|---------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | ----- | -
|                                               |  | 2002 |      | 2001 |  | 2000
|                                               |  |      |      |      |  |     
|Risk-free interest rate                        |  |      | 2.9  | %    |  |      | 3.8  | % |  |   | 5.9   | %
|Expected volatility                            |  |      | 100  | %    |  |      | 85   | % |  |   | 60    | %
|Dividend yield                                 |  |      |     |      |  |      |     |   |  |   |      |  
|Expected life (years)                          |  |      | 4.5  |      |  |      | 4.5  |   |  |   | 4.5   |  
|Weighted-average fair value
of options granted |  | $    | 8.74 |      |  | $    | 8.18 |   |  | $ | 28.89 |  

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

13. 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 $8.6 million,
$10.6 million and $12.3 million for fiscal 2002, 2001 and 2000, respectively.

Retirement Medical Plan

The Company has a retirement medical plan which covers certain of its employees
and provides for medical payments to eligible employees and dependents upon
retirement. At the time of the spin-off from Rockwell, the Company ceased
offering retirement medical coverage to active salaried employees. Retirement
medical expense, consisting principally of interest accrued on the accumulated
retirement medical obligation, was approximately $1.9 million, $2.9 million and
$3.8 million in fiscal 2002, 2001 and 2000, respectively.

71



---



##### Table of Contents



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

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

|                                               |  |      |       |      |  |   |       |  
|---------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|                                               |  | 2002 |       | 2001
|                                               |  |      |       |     
|Change in benefit obligation:                  |  |      |       |      |  |   |       |  
|Benefit obligation at beginning of year        |  | $    | 35.6  |      |  | $ | 36.6  |  
|Service cost                                   |  |      | 0.3   |      |  |   | 0.3   |  
|Interest cost                                  |  |      | 2.4   |      |  |   | 2.7   |  
|Plan participants contributions               |  |      | 0.3   |      |  |   | 0.5   |  
|Curtailments                                   |  |      | (8.0  | )    |  |   | (0.5  | )
|Actuarial gain                                 |  |      | (6.4  | )    |  |   | (1.2  | )
|Benefits paid                                  |  |      | (3.5  | )    |  |   | (2.8  | )
|                                               |  |      |       |      |  |   |       |  
|Benefit obligation at end of year              |  |      | 20.7  |      |  |   | 35.6  |  
|                                               |  |      |       |      |  |   |       |  
|Change in plan assets:                         |  |      |       |      |  |   |       |  
|Fair value of plan assets at beginning of year |  |      |      |      |  |   |      |  
|Actual return on plan assets                   |  |      |      |      |  |   |      |  
|Employer contribution                          |  |      | 3.2   |      |  |   | 2.3   |  
|Plan participants contributions               |  |      | 0.3   |      |  |   | 0.5   |  
|Benefits paid                                  |  |      | (3.5  | )    |  |   | (2.8  | )
|                                               |  |      |       |      |  |   |       |  
|Fair value of plan assets at end of year       |  |      |      |      |  |   |      |  
|                                               |  |      |       |      |  |   |       |  
|Funded status                                  |  |      | (20.7 | )    |  |   | (35.6 | )
|Unrecognized net actuarial loss                |  |      | 3.1   |      |  |   | 11.2  |  
|Unrecognized prior service cost                |  |      | (3.5  | )    |  |   | (5.4  | )
|                                               |  |      |       |      |  |   |       |  
|Accrued benefit cost                           |  | $    | (21.1 | )    |  | $ | (29.8 | )
|                                               |  |      |       |      |  |   |       |  

For measurement purposes, an 11% annual rate of increase in the per capita cost
of health care benefits was assumed for fiscal 2002, decreasing to 5.0% in 2012
and remaining at that level thereafter. The accrued benefit obligation is based
on discount rates of 7.0% (2002) and 7.5% (2001). Increasing the health care
cost trend rate by 1% would increase the accumulated retirement medical
obligation at September 30, 2002 by approximately $1.5 million and would not
significantly increase retirement medical expense.

Pension Plans

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

Net pension expense was approximately $1.2 million, $1.6 million and $1.8
million for fiscal 2002, 2001 and 2000, respectively. As of September 30, 2002
and 2001, the aggregate projected benefit obligation included in the
consolidated balance sheet was approximately $11.1 million and $9.2 million,
respectively. The pension obligations are based on a discount rate of 7.0%
(2002) and 7.5% (2001). The accrued pension liability at September 30, 2002
includes $5.6 million of additional minimum liability, not yet recognized in
net pension expense, which has been charged against accumulated other
comprehensive loss.

14. Special Charges

Special charges consist of the following (in thousands):

|                      |  |      |         |      |  |      |         |  |  |   |        | 
|--------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------ | 
|                      |  | 2002 |         | 2001 |  | 2000
|                      |  |      |         |      |  |     
|Asset impairments     |  | $    | 156,951 |      |  | $    | 342,791 |  |  | $ |       | 
|Restructuring charges |  |      | 41,536  |      |  |      | 20,116  |  |  |   |       | 
|Litigation            |  |      |        |      |  |      |        |  |  |   | 35,000 | 
|Separation costs      |  |      | 878     |      |  |      | 15,693  |  |  |   |       | 
|Other special charges |  |      |        |      |  |      | 11,016  |  |  |   |       | 
|                      |  |      |         |      |  |      |         |  |  |   |        | 
|                      |  | $    | 199,365 |      |  | $    | 389,616 |  |  | $ | 35,000 | 
|                      |  |      |         |      |  |      |         |  |  |   |        | 

Asset Impairments

2002 Impairments During fiscal 2002, the Company performed a strategic review
of its Mindspeed Technologies segment and initiated certain restructuring
actions. These actions are intended to focus Mindspeeds research and
development spending on products for the Internet infrastructure market
segments it believes offer the most
72Table of Contents

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

attractive near-term growth prospects, such as its products for metro/access
applications. The Company believes that end markets for optical long-haul
networks offer weaker recovery prospects, with slow adoption of new, higher
speed networks. The Company determined that this weak demand would adversely
affect the potential return on continued investment in its Novanet business,
which was engaged in the development of semiconductor products for high-speed
synchronous optical networking (SONET) applications. In June 2002, the Company
closed the Novanet design center in Israel, which represented substantially all
of Novanets operations. The Company also expected this weak demand would
adversely affect the operating performance of its NetPlane business and
determined to divest the NetPlane business. NetPlane develops and sells
networking protocol software and systems for control plane applications in
networking equipment. The Company has held preliminary discussions with
potential buyers for NetPlane and anticipates completing the divestiture of
NetPlane in the second quarter of fiscal 2003.

As a result of these decisions, in the third quarter of fiscal 2002 the Company
recorded impairment charges of $114.1 million to write down the carrying value
of certain long-lived assets associated with these operations. Substantially
all of the $61.0 million impairment charge for Novanet was recorded to write
down the carrying value of goodwill. The amount of the impairment charge was
the excess of the carrying value of the goodwill over its fair value, which the
Company estimated to be zero because the Company did not expect to realize any
significant cash flows from Novanet. The principal components of the $53.1
million impairment charge for NetPlane included the balances of goodwill ($40.8
million) and identified intangible assets ($12.3 million). The amount of the
impairment charge was the excess of the carrying value over fair value, which
the Company estimated to be zero because the Company did not expect to realize
any significant cash flows from the disposition of NetPlane.

During the second quarter of fiscal 2002, the Company recorded an impairment
charge of $13.0 million in the Broadband Communications segment to write down
the carrying value (approximately $22 million) of the goodwill related to its
digital imaging business. In July 2002, the Company completed the planned
divestiture of its digital imaging business.

During fiscal 2002, the Company also recorded impairment charges in the
Mindspeed Technologies segment and Broadband Communications segment totaling
$29.4 million and $0.5 million, respectively. The impairment charges for the
Mindspeed Technologies segment included $15.7 million to write off acquired
technology that management determined, at the time of impairment, would not be
used in the future. The remaining impairment charges were associated with
property and equipment that management determined to abandon or scrap.

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

Management believed the decision to realign the Companys manufacturing and
procurement strategies and the resulting elimination of future investment in
process technology and capacity during the transition period, together with the
then-current and projected business conditions, indicated that the carrying
value of the silicon wafer manufacturing facility and related wafer fabrication
machinery and equipment at its Newport Beach, California facility (the wafer
fabrication assets) may have been impaired and that an impairment analysis
should be performed. In performing the analysis for recoverability, management
estimated the future cash flows expected to result from the manufacturing
activities at the Newport Beach facility over a six-year period. This period
reflected the Companys expectation (as of the date it made the impairment
analysis) of the period over which the wafer fabrication assets would generate
cash flow during the Companys transition to a fabless business. The estimated
cash flows were based on declining volumes and average wafer prices for the
products the Company expected to manufacture at the Newport Beach facility
during the transition period. The declines in volume and average wafer prices
were consistent with historical trends and managements decision to focus on
existing specialty-process products based on the current process technology.
Since the estimated undiscounted cash flows were less than the carrying value
(approximately $410 million based on historical cost) of the wafer fabrication
assets, management concluded the value of the wafer fabrication assets was
impaired. The Company recorded an impairment charge of $325.8 million, which
was determined by comparing the estimated fair value of the wafer fabrication
assets to their carrying value. The fair value of the assets was determined by
computing the present value of the estimated future
73Table of Contents

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

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

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

Restructuring Charges

In fiscal 2001, the Company implemented a number of cost reduction initiatives
to more closely align its cost structure with the then-current business
environment. The cost reduction initiatives included 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. In fiscal 2002, the Company expanded the cost reduction
initiatives to provide for further workforce reductions and the consolidation
of additional facilities. The costs and expenses associated with the
restructuring activities are included in special charges in the accompanying
consolidated statements of operations.

2001 Global Restructuring Plan During the second quarter of fiscal 2001, the
Company announced certain expense reduction initiatives and a broad reduction
in workforce affecting all areas of the Company and reducing the Companys
headcount by approximately 900 employees. These actions were the result of a
comprehensive reassessment of the Companys operations and business activities
in order to focus investment and resources in areas that best support the
Companys strategic growth drivers. As part of the reassessment, the Company
determined that it would explore alternatives to dispose of its digital imaging
business and would also exit its board-level sub-assembly module business. The
Company completed these restructuring actions in fiscal 2002.

In connection with this broad reduction in workforce, the Company terminated
approximately 840 employees (including approximately 130 employees in fiscal
2002). The charges for the workforce reduction aggregated $9.4 million
(including $2.6 million in fiscal 2002) and were based upon estimates of the
cost of severance benefits for the affected employees. These actions reduced
the Companys workforce in both the Broadband Communications and Mindspeed
Technologies segments, including approximately 530 employees in the Companys
manufacturing operations. In addition, the Company recorded restructuring
charges of $5.8 million (including $0.2 million in fiscal 2002) for costs
associated with the consolidation of certain facilities and lease cancellation
and related costs. In fiscal 2002, the Company reversed $1.6 million of excess
lease costs accrued in fiscal 2001 as a result of a favorable resolution upon
the termination of the related lease.

Activity and liability balances related to the 2001 global restructuring
actions through September 30, 2002 are as follows (in thousands):

|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|----------------------------------------- |  | ---------- | ------ | --------- |  | ----- | ------ | - |  | - | ------ | -
|                                          |  | Workforce  |        | Facility  |  |       |        |  
|                                          |  | reductions |        | and other |  | Total
|                                          |  |            |        |           |  |      
|Charged to costs and expenses             |  | $          | 6,776  |           |  | $     | 5,584  |   |  | $ | 12,360 |  
|Cash payments                             |  |            | (4,155 | )         |  |       | (223   | ) |  |   | (4,378 | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, September 30, 2001 |  |            | 2,621  |           |  |       | 5,361  |   |  |   | 7,982  |  
|Charged to costs and expenses             |  |            | 2,616  |           |  |       | 172    |   |  |   | 2,788  |  
|Expense reversal                          |  |            |       |           |  |       | (1,646 | ) |  |   | (1,646 | )
|Cash payments                             |  |            | (3,432 | )         |  |       | (2,307 | ) |  |   | (5,739 | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, September 30, 2002 |  | $          | 1,805  |           |  | $     | 1,580  |   |  | $ | 3,385  |  
|                                          |  |            |        |           |  |       |        |   |  |   |        |  

Strategic Manufacturing Restructuring Plan During the third quarter of fiscal
2001, the Company realigned its manufacturing and procurement strategy to
accelerate its transition to a fabless CMOS business model. As part of the
manufacturing realignment, the Company reduced its workforce by an additional
410 employees and recorded
74Table of Contents

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

charges aggregating $7.8 million. These charges were based upon estimates of
the cost of severance benefits for the affected employees. These actions were
completed in the fourth quarter of fiscal 2001 and reduced the Companys
workforce in both the Broadband Communications and Mindspeed Technologies
segments, including approximately 220 employees in the Companys manufacturing
operations.

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

|                                          |  |            |        |  
|----------------------------------------- |  | ---------- | ------ | -
|                                          |  | Workforce 
|                                          |  | reductions
|                                          |  |           
|Charged to costs and expenses             |  | $          | 7,756  |  
|Cash payments                             |  |            | (5,006 | )
|                                          |  |            |        |  
|Restructuring balance, September 30, 2001 |  |            | 2,750  |  
|Cash payments                             |  |            | (2,604 | )
|                                          |  |            |        |  
|Restructuring balance, September 30, 2002 |  | $          | 146    |  
|                                          |  |            |        |  

2002 Corporate and Manufacturing Restructuring Plan During fiscal 2002, the
Company initiated a further reduction of its workforce throughout its
operations primarily as a result of the divestiture of its Newport Beach wafer
fabrication operations and the Spin-off Transaction. In connection with the
2002 corporate and manufacturing restructuring actions, the Company terminated
approximately 230 employees and recorded charges aggregating $4.5 million.
These charges were based upon estimates of the cost of severance benefits for
the affected employees. The Company completed these actions in fiscal 2002,
reducing its workforce by approximately 120 employees in the Broadband
Communications segment and approximately 110 employees in the Mindspeed
Technologies segment. In addition, the Company recorded restructuring charges
of $12.7 million for costs associated with the consolidation of certain
facilities and commitments under license obligations that management determined
would not be used in the future.

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

|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|----------------------------------------- |  | ---------- | ------ | --------- |  | ----- | ------ | - |  | - | ------ | -
|                                          |  | Workforce  |        | Facility  |  |       |        |  
|                                          |  | reductions |        | and other |  | Total
|                                          |  |            |        |           |  |      
|Charged to costs and expenses             |  | $          | 4,534  |           |  | $     | 12,690 |   |  | $ | 17,224 |  
|Cash payments                             |  |            | (3,179 | )         |  |       | (468   | ) |  |   | (3,647 | )
|Non-cash charges                          |  |            | (609   | )         |  |       |       |   |  |   | (609   | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, September 30, 2002 |  | $          | 746    |           |  | $     | 12,222 |   |  | $ | 12,968 |  
|                                          |  |            |        |           |  |       |        |   |  |   |        |  

Mindspeed Strategic Restructuring Plan During fiscal 2002, the Companys
Mindspeed Technologies segment announced a number of expense reduction and
restructuring initiatives intended to reduce Mindspeeds operating cost
structure and focus its research and development spending on products for the
Internet infrastructure market segments it believes offer the most attractive
near-term growth prospects. These actions include the elimination of research
and development spending in high-end optical networking applications, the
closure of Novanet, the planned divestiture of NetPlane and a reduction of
support services spending and will reduce Mindspeeds workforce by over 400
employees. The Company expects to complete the workforce reductions by the end
of the first quarter of fiscal 2003. During fiscal 2002, the Company terminated
approximately 280 employees and recorded charges aggregating $7.1 million.
These charges were based upon estimates of the cost of severance benefits for
the affected employees. These actions reduced the Companys workforce
throughout the Mindspeed Technologies segment. In addition, the Company
recorded restructuring charges of $16.1 million for costs associated with the
consolidation of certain facilities and lease cancellation and related costs.

Activity and liability balances related to the Mindspeed strategic
restructuring actions through September 30, 2002 are as follows (in thousands):
75Table of Contents

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

|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|----------------------------------------- |  | ---------- | ------ | --------- |  | ----- | ------ | - |  | - | ------ | -
|                                          |  | Workforce  |        | Facility  |  |       |        |  
|                                          |  | reductions |        | and other |  | Total
|                                          |  |            |        |           |  |      
|Charged to costs and expenses             |  | $          | 7,061  |           |  | $     | 16,109 |   |  | $ | 23,170 |  
|Cash payments                             |  |            | (2,419 | )         |  |       | (1,211 | ) |  |   | (3,630 | )
|Non-cash charges                          |  |            | (552   | )         |  |       | (354   | ) |  |   | (906   | )
|                                          |  |            |        |           |  |       |        |   |  |   |        |  
|Restructuring balance, September 30, 2002 |  | $          | 4,090  |           |  | $     | 14,544 |   |  | $ | 18,634 |  
|                                          |  |            |        |           |  |       |        |   |  |   |        |  

The Company has paid an aggregate of $25.0 million in connection with its
fiscal 2001 and 2002 restructuring plans and has a remaining accrued
restructuring balance aggregating $35.1 million. The Company expects to pay a
majority of the amounts accrued for the workforce reductions within one year
and expects to pay the obligations for the non-cancelable lease and other
commitments over their respective terms, which principally expire through
fiscal 2005. Cash payments to complete the restructuring actions will be funded
from available cash reserves and funds from operations, and are not expected to
significantly impact the Companys liquidity.

Litigation

In fiscal 2000, the Company recorded a special charge of $35.0 million
representing the estimated amount of a settlement payment (in excess of amounts
previously recorded in fiscal 1998) to be made in connection with certain
litigation based upon claims of patent infringement and other claims relating
to the Companys 56 Kbps modem products. In October 2000, the Company agreed to
a settlement of the litigation, under which it subsequently paid $55.0 million
in cash.

Separation Costs

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

Other Special Charges

In connection with the 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.

15. Segment and Other Information

The Company operates and tracks its results in two segmentsBroadband
Communications and Mindspeed Technologies. The Broadband Communications segment
designs, develops and sells semiconductor system solutions that connect
personal communications access products, such as set-top boxes, residential
gateways, personal computers (PCs) and game consoles to voice, video and data
services over broadband connections, including asynchronous digital subscriber
line, cable and direct broadcast satellite. The Broadband Communications
segment also includes the Companys foundation analog dial-up access portfolio,
including PC data and fax modems, and its broadcast video encoder and decoder
product family. Additionally, the Broadband Communications segment includes the
Companys digital cordless telephone chipset products (which the Company
retained in the Spin-off Transaction) and its global positioning system
receiver product line (which was divested in fiscal 2001), each of which was
formerly part of the Companys wireless communications business. Prior to the
Spin-off Transaction, the Companys current Broadband Communications segment,
together with the wireless communications business and the Mexicali operations,
made up the Companys former Personal Networking segment. Mindspeed
Technologies designs, develops and sells semiconductor networking solutions for
communications applications that extend from the edge of the Internet and
throughout linked metropolitan area networks.

The accounting policies of the segments are the same as those described in 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 expenses and segment
76Table of Contents

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

operating income (loss) consist of asset
impairments, restructuring charges, the settlement of certain litigation,
separation costs and losses on the disposal of certain assets. This definition
of segment operating income (loss) may be different than definitions used by
other companies.

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

|                                    |                            |                                 |           |         |          |      |           |         |          |   |           |         |         | 
|----------------------------------- | -------------------------- | ------------------------------- | --------- | ------- | -------- | ---- | --------- | ------- | -------- | - | --------- | ------- | ------- | 
|                                    |                            |                                 |           | 2002    |          | 2001 |           | 2000   
|                                    |                            |                                 |           |         |          |      |           |        
|Broadband Communications:           |                            |                                 |           |         |          |      |           |         |          |   |           |        
|Revenues                            |                            | $                               | 521,726   |         |          | $    | 541,688   |         |          | $ | 1,211,410 |        
|Cost of goods sold                  |                            |                                 | 317,921   |         |          |      | 522,560   |         |          |   | 692,551   |        
|                                    |                            |                                 |           |         |          |      |           |         |          |   |           |        
|                                    | Gross margin               |                                 |           | 203,805 |          |      |           | 19,128  |          |   |           | 518,859 |        
|Research and development            |                            |                                 | 156,945   |         |          |      | 174,180   |         |          |   | 186,618   |        
|Selling, general and administrative |                            |                                 | 97,249    |         |          |      | 141,276   |         |          |   | 148,233   |        
|                                    |                            |                                 |           |         |          |      |           |         |          |   |           |        
|                                    | Segment operating expenses |                                 |           | 254,194 |          |      |           | 315,456 |          |   |           | 334,851 |        
|                                    |                            |                                 |           |         |          |      |           |         |          |   |           |        
|                                    |                            | Segment operating income (loss) |           | $       | (50,389  | )    |           | $       | (296,328 | ) |           | $       | 184,008 | 
|                                    |                            |                                 |           |         |          |      |           |         |          |   |           |        
|Depreciation                        |                            | $                               | 28,830    |         |          | $    | 97,160    |         |          | $ | 124,204   |        
|Capital expenditures                |                            |                                 | 13,058    |         |          |      | 69,562    |         |          |   | 198,595   |        
|Segment total assets at year end    |                            |                                 | 1,125,644 |         |          |      | 1,097,122 |         |          |   | 2,176,881 |        
|Mindspeed Technologies:             |                            |                                 |           |         |          |      |           |         |          |   |           |        
|Revenues                            |                            | $                               | 80,036    |         |          | $    | 305,368   |         |          | $ | 579,206   |        
|Cost of goods sold                  |                            |                                 | 29,410    |         |          |      | 228,994   |         |          |   | 233,646   |        
|                                    |                            |                                 |           |         |          |      |           |         |          |   |           |        
|                                    | Gross margin               |                                 |           | 50,626  |          |      |           | 76,374  |          |   |           | 345,560 |        
|Research and development            |                            |                                 | 166,155   |         |          |      | 191,159   |         |          |   | 136,237   |        
|Selling, general and administrative |                            |                                 | 68,906    |         |          |      | 106,742   |         |          |   | 81,997    |        
|                                    |                            |                                 |           |         |          |      |           |         |          |   |           |        
|                                    | Segment operating expenses |                                 |           | 235,061 |          |      |           | 297,901 |          |   |           | 218,234 |        
|                                    |                            |                                 |           |         |          |      |           |         |          |   |           |        
|                                    |                            | Segment operating income (loss) |           | $       | (184,435 | )    |           | $       | (221,527 | ) |           | $       | 127,326 | 
|                                    |                            |                                 |           |         |          |      |           |         |          |   |           |        
|Depreciation                        |                            | $                               | 22,216    |         |          | $    | 19,534    |         |          | $ | 6,820     |        
|Capital expenditures                |                            |                                 | 8,171     |         |          |      | 37,734    |         |          |   | 16,099    |        
|Segment total assets at year end    |                            |                                 | 785,391   |         |          |      | 1,404,155 |         |          |   | 1,739,361 |        

A reconciliation of segment operating income (loss) to operating loss is as
follows (in thousands):

|                                      |                |   |          |          |      |   |          |            |   |   |         |         |  
|------------------------------------- | -------------- | - | -------- | -------- | ---- | - | -------- | ---------- | - | - | ------- | ------- | -
|                                      |                |   | 2002     |          | 2001 |   | 2000    
|                                      |                |   |          |          |      |   |         
|Total segment operating income (loss) |                | $ | (234,824 | )        |      | $ | (517,855 | )          |   | $ | 311,334 |        
|Amortization of intangible assets     |                |   | 331,877  |          |      |   | 324,805  |            |   |   | 154,679 |        
|Special charges                       |                |   | 199,365  |          |      |   | 389,616  |            |   |   | 35,000  |        
|IPRD                                  |                |   |         |          |      |   |         |            |   |   | 191,348 |        
|Stock compensation                    |                |   | (194     | )        |      |   | 9,393    |            |   |   | 6,759   |        
|                                      |                |   |          |          |      |   |          |            |   |   |         |        
|                                      | Operating loss |   | $        | (765,872 | )    |   | $        | (1,241,669 | ) |   | $       | (76,452 | )
|                                      |                |   |          |          |      |   |          |            |   |   |         |        

Segment operating loss for fiscal 2001 includes inventory write-downs of $105.4
million and $83.4 million for the Broadband Communications and Mindspeed
Technologies segments, respectively.

77



---



##### Table of Contents



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

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

|                               |                    |   |         |         |      |   |         |         |  |   |           |         | 
|------------------------------ | ------------------ | - | ------- | ------- | ---- | - | ------- | ------- |  | - | --------- | ------- | 
|                               |                    |   | 2002    |         | 2001 |   | 2000   
|                               |                    |   |         |         |      |   |        
|United States                  |                    | $ | 102,637 |         |      | $ | 288,212 |         |  | $ | 601,714   |        
|Other Americas                 |                    |   | 26,952  |         |      |   | 21,711  |         |  |   | 41,464    |        
|                               |                    |   |         |         |      |   |         |         |  |   |           |        
|                               | Total Americas     |   |         | 129,589 |      |   |         | 309,923 |  |   |           | 643,178 | 
|Taiwan                         |                    |   | 128,837 |         |      |   | 156,736 |         |  |   | 407,447   |        
|Hong Kong                      |                    |   | 134,241 |         |      |   | 107,940 |         |  |   | 196,283   |        
|Other Asia-Pacific             |                    |   | 90,315  |         |      |   | 92,268  |         |  |   | 180,302   |        
|                               |                    |   |         |         |      |   |         |         |  |   |           |        
|                               | Total Asia-Pacific |   |         | 353,393 |      |   |         | 356,944 |  |   |           | 784,032 | 
|Japan                          |                    |   | 47,195  |         |      |   | 71,277  |         |  |   | 188,560   |        
|Europe, Middle East and Africa |                    |   | 71,585  |         |      |   | 108,912 |         |  |   | 174,846   |        
|                               |                    |   |         |         |      |   |         |         |  |   |           |        
|                               |                    | $ | 601,762 |         |      | $ | 847,056 |         |  | $ | 1,790,616 |        
|                               |                    |   |         |         |      |   |         |         |  |   |           |        

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):

|                               |  |      |           |      |  |   |           | 
|------------------------------ |  | ---- | --------- | ---- |  | - | --------- | 
|                               |  | 2002 |           | 2001
|                               |  |      |           |     
|United States                  |  | $    | 934,980   |      |  | $ | 1,455,997 | 
|Europe, Middle East and Africa |  |      | 85,507    |      |  |   | 188,670   | 
|Other                          |  |      | 2,747     |      |  |   | 29,177    | 
|                               |  |      |           |      |  |   |           | 
|                               |  | $    | 1,023,234 |      |  | $ | 1,673,844 | 
|                               |  |      |           |      |  |   |           | 

16. Subsequent Events

As of September 30, 2002, the Company held notes receivable from Skyworks with
an aggregate principal amount of $180.0 million, including the $150.0 million
Term Notes and $30.0 million outstanding under the $100.0 million credit
facility which the Company had made available to Skyworks. In November 2002,
the Company and Skyworks entered into a refinancing agreement pursuant to which
Skyworks repaid $105.0 million of the principal amount and all accrued interest
owed to the Company under the Term Notes and the remaining principal amount of
the Term Notes was exchanged for $45.0 million principal amount of a new 15%
convertible note with a maturity date of June 30, 2005. Skyworks also repaid
all amounts outstanding under the credit facility, the credit facility was
cancelled and the Company released all security interests in Skyworks assets
and properties.

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

As of September 30, 2002, the $45.0 million principal amount of the Term Notes
subsequently exchanged for the 15% convertible senior subordinated notes is
classified as a current asset in the accompanying consolidated balance sheet
because the Company has the ability and intent to liquidate the 15% convertible
senior subordinated notes or shares underlying the notes as needed to meet its
liquidity requirements.

78



---



##### Table of Contents






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, 2002 and
2001, and the related consolidated statements of operations, cash flows and
shareholders equity and comprehensive loss for each of the three years in the
period ended September 30, 2002. Our audits also included the financial
statement schedule listed in the Index at Item 15(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, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2002, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.

As discussed in Note 3 to the consolidated financial statements, on June 25,
2002, the Company completed the spin-off of its wireless communications business
and the sale of its Mexicali operations. The consolidated financial statements
referred to above have been restated to report the wireless communications
business and the Mexicali operations as discontinued operations for all periods
presented.

DELOITTE & TOUCHE LLP
Costa Mesa, California
October 22, 2002, except for Note 16,  as
to which the date is November 22, 2002

79



---



##### Table of Contents






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

Not applicable.




PART III

Certain information required by Part III is omitted from this Annual Report in
that the Registrant will file its definitive Proxy Statement for the Annual
Meeting of Shareowners to be held on February 26, 2003 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 and Related Stockholder Matters

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




Item 13. Certain Relationships and Related Transactions

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.

80



---



##### Table of Contents






Item 14. Controls and Procedures

Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Companys
management, including the Companys Chairman and Chief Executive Officer and
its Senior Vice President and Chief Financial Officer, of the effectiveness of
the design and operation of the Companys disclosure controls and procedures,
which are defined under Securities and Exchange Commission rules as controls
and other procedures of a company that are designed to ensure that information
required to be disclosed by a company in the reports that it files under the
Exchange Act is recorded, processed, summarized and reported within required
time periods. Based upon that evaluation, the Companys Chairman and Chief
Executive Officer and its Senior Vice President and Chief Financial Officer
concluded that the Companys disclosure controls and procedures were effective.

There were no significant changes in the Companys internal controls or other
factors that could significantly affect these controls subsequent to the date
of their evaluation.




PART IV




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

(a)(1) Financial Statements

The following consolidated financial statements of the Company for the fiscal
year ended September 30, 2002 are included herewith:

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

(2) Supplemental Schedules

Schedule II Valuation and Qualifying Accounts

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

(3) Exhibits

|         |  |                                                                                                                                                                                                                                                                                                                   
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits |  | Description                                                                                                                                                                                                                                                                                                       
|         |  |                                                                                                                                                                                                                                                                                                                   
|2        |  | Agreement and Plan of Reorganization dated as of December 16, 2001, as amended as
of April 12, 2002, by and among Conexant, Washington and Alpha (excluding
exhibits), filed as Exhibit 2.1 to Conexants Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002, is incorporated herein by reference.
|         |  |                                                                                                                                                                                                                                                                                                                   
|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, filed as
Exhibit 3-a-2 to the Companys Annual Report on Form 10-K for the year ended
September 30, 2001, is incorporated herein by reference.              
|         |  |                                                                                                                                                                                                                                                                                                                   
|3-a-3    |  | Amended By-Laws of the Company, filed as Exhibit 3-a-3 to the Companys Annual
Report on Form 10-K for the year ended September 30, 2001, is incorporated herein
by reference.                                                                                                                                    
|         |  |                                                                                                                                                                                                                                                                                                                   
|4-a-1    |  | Rights Agreement, dated as of November 30, 1998, by and between the Company and                                                                                                                                                                                                                                   

81



---



##### Table of Contents



|         |  |                                                                                                                                                                                                                                                                                                                                                                                                  
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits |  | Description                                                                                                                                                                                                                                                                                                                                                                                      
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                  
|         |  | ChaseMellon Shareholder Services, L.L.C., as rights agent, filed as Exhibit 4.4 to
the Companys Registration Statement on Form S-8 (Registration No. 333-68755), is
incorporated herein by reference.                                                                                                                                                                                           
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                  
|4-a-2    |  | First Amendment to Rights Agreement, dated as of December 9, 1999, filed as Exhibit
4.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended December
31, 1999, is incorporated herein by reference.                                                                                                                                                                             
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                  
|4-b-1    |  | Indenture, dated as of May 1, 1999, between the Company and The First National Bank
of Chicago, as trustee, including the form of the Companys 4 1/4% Convertible
Subordinated Notes Due May 1, 2006 attached as Exhibit A thereto, filed as Exhibit
4.1 to the Companys Registration Statement on Form S-3 (Registration No.
333-82399), is incorporated herein by reference.                 
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                  
|4-b-2    |  | Indenture, dated as of February 1, 2000, between the Company and Bank One Trust
Company, National Association, as trustee, including the form of the Companys 4%
Convertible Subordinated Notes Due February 1, 2007 attached as Exhibit A thereto,
filed as Exhibit 4.04 to the Companys Registration Statement on Form S-4
(Registration No. 333-96033), is incorporated herein by reference.
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                  
|*10-a-1  |  | Conexant Systems, Inc. 1998 Stock Option Plan, filed as Exhibit 10.6 to the
Companys Registration Statement on Form 10 (File No. 000-24923), is incorporated
herein by reference.                                                                                                                                                                                                               
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                  
|*10-a-2  |  | Copy of resolution of the Board of Directors of the Company, adopted March 1, 1999,
amending the Companys 1998 Stock Option Plan, filed as Exhibit 10-b-2 to the
Companys Annual Report on Form 10-K for the year ended September 30, 1999, is
incorporated herein by reference.                                                                                                               
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                  
|*10-a-3  |  | Forms of Stock Option Agreements under Rockwells 1988 Long-Term Incentives Plan
for options granted 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.                                                                                                  

82



---



##### Table of Contents



|         |  |                                                                                                                                                                                                                                                                                                                                                                                                           
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits |  | Description                                                                                                                                                                                                                                                                                                                                                                                               
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                           
|*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 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                                                                                                                      

83



---



##### Table of Contents



|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |  | precedent, filed as Exhibit 10-c-6 to the
Companys Annual Report on Form 10-K for the year ended September 30, 1999, is
incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|*10-b-7  |  | Copy of resolutions of the Board of Directors of the Company, adopted September 8,
1999, approving the repurchase by the Company of shares of Common Stock from
certain executives and employees of the Company or loans to such executives or
employees, in each case, in an amount sufficient to pay the required withholding
tax in connection with the acceleration of the vesting of certain outstanding
restricted stock awards under the Companys 1999 Long-Term Incentives Plan, filed
as Exhibit 10-c-7 to the Companys Annual Report on Form 10-K for the year ended
September 30, 1999, is incorporated herein by reference.
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|*10-b-8  |  | Copy of resolution of the Special Committee of the Board of Directors of the
Company, adopted September 22, 1999, determining that the conditions precedent to
the acceleration of the vesting of certain outstanding restricted stock awards
under the Companys 1999 Long-Term Incentives Plan have been satisfied, filed as
Exhibit 10-c-8 to the Companys Annual Report on Form 10-K for the year ended
September 30, 1999, is incorporated herein by reference.                                                                                                                                                                    
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|*10-b-9  |  | Memorandum of Adjustments to Outstanding Options Under the Conexant Stock Plans
approved and adopted by the Board of Directors of the Company on May 9, 2002, as
amended June 13, 2002, in connection with the Spin-off Transaction and the Merger.                                                                                                                                                                                                                                                                                                                                                                                      
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|*10-b-10 |  | Memorandum of Proposed Amendments to the Conexant Systems, Inc. Stock Option Plans
adopted by the Board of Directors of the Company on June 13, 2002 in connection
with the Spin-off Transaction and the Merger.                                                                                                                                                                                                                                                                                                                                                                                                                         
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|*10-c-1  |  | Conexant Systems, Inc. Retirement Savings Plan, as amended, filed as Exhibit 4.5 to
the Companys Registration Statement on Form S-8 (Registration No. 333-73142), is
incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|*10-d-1  |  | Copy of resolutions of the Board of Directors of the Company, adopted August 13,
1999 amending, among other things, the Companys 1999 Long-Term Incentives Plan,
filed as Exhibit 10-e-1 to the Companys Annual Report on Form 10-K for the year
ended September 30, 1999, is incorporated herein by reference.                                                                                                                                                                                                                                                                                                                        
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|*10-e-1  |  | Conexant Systems, Inc. Directors Stock Plan, 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 J.S. Blouin,
L.C. Brewster, R.Y. Halim, D.E. OReilly, A. Rangan, F.M. Rhodes, T.A. Stites and
Michael H. Vishny.                                                                                                                                                                                                                                                                                                                                                                
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|*10-f-3  |  | Employment Agreement dated December 15, 1998 between the Company and D.W. Decker,
filed as Exhibit 10.7 to the Companys Quarterly Report on Form 10-Q for the
quarter ended December 31, 1998, is incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                     
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|*10-f-4  |  | Employment Agreement dated February 25, 2002 between the Company and Moiz Beguwala.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|*10-f-5  |  | Amendment to Employment Agreement dated as of December 2, 2002 between the Company
and Moiz Beguwala.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

84



---



##### Table of Contents



|         |  |                                                                                                                                                                                                                                                                                                        
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits |  | Description                                                                                                                                                                                                                                                                                            
|         |  |                                                                                                                                                                                                                                                                                                        
|         |  | Rockwell International Corporation, filed as Exhibit 2.3 to the Companys
Current Report on Form 8-K dated January 12, 1999, is incorporated herein by
reference.                                                                                                                                      
|         |  |                                                                                                                                                                                                                                                                                                        
|10-j-1   |  | Contribution and Distribution Agreement dated as of December 16, 2001, as amended
as of June 25, 2002, by and between Conexant and Washington (excluding schedules)
filed as Exhibit 2.2 to Conexants Current Report on Form 8-K dated July 1, 2002,
is incorporated herein by reference.             
|         |  |                                                                                                                                                                                                                                                                                                        
|10-j-2   |  | Employee Matters Agreement dated as of June 25, 2002 by and among Conexant,
Washington and Alpha (excluding schedules) filed as Exhibit 2.3 to Conexants
Current Report on Form 8-K dated July 1, 2002, is incorporated herein by reference.                                                          
|         |  |                                                                                                                                                                                                                                                                                                        
|10-j-3   |  | Tax Allocation Agreement dated as of June 25, 2002 by and among Conexant,
Washington and Alpha (excluding schedules) filed as Exhibit 2.4 to Conexants
Current Report on Form 8-K dated July 1, 2002, is incorporated herein by reference.                                                            
|         |  |                                                                                                                                                                                                                                                                                                        
|10-j-4   |  | Mexican Stock Purchase Agreement dated as of June 25, 2002 by and between Conexant
and Alpha (excluding exhibits and schedules) filed as Exhibit 99.1 to Conexants
Current Report on Form 8-K dated July 1, 2002, is incorporated herein by reference.                                                
|         |  |                                                                                                                                                                                                                                                                                                        
|10-j-5   |  | Amended and Restated Mexican Asset Purchase Agreement dated as of June 25, 2002 by
and between Conexant and Alpha (excluding exhibits and schedules) filed as Exhibit
99.2 to Conexants Current Report on Form 8-K dated July 1, 2002, is incorporated
herein by reference.                           
|         |  |                                                                                                                                                                                                                                                                                                        
|10-j-6   |  | U.S. Asset Purchase Agreement dated as of December 16, 2001, as amended as of June
25, 2002, by and between Conexant and Alpha (excluding exhibits and schedules)
filed as Exhibit 99.3 to Conexants Current Report on Form 8-K dated July 1, 2002,
is incorporated herein by reference.              
|         |  |                                                                                                                                                                                                                                                                                                        
|10-j-7   |  | Financing Agreement dated as of June 25, 2002 by and among Alpha, certain of its
subsidiaries identified therein and Conexant (excluding certain exhibits and
schedules) filed as Exhibit 99.4 to Conexants Current Report on Form 8-K dated
July 1, 2002, is incorporated herein by reference.       
|         |  |                                                                                                                                                                                                                                                                                                        
|10-j-8   |  | First Amendment of Financing Agreement dated as of November 6, 2002 among the
Company, Skyworks and certain subsidiaries of Skyworks identified therein.                                                                                                                                               
|         |  |                                                                                                                                                                                                                                                                                                        
|10-j-9   |  | Refinancing Agreement dated as of November 6, 2002 between the Company and Skyworks.                                                                                                                                                                                                                   
|         |  |                                                                                                                                                                                                                                                                                                        
|10-k-1   |  | Capacity & Reservation Deposit Agreement dated as of March 20, 2000 by and between
the Company and UMC Group (USA). **                                                                                                                                                                                 
|         |  |                                                                                                                                                                                                                                                                                                        
|10-k-2   |  | Amendment No. 1 to Capacity & Reservation Deposit Agreement dated as of March 24,
2000 between the Company and UMC Group (USA). **                                                                                                                                                                     
|         |  |                                                                                                                                                                                                                                                                                                        
|10-k-3   |  | Amendment No. 2 to Capacity & Reservation Deposit Agreement dated as of August 1,
2000 between the Company and UMC Group (USA). **                                                                                                                                                                     
|         |  |                                                                                                                                                                                                                                                                                                        
|10-k-4   |  | Amendment No. 3 to Capacity & Reservation Deposit Agreement dated as of May 17,
2001 between the Company and UMC Group (USA). **                                                                                                                                                                       
|         |  |                                                                                                                                                                                                                                                                                                        
|10-k-5   |  | Amendment No. 4 to Capacity & Reservation Deposit Agreement dated as of August 24,
2001 between the Company and UMC USA. **                                                                                                                                                                            
|         |  |                                                                                                                                                                                                                                                                                                        
|10-k-6   |  | Foundry Agreement dated as of July 27, 2000 by and between the Company and UMC
Group (USA). **                                                                                                                                                                                                         
|         |  |                                                                                                                                                                                                                                                                                                        
|10-l-1   |  | Wafer Supply and Services Agreement dated as of March 30, 2002 by and between
Specialtysemi, Inc. (now named Jazz Semiconductor, Inc.) and the Company, filed as
Exhibit 10.1 to Conexants Quarterly Report on Form 10-Q for the quarter ended
March 31, 2002, is incorporated herein by reference. **
|         |  |                                                                                                                                                                                                                                                                                                        
|21       |  | List of Subsidiaries of the Company.                                                                                                                                                                                                                                                                   
|         |  |                                                                                                                                                                                                                                                                                                        
|23       |  | Independent Auditors Consent.                                                                                                                                                                                                                                                                         
|         |  |                                                                                                                                                                                                                                                                                                        
|24       |  | Power of Attorney authorizing certain persons to sign this Annual Report on Form
10-K on                                                                                                                                                                                                               

85



---



##### Table of Contents



|         |  |                                                                          
|-------- |  | -------------------------------------------------------------------------
|Exhibits |  | Description                                                              
|         |  |                                                                          
|         |  | behalf of certain directors and officers of the Company.                 
|99       |  | Written Statement of Chief Executive Officer and Chief Financial Officer.



---

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

(b) Reports on Form 8-K

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

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

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

Current Report on Form 8-K dated November 22, 2002, reporting consolidated
financial statements of the Company for the three years ended September 30,
2001, restated to present as discontinued operations the Companys wireless
communications business and Mexicali operations, which were divested on June
25, 2002 (Items 5 and 7).

(c) Exhibits

See subsection (a) (3) above.

(d) Financial Statement Schedules

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

86



---



##### 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 17th day of December, 2002.

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

Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed on the 17th day of December, 2002 by the
following persons on behalf of the Registrant and in the capacities indicated:

|                                           |  |                                                                                              
|------------------------------------------ |  | ---------------------------------------------------------------------------------------------
|Signature                                  |  | Title                                                                                        
|                                           |  |                                                                                              
|/s/ Dwight W. Decker
Dwight W. Decker      |  | Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)              
|                                           |  |                                                                                              
|Balakrishnan S. Iyer*
Balakrishnan S. Iyer |  | Senior Vice President
and Chief Financial Officer
(Principal Financial Officer) and Director 
|                                           |  |                                                                                              
|J. Scott Blouin*
J. Scott Blouin           |  | Senior Vice President,
Chief Accounting Officer and Controller
(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.
|-- |  | -----------------------------------------------------------------

87



---



##### Table of Contents






CERTIFICATIONS

I, Dwight W. Decker, Chairman of the Board and Chief Executive Officer of
Conexant Systems, Inc., certify that:



|1. |  | I have reviewed this Annual Report on Form 10-K of Conexant Systems,
Inc.;                                                                                                                                                                                                                                              
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this Annual Report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this Annual
Report;                   
|  
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this Annual Report is
being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| | b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this Annual Report (the Evaluation Date); and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | c) |  | presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                      



|5. |  | The registrants other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officer and I have indicated in this
Annual Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Dated: December 17, 2002

/s/ Dwight W. Decker

Dwight W. Decker
Chairman of the Board and   Chief
Executive Officer

88



---



##### Table of Contents



I, Balakrishnan S. Iyer, Senior Vice President and Chief Financial Officer
of Conexant Systems, Inc., certify that:



|1. |  | I have reviewed this Annual Report on Form 10-K of Conexant Systems,
Inc.;                                                                                                                                                                                                                                              
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this Annual Report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this Annual
Report;                   
|  
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this Annual Report is
being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this Annual Report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officer and I have indicated in this
Annual Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Dated: December 17, 2002

/s/ Balakrishnan S. Iyer
Balakrishnan S. Iyer
Senior Vice President and
Chief Financial Officer

89



---



##### Table of Contents






SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS
(In thousands)

|                               |                                               |         |            |          |              |     |            |        |        |  |            |         |   |  |   |        | 
|------------------------------ | --------------------------------------------- | ------- | ---------- | -------- | ------------ | --- | ---------- | ------ | ------ |  | ---------- | ------- | - |  | - | ------ | 
|                               |                                               |         |            |          |              |     | Additions  |        |        |  |            |         |   |  |  
|                               |                                               |         | Balance at |          | Charged      |     |            |        |        |  | Balance at
|                               |                                               |         | Beginning  |          | to Costs and |     | Deductions |        | End of
|Description                    |                                               | of Year |            | Expenses |              | (1) |            | Year  
|                               |                                               |         |            |          |              |     |            |       
|Year ended September 30, 2002: |                                               |         |            |          |              |     |            |        |        |  |            |         |   |  |   |       
|                               | Allowance for doubtful accounts               |         | $          | 15,000   |              |     | $          | (3,878 | )(2)   |  | $          | (2,717  | ) |  | $ | 8,405  | 
|                               | Reserve for sales returns
and allowances      |         |            | 3,537    |              |     |            | 12,839 |        |  |            | (13,075 | ) |  |   | 3,301  | 
|                               | Allowance for excess and
obsolete inventories |         |            | 44,350   |              |     |            | 17,063 |        |  |            | (10,424 | ) |  |   | 50,989 | 
|Year ended September 30, 2001: |                                               |         |            |          |              |     |            |        |        |  |            |         |   |  |   |       
|                               | Allowance for doubtful accounts               |         | $          | 3,157    |              |     | $          | 23,081 |        |  | $          | (11,238 | ) |  | $ | 15,000 | 
|                               | Reserve for sales returns
and allowances      |         |            | 4,020    |              |     |            | 28,394 |        |  |            | (28,877 | ) |  |   | 3,537  | 
|                               | Allowance for excess and
obsolete inventories |         |            | 41,106   |              |     |            | 17,070 | (3)    |  |            | (13,826 | ) |  |   | 44,350 | 
|Year ended September 30, 2000: |                                               |         |            |          |              |     |            |        |        |  |            |         |   |  |   |       
|                               | Allowance for doubtful accounts               |         | $          | 9,252    |              |     | $          | (1,472 | )(2)   |  | $          | (4,623  | ) |  | $ | 3,157  | 
|                               | Reserve for sales returns
and allowances      |         |            | 7,102    |              |     |            | 9,160  |        |  |            | (12,242 | ) |  |   | 4,020  | 
|                               | Allowance for excess and
obsolete inventories |         |            | 58,615   |              |     |            | 4,639  |        |  |            | (22,148 | ) |  |   | 41,106 | 



---

|(1) |  | Deductions in the allowance for doubtful accounts reflect amounts written
off.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Additions charged to costs and expenses in the allowance for doubtful
accounts reflect a credit balance recorded in fiscal 2002 and 2000, resulting
from reductions in the allowance account associated with overall collections
experience more favorable than previously estimated.                                                                                                                                                                                                                                                                                                                                                                            
|   
|(3) |  | Additions charged to costs and expenses in the allowance for excess and
obsolete inventories in fiscal 2001 exclude inventory write-downs of $188.8
million relating to inventory that the Company expected to be unable to sell.
During fiscal 2002 and 2001, the Company sold $50.7 million and $6.8 million,
respectively, of inventories previously written down to a zero cost basis and
scrapped $10.8 million and $26.4 million, respectively, of previously
written-down inventories. As of September 30, 2002, the Company continued to
hold inventories with an original cost of $94.1 million which were previously
written down to a zero cost basis.

90



---



##### Table of Contents






EXHIBIT INDEX

|         |  |                                                                                                                                                                                                                                                                          
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*10-b-9  |  | Memorandum of Adjustments to Outstanding Options Under the Conexant Stock Plans
approved and adopted by the Board of Directors of the Company on May 9, 2002, as
amended June 13, 2002, in connection with the Spin-off Transaction and the Merger.                      
|         |  |                                                                                                                                                                                                                                                                          
|*10-b-10 |  | Memorandum of Proposed Amendments to the Conexant Systems, Inc. Stock Option Plans
adopted by the Board of Directors of the Company on June 13, 2002 in connection
with the Spin-off Transaction and the Merger.                                                         
|         |  |                                                                                                                                                                                                                                                                          
|*10-f-2  |  | Schedule identifying agreements substantially identical to the Employment Agreement
constituting Exhibit 10-g-1 hereto entered into by the Company with J.S. Blouin,
L.C. Brewster, R.Y. Halim, D.E. OReilly, A. Rangan, F.M. Rhodes, T.A. Stites and
Michael H. Vishny.
|         |  |                                                                                                                                                                                                                                                                          
|*10-f-4  |  | Employment Agreement dated February 25, 2002 between the Company and Moiz Beguwala.                                                                                                                                                                                      
|         |  |                                                                                                                                                                                                                                                                          
|*10-f-5  |  | Amendment to Employment Agreement dated as of December 2, 2002 between the Company
and Moiz Beguwala.                                                                                                                                                                    
|         |  |                                                                                                                                                                                                                                                                          
|10-j-8   |  | First Amendment of Financing Agreement dated as of November 6, 2002 among the
Company, Skyworks and certain subsidiaries of Skyworks identified therein.                                                                                                                 
|         |  |                                                                                                                                                                                                                                                                          
|10-j-9   |  | Refinancing Agreement dated as of November 6, 2002 between the Company and Skyworks.                                                                                                                                                                                     
|         |  |                                                                                                                                                                                                                                                                          
|10-k-1   |  | Capacity & Reservation Deposit Agreement dated as of March 20, 2000 by and between
the Company and UMC Group (USA). **                                                                                                                                                   
|         |  |                                                                                                                                                                                                                                                                          
|10-k-2   |  | Amendment No. 1 to Capacity & Reservation Deposit Agreement dated as of March 24,
2000 between the Company and UMC Group (USA). **                                                                                                                                       
|         |  |                                                                                                                                                                                                                                                                          
|10-k-3   |  | Amendment No. 2 to Capacity & Reservation Deposit Agreement dated as of August 1,
2000 between the Company and UMC Group (USA). **                                                                                                                                       
|         |  |                                                                                                                                                                                                                                                                          
|10-k-4   |  | Amendment No. 3 to Capacity & Reservation Deposit Agreement dated as of May 17,
2001 between the Company and UMC Group (USA). **                                                                                                                                         
|         |  |                                                                                                                                                                                                                                                                          
|10-k-5   |  | Amendment No. 4 to Capacity & Reservation Deposit Agreement dated as of August 24,
2001 between the Company and UMC USA. **                                                                                                                                              
|         |  |                                                                                                                                                                                                                                                                          
|10-k-6   |  | Foundry Agreement dated as of July 27, 2000 by and between the Company and UMC
Group (USA). **                                                                                                                                                                           
|         |  |                                                                                                                                                                                                                                                                          
|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       |  | Written Statement of Chief Executive Officer and Chief Financial Officer.                                                                                                                                                                                                



---

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